Sure...The Banks Aren't Being Bailed Out.

It may not be official, but the banks are being bailed out. Let me prove it.

The federal funds rate is the rate that banks can charge each other for overnight or short term loans. They can also borrow money from the government at this rate, which is currently at 3%. The feds raise this money by selling government backed bonds, which at this moment are being sold every two weeks at a whopping $20 billion bi-weekly. The feds have just increased that this month to $60 billion bi-weekly because of the extraordinary demand for them.

Here is where the problems come in. The feds have short term loans at 3%, however the terms can be extended and usually are, in fact quite frequently. All the banks have to do is re-finance the loans, in which the banks pay no fee to do so; however they do have to take the current fed funds rate at the time they are refinanced.

So technically, the banks could borrow billions at 3% right now and use it to lend out, keep their reserves up, swim in the vault like Uncle Scrooge from Ducktales did, etc.

Here is how the banks are being bailed out. Technically, the feds assume (you know what they say about the word "assume") that when the bank borrows the money, they are going to use it to lend out to consumers for auto loans, business loans, mortgages, credit cards, boat & R.V. loans, personal loans, etc. Here is the problem. Banks are borrowing billions and not lending it all out. They are using it to bail themselves out and I can prove it.

First, six to nine months ago it was still somewhat easy to get 100% financing, either for full doc loans or stated income loans. The banks wanted a better credit score (640 FICO) and some wanted more assets, however it was still doable. This was also when small and medium banks were just beginning to start taking write offs for bad mortgages. The big ones were still reporting a profit, especially Citibank.

Fast forward to today. Now big banks are writing off hundreds of billions of dollars in bad mortgages, putting more restrictions on every type of loan, refusing to do certain types of loans, including Chase Manhattan who just got rid of their expanded approval loans (Fannie Mae) and A- loans (Freddie Mac). A few weeks ago, Chase also eliminated all of their stated income products. They are requiring bigger down payments, more reserve assets, better FICO scores, lower debt ratios, etc.

So the banks are keeping the money that they borrow and have greatly reduced their loan output for mortgages at the same time. I seriously doubt that they are using that money to fund more auto loans or boat loans. I think they are sitting on it until they get back on track.

If you don't believe me, walk in to your nearest big bank (BofA, Chase, Wamu, Wells Fargo, etc) and ask them for a 100% purchase money mortgage. I will bet that all of them will tell you they no longer offer that program and will require at least a 3% or 5% down payment to approve you for a loan, besides the excellent credit and everything else. If they do have that program, I guarantee that you will never be able to meet all of the conditions of the loan. They will probably have the underwriters review the file five or six times to ask for things that are impossible.