Washington’s efforts to resolve the financial crisis has been very bleak according to the Wall Street, as banks are accumulating its losses and its stocks plummeting. Banks in the United States are burdened with mortgage-backed assets from the foreclosure crisis, and are in a risky position regardless of an addition of billions of dollars from the government last year. The problem is getting bigger and the banks can only take so much.
Treasury Secretary Timothy Geithner simply stated that the administration plans to get credit flowing again and fix the $700 billion bailout. Investors hope that the Obama administration ponders on several options to keep the banks alive like pumping more money into banks and establishing a government unit to purchase bad bank assets so that they will start lending again, which can somewhat uplift the spirits of those experiencing the foreclosure crisis.
In addition, experts believe that Citigroup and the Bank of America will require even more government cash injections to compensate future losses to stay afloat. It is feared that as these big banks have merged into the global financial system, their collapse could initiate a disaster.
Moreover, investors are in agony as Citigroup’s stocks took a big 20 percent drop to below $3 a share last Tuesday. The Bank of America also shares a drop at 29 percent. Both banks recovered on Wednesday, but experts believe the worst is yet to come.
But the bailout money may not necessarily resolve the financial crisis, for the root cause of the problem has not yet been addressed: the mortgage foreclosure crisis and bad assets of the bank’s books. Moreover, giving the banks more money may lead to the removal shareholders due to a federal takeover of the banking system in the United States.
An alternative proposed would be creating a bank run by the government to purchase the banks’ bad assets. By eliminating the assets that put a burden to banks, they will stop hoarding money and start lending again, especially to those on the brink of losing their homes to foreclosure.
A report made by Goldman Sachs last week calculated that financial institutions and investors all over the globe will eventually absorb $2 trillion losses on U.S. loans alone from the foreclosure crisis - but up to now have identified only half of these losses.
Troubled banks could take a fall and can cause panic unless the banking department finds a way to counteract these losses.
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