Changes

==Collapse of #6 and #4 largest banks==

==Collapse of #6 and #4 largest banks==

On Sept. 25, Washington Mutual, the 6th largest bank in the US with $310 billion in assets, went [[bankrupt]] after a run in which depositors withdrew $17 billion in a few days. Its stockholders lost all their money, the US government took it over (through the [[FDIC]], which insures ordinary bank deposits), and resold it the same day to the biggest New York bank, JPMorgan Chase. It was the largest commercial bank failure in American history, by far.<ref>In the [[Great Depression]], only one major bank failed (New York's Bank of United States, in late 1930), although over 6000 small neighborhood and rural banks went under; depositors eventually received on average 85% of their deposits.</ref>  

On Sept. 25, Washington Mutual, the 6th largest bank in the US with $310 billion in assets, went [[bankrupt]] after a run in which depositors withdrew $17 billion in a few days. Its stockholders lost all their money, the US government took it over (through the [[FDIC]], which insures ordinary bank deposits), and resold it the same day to the biggest New York bank, JPMorgan Chase. It was the largest commercial bank failure in American history, by far.<ref>In the [[Great Depression]], only one major bank failed (New York's Bank of United States, in late 1930), although over 6000 small neighborhood and rural banks went under; depositors eventually received on average 85% of their deposits.</ref>  

 

Meanwhile the #4 U.S. bank, Wachovia, burdened by $120 billion in toxic securities,<ref> At the height of the bubble in 2006 Wachovia purchased  Golden West Financial, a California lender specializing in "pay-option" mortgages that enabled speculators to buy houses and pay very little a month for a year or two (at which time they expected to sell it for a profit). [http://www.brokeroutpost.com/reference/22657.htm explanation of pay-option loans]</ref> was bought out by Citigroup on Sept. 29 in a deal engineered by the FDIC.  However Wachovia then broke its deal and merged into Wells Fargo. The result is that four major banks now dominate the American economy (Bank of America, Citibank, JP Morgan Chase, and Wells Fargo), along with dozens of regional chains and thousands of small local banks.

Meanwhile the #4 U.S. bank, Wachovia, burdened by $120 billion in toxic securities,<ref> At the height of the bubble in 2006 Wachovia purchased  Golden West Financial, a California lender specializing in "pay-option" mortgages that enabled speculators to buy houses and pay very little a month for a year or two (at which time they expected to sell it for a profit). [http://www.brokeroutpost.com/reference/22657.htm explanation of pay-option loans]</ref> was bought out by Citigroup on Sept. 29 in a deal engineered by the FDIC.  However Wachovia then broke its deal and merged into Wells Fargo. The result is that four major banks now dominate the American economy (Bank of America, Citibank, JP Morgan Chase, and Wells Fargo), along with dozens of regional chains and thousands of small local banks.

 

In early October, Bank of America, the new owner of Countrywide, reached a settlement with 11 states that sued it over fraudulent practices. The state of Illinois accused Countrywide of relaxing underwriting standards, structuring loans with risky features, and misleading consumers with hidden fees and fake marketing claims, like a false promise of a "no closing costs loan." Countrywide gave special incentives to its brokers for selling impossible loans by paying higher commissions on them. In reviewing one Illinois mortgage broker’s sales, the Illinois complaint said the "vast majority of the loans had inflated income, almost all without the borrower’s knowledge."  Bank of America did not deny the charges and instead agreed to pay out $8.4 billion to 400,000 Countrywide customers. Countrywide will reduce principal balances for some people and cut interest rates for others. Rates for some people could decline to as low as 2.5% and remain at that level for five years.  Fannie Mae, Freddie Mac and IndyMac, now all owned by the federal government, have begun their own programs to modify mortgage terms for some hard-pressed borrowers.

In early October, Bank of America, the new owner of Countrywide, reached a settlement with 11 states that sued it over fraudulent practices. The state of Illinois accused Countrywide of relaxing underwriting standards, structuring loans with risky features, and misleading consumers with hidden fees and fake marketing claims, like a false promise of a "no closing costs loan." Countrywide gave special incentives to its brokers for selling impossible loans by paying higher commissions on them. In reviewing one Illinois mortgage broker’s sales, the Illinois complaint said the "vast majority of the loans had inflated income, almost all without the borrower’s knowledge."  Bank of America did not deny the charges and instead agreed to pay out $8.4 billion to 400,000 Countrywide customers. Countrywide will reduce principal balances for some people and cut interest rates for others. Rates for some people could decline to as low as 2.5% and remain at that level for five years.  Fannie Mae, Freddie Mac and IndyMac, now all owned by the federal government, have begun their own programs to modify mortgage terms for some hard-pressed borrowers.

<ref> Gretchen Morgenson, "Countrywide to Set Aside $8.4 Billion in Loan Aid," [http://www.nytimes.com/2008/10/06/business/06countrywide.html?ref=business ''New York Times'' Oct. 6, 2008]</ref>   

<ref> Gretchen Morgenson, "Countrywide to Set Aside $8.4 Billion in Loan Aid," [http://www.nytimes.com/2008/10/06/business/06countrywide.html?ref=business ''New York Times'' Oct. 6, 2008]</ref>   

Citigroup, the third largest bank in the U.S., is tottering in late November despite its receipt of $25 billion in TARP bailout money. Its value according to the stock market has plunged to $21 billion, down from $244 billion two years ago. Round after round of layoffs have ended 75,000 jobs in 2008 out of 375,000 employees a year ago. Very heavy exposure to toxic mortgages is the main culprit.  

At all times Citigroup used elaborate mathematical risk models that looked at mortgages in particular geographical areas, but never included the possibility of a national housing downturn, or the prospect that millions of mortgage holders would default on their mortgages. The prevailing approach at Citigroup and the other big banks was to make money as fast as possible (generating annual bonuses of $10 to $30 million for senior executives), which assigning zero to the risk of a systemwide downturn. Such a downturn came with disastrous consequences for Citigroup and its rivals on Wall Street. Even after Bear Stearns ran into serious trouble in summer 2007, Citigroup decided the possibility of trouble with its CDO’s was so tiny (less than 1/100 of 1%) that they excluded them from their risk analysis. Citigroup still holds $20 billion of mortgage-linked securities, most of which have been marked down to between 21 cents and 41 cents on the dollar. It has billions of dollars of giant buyout and corporate loans. And it also faces a potential massive losses on auto, mortgage and credit card loans as the economy worsens.</ref>Eric Dash and Julie Creswell, "Citigroup Pays for a Rush to Risk," [http://www.nytimes.com/2008/11/23/business/23citi.html?ref=business&pagewanted=all ''New York'' Times,’’ Nov. 22, 2008]</ref>

==Crisis in Auto industry==

==Crisis in Auto industry==