WHERE DOES ALL THE RISK LIE? the banks!

i know its not unusual for me to focus on the potential negatives, but here i go again.

during the past few years of easy money, banks & financial institutions have had a wonderful opportunity to exploit low interest rates in order to dramatically increase their lending to businesses and consumers. recently, in an effort to maintain the volumes and activity levels in their lending businesses, the banks, and all other companies who are now acting like banks(i.e. auto cos., consumer elec. retailers, computer cos., furniture cos., tax prep. cos., etc) have all foregone good risk management and lowered credit standards in order to qualify more borrowers in order to keep the volume of loans up. while doing that, they have also foregone profits/returns on the loans, i.e 0% financing or very low rates on loans. in effect, what they have done is the most dangerous thing a bank can do. THEY HAVE TAKEN ON MUCH MORE RISK WHILE ACCEPTING MUCH LESS RETURN!

that leaves banks in a very bad place. they have huge portfolios of riskier loans that have low or no returns. the banks in effect own all the new homes, cars, and everything else sold with these financing incentives and they have a potential for higher loss rates as the quality of the borrowers has declined and the assets that support those loans decline. furthermore, in order to handle the unprecedented demand for loans, the financial institutions mentioned above have utilized computers to qualify borrowers. these computer programs are unproven during difficult economic periods, or any periods for that matter, and could result in even more bad credits that the banks are unaware of because only the computers know, until the loans go bad.

lastly, a large portion of the lending has been refi's on homes that have risen in value, some much more than others. if the loan to values prove to be to high, or way too high, once again banks will be left in an even worse place...holding lots of bad mortagages on homes that drop in value significantly.

finally, as the credit situation could be an issue, so to will the demand for new lending. we have all refied at least once. we have bought autos for 0%(autos on the road are the youngest ever & have great warranties). we have decorated our new homes w/ loans that don't require payments until 2004. what will we borrow money for next? i think the consumer is full up with stuff and loans on that stuff.

i know that my view is unpopular, yet if it is thought through and analyzed in a quiet room without all the bulls screaming about the recovery and the end of the bear market, it makes much more sense than the unsupported bull case for nothing but up. if the banks come under pressure from this, it could result in the catalyst that ends this CYCLICAL BULL market we have been in for the past 4 months and the SECULAR BEAR market we are STILL IN will resume in full force.

its very hard to fight all the cheerleading, yet it is sheer stupidity to ignore the facts of dangers that still loom large in our economy.

have a grateful day!

larry