The end of the year has come and where are we and again how is this different from the S&L scandal except for the amount?The Savings and Loan Crisis resulted in the failure of over 1,000 banks with over $500 billion in assets on their books. The FDIC estimates that the total cost to resolve the crisis was $153 billion. This was needed to administer the closing of defunct banks, pay the insurance on savings account deposits, and pay off other debts. Of this, the taxpayer cost was $124 billion.
The Fed's bailout in the current Banking Liquidity Crisis has totaled $64 billion in the form of loans to member banks. If the Fed's actions are successful, and liquidity is restored, then the money will be repaid, and it shouldn't cost the taxpayers directly.
However, no ones really knows exactly how deep the Subprime Mortgage Crisis goes. This was also the problem with the S&L Crisis, and the reason costs kept mounting. In fact, it took nine years before the full extent of the S&L crisis was known.
The current crisis is further complicated because it probably extends beyond real estate. The financial firms that repackaged mortgages into mortgage-backed securities did the same auto loans, credit card debt, and corporate debt. These Collateralized Debt Obligations (CDO's) have been bought by corporations, mutual funds and pension funds. Therefore, the extent of the potential bad debt is completely unknown, and this is what is scaring Wall Street, economists...and the Fed.
Two things will restore stability by the end of 2008. The first is that there are plenty of investors from China, Saudi Arabia and other countries that are happy to invest in these well-known financial institutions. This liquidity will prevent large-scale bankruptcies and layoffs. The U.S. economy is so important, and the global economy is so inter-related, that no one wants to see this crisis become cataclysmic.
The second is that the crisis was basically caused by a pricing problem, which is easily solvable. According to Federal Reserve Governor Kroszner, CDO's are so complex that it is difficult for investors to determine what the real value and price should be. The financial markets will figure it out, but it will probably be at a lower value. (See Fed Governor Kroszner Says Credit Crisis May Not Be Over)
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