I went to a luncheon put on by Umpqua Bank today. They speaker was Ray Davis the bank’s CEO. He is an excellent speaker and I thought provided a refreshing perspective on the financial crisis. Ray explained how the financial services bailout works; basically the government made the banks an offer they couldn’t refuse!
Ray’s opinion was that the tax payer would actually do quite well with the whole thing. He said that the government loans money to the banks (whether they wanted it or not!) and will get a 5% interest for the first 5 years. After 5 years they get 9% interest. He also said that they get warrants on the stock that have a pretty low strike price. That means that if bank stock prices go up they have the right to buy a certain amount of stock at the low price. Since bank stocks are pretty depressed at the moment, it seems like a good deal.
In terms of helping the economy, now that the banks have all this money and they have to pay 5% for the privilege, they almost have no choice but to lend it out and earn more than the 5% in order to pay for it. This should free up the credit market eventually.
Ray also made a comment on the property market. He said that the Sacramento, CA area had been the ground zero of foreclosures. Apparently a year ago there were more than three times more homes for sale than is the case now. He did acknowledge that prices dropped significantly before those sales occurred but he was encouraged that the home inventory had dropped. He wasn’t about to predict that the market has bottomed but he hinted at it anyway.