Transcripts

The Bank Rescue Plan's Pitfalls

SUSIE GHARIB: The goal of the financial rescue plan unveiled in Washington this week was to flood banks with cash so they will start lending again. Whether the plan will succeed is still unclear, but what is becoming clear, the plan is having unintended consequences. Stephanie Dhue reports.

STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: As government leaders try to solve the financial crisis, new problems are cropping up. Mortgage rates have soared in the last week, making it more difficult for homeowners to sell or refinance. The average 30-year fixed rated mortgage jumped more than 1/2 percentage point this week to 6.74 percent. Bankrate.com`s Greg McBride blames the potential cost of the rescue package.

GREG MCBRIDE, SR. FINANCIAL ANALYST, BANKRATE.COM: Investors are concerned about just how many more securities the government will have to issue to pay for that. As a result, this not only depressed bond prices, but it pushed yields and subsequently mortgage rates higher over the last week.

DHUE: The part of the package set aside to buy troubled assets from banks may also have unintended consequences for struggling homeowners. Senator Bob Casey says he`s hearing stories that lenders are no longer working with distressed borrowers to prevent foreclosures.

SEN. ROBERT CASEY, (D) PENNSYLVANIA: Banks are now holding back on modifying loans because they`re waiting to see if they can sell them to Treasury first. And I think Treasury`s lack of clarity is apparently causing banks and investors to sit and wait.

DHUE: The Financial Services Roundtable, which represents financial institutions, says banks are continuing to modify loans and will do so even if the loans are sold to Treasury. And there`s yet another possible unintended consequence, this one for lenders. Economist Jack Albertine says smaller banks will be at a disadvantage.

JACK ALBERTINE, CHAIRMAN & CEO, ALBERTINE ENTERPRISES: The government has made a statement that if you`re too big to fail, you won`t fail and I think that will give a competitive advantage to large institutions in the capital markets in the future and make it more difficult for small and mid- size financial institutions to grow and prosper.

DHUE: But analysts say, even if the rescue package succeeds in opening up the credit markets, investors, lenders and consumers will still be cautious, making for a severe recession. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.