Frank Words from a President…and a Repeat of History

As President George Bush nears the end of this last term in the White House, the President addressed the nation last night in what I believe was an excellent rendition of the vast reaching effects of the housing bust. President Bush clearly described what had happened to the lending environment and how it will affect Americans unless the $700-billion bank bailout package is approved by Congress.

Like you, I’ve heard many speeches from President Bush over the past eight years. His words on the housing market, the economy, and the financial system last night were delivered in such a clear fashion that a layperson would be able to understand the effects of the housing bust. And I believe that is very important for the American people.

Back in 1989, the United States faced a similar financial crisis caused by over aggressiveness on the part of savings and loans institutions. Another President Bush, then George H.W. Bush, and Congress created the Resolution Trust Corporation (better known as the RTC) to take over troubled savings and loans companies.

The RTC closed or helped unload the assets of 747 savings and loans companies that had total assets of $400 billion. While most newcomers to the financial markets will not remember the savings and loans crisis of the late 1980s, by the end of the debacle, there were 350 failed savings and loans companies under the control of the RTC. Total taxpayer cost at the end of the crisis was said to be about $120 billion — a cost that literally saved the economy from upheaval.

(For financial trivia buffs, the number of mortgage-related lawsuits that have been filed in federal courts over the subprime mess now exceeds 600 cases — surpassing the 560 cases filed during the savings and loans crisis of the late 1980s.)

While my vote may not count, I’m for the proposal that Treasury Secretary Henry Paulson has put in front of Congress. I was around in the 1980s when the RTC was set up and I saw firsthand how it helped bail out investors and consumers caught up in the savings and loans crisis.

As an avid student of the stock market, I believe the bank bailout would free banks of loans they cannot otherwise unload…a big plus for the financial stocks. But there is more here than just seeing the bank stocks rise in price again. With bad loans on their books, the banks will have fresh money to start lending to businesses again. Those loans help businesses grow. And there is nothing the stock market likes more than growing businesses.

Does the stock market sense that the $700-billion bank bailout and all its related positives are coming? Possibly, and it could well explain why the Dow Jones Industrial Average is failing to fall flat on its proverbial face.