Towards the end of 2008, the meltdown in the financial and mortgage markets led to a credit crisis that froze lending nationwide. For a while now analysts have been forecasting another looming credit crisis — this time it has to do with the commercial real estate market. Finance and economic blogger Calculated Risk predicted declines back in December 2008.

However, what makes this “latest” threat to U.S. lending institutions particularly dangerous, is that several Federal entities — from the Federal Reserve, to the Treasury, to the FDIC — are financially stretched to their limits, and may be unable or unwilling to provide adequate support to lenders if or when the time arises.

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When the nation’s banks invested heavily in the private mortgage market, taxpayers were left to pay the $700 billion tab it has taken so far to clean up their mess. Now, with about 8,500 federally-insured banks again investing heavily in the shaky American mortgage market, who do you think will be left to pick up that tab when or if that market collapses? Ding, ding, ding — you guessed it — the American taxpayers!

During the housing boom, the mortgage-backed securities in which the large banks invested in were chock full of subprime and poorly-underwritten loans. Since the collapse of the housing market, lenders have ceased writing new subprime loans or any which can’t be easily sold. All the way back in January we predicted that a lender or lenders would eventually come along to cater to the under-served, “non-prime” audience. That lender turned out to be the Federal Housing Administration (FHA), a.k.a the Federal government.

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Remember when Chrysler took out that full-page ad thanking the American people for their generous bailout money? Oh, you forget about it…sorry to bring that up again.

Since we’re already on the subject, we’d like to add that the Congressional Oversight Panel (COP) — the group in charge of overseeing government bailouts — reiterated that taxpayers will likely see little to none of that ‘generous’ bailout money.

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The term “toxic assets” became a common phrase to the everyday consumer in the later months of 2008. At that time our economy was in a free fall and these toxic assets were in part to blame. In an attempt to right the sinking ship that was our economy, Federal officials decided to create a $700 billion program to rid our financial markets of these toxic assets — mortgages, certain securities, and other loans which have gone bad. Professors and authors Kenneth Scott and John Taylor write in the Wall Street Journal that toxic assets are “one of the original causes of the financial crisis” which “still persists and remains a serious impediment to economic recovery.”

Why?

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That’s according to a report released yesterday by Neil Barofsky, the man in charge of overseeing the Troubled Asset Relief Program (TARP). Barofsky believes that TARP’s $700 billion price tag is only the tip of the iceberg in terms of what the country’s financial rescue will cost taxpayers:

Barofsky’s estimates include $2.3 trillion in programs offered by the Federal Deposit Insurance Corp., $7.4 trillion in TARP and other aid from the Treasury and $7.2 trillion in federal money for Fannie Mae, Freddie Mac, credit unions, Veterans Affairs and other federal programs.

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Today was former Treasury Secretary Henry Paulson’s turn to testify in front of a Congressional committee regarding the Bank of America (BofA), Merrill Lynch merger. Previous testimony from BofA chief Ken Lewis claimed that his bank was strong armed by Federal regulators into accepting the merger that he had resisted. Today, Paulson had this to say:

“I further explained to [Lewis] that, under such circumstances, the Federal Reserve could exercise its authority to remove management and the board of Bank of America.”

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Repayment conditions seem to be getting tougher and tougher for the TARP banks. This week the Federal Reserve required some firms to raise even more private capital than what they were previously told before than can repay their Federal debts:

JPMorgan Chase & Co. and American Express Co. were told they need to boost common equity, less than four weeks after being informed they had enough to withstand a deeper economic slump. Morgan Stanley was directed to raise more funds after already selling stock to cover its stress-test shortfall. One firm was told June 1, people with direct knowledge said.

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Two hundred and fifty financial institutions with “preliminary approval” to receive TARP funds had withdrawn their applications as of the end of March. The withdrawal has raised red flags amongst the banks’ regulator, saying the action is “counter” to the program’s purpose and could serve to increase the market’s instability.

According to a first-quarter report issued by the Financial Stability Oversight Board to Congress (pg. 39), “To the extent that such withdrawals reflect a wariness of qualifying financial institutions to seek or receive capital under the TARP, the actions run counter to the purposes of the CPP [Capital Purchase Program], which are to make capital available to broad segments of the banking industry in order to promote stability, public confidence in the financial system and support lending to households and businesses.”

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“Once the government gets its claws into an industry, it’s often hard to get them out,” said HSH Vice President Keith Gumbinger.

Certain scenarios which started out as sounding more like conspiracy theories for nationalization have, within a couple of months, begun to sound a lot more plausible. There are certainly a number of hot-button issues circulating through the financial world these days — “nationalization” being one of them.

One could argue that the transition of the once quasi-government controlled Fannie Mae and Freddie Mac to the government-run Fannie Mae and Freddie Mac could also be happening (in a roundabout way) to our nation’s largest banks. Many of these mounting scenarios are considered by critics, as the New York Times put it today, as “a back door to nationalization.”

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Citigroup is the third banking institution to release “better-than-expected” first-quarter earnings this week — but some of their customers, as well as the Treasury Department, are not impressed — frankly they’re concerned.

An accountability report released this week by the Treasury Department revealed that lending amongst the nation’s largest banks declined by six percent in February from the month prior. The Department has become so concerned with the lack of lending amongst TARP banks that it launched a Federal probe to investigate the matter.

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