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Bank of America, Citigroup Fannie Mae, Freddie Mac and Wal-Mart

  //business-finance.news-articles.net/content/201 .. tigroup-fannie-mae-freddie-mac-and-wal-mart.html
  Published in Business and Finance on Friday, May 14th 2010 at 14:10 GMT by Market Wire
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CHICAGO--([ BUSINESS WIRE ])--Zacks.com Analyst Blog features: Bank of America (NYSE: [ BAC ]), Citigroup (NYSE: [ C ]), Fannie Mae (NYSE: [ FNM ]), Freddie Mac (NYSE: [ FRE ]) and Wal-Mart (NYSE: [ WMT ]).

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Here are highlights from Thursdaya™s Analyst Blog:

Initial Jobless Claims Down (Sort Of)

By the time someone has been out of work for more than six months, particularly if they thought that they would get a new job after two or three months, they have probably used up most of their savings and have probably already run up their credit cards. After all, there are plenty of things that you would continue to spend money on if you thought you would be working again soon, that you might have cut off sooner if you had know just how long you would have been out of work.

While things vary a bit by state, in most states unemployment insurance will pay about 60% of your working income, up to a maximum of about $400 per week. It is pretty hard to cut 40% of your spending overnight; particularly when for most people a large portion of their spending is fixed on things like the mortgage and car payments.

If there were no extended claims, then these people would have no income at all -- and with savings depleted and credit lines used, they would have zero financial resources. In years gone by, those who were homeowners could use the equity in their houses to tide them over, but in the first quarter, 24% of all houses with mortgages were under water, and an additional 4% had less than 5% positive equity. For those people, borrowing against the house is not an option.

What is an option if they didna™t have extended benefits would be to simply stop paying their mortgage and wait for the sheriff to show up at the door. In many areas of the country, that can take well over a year. However, if everyone were to do that, the new capital that the banks have raised to get out from under the TARP program, and which they have been able to generate due to the very steep yield curve, would quickly be depleted. We would soon be back to the "bad old days" of October 2008. Bank of America (NYSE: [ BAC ]) and Citigroup (NYSE: [ C ]) would once again be basket cases on the verge of collapse, and with them the whole world financial system.

It is not that people are not putting this into practice now -- after all, it is the economically rational thing to do if your house is deeply underwater -- but that there would be far more of them doing it. People not being able to pay their mortgages is at the heart of the reason that Fannie Mae (NYSE: [ FNM ]) and Freddie Mac (NYSE: [ FRE ]) continue to bleed billions and billions each quarter with no end in sight.

Also, if people had no income or other financial resources, they would not be able to shop for even the most basic needs at Wal-Mart (NYSE: [ WMT ]), which would lead to layoffs there and up and down the Wal-Mart supply chain. Those people would then be getting unemployment insurance until their 26 weeks were up, and the downward cycle would continue.

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