With credit markets remaining under stress, and with uncertainty growing regarding the status of megabank Citigroup (NYSE: C), the U.S. Congress may have to take more action to maintain financial system stability and prevent the U.S. economy from spiraling into a deeper recession, so says economist David H. Wang.

"The U.S. Congress may have to approve a 'TARP 2,'" Wang told BloggingStocks Friday. "Whether Congress does it as part of a fiscal stimulus package, or separately, it is clear we will need more money to purchase toxic assets, improve bank capitalization and allocate funds for home mortgage refinance programs, and other financial stabilization measures. At this stage of the crisis, the $700 billion TARP is not going to be enough, in my interpretation."

Bank sector stress remains

Wang said that if Citigroup, whose CEO Vikram Pandit said has adequate capital, for some reason cannot, when needed, find additional capital in the private sector, then "the Fed and or U.S. Treasury will step in, and take necessary measures to stabilize the bank," Wang said. If the U.S. Treasury is the primary funder, "that action, and other forthcoming, planned actions by the Treasury may use up a considerable amount of TARP funds, requiring a TARP 2."

In the last few years it's become pretty clear that there are many mortgages which people can't repay. But that's not the only place where people are having problems making ends meet. Borrowers holding loans for commercial real estate, leveraged buyouts, and automobiles are also having their problems with repayment.

So it should not be a huge surprise to learn that people who hold credit cards are not repaying the money they borrowed in a timely fashion. Innovest StrategicValue Advisors, a consulting firm, forecasts that banks will charge off $18.6 billion worth of credit card receivables in the first quarter of 2009 and $96 billion in 2009 -- that would be 261% more than in 2007 and 131% higher than the level it expects by the end of 2008.

But will a rise in defaults be devastating to credit card companies? A typical installment loan is a relatively low $2,200, so if a borrower pays late, the credit card companies can charge very high fees and raise the interest rates so high that they can offset some of the losses they'll incur when they ultimately end up charging off the receivable. But this credit crunch has proven that historical patterns don't always apply.

It would not surprise me if a rapid rise in credit card defaults had a negative impact that most experts had not anticipated.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

As Washington legislation goes, the housing bailout bill that the U.S. House and Senate passed last week and that President Bush is expected to sign this week, is omnibus in scope and, ultimately, in budget and economic impact.

Economist Glen Langan told BloggingStocks Monday the bill's two key components are the assistance to Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), and a new Federal Housing Administration program. The former, Langan says, "represents an implied guarantee" of Fannie and Freddie by the U.S. Government, which should restore confidence in each, and in the secondary mortgage market. Banks and other mortgage lenders, he said, "will now be more willing to write conforming loans, knowing that Fannie and Freddie will have the funds available to purchase and back these loans."

The latter, a Federal Housing Administration program that enables banks to sell to the U.S. Government mortgages unlikely to be repaid, "will help stem the tide of foreclosures that's plaguing the housing sector," as well as "relieve banks/lenders of less-than-stellar to non-performing assets," Langan said.

Beginning of the end of the housing slump?

Some House and Senate Republicans, and a few Democrats, among others, have chaffed at the bailout bill's cost and ultimate impact on the U.S. taxpayer. House Republican leader U.S. Rep. John Boehner, R-Ohio, told Bloomberg News the bill did not reform Fannie and Freddie enough, and will leave taxpayers with a bill for "billions and billions of dollars." Langan said Rep. Boehner's concern is legitimate.

The dollar rose to a one-month high Thursday morning, as dollar bulls cheered a report that U.S. Congressional legislation designed to shore-up Fannie Mae and Freddie Mac had passed the House and that the Senate will begin evaluating the measure.

The House voted 272-152 in favor of the measure, and the Senate is expected to pass the bill within days, The Washington Post reported Thursday. President Bush, reversing earlier opposition to a component of the bill that would help communities hit hard by foreclosures, said he will sign the legislation in its current form.

The U.S. Federal Reserve will issue new rules next week aimed at protecting future homebuyers from questionable lending practices.

Fed Chairman Ben Bernanke provided a preview of the Fed's new rules during a speech Tuesday at the FDIC Forum on Mortgage Lending for Low/Moderate Income Households in Arlington, Va. Under the Fed's authorities, the Home Ownership and Equity Protection Act, the rules -- which will apply to all lenders, not just banks -- are expected to, among other reforms:

• Restrict lenders from penalizing high-risk borrowers who pay off loans early.
• Bar lenders from making loans without proof of a borrower's income.
• Require lenders to make sure that borrowers set aside money to pay for taxes and insurance.

'Front end' / 'back end' ratios deemed key

Economist Peter Dawson told BloggingStocks he's taking "a wait-and-see approach" regarding the Fed's mortgage regulation revisions. "This set of revised regulations could be, arguably, the most important federal regulation change, in financial terms, since the last plan to maintain the solvency of the Social Security trust fund," Dawson said.

The ever-incisive FT columnist Martin Wolf offers prudent and timely advice concerning the reforms needed to ease credit market doldrums and right the global financial state of things.

One key practice Wolf would like to see addressed is bank / mortgage lender selling of mortgages they originate.

Designers of the practice had good intentions: It was designed to free-up capital so banks / mortgage lenders could have more money available for future homebuyers. A noble intention.

Unfortunately, as tradition reminds us, the road to perdition (and record housing sector slumps) is paved with good intentions. The problem, Wolf notes, is that the originate-and-distribute model encouraged banks / mortgage lenders to originate (in many cases for handsome fees) high-risk, very-poor-credit-quality mortgages with reckless abandon, because originators knew that the loan would be sold, and its status as a performing asset would be entirely someone else's problem. Save the best (mortgages), get rid of the rest.

It's not surprising, Wolf notes, that the originate-and-distribute model became laden with sloppy, irresponsible and even fraudulent loans. Wolf's reform: originators must be required to retain a portion of the equity of securitized loans. Hence, if / when they go bad, the originator loses money too.

Economic Analysis: Wolf's proposed financial / bond market reform is on the mark. If every party, including the originator, has a stake in a mortgage's repayment status, that will lead to higher-quality loans, while at the same time retaining the secondary market's benefit of freeing-up capital for new mortgages.

Hank Paulson and Ben Bernanke are finally getting around to admitting that the subprime problem is not "contained." Regrettably, their grudging admission of reality also comes with a price -- they are unwilling to offer a solution to a problem whose magnitude they cannot even count.

This is the scariest part. According to the New York Times, at a speech in New York last night Bernanke said, "I'd like to know what those damn things are worth. Until investors are confident in their evaluations, they are not going to be willing to fund these vehicles."

This spring, Paulson and Bernanke were singing the same hymn: "subprime is contained." The reasons? The administration's trademark combination of religion -- the desire to avoid a "moral hazard" -- coupled with incompetence -- a lack of awareness of the magnitude of the problem or how to solve it. Moral hazard is a concept I happen to agree with -- investors should get the benefits and pay the costs of their risky bets rather than asking the government to bail them out of their mistakes.

You just have to love the U.S. -- marketing runs the majority of the world's largest economy, and when subprime lenders began using low interest rates to push shoddy mortgages onto clueless homebuyers years back, millions jumped on the bandwagon. If you weren't flipping houses for a living, you were getting into a much larger home with the feeling that those larger payments and mortgage term resets were years off. We're here now, and foreclosures are up while homeowners are losing their collective shirts. Is it the housing equivalent of the Titanic sinking? Nah -- but that's what many of the media portray it to be.

But, in perfect "we can save this country" fashion, a few 'Crats on the Hill have decided that the U.S. needs a 'mortgage czar' to protect us all from getting in over our heads with goofy mortgages. The prediction is that foreclosures will continue to escalate, so some lawmakers want $200 million to help those in over their heads make sure they don't lose their homes.

Wilbur L. Ross has spent his career managing complex bankruptcies and restructurings. And he's pretty good at it -- he is now a billionaire. In fact, he's so good that Goldman Sachs recently partnered with him to start a fund to capitalize on prospective financial implosions.

Well, according to a report from Reuters, Ross thinks that 2007 will be a tough year, especially for companies that have loaded-up on debt for buyouts. He sees many more bankruptcies and as a result expects to see a 7% default rate on junk bonds. That would be an increase of 700%.

He also mentioned that the holders of junk bond debt have changed. There are now many hedge funds that have played in this market. If a leveraged company has problems, will a hedge fund really be interested in working with management? Or will the hedge fund use tough tactics to salvage the investment?

Another concern of Ross: he believes that in buyout deals, the multiples are simply too high.

In other words, if things go wrong, things are likely to unwind quickly. Of course, for Ross, this will mean more good times ahead.

Tom Taulli is the author of various books, including the Complete M&A Handbook and operates InvestorOffering.com.