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This is a copy of Sy's weekly (weekend) newspaper column 'Being Street Smart', which appears in a few newspapers and on a number of financial Internet sites. You may post this as content on your own website as long as full credit is given exactly as at the bottom of the article.
BEING STREET SMART
by Sy Harding
Panic Averted - But? August 24, 2007.
A week ago Friday the Federal Reserve created excitement when it cut the ‘discount rate’, the rate that troubled banks pay to borrow money from the Fed. The news ended a scary six-day market plunge. The Dow jumped 233 points on the Fed decision, and a huge sigh of relief could be heard around the country.
However, in the background there was some concern, given the publicity surrounding the credit crunch, that troubled banks would be reluctant to go to the discount window for fear of revealing that they are in trouble. So this week, in a move that had Fed pressure written all over it, four of the largest banks in the nation, Bank of America, CitiGroup, JP Morgan Chase, and Wachovia, stepped up to the window to borrow a total of $2 billion ($500 million each). Unfortunately, that apparently didn’t work to remove the stigma of using the discount window. On Thursday the Fed reported that total borrowing at its discount window since its rate cut had been - $2 billion. So much for the assistance to the troubled banking system provided by the discount rate cut.
On
Wednesday, in another move that looked like it had Federal Reserve pressure
behind it, Bank of America announced a $2 billion investment in troubled
national mortgage-provider Countrywide Financial Corp. Bank of
The announcement created some early excitement in the financial media and in the stock market, until it was realized that it wasn’t as much a vote of confidence in Countrywide as it originally appeared to be. For its $2 billion investment, BankAmerica is getting preferred stock that will pay it a 7.2% yield, more like a high-yield bond, which will bolster its own earnings. And later the preferred stock can be converted to common stock at $18 a share if everything works out for Countrywide and its stock price rises.
However, even that effort ran into a brick wall. In an interview on Thursday, the CEO of Countrywide Financial himself poured icy cold water over the attempt to bolster confidence, saying the current financial situation is among the worst he’s seen in 55 years, the current housing slump will lead to a recession, and that there is still a tremendous liquidity problem.
He may be right. This week came reports that real estate foreclosures increased by 9% in July, and are up 93%, almost double, over a year ago. Meanwhile, the U.S. Consumer Comfort Index fell 9 points last week, to minus 20, the sharpest decline in the more than 21 years the poll has been conducted.
It’s interesting to see how widely the impact of the bursting of the real estate bubble varies across the country.
Some
areas are not surprises. Among the hardest hit with foreclosures have been
It
is an indication that economic problems, as well as the bursting of the real
estate bubble, are involved.
In
the other direction, hardly impacted at all are
The problems have many lenders unwilling to make loans of any kind for the time being, but particularly those brought to them by outside mortgage brokers. Major banks have been closing those types of operations across the country, and laying off employees. The latest reports show 23,000 employees in the financial services sector have lost their jobs just this month so far.
Caught in the middle are borrowers whose credit record might qualify them for better terms but they are at risk of losing their homes anyway if they can’t find a lender willing to refinance their existing mortgages.
It does seem the problems will take time to work out. Meanwhile, the stock market must deal with uncertainties about the economy as well as the continuing problems in the financial industry, not usually a supportive situation.
Sy Harding is President of Asset Management Research Corp., and publisher of the financial website www.StreetSmartReport.com, and the free blog www.SyHardingblog.com. He also authored the timely 1999 book Riding the Bear - How to Prosper in the Coming Bear Market.