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Archive for Treasury Secretary Henry Paulson

What Does Wall Street Bailout Mean To Main Street?

With so many opinions about what is happening with the economy, what does this mean to you?

Wow, what a week.  There is no shortage of fireworks on Capitol Hill as the Senate Banking Committee continues to throw Fed Chairman Ben Bernanke and Secretary of Treasury Hank Paulson on the grenade.  The one constant that continues to be thrown around by members of the committee is that this unprecidented measure will “cost” tax payers $700 billion.  I am afraid that this term is being lost on the committee as it is also being lost by tax payers and citizens due largely to a misunderstanding of what this “bailout” actaully involves.

Let me qualify this by saying that I am a very large opponent of gevernment intervention at any level.  There is nothing that the government gets involved with that makes anything cheaper, more effective or more efficient.  That being said, we have reached a monumental point in the financial markets where intervention is necessary to avoid a total collapse of the financial markets that is nearly immeasurable by most people alive today.  Unless you are in your 80’s, it is unlikely you can truly appreciate what affect the depression had on this country (myself included).  The argument being made is that tax payers are being asked to foot the bill for mistakes made by people and organizations that they had nothing to do with, and to a limited extent that is true.

What is really going on is a total lack of faith in the system due to the unwillingness of financial institutions not only to lend money to consumers, but also to each other to keep the system fluid and capitalized.  When using the term bailout, you must see the bigger picture of what is actually going on.  The Fed and Treasury Department are proposing to the Senate Banking Committee that the government purchase certain mortgage backed securities from financial institutions that need help to liquidate these securities to continue in business.  If you own a pizza parlor, you can only remain in business if you sell pizzas for more than the cost to make them, use the proceeds to buy supplies, and repeat the process.  The same is true in the financial industry.  Banks can only lend money after taking certain securities, liqudating them in the open market, recovering the cash, and lending it again for a profit.  This is a highly simplified version of what is happening, but it has very complicated and wide reaching implications in all of our lives.

Some of these securities are owned by your pension fund, or your local municipality, or even your investment banker (as we have already seen with Bear Sterns and Lehman Brothers).  While it is pertrayed in the media and misunderstood by elected officials that this is a $700 billion line item expense to the tax payers, that in fact is not true.  It is actually the government purchasing assets with the intention of holding them and selling later.  The proposal is also suggesting that the securities be purchased in a reverse auction fashion where the banks most desperate will sell first at the lowest coupon rate, and as the value rises, the market will dictate what is reasonable to sell for each individual company.

In the end, the actual cost to the tax payer will be much less than $700 billion, in fact, it will more likely be a fraction of that.  The result of this action would be to open up a logjam in the system allowing institutions to become more liquid, be able to lend more money to consumers, and increase consumer confidence in the economy as a whole.

As you sit in Smallville, USA and wonder why you would go along with such a deal, be aware of the fact that farmers who need short term financing to get their crops to market are affected.  Car companies that employ thousands of people to build and sell cars are affected.  And, small businesses that need money to expand and grow and create more jobs are affected.  This may have originated on Wall Street, but there is a very real impact on Main Street that could create real problems if it is not done.

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Monday July 14, 2008

Fannie and Freddie push the market higher?

Friday’s news about the uncertainty of the future of Fannie Mae and Freddie Mac led to a huge sell off in stock for the 2 mortgage giants.  Was it warranted, or just a fearful market overreacting?  That question will probably not be answered today.  But, the Treasury department stepping up to help out lends a little more stability to an uncertain market.

Treasury Secretary Henry Paulson and FED Chairman Ben Bernanke have given the green light to Fannie Mae and Freddie Mac to borrow money directly from the Central Bank at the federal discount rate of 2.25%.  This is significant because it has never happened in the past.  The federal funds discount window has been historically limited to banks and credit unions, but this option being made available to Fannie and Freddie is giving a little boost to the mortgage bond market and mortgage rates this morning.

It is not likely that this is a long term rebound in bond prices, but it is worth mentioning.  In addition, the Producer Price Index (PPI) and the Retail Sales Report are due out tomorrow and will dictate the direction of the market when they come out.

If you have a mortgage currently working, you might want to go ahead and lock your rate.  But, if your mortgage is a little farther out, wait and see what happens tomorrow to make a decision to lock or not.

Friday July 11, 2008

Volatility in stocks leads to a mild bond rally.

Bonds are flat at the time of this post, but they weren’t that way earlier.  We have been up and down and back to the middle today on a variety of financially related news.

Oil prices hit a new high this morning after an early spike of almost $5/barrel to push it over $147 for the first time.  This spike in oil caused a sell off in stocks, and a sell off in stocks went into the bond market creating a little upward movement this morning.

If you haven’t seen the news yet, Fannie Mae and Freddie Mac (the nations 2 largest secondary mortgage market guarantors, and holders of over 50% of the total $6 trillion in existing home mortgages) are hurting.  Secretary of Treasury Henry Paulson had some possitive things to say about them yesterday and how the government can help to fortify their position.  Then, the New York Times reported that the government is considering a contingency plan to take over Fannie Mae and Freddie Mac.  This, of course, is not good news for anybody, and traders were lining up to sell stock in both companies today leading to a 40% decline in value.

Now, the bond market feeds on bad news, so there was a rally based on all of the above mentioned negativity.  Then, the report about US exports came out with a lower than expected trade deficit, and much better than expected foreign consumption of US goods.  Apparently, the weak dollar makes exports to foreign countries more palatable, and our friends across the pond are buying more of our goods as a result.

All in all, I will stick with my recommendation from yesterday to lock your mortgage rate if you have a short term mortgage in processing.  We are still facing a significant upside resistance level at the 200 day moving average, and it is not likely that any gains that may be obtained would be worth sitting with baited breathe and calling your mortgage banker 4 times a day.  Go ahead and lock, then enjoy your weekend.

Thursday July 10, 2008

Weekly jobless claims fall, market reacts.

The Weekly Initial Jobless Claims report came out today much better than forecast.  With 58,000 fewer claims, the report sank to 346,000, the lowest level since April.  This news, which is good for the economy, would normally be seen as bad news for mortgage bonds.  But, mortgage bonds appear to be remaining relatively flat on the news.

Treasury Secretary Henry Paulson and FED chairman Ben Bernanke testified before the House Financial Services Committee today to suggest ways that Congress could “fix” the financial regulatory system to prevent future crises.  I managed to make it through about 30 minutes of the meeting before the barage of stupid questions followed by equally predictable answers gave me a head ache.  At least they do agree on one thing…we need more government intervention.  AWESOME!!  Nothing says efficiency and dependability like putting it in the hands of the government.

Back to the matter at hand; if you are currently working on a mortgage loan, I would suggest locking your rate now.  Bond prices are currently testing the topside support level of the 200 day moving average.  Given the difficulty of crossing that major threashold, combined with the fact that no other significant economic data is due out this week, mortgage bonds are probably about as good as they are going to get in the near term.