My Take on the Treasury’s Plan

“Give me your distressed, your marked down,
Your troubled securities yearning to find value,
The wretched refuse of your mortgage meltdown.
Send these, the home loans, default-tossed to me.
I lift my balance sheet beside the Treasury’s door.”

Another One Breaks the Buck . . .(my apologies to Queen)

In one of the first fallouts from the failure of Lehman Brothers Holdings, (LEH) this week, one of the first and largest money market funds put a seven-day freeze on redemptions. The Primary Fund (RFIXX), which is managed by the inventor of money market funds, The Reserve, indicated Tuesday that they held $785 million worth of Lehman debt that is now worthless. The result was that the value of one share of the fund fell to 97 cents. Money market funds’ number one objective is to keep the net asset value at $1. Failure to do so - called ‘breaking the buck’ – can create a ripple effect and undermine confidence in all money market mutual funds.  MMFs are considered the bastion of ‘safety’ among uninsured stock and bond investments. The freeze on redemptions will try to prevent a run on the fund by remaining investors, and give it time to perhaps find a solution.

The fund had roughly $23 billion in assets Tuesday, falling from over $64 billion at the end of May 2008. That tells me that lots of folks knew something was going on here. Since the fund is open to retail investors (regular people like you and me), as well as institutional investors, it’s likely that individual investors could actually lose money. It would be the first time in history that has happened. I wonder if the institutional investors were able to get out and leave the losses to mom and pop?

This is the nature of ‘systemic risk‘

From Whoo Hoo! To Whaa Happen?

It’s Friday, do you know where your bank is? I say that since it is entirely possible we may find out about another bye-bye banking behemoth this weekend – Washington Mutual (WM), Inc. While it looks like there

Courtesy CBS Marketwatch

won’t be an FDIC seizure this weekend, à la IndyMac, Integrity Bank and Silver State Bank, rumors abound that there may be a deal struck soon to sell part, or all, of WAMU to JP Morgan Chase. Previous talks between the two fell apart a few months ago, but this week saw the departure of WAMU’s longtime CEO, Kerry Killinger, who became CEO in 1990. Sometimes CEO departures portend that a major change is about to take place.

In a proactive move, last night the bank pre-announced their 3^rd Quarter losses. They’re bolstering their loan loss reserve by $4.5 billion and analysts from Merrill Lynch and Lehman Brothers, for whom the bell seems to also be tolling, continue to be skeptical about WAMU’s independent viability. This morning, Moody’s downgraded the bank’s rating to junk status. The stock closed today at $2.73 per share.

Like most of the other troubled banks, WAMU’s problems stem from their aggressive mortgage business and the problems that have evolved from their sub-prime and Alt-A mortgages. It hasn’t helped that their primary markets: California, Arizona and Nevada have been particularly hard hit. WAMU was also a large originator of adjustable rate mortgages. The rate resets on these will begin to accelerate soon and it remains to be seen whether borrowers will continue to pay higher mortgage payments on fast depreciating assets in these markets. The future doesn’t necessarily look too bright.

It’s really a sad commentary on what was once the envy of the thrift world. It got its start shortly after the Seattle fire of 1889. I’ve lived in Seattle (WAMU’s headquarters) for nearly a quarter century and watched it evolve from the ‘Friend of the Family’ at less than $1 billion in assets to the largest thrift institution in the US.

WAMU ushered in Free Checking into the Seattle market in 1993 with the introduction of the Rodeo Grandmas. It was a wildly successful campaign and the Grandmas became iconic figures.

I wonder what grandma would say today?

Deal (or no) Deal?

One of the provisions included in the housing bailout bill passed in late July included a “tax credit” for first time homebuyers. Mortgage originators all over are touting this to prospective borrowers. One of the comical things is that the government defines ‘first time’ as someone who hasn’t owned a home in the last three years, but I digress.

Upon closer scrutiny of the provisions of the credit is that it isn’t actually a credit, it’s a loan, albeit an interest free one, that extends for 15 years. First-timers receive the credit in the tax year in which the home purchase is made and the availability extends until June 30 of next year. The maximum credit is 10% of the purchase price or $7,500; whichever is less – which effectively puts a cap on the purchase price of $75,000. This is only about a third of the current median home price. Deal?

It seems to me that there is little incentive for the first-time homebuyer.  It begins to phase out at AGI levels of $75,000 for individuals and $150,000 for married taxpayers that file jointly, and is eliminated altogether at income levels of $95,000 for individuals and $170,000 for joint filers. In addition, if the home is sold within 15 years, the entire balance of the credit is due immediately. First time homebuyers tend to buy first-time homes – not likely the one’s they are going to stay in for an extended period. (That is, of course, unless you are me – I’m still living in the first house I bought). That could create a big tax bill for a young couple that wants to move up in a few years. Deal?

With all the stipulations, it doesn’t appear that exercising the credit makes much economic sense. Also with housing prices continuing to fall, who wants to take out an additional loan on a (currently) depreciating asset?

No Deal. . .