March 19 Economic Update
March 19th, 2008Steve Peterson, Branch Manager
Chase Home Finance
Office: (800) 894-5440 Ext. 214
Cell: (775) 219-7151
From my seat at this odd spectacle, it appears that we are coming down to it. It? The true economic crisis in our land: Giant financial companies have long been making tremendous amounts of money through the manipulation of debt. But debt must be repaid at some point, somehow. It isn’t a game that can go on forever. While the game is indeed going on, the financial entities can use debt to create huge amounts of debt. It can look like they’re creating wealth in the process. But the truth is, debt must be repaid someday, somehow.
Bear Stearns seems to have turned itself into an elaborate Ponzi Scheme, and when investors finally started to line up outside the door, demanding their money, the Bear could not pay…could not raise the money to make good on its debts. The Federal Reserve stepped in with financial backing to keep the game going, created an elaborate scheme in which J.P.Morgan Chase “buys” the Bear (at $2 a share!), and the result is several thousand people who have apparently lost their jobs and amazing amounts they invested in the Bear.
These are very, very tough times. The financial markets are now being forced to reinvent themselves. Each morning, when I wake up, I’m not sure which companies will still be there–which brokerage houses, which banks, which mortgage giants.
But this will all pass–though it is impossible to say how long it will take and how many people will be hurt by it. The truth is, we do continue to need to buy and sell houses, and to manufacture products, and to invent and create…and we will slip gradually from the grasp of a system that became so mired in the massaging of debt that it forgot what business is really about.
Perhaps the surest sign that we’re emerging from this mess will be a series of mornings when we wake up and no longer check the newspapers for details of the next major failure among the giants of our economic life. I think that may be a few months from now, not a few years.
Hold firm. Remember what we say about the darkest light…just before the dawn.
Thumbnail Sketch: You probably understand this already, but a quick review won’t hurt. Ground Zero for the current economic crisis can be found among the largest financial brokerages on Wall Street—focused in the fifth largest brokerage house in the world, Bear Stearns. Bear Stearns dove with enthusiasm into the market for subprime mortgage-backed securities. You will recall that two Bear Stearns funds were among the first to fall. We’ve been watching this company over the past several months with great concern.
Whether it was lowering (fed funds) interest rates, or making it possible for financial brokerages to borrow at the discount window along with banks, or, most recently, allowing those brokerages to use their AAA-rated mortgage-backed securities as collateral for 28-day borrowings of U.S. Treasury securities…the Fed has been trying to provide some relief for the financial brokerages and to calm the markets, which are losing faith in the financial viability of those brokerages. Why? Because the brokerages haven’t been able to sell their assets to anyone; no one has wanted to buy mortgages at anything but fire-sale prices. The Fed was—and still is—trying to head off an avalanche of panic as investors lose all confidence in the financial brokerages and demand their deposits. Which is precisely what started to happen, as a good old-fashioned “run on the bank’ developed for Bear Stearns, which simply didn’t have any way to put together enough funds to pay its depositors. The Fed stepped in, called on J.P.Morgan Chase (arguably the only house large enough to handle all of Bear Stearns’ accounts) to help, and agreed to guarantee the assets of Bear Stearns. That was, to say the least, a stop-gap measure.
Next, the Fed helped negotiate the purchase of Bear Stearns by J.P.Morgan Chase at the stunning fire-sale price of $2 a share. Friends, Bear Stearns analysts had recently measured the resale value of their assets at about $80 a share. And last year the stock sold for more than $130 a share. Their office buildings alone are surely worth more than the equivalent of $2 a share. J.P.Morgan Chase, in other words, is being paid a great deal of money to keep this shell of a financial house in the game. Again, however, this is stop-gap. The markets—and you and I—watch this with tremendous concern. The financial giants are in danger of imploding. The system is reinventing itself as fast as it can, which may not be fast enough to avoid further significant damage.KEY INDICATORS
Gold $1004.30/ounce [up]Crude Oil (Brent) $105.56/brl [up]U.S. Dollar to… Euro .6400 [down] Japanese Yen 99.82 [down]6-mo Treasury Bill Yield 1.31%10-yr Treasury Note Yield 3.49%[6-mo down 32 bps, 10-yr down 11 bps]11th Dist Cost of Funds: 3.970%30-yr Fixed-rate Mortgage 6.48%15-yr Fixed-rate Mortgage 5.71%1-yr ARM 5.91%[HSH averages rates: 30-yr down 24 bps, 15-yr down 42 bps; 1-yr ARM up 13 bps] Mortgage Bankers Association Mortgage Applications Index week ending 3/7 Overall 671.7 (down 1.9%; up 3% the week prior) Purchase Money Loans 368.8 (up 1.6%; up 1.4% the week prior) Refinancing Loans 2448.2 (down 4.7%; up 4.5% the week prior)
Weekly Jobless Claims 3/8 353,000 first computation – 353,000 prior week (with upward revision of 2,000) NAHB Housing Market Index Mar Unchanged at 20
Housing Starts Feb Down 0.6% - permits down 7.8% Fed funds rate cut by .75%
