Financial sector is in trouble again today, the Dow Jones industrial average down 460 points. The Standard & Poor’s 500 index has fallen 54 points, and the Nasdaq composite index fell 74 points. The big news makers are Lehman Brothers, Merill Lynch, Bank of America, AIG, and the Fed buy up of $70 Billion in mortgage-baked repos.
Last week we discussed the Fannie & Freddie Bailout and in my opinion it was a necessary move by the Treasury but a move that would only maintain the status quo not improve the "credit crunch" or "mortgage meltdown" situation.
Today a few things have happened to strengthen that opinion, the Fed has fulfilled $70 Billion in mortgage-backed repos of the $173 billion in mortgage-backed repos out on the market. Lenders are still not seeing interest in mortgage-backed securities because of global concerns with the US financial industry and with todays news the Feds may be stepping up to buy more of these repos in the not too distant future. Lehman Brothers is looking at bankruptcy and Merill Lynch is being gobbled up by Bank of America at $29 a share, equating to $50 billion in stock.
Finally, AIG is looking to do a 3 part plan to raise $50 billion in liquidity. AIG has negotiated a deal with the state of New York to access $2o billion of its assets held by their subsidiaries to stay in business. There is no plan to have the Fed come in and bailout this company directly, instead the Fed has hired Morgan Stanley to negotiate a bridge loan for AIG. This bridge loan, if it happens, will be based on $20 to $25 billion in treasury reserves on assets that are worth twice that. Rumor had it that Berkshire Hathaway was in talks with AIG but backed out, probably because the deal isn't good enough for Warren Buffet to expend the $50 billion to save this insurance giant. Lehman believes they have until Wednesday to raise the needed capital and from all vantage points this is not a company that we can afford to see fall, so let's hope they can do it.
It is like throwing a rock into a pond and watching the ripples as they flow out into the deeper water. Everything is interconnected, there is no one action that is going to fix the financial, housing, and insurance industries in one fell swoop.
The Fed's are scheduled to meet and possibly cut rates on Tuesday September 16th, with the market shift and subsequent panic, if they do not cut it will be a surprise. Previously expectations on the street were that the Feds would leave the rate unchanged, however they are now expecting that there will be a a 25 to 50 basis point cut. The Fed's have room for a cut and may today feel a need to insure some confidence by cutting the fed funds rate.
Now what does all of this mean to homeowners, home buyers, investors, and the average consumer?
The bad news is the difficulty in obtaining home loans that has been felt for the last year will unfortunately continue. There is no reason that mortgage-backed securities are going to turn into a profitable or even safe investment, if anything they are looking worse than ever, so the tightening on lending guidelines will move forward. For investors out there if you had money tied up in any of these entities you are feeling some definite pain today. Stocks have dropped significantly and quickly, so money has been lost. If you had investment or saving accounts with these institutions you should be protected in most cases, but a good practice is diversification you should never keep all of your money in one place.
The good news for consumers is if the Fed cut happens your interest rate will improve by a quarter to a half of a percent on credit cards, equity lines, car loans, student loans, etc.. Long term interest rates, your 30, 20 and 15 year fixed mortgages will see some short term improvement, so for those individuals that are able to purchase or refinance this is a good time to do it.
When you turn on the news this evening remember to keep it all in perspective, the media is equivalent to a dog with a bone, they will take this news and beat it to death. The outlook will be ground shaking doom and gloom, no different than any other day and any other news story. The experts will you show how this crisis will move into the overall economy and trickle down to the unsuspecting masses. The news is taken from a global world perspective, you are an individual living in a micro world which is affected by this news but not controlled by it.
If you are ready to buy or refinance a home, do it. If you are ready to start or grow a business, do it. And if you are an investor add this information to your ongoing research and invest accordingly. The only thing that has really changed with all of this news is that interest rates may see a short term improvement and investors may need to restructure their investment portfolios. Stay educated and you will make the right decisions.