Wall Street Ready To Tank Tomorrow

[S197]

Can you please tell me where you're getting 4.5% in a MMkt account as I would like to move some cash into that. My core account is in a muni mutual fund that is yielding 1.6% today. Six month CDs are averaging around 3%. Who is offering a MMkt account at 4.5%???

Sure, http://www.everbank.com. They're offering a 3-month introductory rate of 4.76% APY. They also pledge to keep their yield in the top 5% of all MMA's so even after the intro rate, their MMA is still yielding 3.51% APY. Very respectible in this current environment.

They also have foreign currency CD's (also FDIC insured) if you're into that stuff but ForEx is not something I'm skilled in.

Gold is off about 30% from its July high (using the SPDR etf). It's down 1% today in a market where is should be up. Inflation is in check and the dollar is still surprisingly strong and that makes be a bear on gold. Dennis Gartman is saying to stay away from gold (although Gartman isn't quite the commodity guru that CNBC thinks he is).

Today's market is not for investors; it's strictly a traders market.

Yep I sold my gold position when it went over $1,000 an ounce and just recently bought back in. It may fall more if we're really in a deflationary economic environment but I think the Fed will cut rates again and commodities will rise. Just a short-term play and only a small portion of my portfolio. We're runnning the printing presses hard and this dollar rally will not last, IMO.

As for today being a trader's market, I agree. But look at the S&P chart since 2000. It's been a traders market for almost a decade, if you bought and held the S&P 500 over that period, you would've made nothing. Not even taking into account inflation.

[S197]

How does this effect people that bought a house during this time period and *can* afford the loan they took out? If you have a mortgage (that you pay on time) from one of these banks that goes under what does that mean for you?

No direct effect. Your mortgage along with others are bundled up and sold to investors (such as Fannie and Freddie) as banks do no want to keep these on their books.

This is the reason the government had to bailout Fannie & Freddie, they together own or guarantee half of all mortgages in the US. If they went under, there would be virtually no secondary market for banks to sell their mortgages to. And banks do not want to keep 30-year loans on their balance sheet.

The indirect consequence, is you and I (taxpayers) are now on the hook for the losses. It may be the next generation who will feel it the most. You can only write so many IOU's before its time to pay up.

[PurpleMustReign]

We are in the worst financial crisis since 1929. Wall Street is disintegrating.

The investment banks (i.e. Merrill Lynch, Bear Stearns, Leham Bros., Goldman Sachs, etc) have no minimum capital regulations. Over the last decade they have used excessive leverage to help foster the housing bubble along with other things. Lehman, before they went out of biz was leveraged 40:1. Commercial banks like Wells Fargo are leveraged around 6:1. Commercial business that are levered more than 2:1 are usually considered risky.

Here's an example. Me = investment bank. You = customer.

I lend you $400K and have $10K of capital to back that up. You take that $400K and buy a house with no money down. My only collateral is a mortgage on the house you cannot afford. I allow you to buy that house without verifying your income or doing any credit underwriting that used to be in place to qualify for a mortgage. You decide to take a teaser rate in the form of an adjustable mortgage that resets in two years. Two years pass, your rate adjusts, you fall past due on your mortgage and are headed toward foreclosure. Both you and I were betting that your home would keep increasing in value but instead it has declined by 25%.

Repeat that about 20 million times in the US and then go over to Europe and repeat the same model.

I have to raise capital as I usually do to keep funding operations but now I can't do it because no one is willing to invest in me. The reason no one will invest in me is because my balance sheet if full of crap and I don't have anywhere near enough capital in relation to my liabilities. I go out of business, you lose your house and all of your purchasing power. You aren't buying anything and that helps to put the economy into a recession.

A year from now we might not have a single investment bank on Wall Street. We're talking about firms that have been in business since the early 1900s. Oil is now in the low 90s. That's a 40% decline from early July. In "normal" times that should have been a catalyst for a nice run up in the market. Instead we had the 6th largest point decline in the Dow yesterday. This is serious stuff.

Wow. It makes much more sense now. Thanks.

I have a question that may border on politics, but how much of this is due to the war and oil prices? Will the economy recover? What does this mean for future housing markets, and also stocks? And 401K? Will that be safe? Be gentle, I am a complete zero when it comes to economics.

[S197]

Will the economy recover?

Yes, I think so. Although it may be a slow recovery.

What does this mean for future housing markets, and also stocks? And 401K? Will that be safe? Be gentle, I am a complete zero when it comes to economics.

That's the million dollar question and no one can really say for sure. I think housing will fall further, as there's a big disconnect between wages and housing prices. (Watch the Chris Martenson link I posted if you can, he makes it very easy to understand the current housing bubble)

If you are far away from retirement, do not touch the 401(k) and if your company matches, make sure you contribute at LEAST that much.

Things are bad, but as Buffet says, "Buy on fear, sell on greed." I think as this thing unwinds we will see a lot more fear. This will lead to buying opportunities. I don't think we're quite there yet but my guess is as good as anyone else's.

[wang_chi7]

Wow. It makes much more sense now. Thanks.

I have a question that may border on politics, but how much of this is due to the war and oil prices? Will the economy recover? What does this mean for future housing markets, and also stocks? And 401K? Will that be safe? Be gentle, I am a complete zero when it comes to economics.

I'll only answer your first question, but I'm far from an expert. The war and oil prices have some effect, but not a lot; oil not having much of an effect is illustrated by its recent price decline not doing didly. Oil is definitely a big issue because it is hurting the average American big time in their wallets, but its not killing wall street or the economy as a whole. The biggest reason for this economic decline/collapse is what X touched upon though- the housing market. Its not only killing the financial sector, but also retail (nobody's spending to improve their homes and people forclosing don't have exposeable income.)

Basically it's come down to pure stupidity. People buying crap they don't need and can't afford. Way too many homes were bought way out of price range. But it doesn't stop there; people are maxed out on credit cards (which are supposed to be for emergencies only unless you pay in full every month.) Our stupidity and greed have caught up with us and now everybody will pay.

(getting into politics, but need to complete my thought) Everybody wants to blame the government because its the easy thing to do. But it ain't their fault people are buying houses way out of their price range. It ain't their fault everybody absolutely had to drive a gas guzzling SUV (even though most were used in town and to haul four or less people around.) And it ain't their fault people are using their credit cards to buy wants. Its the citizenry and not the government. I don't expect, or want them, to try and fix it because government intervention usually backfires. We have to take our medicine. Its going to hurt, but we as a people have only ourselves to blame.

[S197]

(getting into politics, but need to complete my thought) Everybody wants to blame the government because its the easy thing to do. But it ain't their fault people are buying houses way out of their price range. It ain't their fault everybody absolutely had to drive a gas guzzling SUV (even though most were used in town and to haul four or less people around.) And it ain't their fault people are using their credit cards to buy wants. Its the citizenry and not the government. I don't expect, or want them, to try and fix it because government intervention usually backfires. We have to take our medicine. Its going to hurt, but we as a people have only ourselves to blame.

I agree, especially with the last two sentences. That being said, the government should also lead by example. Consumers have massive amounts of debt but look at our deficit. The consumer mentality just mimics the government.

[Mr. X]

Sure, http://www.everbank.com. They're offering a 3-month introductory rate of 4.76% APY. They also pledge to keep their yield in the top 5% of all MMA's so even after the intro rate, their MMA is still yielding 3.51% APY. Very respectible in this current environment.

I've never been comfortable wiring money to an online bank just to park funds for the short term. Not worth the hassle for me. I prefer to keep everything consolidated in one account with one brokerage firm.

When I checked BankRate, the national average for MM savings is 2.4%. EverBank is paying almost double the national average. That's a red flag for me and a reason to stay away even if it is FDIC insured. When IndyMac went down the average length of time it took depositors to get their money was 4-5 weeks. Interest stops accruing on the date the FDIC takes over. EverBank has a decent rating but IndyMac also had a decent rating before it went down. Banks usually don't pay double the national average unless they are squeezed for liquidity.

[Mr. X]

Everybody wants to blame the government because its the easy thing to do. But it ain't their fault people are buying houses way out of their price range.

Slightly disagree. Greenspan kept interest rates artificially low for too long. That cheap money helped to fuel the housing bubble. In addition to that Freddie and Frannie went way off the reservation. They were set up years ago to help bring liquidity to the mortgage market with the idea of fostering home ownership. They were GSEs (government sponsored entities). Because of that they were able to raise capital at much lower rates which made mortgages more affordable than they otherwise would have been. No one knew for sure what "sponsored" meant. Now we know. It meant government guaranteed. The problem was that Freddie and Frannie were private corporations using the implied backing of the US Treasury but they were being run like huge hedge funds with no regard to risk. They morphed into something that was inconsistent with their original purpose.

What I would like to know is what happened to credit underwriting standards for mortgages that qualified for repurchase by Freddie and Frannie? It seemed to go out the window about seven years ago. If you had a pulse you qualified. Who signed off on that? Why wasn't anyone screening these mortgages? As usual no one will be held accountable for the US Treasury assuming hundreds of billions of dollars worth of mortgage paper and when a big chunk of that stuff craps-out it's the taxpayers (you and me) that get stuck with the bill.

[John]

Today the volume in AIG is over 1.1 billion shares. That is truly amazing. It got down to 1.25 but it's bouncing back based on rumors of a government backstop. So much for the "moral hazard" concern.

The theory of bailing out Bear Stearns was that the systemic risk was so high that the cost of allowing it to fail would have been much more expensive than doing the bail out. AIG is a huge player in Credit Default Swaps and is much larger than Bear Stearns. AIG's systemic risk has to be much higher that Bear Stearns. I abhor the idea of a government bailout but on the other hand a failure of AIG could be the thing that stimulates a panic. Rock meet Hard Place. Hard Place meet Rock.

I wonder what the federal budget deficit will be next year? $800 Billion? $1 Trillion? I don't see how we can be adding all this crap debt to the balance sheet of the Fed without the deficit going through the roof.

We're walking a thin line with the "no politics" policy here. Note I said we.

Attempting to stick to financials, I disagreed with the need to pad the Chase purchase of Sterns. That was the first company that should have gone bankrupt IMO. I seriously believe the Feds were very out of touch with the total situation at that point, or it was CYA gone wrong. Lehman was mismanaged, stuff happens.

I sense the Trump situation is coming into play here. Trump got himself into such debt with a single bank that they couldn't let him go bankrupt years ago and actually gave him more. I don't know what that little jerk's situation is now, but it was a very risky move by that bank (don't recall which one just now). Looks like the same situation is still in play but this time it is the Lehmans playing fast and loose figuring the Feds will bail them out because they're so big, AIG too. That can't be allowed to continue. Fannie and Freddy was a bail out that had to happen... but how much more can the taxpayers cover?

I believe the radio just said (this minute) the Fed will bail-out AIG... Arggh. This isn't over until it hits bottom and delaying that on our backs isn't a good idea.

[S197]

I've never been comfortable wiring money to an online bank just to park funds for the short term. Not worth the hassle for me. I prefer to keep everything consolidated in one account with one brokerage firm.

When I checked BankRate, the national average for MM savings is 2.4%. EverBank is paying almost double the national average. That's a red flag for me and a reason to stay away even if it is FDIC insured. When IndyMac went down the average length of time it took depositors to get their money was 4-5 weeks. Interest stops accruing on the date the FDIC takes over. EverBank has a decent rating but IndyMac also had a decent rating before it went down. Banks usually don't pay double the national average unless they are squeezed for liquidity.

I wouldn't wire funds as the fees are expensive. Most of the time it's done by ACH transfer (or you can write a check I suppose).

As far as EverBank's financial strength:

Jacksonville, FL - EverBank® Financial Corp. today announced record earnings of $44.7 million for the first half of 2008, an increase of 162% over the $17.1 million recorded in the first half of 2007. 2008 year-to-date earnings benefited from EverBank's gain from the sale of its share of EverBank Reverse Mortgage LLC to MetLife, Inc. Earnings from continuing operations, which exclude this gain, also reached a record $18.5 million, an increase of 8% over the first half of 2007. The strong earnings bolstered EverBank's equity position to over $402 million, further demonstrating the financial strength of the company. EverBank's assets and deposits grew to $6.0 billion and $4.1 billion, respectively.

"EverBank's financial health and performance have never been greater" stated Rob Clements, Chairman and CEO of EverBank Financial Corp. "EverBank is in a unique position in the banking and lending industry: during a time when many other banks and financial institutions are in distressed or weakened positions from relying on risky lending, unpredictable capital markets funding and unsustainable leverage, EverBank maintained disciplined risk and credit management practices. As a result, EverBank's distinctive, diversified and disciplined business model generated record earnings, record bank capital, record deposits and record assets, positioning the company for significant growth."

In a time when Bank's are producing massive losses, they've remained profitable and earnings have actually been improving. They've also won accolades from Frobes, Kiplinger and Money.

Keep in mind the muni fund you're invested in is only as good as its insurers, most municipals are only investment grade because of their insurers, they themselves are usually not. And the monoline insurers (Ambac and MBIA) have both been downgraded as of late. There's no FDIC for money market funds.

In the end, its what you're comfortable with so if you're uncomfortable with online banks then you're probably right to stay away. Myself, I'll take a high yield, 100% insured, profitable bank MMA over a money fund any day.

[wang_chi7]

Slightly disagree. Greenspan kept interest rates artificially low for too long. That cheap money helped to fuel the housing bubble. In addition to that Freddie and Frannie went way off the reservation. They were set up years ago to help bring liquidity to the mortgage market with the idea of fostering home ownership. They were GSEs (government sponsored entities). Because of that they were able to raise capital at much lower rates which made mortgages more affordable than they otherwise would have been. No one knew for sure what "sponsored" meant. Now we know. It meant government guaranteed. The problem was that Freddie and Frannie were private corporations using the implied backing of the US Treasury but they were being run like huge hedge funds with no regard to risk. They morphed into something that was inconsistent with their original purpose.

What I would like to know is what happened to credit underwriting standards for mortgages that qualified for repurchase by Freddie and Frannie? It seemed to go out the window about seven years ago. If you had a pulse you qualified. Who signed off on that? Why wasn't anyone screening these mortgages? As usual no one will be held accountable for the US Treasury assuming hundreds of billions of dollars worth of mortgage paper and when a big chunk of that stuff craps-out it's the taxpayers (you and me) that get stuck with the bill.

Great points, I still think its ultimately up to the people buying these homes to sit down and write a budget. It doesn't take much figuring to find out exactly what you can afford. Yeah, they were told based on their income they can afford a certain amount (an amount too high if you want to drive a couple new cars, go on expensive vacations and save for a nice retirement, but COULD afford) but its still up to the person to figure it out themself. Buying a house assuming it will gain value or assuming your salary will go up so you can one day afford it is just plain stupidity. Lots of otherwise smart people did it, but it was pure stupidity. Don't count your eggs before they are hatched, even if Uncle Sam does. It doesn't take a rocket scientist to figure out what you can afford for a mortgage.

[Mr. X]

I wouldn't wire funds as the fees are expensive. Most of the time it's done by ACH transfer (or you can write a check I suppose).

I don't care that much about the wire transfer fee (it's like $20). It's just the idea of transferring money into an online bank where I don't have any relationship. Also ... when I do an ACH transfer from my bank account to my brokerage account it takes 5-7 days to clear. If I want to move back into the market I don't want to have to wait a week to do that.

As far as EverBank's financial strength

Yeah ... I read the memorandum at bankrate on EverBank and it looked okay except for their capital ratio which is about half the bank standard. Nonperforming loans on June 30th were 18% of assets which a little high but okay given how standards are changing.

My question remains ... if EverBank is strong why do they feel it's necessary to offer a MMS rate that is almost twice the national average?

Keep in mind the muni fund you're invested in is only as good as its insurers, most municipals are only investment grade because of their insurers, they themselves are usually not.

My muni fund is mostly GOs not revenue bonds. When is the last time a muni GO defaulted? I don't think there has been one.

And the monoline insurers (Ambac and MBIA) have both been downgraded as of late. There's no FDIC for money market funds.

Good point. When Amback and MBIA went in the crapper I went through my muni prospectus with a fine tooth comb. Amback and MBIA got into trouble due to the auction rate securities problem. It's been a while since that hit the fan. Nothing has happened with the muni market due to the auction rate securities liquidity problems. There hasn't been a single muni default that I am aware of.

In the end, its what you're comfortable with so if you're uncomfortable with online banks then you're probably right to stay away. Myself, I'll take a high yield, 100% insured, profitable bank MMA over a money fund any day.

Did you open an account at EverBank? If yes, did you do it online or at a branch (do they have any branches in your area)? I'd be interested in knowing what your experience was. Have you withdrawn any funds at any time and how did that work in terms of the length of time it took you to get your money.

[S197]

Did you open an account at EverBank? If yes, did you do it online or at a branch (do they have any branches in your area)? I'd be interested in knowing what your experience was. Have you withdrawn any funds at any time and how did that work in terms of the length of time it took you to get your money.

Yep I have an account. It's actually my second online account, I used to keep a rainy day fund with EmigrantDirect but moved over for the higher yield. For EverBank, you can start the application process online but you do need to mail in paperwork. There are no physical branches in my area, which sort've answers your question about their higher yield. Not being a traditional "brick and mortar" bank reduces their overhead, the savings of which is passed on to the customer allowing for higher yields.

I've moved funds between them and several different financial institutions without problem. I will say this though, their ACH does take longer (similar to your experience of the 5 business day wait) so now I initiate transfers through my broker which go through in about 2 business days. Like other MMA's you're also able to write checks off the account (I think its 5 per month by federal law). I haven't done any wires so I can't comment on that.

Your concerns about insolvency are valid but it sounds like you did your due diligence. In the end, the tax break and familiarity of the muni fund may be the better choice but I just thought I'd throw out another option.

(They should be paying me for this advertisement)

On a similar note, I just read today that a money market fund "broke the buck." First time in 14 years.

http://www.bloomberg.com/apps/news?pid= ... refer=home

[PurpleMustReign]

Mr. X,

What do you do for a living, is it financial related? Just curious.

[Hunter Morrow]

I'm not going to blame this all on the private sector.
Deregulation definitely played an enormous part to this.
If bonds were regulated so bundled up pieces of overextended loans to people who could never pay back on them weren't "AAA", if institutions weren't leveraged at 10, 20, 30+ to 1, and so on and so forth.
If rules and accountability weren't thrown out the window in pursuit of profit none of this would have happened.
You think the Savings And Loans scandal would have been a big enough tip off that if rules were thrown out the window this would be the result.
Many people were on point about deregulation and sham accounting leading to a housing and investment collapse, for years, but they were all Chicken Littles. Sky's falling now, I guess.