Just got a feeling that we've been spooked enough. I've read your comments and the genuine fear that I see is about bank deposits and mortgages being made.

The FDIC, in my opinion, has been doing a great job of arranging mergers and reassuring depositors. Credit unions want you to know they, too, carry federal insurance from the National Credit Union Administration. .

Goldman Sachs, Morgan Stanley and recently Raymond James have decided to become commercial banks. Doesn't that give you a sense that deposits are sound?

I think the best idea of the morning is to increase FDIC insurance limits, so that depositors are more assured.

FDIC insurance premiums are paid by the industry. And isn't it about right that banks, the ones with all those sound deposits, chip in to resolving this crisis of confidence?

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Tax Break Extension

To the many South Floridians who are desperately trying to sell a home that’s worth less than the mortgage balance, the tax break was the best part of the bailout bill.

If the bill had passsed, homeowners would not we federal income tax on certain mortgage debt that their lender forgives before Jan. 1, 2013. For example, lenders can agree to a “short sale” for an amount that is less than the mortgage. The unpaid debt is forgiven.

Under federal tax law, any forgiven debt is subject to federal income tax. But Congress changed that last year, making an exception to the rule for mortgage debt up to $2 million on a principal residence. The exception covered mortgage debts forgiven in 2007, 2008 and 2009.

The bailout bill would have extended that time period by three years.

The tax break also applies to foreclosures, deed-in-lieu of foreclosures or any loan modification.

So, sorry, no extension applies.

Investors who got caught in this crisis don't get the break either.

And as one commentor on my earlier post noted, the lenders are playing hardball. They don't want to give up on this debt, they're going after your credit and doing anything they can to get repaid. No nice guy tactics in this market.

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They warned us about disaster.
Congress brought one about today. More than 777 points on the Dow are gone. And the Bailout Bill is toast.
If ou've been reading this blog, you know that I don't think it's designed to help homeowners much at all.
Or to cure the housng industry's ills.
Those are the "root causes" of the problem, in Treasury Secretary Henry Paulson's phrase.
But they're not getting a solution.
The trouble here is the characters who brought this crisis about are not the ones who are paying for it now. All of us are. All investors. Anyone who needs a loan. Credit card holders, too.
The people who did this, they're not on the hook.
What does the market meltdown mean to you?

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To the many South Floridians who are desperately trying to sell a home that’s worth less than the mortgage balance, there’s one bit of good news in the bailout bill.

You won’t owe taxes on any debt that’s forgiven in a short sale, which is a sale for a price that’s less than the mortgage, through Jan. 1, 2013.

That’s a three-year extension of a tax break that Congress put in place last year.

I’m culling through the bill now, looking for anything else it offers homeowners or borrowers. Check back later for more….

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Florida's mortgage market, along with some help from California's equally troubled housing situation, has brought Washington Mutual down. Apparently, about two weeks ago, WaMu's weakned position became frightening to depositors, who began taking out their money. And that lead to its end.

WaMu was one of the most active mortgage lenders in Florida, before it began cutting back those operations. And it was a substantial employer.

By deposits, Washington Mutual is the fifth largest banking institution on Florida. It has $11.9 billion in deposits and it has 259 offices here, according to FDIC statistics.

The one thing that I have seen in past bank failures or transitions is that once the FDIC steps in, things run smoothly. I would expect very little disruption to depsitors whose funds are below the $100,000 FDIC insurance limit on most accounts. The figure is higher for retirement accounts and certain trusts.

And it's important to not classify all banks as troubled. Strong institutions, who sidestepped the risky lending practices of the last two years, will remain and will benefit from this financial meltdown.

J.P. Morgan Chase & Co. is absorbing WaMu, paying $1.9 billion for its assets.

This failure is almost ten times larger than the failure of IndyMac Bank. WaMu had $307 billion in assets compared to IndyMac's $32 billion.

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Homeowners, you're not getting a bailout.

Banks are the target of this debate.

Not foreclosures, distressed borrowers, would-be homeowners or the under-water mortgage industry.

Treasury Secretary Henry Paulson isn't aiming for the housing market. He's working to restore credit. Which, eventually, will help the housing market.

But the bailout plan is not specifically designed to buy mortgages. It could end up buying home loans, but that's not the target. Treasury Secretary Paulson is aiming for mortgage-backed securities. These are bundles of mortgages of any kind, not necessarily home mortgages. It's possible that securities backed by commercial loans get bought first.

Paulson has made no promise to snap up home mortgages.

And to be sure, when this bailout plan buys a mortgage-backed security, the terms of the underlying mortgage would not be changed.

There is fierce resistance on Capitol Hill to the idea of anyone telling the banks that they have to start working with borrowers and altering the terms of distressed loans.

The housing bill that passed this summer is an example. Its provisions for renegotiating loans, they're all voluntary. If lenders want to, they can cut down a mortgage amount or change the interest rate. They don't need a new law to do so.

But they don't want to. Just as banks don't want to write down the value of these mortgage-backed securities. Or to sell them at current prices.

They don't want to take the loss, to cut down their own capital. Because that would weaken them.

Several organizations -- AARP, Center for Responsible Lending, the Leadership Conference on Civil Rights, Acorn -- are calling on the House and Senate to insert relief for homeowners into the bailout. They want to allow judges in bankruptcy cases to alter the terms of a loan.
But so far, that's not part of the plan that's being debated in Congress.

Paulson was asked about the impact of this plan on the foreclosure problem during his testimony in the Senate. "I would say regrettably not every homeowner is going to save their home, as you well know," he replied.

And then he went on to say what was more important was making financing available so that lenders could keep on lending.

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Here's a video, explaining why your insurance policies and annuities are still in force:

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If the current markets have convinced you that you're not really a long-term investor -- and by that I mean five years or more -- and you want out, I have a word for you.

Wait. Don't sell at the bottom.

But how long?

If past financial crises are any guide, data from Morningstar shows that in recent fits of market panic, it pays to wait three to five years after the crisis. Because by then you'll be ahead.

The point is taken form Morningstar's look at stock and bond markets in the wake of the October 1987 stock market crash, the August 1989 savings and loan crisis, the September 1998 bailout of Long Term Capital Management, the March 2000 dot-com crash and the September 2001 terrorist attacks.

In three out of five panics, if you'd held on to an all-stock portfolio for five years, you would have been substantially better off than if you had sold at the low point.

Five years after the '87 crash, the stock portfolio would have a 98.6 total return; after the S&L crisis, 58 percent return; and after the terrorist attacks, a 40.1 percent return. Long Term Capital's five-year record was up only 5.1 percent and after the dot-com crash, you would have been down 14.8 percent.

Can't hold on for five? The three year-record is good, too, in three out of five and OK in the fourth. Even a year helps stocks get back to even and off the bottom in most cases.

Six months, though, won't do it. Three times out of five, stocks were still down.

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If you want a spirited discussion of options, talk to Mark Wolfinger, a Chicago trader who has been in the options business since 1977. His latest book is The Rookie’s Guide to Options.

I think he has an interesting point of view about the ban on short-selling 799 financial stocks. That list has now been expanded to include some other Dow Jones Industrial Average Stocks, GM, GE and American Express.

So I'm going to let Mark be my guest blogger. Here's his post:

Last week was the most volatile week in stock market history. But the Royal Mounties (the Feds) have come to the rescue! Or have they? The curb on short sales gave the market a boost, but: what happens in two weeks when the ban expires?

Reminder: Short selling involves selling shares you borrow from your broker. Short sellers hope to buy stock later – at a lower price - and earn a profit. It’s a common investment technique.

Many cheered when the government banned short selling of 799 financial stocks. Supporters believe short sellers were responsible for unfairly driving stock prices lower. Apparently they believe it’s wrong to profit from the unfortunate circumstances of others? That’s evil. That’s un-American.

President Bush commented that short sellers were “intentionally driving down particular stocks for their own personal gain.” What’s wrong with that? Don’t investors buy stocks at the slightest rumor, driving prices higher?

Unless short sellers spread untrue rumors (that’s not legal) they are doing nothing wrong. Markets go down, and blaming that on ‘evil short sellers’ is foolish.

Opponents believe too many companies took too much risk. When those risky investments turned sour, they lost money. Their stocks declined. Companies used too much leverage - they borrowed money to back risky investments, and when those investments collapsed, they were unable to borrow enough money to meet maintenance requirements (similar to your margin call when your portfolio value declines). As a result of losses, stock prices collapsed.

That’s the fault of the bank’s traders and upper management who allowed those investments – not short sellers. CEOs walks away with golden parachutes (how do they sleep at night?) leaving employees without jobs and shareholders with worthless stock.

Short sellers understood the situation before anyone else, and deserve their profits.

Consider this: When you research a company’s business and decide the future is bright and the price is reasonable, you buy shares. So I ask: what’s wrong with doing an analysis, deciding the future is bleak, and the shorting the stock? No one objects when investors buy shares.

Selling short deserves more respect. When investors want to buy shares, short sellers help supply those shares – keeping the price reasonable for buyers.

Will this new government policy help? In my opinion, no. It may have a short-term effect – as it did last Friday.

If investors cannot short stock, they can buy put options (giving them the right to sell stock at a fixed price) or sell call options (which profits when a stock declines), or both. In fact, selling one call option and buying one put option is equivalent to selling 100 shares of stock.

Thus, short sellers will not be stopped. This new policy is a futile, publicity-generating, gesture – hoping to stem the bearish tide. The deregulators now want massive regulation!

This policy may succeed - psychologically. If people are reassured, they may (over time) pour money into the market (or at least stop selling), preventing prices from falling. It’s too soon to know.

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Some sensible things are starting to happen.

Stock prices are down, so Nike, Hewlett Packard and Microsoft today are launching stock buyback programs, for a combined total of $53 billion.

That's normal behavior. Buy low kind of stuff.

We haven't seen normal in so long, it's rather exciting.

Without knowing the details, my initial impression of Goldman and Morgan Stanley becoming banks is good. The Federal Reserve would regulate their holding companies.

It does not mean that extraordinary risk-taking below the holding-company level wouldn't happen. But it might mean that when the upper echelon becomes involved in extraordinary risk-taking, regulators would become aware. And their reactions would have great weight in whether these activities would be allowed to continue.

For quite some time to come, the notion of risk and how to avoid it will predominate.

And someone, even if it's not the CEO or the board, will be demanding transparency from inside large financial institutions.

How stock and bond markets react to those two trends is what I'm wondering about. Will we see a bunch of petulant traders, pushing stocks down? Or will conservative investments become the vogue?

Because of course people are asking today, where should I put my money now? Housing's bust. Stocks are bust. Where?

I'm happy to hear from anyone who'd like to comment.

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The market closed within arm's reach of last Friday's close.
The Dow ended its most amazing week ever at 11,375.8, only 33.56 points below where it was one week ago.

But oh, has the debate started.

My inbox is full of people hailing the government's many actions or hating them. The taking of mortgages from the banks will turn into a $1trillion taxpayer bill bailout. Or the government's getting these mortgages at a very cheap price and could eventuallly profit from them.

A week ago, the world's largest insurer was not a government controlled company. Lehman Brothers was still in business. No money funds had broken the buck in 14 years.

My take: We should be slammed with so many new regulations that make sure the taxpayer's money is well spent.

And investors should demand, insist, on transparency. Some of the things I found on AIG's books were amazing to me. How anyone who looked could not have been worried, I don't know.

I'm not entirely sure it's over. I don't know what will happen next. But it sure feels better.

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Whew.

For the moment, I'm not afraid to check on the markets.

I think the most crucial step, of the many announced this morning, was the shoring up of the money
market mutual funds. That should restore some investor confidence.

And of course, stopping the shorting of 799 financial stocks.

I don't know what will happen when that ban expires in October.

But for the moment, I'm relieved.

What do you think of this crazy week on Wall Street?

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I found another red flag at AIG that was waving long before this company teetered and fell.

It was in the, excuse my language here, super senior credit default swap portfolio.

Rolls off the tongue, doesn’t it?

It’s complicated.

But here’s the simple part: They caused huge losses that AIG underestimated until recently.

In December, AIG’s auditor Price Waterhouse Coopers said that it had issues with the way AIG was valuing these swaps. So AIG in February said it would change its ways.

The result was a ratcheting upward of the estimated losses.

Upward from an estimated loss of $352 million at the end of September 2007, according to a story on FinancialWeek.com. The estimated loss on its super senior credit default swap portfolio in August in its SEC filing: $5.6 billion.

So the loss was 16 times greater than what AIG estimated it to be last year.

And who knows if that’s really it?

Here’s a stab at defining what these super seniors are:

Credit default swaps are essentially insurance for a debt obligation. The debt consisted of a group of residential mortgages. The debt was divided up into categories, officially called tranches, that line up by who gets paid first, if the debt goes bad. The super senior category stands toward the front of the line.

But down there at the back of the line is a mortgage that may go bad. No one wants these swaps right now. The mortgages are going bad, the insurance has to pay off. The value of these swaps plummeted.

Months and months ago.

In public filings, for all to see.

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I wanted to see with my own eyes what AIG was telling the world in its last public report as a non-government-owned company.

I wanted to look because maybe I could get something out of there to tell the teacher who called me to find out if her annuity is safe.

She’s been putting money in for 20 years. She’s not expecting a lavish retirement. But she’s been prudent. She’s taken care of her future. And now she didn’t want to see it all taken away.

An $85 billion bailout all comes down to this:

Who is hurt? Taxpayers? The teacher? The shareholders?

So I spent some time this afternoon looking at what the giant insurance and financial services company knew, or said it knew, in August.

In discussion after discussion, the quarterly report noted the deteriorating condition of the housing and financial markets, the possibility that it would have to put up more collateral if its debt were downgraded, and even hinted it couldn’t accurately value some of its more complicated mortgage-backed securities.

It looks like AIG couldn’t predict what it might owe in the most dire of circumstances.

And that’s a pretty common problem right now.

After the announcement that the almost $65 billion Primary Fund, a money market fund that was part of The Reserve Fund, would no longer be able to pay off its investors at 100 cents on the dollar, it became clear the their investments, their holdings, were not worth what they thought. Or what anybody thinks.

“To a certain extent, nobody knows just how liquid much of these assets are,” said Keith Long, of the hedge fund Otter Creek Management, in West Palm Beach.

But AIG did throw out plenty of warning signs. Enough to make me wonder why this stock was still so widely held. Did mutual fund managers evaluate it once, when they bought it, and then forget it? Did anyone ever look back?

Back to the teacher. As far as I can tell, the advice that’s being given out by regulators seems to be right on: Keep paying the premiums, your assets are there, the insurance subsidiaries aren’t where the problems are. The problems were in the credit default swaps.

New York State Insurance Superintendent Eric Dinallo put it well this morning in an interview with CNBC.

He said, “There is a theory that diversification of financial services activities gets you risk management, but it is only true if you stay within your core competencies.”

AIG ‘s competency in insurance was formidable. The rest, well, it may have looked good once. But not now.

The National Association of Insurance Commissioners today made the point that under state regulation, the claims of policyholders come ahead of all others in the event an insurance company fails. And these insurance subsidiaries were solvent, NAIC said.. The foreign subsidiaries were doing gobs of business in China and other markets. I saw that in the filings.

The insurance companies were rocked by the bad markets, of course, because insurance companies are essentially investors. But there was little indication, at least in August, that investment losses were threatening.

Even if they did fail, the state guaranty associations would come into play. These are essentially agreements, backed by state law, that when one company goes under, other companies come in and replace the coverage.

The insurance commissioners seem to think that that it is the insurance parts of AIG that could be its salvation, as they are perhaps sold off to repay AIG’s obligations -- including the one to us, the taxpayers.

I certainly hope so.

Because I know there’s more than one teacher, clinging to her retirement savings, needing for this to work out the way regulators say it will.

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Is there anybody in South Florida who wants to chat about their Fannie Mae and Freddie Mac shares?
Maybe I should stand back, because this question is likely to open the door to a lot of discontented, unhappy, disturbed people.
The common shares of these two were among the most widely held, landing in some of the largest mutual funds.
Dividend-seekers, too, liked the preferred shares.
Both have tanked, since the bail out.
If you want to talk about it, for a possible story, send in a comment.

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Mortgage interest rates plunged below 6 percent in the last week, reaching the lowest level in five months, reflecting investors’ relief over the government bailout of Fannie Mae and Freddie Mac.

Freddie Mac’s weekly survey released Thursday showed average 30-year, fixed-rate mortgages have fallen to 5.93 percent, down from 6.35 percent the week before.

The rate on 15-year, fixed-rate mortgages averaged 5.54 percent, down from 6.90 percent.

“It puts a little more buying power behind those prospective buyers in today’s marketplace,” said Greg McBride, senior financial analyst at Bankrate.com.

The new rate would slice about $76 off the monthly payment on a new $200,000 loan, compared to one month ago, Freddie Mac said.

Offsetting the good news, though, are declining home values, which would make it impossible for some homeowners to refinance their existing mortgage to take advantage of lower rates.

Looking ahead, rates may have a little bit farther to fall, says Orawin Velz, associate vice president of economic forecasting at the Mortgage Bankers Association of America.

In the fourth quarter, the organization expects rates to hit an average of 5 percent. Next year, however, she said they could pop up above 6 percent as the economy recovers.

And, lenders have told regulators that they've raised their standards for making new loans, which means it is more difficult to qualify for a mortgage.

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The "credit crunch" is more than a vague term, just something happening out there.
It is so real, when you look at some numbers I collected the other day from the U.S. Small Business Administration.
For example, Bank of America has cut back its SBA-backe, working capital oans to small firms in Broward County by almost 60 percent since last year. During the federal fiscal year that begins Oct. 1 through Aug. 31, Bank of America issued less than $4 million in these loans, down from almost $9.9 million in the same period a year ago.
Other lenders' numbers are down, too, but it's at the big banks that the crisis is most apparent.
Wachovia's figure was a little less than $6 million, down from $9.6 million, for small business workng capital loans in Broward.
In Palm Beach, Washington Mutual's lending dropped from almost $1.4 million to less than $400,000.

.

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Thirty-year fixed mortgages overnight have fallen well below 6 percent.

That's a huge drop from last week, when the 30-year fixed average was 6.35 percent. As of Tuesday, Bankrate.com says the rates have fallen to 5.88 percent.

It's probably a sign of how much the market likes the Fannie and Freddie takeover.

Watch for further declines Thursday, when Freddie Mac posts the weekly average.

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I get somewhat frightened by the prospect of the financial markets going back to business as usual, at least the way they've defined that since 2006.

I am wary of re-opening the market for subprime mortgages. I am wary of lenders who make home loans based on such small down payments that the buyers walk away the minute trouble begins.

Call me out of touch, but high lending standards are a plus. They are high for a reason. The people who couldn't really handle buying a house have now fallen, at the fastest foreclosure rate in more than three decades.

Did lax lending standards do us much good? I don't see that they did. Neighborhoods were transformed into fertile grounds for speculation. They're gone, the homes and condos are empty, and so many small-time buyers are hurt. And, as I've reported before, the rate of home-ownership in America went up only marginally while all this was going on. In 2000 it was 66.2 percent. In 2006, it was 67.3 percent, the Census Bureau says.

So the government is taking over the two giants of mortgage finance. That should quiet the storm in financial markets.

But the crisis here, in the real world of too many homes to sell, continues.

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Get ready.

Employers are facing an 8 percent cost increase when they renew their health insurance plans for next year, according to early results from a survey by Mercer, the big employee benefits consultants.

They’re not sitting back and taking it.

And guess who’s going to get more of the health care cost burden?

More than half of employers who plan to take action to reduce their costs said they’d increase employees’ deductibles, co-pays and co-insurance or they’ll raise the total out-of-pocket cost employees have to pay.

And so, workers get more of the same.

Mercer says that between 2003 and 2007, the median family deductible went up by half, to $1,500 from $1,000, for a preferred provider organization, the most popular health plan that employers offer.

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Yesterday’s Beige Book, a report on regional economies from the Federal Reserve, had this view from the Atlanta Fed of one of Florida’s most important industries:

“

Tourism related activity was mixed with reports noting lower hotel occupancy in some parts of the District. Tourism contacts also reported concerns regarding reduced Labor Day weekend travel, and most anticipate some weakening in business travel during the fall.”

Actually, the tourism story may be a good one in 2008.

Here’s why: According to Visit Florida, the state had a 1.2 percent gain in tourists visiting the state in the April-May June quarter compared with the year before. That followed a 4.1 percent gain in tourist visits between January and March compared to 2007.

As the year began, Miami ranked number one in the country for hotel occupancy and it had the second highest average daily room rate, according to The Miami Herald.

But back to the summer that wasn’t so hot. Both summer and the fourth quarter were soft last year, too.

Let’s assume Florida’s tourism industry in the second half of 2008 sees no growth from last year. We’d have the exact same number of visitors in the final six months..

If that happened, Florida would have an annual total of 85.7 million visitors
.
That’s the highest number in a decade,

It’s 46 percent higher than the number of people who visited Florida in 1999.

Why would the number of visitors stay the same as last year? You might assume it would decline, due to the weak economy and high gas prices. But tourism here is not dependent only on our economy.

Foreign visits so far have been on the rise, both from Canada and from other countries. The weak dollar was a boon to Canadians and visitors from the United Kingdom earlier this year. And the bustling Latin American economies, boosted by oil and commodity profits, are enriching those citizens.

The large point is that the economy isn’t a song with only downbeats. Tourism, for much of this year, has played its own tune. And it’s been upbeat.

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