Eat Fruit

Over the past few weeks Apple (AAPL) has lost around 15% of its stock value. That makes this a good time to buy, and buy big. Apple is a bit price, its around $88/share, but when the market gets back to fundamentals it will climb up over $115/share.

Right now AAPL has 25 billion in the bank, and that is a nice stockpile to fund its research and development operations. While speculation continues about Steve Job's future role in the company, he has created an anti-establishment, anti_Microsoft juggernaut. Some of that R&D money is already paying dividends, like the improved iPod Nano. The new Nano has a great screen, better backlight, and an improved interface.

The other big news out of AAPL is the fact that they are now selling iPhones for less than $200 at Walmart. We believe that if Apple's push into Wal-Mart stores goes successfully, it will be creating a situation "to sell a relatively complex piece of computing to folks who may never have touched a computer, or who didn't think they'd ever want to carry one around with them." Further, this could drive a wedge between Apple and competitors Research In Motion and Palm, as the latter two have so far had a tough time selling their smartphones to non-corporate consumer types, a market which, for the most part, is dominated by Apple.

All of this is bad news for Blackberry and even worse news for Palm. The new Palm Centro has had a big marketing push over the Holidays, but it wont matter. The lack of push technology makes its too inefficient.

Also, a recent demographic shift in smartphone users from corporate users to individual consumers has created a margin issue at Research In Motion. As more than half of RIM's new subscriptions are now coming from consumers, the company now sees its gross profit falling from 45.6% to in the range of 40-41%.

Shares of Research In Motion are now down nearly 3% this week alone. Elsewhere in the sector, shares of Palm are down 3.4% to $3.10 and Nokia stock is also down 3.4% to $14.93. Meanwhile, shares of Apple, which initially traded up as much as 2%, are now up about 0.5% to $86.23.

stay bullish

Yesterday was not real. Goldman Sachs Group Inc., the securities firm that reported its first quarterly loss yesterday, fell 2.7 percent in Germany, while
International Business Machines Corp., the world’s largest provider of
computer services, dropped 2.9 percent.

I am bullish on GS, mainlly because it is over-valued, and not by a small amount, y at least 25%. If you can take a short position on the stock.

Futures suggested the S&P 500 will decline after a 5.1 percent rally
yesterday spurred by the Fed’s move to cut its benchmark interest rate
to as low as zero. The central bank’s decision came after simultaneous
recessions in the U.S., Europe and Japan dragged the S&P 500 down
almost 45 percent from its 2007 record.

Following interest-rate cuts you always see an initial reaction and
then you get back to your senses. All the structural indicators, such as the economic cycle and profit outlook, remain negative.

GM?

The collapse of the automobile bailout plan raises the prospects of bankruptcy for General Motors and Chrysler.

The Dow Jones Industrial Average tumbled 135.96 points (1.59 per cent) to 8429.13 in opening trades and the Nasdaq composite fell 14.45 points (0.96 per cent) to 1493.43.

The broad Standard & Poor's 500 dropped 13.43 points (1.54 per cent) to 860.16. ANd guess which stock is actually up, General Motors. AFter taking a beating early this morning, GM bounced back up, almost as if the market knew that a bailout (in some form) was on its way. Sahers should have taken a big hit, but they didn't, why? If GM were in Illinois I would assume corruption, but this time I think it is more global, simply put - speculation.

The White House said on Friday it would consider tapping a $US700 billion ($1.04 trillion) financial rescue fund "to prevent a collapse of troubled automakers" after lawmakers failed to pass an alternative.

On Wednesday Sen. George V. Voinovich, Ohio Republican and a leading supporter of the emergency measure, said that the bill didn't have the necessary Republican votes to pass Congress. And he was right.

If you are an average investor stay away from GM right now, it is not trading on fundamentals, its more emotion. If you are looking to short GM, stay away from it, because you just can't tell what will happen next. If you are an options trader, avoid GM like Bird Flu, it is toxic.

When do you shower?

It seems to me that those American's who take a shower before they go in to work, like bankers and stock brokers got a better deal than those who shower after they get off of work, like can manufacturers. The Banks got $700,000,000,000+ and it has not helped the average American taxpayer one bit.

For a total cost of $450 billion (a savings of 250b) the US government could have given EVERY household in America a $150,000 stimulus check. Additionally, they could have taxed that money at a rate of 30%, thereby generating a 135b in tax revenue. Additionally, they could have put restrictions on how the funds were spent. For example, they could have mandated that no less than 50% of the gross amount be spent on existing debt. If a person had no existing debt then they would be forced to place the money into a government savings plan for a period of not less than 2 years.

Had the US government done this, the majority of American's would be current on their mortgages right now, and there would be no foreclosure crisis. Additionally car repossessions would go way down.

The remaining 50% of the gross stimulus amount could be used as the Household saw fit. I am confident that many people would buy new cars. That would help boost the auto industry.

But my bright ideas aside, the automakers are forced to beg for 15b (400 times less then what the Banks got) and they have a new Car Czar. Where is the Bank Czar? I guess the fact that the auto industry employees 3x as many people in America as the banking industry was not factored into the equation. This is not just about the manufacturing jobs, or the nation's ailing steel industry, which relys on the Big Three, or the scientist who invent new technologies like new soy-based foam.

Its clear that the government did not do this to save the economy, but rather to save big business, nsamely the banking business. There is no reason why billions of dollars is being spent and people are still being forced out of their homes. And better yet, why dont the banks lend money to the car makers?

Why Amex Became a Bank

Futures are down as Asia and then Europe opened down. Get ready to hear a lot more economic stimulus plans from many governments. The dollar is up, commodities are down roughly 2 percent, and the bond market is closed.

Elsewhere:

1) Sign of the times: American Express' application to become a bank holding company was approved by the Federal Reserve.

What does this mean? Several analysts noted that it means AmEx [AXP 22.97 -1.01 (-4.21%) ]is assuming that the funding difficulties everyone is experiencing will be longer and more protracted than many expected.

By becoming a bank holding company, they are trying to broaden their funding sources, and will gain greater access to capital under the current and any future government-sponsored programs. And they do need capital. In the next six months, AmEx will need $4 billion in net commercial paper and $7 billiion of long-term debt.

Now they can turn to the real issue: stemming the losses coming from their consumer credit card division.

2) Las Vegas Sands [LVS 5.20 -2.80 (-35%) ]reported earnings below expectations, more importantly several projects are being delayed to preserve capital, and they are about to announce a $2.1 b capital raise. MGM [MGM 11.38 -1.28 (-10.11%) ]and Las Vegas Sands down 7 percent pre-open.

3) Here is is the type of news we WANT to be seeing. Citigroup [C 10.93 -0.28 (-2.5%) ]is joining JP Morgan[JPM 36.44 0.03 (+0.08%) ] by offering mortgage refinancings. Reducing consumer debt burdens is a key part of getting the economy going; expect to see more of this in the very near future.

Citigroup to Rework Thousands of Mortgages
This will have long-term positive effects for a variety of reasons (reduced foreclosures, increased confidence, reworked mortgage terms could be favorable) and while it may not be moving the needle this morning, as time goes on this news has a greater effect that its being given credit for this morning.

4) REITS. Lots of discussion on the Street yesterday about the fallout from the Circuit City bankruptcy, believed to be the latest of several bankruptcies coming. Impact on the REITs was profound, with many mall REITs down ten percent or more.

Credit Spreads
Pros Say: Currency Trends in Reverse
Credit Crunch Timeline
It's not just poor fundamentals killing REITs: they are experiencing higher capital costs as well. Interest rates are higher, the underwriting criteria has become much stricter, and loan-to-value ratios are dropping. It means that a lot of companies are going to de-leverage.

Speaking of funding difficulties: the Yellowstone Club, an exclusive mountain retreat in Montana which boasts former VP Dan Quayle and Bill Gates among its members, filed for bankruptcy Monday because they could not secure new financing.

Credit Default Swap

I am sure you have all heard about these credit products, so now I will explain them in lay terms. Credit Default Swap (CDS) contracts have been compared to insurance, because the buyer pays a premium, and in return receives a sum of money if a specified event occurs. However, this is a slightly misleading comparison because the buyer of a CDS does not need to own the underlying security; in fact the buyer does not even have to suffer a loss from the default event.

Basically one company agrees to insure the assets of another company at the insured party pays the insuring party a yearly fee or premium. Lets say an asset management (Company A)firm owned a $10m Lehman Brother bonds and that that bond carried a A+ rating. Now a smaller firm (Company B)agrees to insure that bond in case of default at a rate of 5% per year for a period of two years.
If the Lehman bond went into default after one year, Company A would have paid Company B $500,000, however Company B would owe Company A the balance of the insured bond or $10,000,000.

Critics of the huge credit default swap market have claimed that it has been allowed to become too large without proper regulation, and that because all contracts are privately negotiated, that the market has no transparency. Furthmore there have even been claims that CDS's exacerbated the 2008 global financial crisis by hastening the demise of companies such as Lehman Brothers and AIG.

In the case of Lehman Brothers it is claimed that the widening of the bank's CDS spread reduced confidence in the bank and ultimately gave it further problems that it was not able to overcome. However, proponents of the CDS market argue that this confuses cause and effect; CDS spreads simply reflected the reality, that the company was in serious trouble. Furthermore they claim that the CDS market allowed investors who had counterparty risk with Lehman Brothers to reduce their exposure in the case of their default.


This works except when the bond defaults and company B only have $5,000,000 and therefore can not afford to pay Company A what it is owed. No we have a loose-loose situation and neither party is made whole.

All of this came during the Asian financial crisis of 1997. Some very smart bankers at JP Morgan Chase decided that they needed to "hedge" against double losses.

C Citi fail?

Citigroup (C) is not going to make it, at least not an an independent company. The FT has reported that the head of Goldman Sachs (GS) called Citigroup CEO Vikram Pandit to discuss a merger. Goldman had converted itself into a commercial bank. Maybe it was worried it would go the way of Morgan Stanley (MS). But, the Treasury has come up with capital for all the big financial firms, so the urge to do something has probably passed for the world's premier investment bank.

It is different for Citigroup. There things have gone from bad to worse.
Citigroup is not likely to make it as an independent company. It will not be a buyer. It will be sold.

If the bank's stock price and analysts covering the company are right, Citi's fate could be determined by the end of the year. Over the last month, shares in the bank are down by 40%. Rival JPMorgan (JPM) is off 2%. Wells Fargo (WFC) is up 10%. Citi's market cap is down to $66 billion. Bank of America's is nearly $100 billion.
In the last quarter Citi lost $2.8 billion, or $.60 per share, compared with a profit of $2.2 billion, or $.44, in the period a year ago. Revenue fell 23% to $16.7 billion Bank analyst Meredith Whitney, who has been right more often than not on bank stocks, says that troubles in Citi's consumer group will drive up its losses more than expected. She cut her earnings estimates on the bank to a 2008 loss of $2.87 per share and a loss of $2.65 in 2009. Citi may not have the capital to cover those losses even with the government's cash injection.
What Whitney did not factor in just a week ago is that the credit crisis and signals of a recession have become much worse in a matter of days. Mortgage defaults are likely to rise more sharply then they have been as people lose jobs. The consumer's ability to pay his credit cards debt will deteriorate sharply. Citi's investment banking business is dead as a doornail. Most LBO loans are dropping in value as each week passes.

Citi will not report Q4 earnings for almost three months. It may run into awful trouble before that. The Fed and Treasury are going to have to find a merger candidate. Most likely that will be JP Morgan (JPM) because Bank of America (BAC) and Wells Fargo (WFC) are already digesting big acquisitions. Or, the government may turn around and take a majority stake in the money center bank the way it did with AIG (AIG) where it has already provided $90 billion in loans.

Vikram Pandit will have failed. It may take a little while for that to become absolutely clear, but Wall St. can take it to the bank. Or, maybe not.
Douglas A. McIntyre

Value City

For all of you who have seen your 401k portfolio loose 10% over the past few months, don't worry. Hopefully you do not need that money right now.

This morning U.S. stocks headed for yet another sharply lower open Monday as stock markets tumbled further around the world on worries about the health of the global economy.

A surge in the yen illustrated investors' nervousness about how much economic activity could slow. Japan's Nikkei 225 index dropped to its lowest close in 26 years as investors worried that the high yen will hurt Japanese exports and further disrupt economic activity. The currency moved to the 93 yen level.

This tell us that we have not yet seen the bottom and that market volitility is still an issue. For the casual investor this offers an oppentunity. Equities are cheap right now.

Example 1: this company is trading a 11x forward earnings, pay a very good dividend and is debt light and cash heavy, Microsoft. Microsoft is a high quality stock and is a value right now.

Some others include Dow, Becton Dickinson, Disney and Quixote are all good picks.

Move over OPEC

What OPEC did for crude the Kremlin wants to do with natural gas.

TEHRAN, Iran - Russia, Iran and Qatar made the first serious moves Tuesday toward forming an OPEC-style cartel on natural gas, raising concerns that Moscow could boost its influence over energy markets spanning from Europe to South Asia.

Such an alliance would have little direct impact on the United States, which imports virtually no natural gas from Russia or the other nations.

But Washington and Western allies worry that closer strategic ties between Russia and Iran could hinder efforts to isolate Tehran over its nuclear ambitions. In addition, the United States opposes a proposed Iranian gas pipeline to Pakistan and India, key allies.

In Europe - which counts on Russia for nearly half of its natural gas imports - any cartel controlled by Moscow poses a threat to supply and pricing.

Russia, which most recently came into confrontation with the West over its five-day war with Georgia in August, has been accused of using its hold on energy supplies to bully its neighbors, particularly Ukraine.

Moscow cut natural gas exports to the former Soviet republic over a price dispute during the dead of winter in 2006 - a cutoff that caused disruptions to European nations further down the pipeline.

The 27-nation European Union expressed strong opposition to any natural gas cartel Tuesday, with an EU spokesman, Ferran Tarradellas Espuny, saying: "The European Commission feels that energy supplies have to be sold in a free market."

Together Russia, Qatar and Iran account for nearly a third of world natural gas exports - the vast majority supplied by Russia - according to U.S. government statistics. The three hold some 60 percent of world gas reserves, according to Russia's state-controlled energy company Gazprom.

The United States - the world's largest consumer of oil and gas - produces most of its natural gas needs at home, importing only from Canada and Mexico.

Russia is also a major oil producer, though not an OPEC member. For its part, Iran, in its standoff with world powers over its nuclear program, has threatened to choke off oil shipments through the Persian Gulf if it is attacked.

A gas cartel could extend both countries' reach in energy and politics, particularly if oil prices bounce back to the highs seen earlier this year, prompting renewed interest in cleaner-burning natural gas and other alternative fuels.

Tuesday's gathering in Tehran appeared to be the most significant step toward the formation of such a group since Iran's supreme leader, Ayatollah Ali Khamenei, first raised the idea in January 2007.

"Big decisions were made," said Iranian Oil Minister Gholam Hossein Nozari. His Qatari counterpart, Abdulla Bin Hamad al-Attiya, said at least two more meetings were needed to finalize an accord, according to the Iranian Oil Ministry's Web site. No timeframe was given.

Calling the grouping the "big gas troika," the chief executive of Russia's state-controlled energy company Gazprom, Alexei Miller, said it would meet three or four times a year.

"We are consolidating the largest gas reserves in the world, the general strategic interests and - what is very important - the high potential for cooperation on three-party projects," Miller said.

Already, Russia has built Iran's first nuclear reactor, which Iranian officials say could begin operating later this year. The West fears Iran's nuclear program could lead to development of atomic weapons; Iran insists it is only for peaceful energy production.

Experts say a natural gas cartel would not have the same influence on prices as OPEC has on oil since natural gas is not subject to the same severe fluctuations.

"There's always some worry when these guys get together that they'll try to replicate OPEC, but they know that's not doable," said Robert Ebel, senior adviser to the Energy and National Security Project at the Center for Strategic and International Studies in Washington. "They can try to get more control over gas, but it's not OPEC."

True its not OPEC, but it will be soon.

Walmart Canada

Once again Walmart shows why it is king. Wal-Mart Stores Inc., known for its strong stance against workers unionizing, on Thursday closed a tire and lube center in Canada where workers had voted to organize.

A Wal-Mart spokesman said the five workers and one manager at the center were offered jobs at comparable Wal-Mart facilities or elsewhere in the store, which is located in Gatineau, Quebec and has more than 250 workers. The store itself will remain open.

The closure comes after an arbitrator in Quebec had imposed a labor contract on the facility in August.

The United Food and Commercial Workers union called the closure an "attack" on Wal-Mart workers. Wal-Mart in 2005 closed a store in Jonquiere, Quebec, after workers there agreed to unionize. The union has a Canada Supreme Court case pending over whether those workers' rights were violated.

Wayne Hanley, president of UFCW Canada, said the closing violates workers' rights.

"Wal-Mart thinks a cheap oil change is more important than the Canadian constitution," Hanley said.

Wal-Mart Canada spokesman Andrew Pelletier said the contract that was imposed on Wal-Mart in August would have raised costs too much. "It could require us to increase consumer prices by more than 30 percent," Pelleti

What really makes this so interesting is that Walmart is a solid stock on the S&P Canada, and there is nothing that anyone can do to stop them.

Up hill

Germany, France and other European countries on Monday unveiled bail-out plans to recapitalise their banks and reopen credit markets, following the British announcement of measures to nationalise parts of the UK banking system.

The world’s stock markets soared as details emerged of the co-ordinated European campaign to spend more than £1,434bn (€1,832bn, $2,477bn) on bailing out the continent’s troubled banks.

Other European stock markets followed suit as Germany, France, Austria, Portugal and the Netherlands announced their plans, Italy’s cabinet passed a new decree offering more support to the financial sector, and the Spanish government approved a guarantee for issues of new bank debt. Frankfurt’s Xetra Dax closed up 11.4 per cent, while the CAC 40 in Paris rose 11.2 per cent.

Europe’s central banks promised unlimited dollar funding in co-ordinated action with the US Federal Reserve. This dramatic further expansion of Fed liquidity operations is intended to ease the intense demand for dollars in Europe. The European Central Bank, Bank of England and Swiss National Bank said they were ready to inject as much as needed into the markets for dollar funding covering periods of seven days, a month and 84 days.

Confidence in the money markets showed signs of returning as the interbank cost of borrowing in sterling, euros and dollars fell. Three-month dollar Libor eased to 4.75 per cent from 4.82 per cent, its steepest drop since March and the first time it has fallen since last Monday when it was 4.29.

Wall Street also snapped back from last week's devastating losses after major governments announced further steps to support the global banking system, including plans by the U.S. Treasury to buy stocks of some banks. All the major indexes rose more than 8 percent, and the Dow Jones industrials rose more than 700 points.

In late afternoon trading, the Dow Jones industrial average rose 712.05, or 8.43 percent, to 9,163.24. It was the Dow's largest-ever point gain during a session, surpassing the jump of 503.45 points seen on Sept. 30.

The Dow's largest point increase by the time the closing bell sounded occurred March 16, 2000, during the waning days of the dot-com boom, when the blue chips closed up 499.19, or 4.93 percent.

Broader stock indicators also jumped Monday. The Standard & Poor's 500 index advanced 78.71, or 8.75 percent, to 977.93, and the Nasdaq composite index rose 146.86, or 8.90 percent, to 1,796.37.

About 2,900 stocks advanced on the New York Stock Exchange, while about 250 declined. But the trading volume of 1.22 billion shares was lighter than it had been last week, suggesting there was less conviction in the buying than during last week's selling.

Wall Street was cheered by word from the Bank of England that it would use up to $63 billion to help the three largest British banks strengthen their balance sheets.

The Bank of England, the European Central Bank and the Swiss National Bank also jointly announced plans to work together to provide as much short-term funding as necessary to help revive lending.

After a series of weekend meetings in Washington of heads of the Group of Seven nations, the gains in global markets signaled that investors found comfort from the actions and pledges coming from government officials.

The surge in stocks comes after a dismal week on Wall Street that erased an estimated $2.4 trillion in shareholder wealth. The Dow, after eight consecutive daily losses that totaled just under 2,400, or 22.1 percent, finished at its lowest level since April 2003, and also suffered its worst weekly percentage loss ever, a fall of 18.2 percent.

Meanwhile, the S&P 500 and the Nasdaq each lost 15.3 percent last week.

DOW is down again

Lets focus on the positive. The DOW is down below the 9000 level, but that is not our concern today. We are going to look at some international stocks that are a good value right now.

Our first big pick is is Unibanco which is the third largest privately-owned bank in Brazil. Unibanco stands for União de Bancos Brasileiros (Brazilian Banks Union). Brazil is a place where, unlike America, the citizens are not over collateralized. They do not own homes and cars that they can not afford. So that means, Brazilians need loans, and they are willing to pay them back.

The second company is one that is paying a double digit dividend: CEMIG. CEMIG stands out among other Brazilian utilities because of its green energy initiatives and vision for the future. The bulk of its electricity is generated from 56 hydroelectric plants, a definitive advantage in a time of volatile energy prices. It has also been a leader in experimenting with renewable energy sources; its engineers have been actively testing the implementation of new solar and biofuel-based generators.

Recently management has announced plans to grow through the acquisition and development of more power plants. Expect to see more deals such as CEMIG’s recent bid for Companhia Brasiliana de Energia, or the possibility of participating in the building of the new 6,450 megawatt Rio Maderia hydroelectric plant.

CEMIG has also been growing its transmission and distribution network. They are constructing a transmission line to Chile, a move hailed as CEMIG’s first steps towards international development. Within Brazil, the “Light for Everyone” program promises to deliver power to an untapped market of 2.5 million low income rural homes

Bad Wachovia

It appears that Wachovia's brass doesn't know what it means when an executive signs on the dotted line. Now it looks like the only ones who will gain will be the lawyers.

NEW YORK - Wachovia says it agreed to be acquired by San Francisco-based Wells Fargo & Co. in a $15.1 billion all-stock deal. But Citigroup now demands that Wachovia abide by the terms of its earlier deal to buy Wachovia's banking operations.

The clash sets up a battle over who will win Charlotte, N.C.-based Wachovia.

The Citigroup deal would have been done with the help of the Federal Deposit Insurance Corp., but the Wells deal would be done without it. The head of the FDIC said the agency is standing behind the agreement it made with Citigroup.

Citigroup says its agreement with Wachovia provides that Wachovia will not enter into any transaction with any party other than Citi or negotiate with anyone else.

Washington Mutual Fails

For WaMu the Government bailout will be too little too late. Its possible that JP Morgan Chase, however will may get a healthy slice of the $700 billion pie.

The Federal Deposit Insurance Corp. seized WaMu on Thursday, and then almost immediately sold off WaMu's banking assets to JPMorgan Chase & Co. for $1.9 billion. This is the second major purchase Chase has made this year; back in March Chase purchased Bear Sterens for nearly $1.5 billion.

WaMu, founded in 1889, now holds the dubious title of the largest bank to fail in US history. Its $307 billion in assets eclipse the $40 billion of Continental Illinois National Bank, which failed in 1984, and the $32 billion of IndyMac, which the government seized in July.

One positive is that the sale of WaMu's assets to JPMorgan Chase prevents the thrift's collapse from depleting the FDIC's insurance fund. But that detail is likely to give only marginal solace to Americans facing tighter lending and watching their stock portfolios plunge in the wake of the nation's most momentous financial crisis since the Great Depression.

WaMu "was under severe liquidity pressure," FDIC Chairman Sheila Bair told reporters in a conference call.

"For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks," Bair said in a statement. "For bank customers, it will be a seamless transition. There will be no interruption in services and bank customers should expect business as usual come Friday morning."

The bank's failue means that shareholders' equity in WaMu will be completely wiped out. The deal leaves private equity investors including the firm TPG Capital, which gave WaMu a cash infusion totaling $7 billion this spring, with nothing and no recourse.

JPMorgan Chase is in this to acquire assets, not liabilities. Chase said it was not acquiring any senior unsecured debt, subordinated debt, preferred stock of WaMu's banks, or any assets or liabilities of the holding company, Washington Mutual Inc. JPMorgan also said it will not take on the lawsuits facing the holding company. Basically they are just covering deposits and loans.

JPMorgan Chase, the second largest bank in America will not have more than 5,400 branches in 23 states. Its possible that the company will take advantage of economies of scale and close some competing branches, but Chase hopes to to close less than 10 percent of the two companies' branches.

Dominoes

I once had a professor who would tell us that while free markets were fickle, things were [almost] never as bad as they seemed nor as good as they seemed to be. We are experiencing that rare case where things may actually be as bad as we think.

That said, lets look at the causes, and realize that socialism is NOT the answer. We should never privatize gains and socialize losses. How may of us made $70,000,000 last year? Lloyd C. Blankfein, the CEO of Goldman Sachs did.

How it all began
In the mid 1990s, when the US economy was booming, the idea of home ownership and small business start-ups became all the rage. At the same times banks were running out of qualified people to loan money to. Since banks make money by charging interest on loans (including mortgages) they began to ease credit restrictions.
By the late 1990s and early 2000s the increase in demand for homes drove up the price of homes.

From 2003-2005 the economy began to take a real turn for the worse, and unemployment began to rise. Since more homeowners had seen the value in their homes rise due to increase demand, many began to borrow against their homes; using the equity to help pay off other debt that has accrued.
Around the same times, there was still this massive push to get new homeowners into the market. Vultures began to come in and convince some that they were ready for home ownership, when in reality they were not. That caused subprime lending to soar. All bad loans were not subprime.

Some very smart investment bankers began to realize that these loans were going to be problems, however they had an out and it was CMOs. Banks began to sell loans to other banks. Then the loans would be packaged together with other loans and given an insurance wrap. These bundles now had mortgages as the underlying collateral. Once these loans began to default at a higher rate these CMOs became harder to sell.

In 2007 fear form the subprime market began to spread to the mortgage market in general. In turn banks, especially those who were exposed on the home lending side began to see their stock price drop; fewer home buyers meant that the price of homes was dropping fast as well.

In the fall and winter of 2007 were when things really hit the fan: executives at Citigroup and Merrill Lynch were forced from their post, as those firms began to realize steep losses in both asset base and profitability. This caused banks to sell off senior debt to raise money: Citigroup raised $7.5 billion from Abu Dhabi; National City picked up $7 billion; and Washington Mutual raised 5 billion.

Then came the New Year, and the nation's largest mortgage lender, Countrywide was on the verge of going belly up when Bank of America stepped in and bailed them out. The in March Bear Sterns ccrumble under its own weight of decreasing losses and write downs. Next in July the second largest home lender in CA IndyMac was taken over by federal regulators. The next two dominoes were Freddie and Fannie. Then came Lehamn Bros.

Now we have consolidation and Goldman will become a bank. What's next? Maybe things are as bad as they seem.

Another Government Bailout

Another day, another bailout. The U.S. government stepped in Tuesday to rescue American International Group Inc. aka AIG, one of the world's largest insurers, with an $85 billion injection of taxpayer money. What this proves is that the US governement has its priorities completely messed up.

Just a few weeks ago America sent $1 billion to Georgia to help rebuild damage caused by its war with Russia. And now the "loan" billions more to a private company. What about our schools and Americans unable to afford healthcare?

There is a problem when a society socalizes losses yet privatizes gains. While every American citizen is helping to foot the bill for AIG while they are in trouble, do we all receive dividend checks when AIG returns to profitability? If so then this is a good deal. Oh by the way where did the US govt get the money from, I thought we had a trillion dollar tab that.

AIG was the second time this month the feds put taxpayer money on the hook to rescue a private financial company. AIG says it plans to repay the money in full with proceeds from the sales of some of its assets.
When one bank loans another bank money, AIG insures those loans. Without AIG banks would have to find other ways to insure those loans.

Under the deal, the Federal Reserve will provide a two-year $85 billion loan to AIG, which many believe teetered on the edge of failure because of stresses caused by the collapse of the subprime mortgage market and the credit crunch that ensued. In return, the government will get a 79.9 percent stake in AIG and the right to remove senior management.

What is important to realize is that all investments have risk and unless your a Big Boy you won't get bailed out.

The Fed's move was part of a concerted push to help calm jittery markets and investors around the world.

On Tuesday, the Fed decided to keep its key interest rate steady at 2 percent, but acknowledged stresses in financial markets have grown and hinted it stood ready to lower rates if needed.

The central bank also pumped $70 billion into the nation's financial system to help ease credit stresses. In emergency sessions over the weekend, the Fed expanded its loan programs to Wall Street firms, part of an ongoing effort to get credit flowing more freely.

The stock market, which Monday posted its largest point loss session since the Sept. 11 attacks, recovered Tuesday after the Fed's decision on interest rates. The Dow Jones industrials rose 141 points after losing 500 points on Monday.

AIG's shares swung violently, though, as rumors of potential deals involving the government or private parties emerged and were dashed. By late Tuesday, its shares had closed down 20 percent - and another 45 percent after hours.

Buy AIG, it will bounce back in the next few weeks, its dirt cheap right now.

Lehman and the Fed

NEW YORK - The field of possible buyers for Lehman Brothers narrowed Saturday, but the parties involved in the discussions over the hemoraging investment bank's future were not able to nail down a solid plan over how to finance the rescue.

An investment banking big wig said Bank of America Corp. and Barclays Plc have emerged as the two more realistic suitors for Lehman Brothers. The point of contestation is the possiblity of some sort of cash injection from Lehman's rival Wall Street banks and brokerages. This is counter-intuitive. The free market is a jungle, kill or be killed, and Lehman is dying. Why help your competetor?

Top officials from the Federal Reserve and the US Treasury Department and executives from Wall Street power banks met at the New York Fed's Manhattan headquarters Saturday, after a late night meeting on Friday. All in an attempt to hash out a deal to rescue Lehman Brothers.

The financial world was watching. Failure could prompt skittish investors to unload shares of financial companies, a contagion that might affect stock markets at home and abroad when they reopen Monday. If there is no sale announced by 8:30am Monday, you should think about shorting the stock - the price will continue to fall.

Discussions were expected to continue today, said Andrew Williams, a spokesman for the New York Federal Reserve.

The investment banking official, who asked not to be named because the talks were ongoing, said the investment houses were balking at paying to polish up Lehman's balance sheet so Bank of America or Barclays could buy a financially clean firm.

He said the investment banks were angling for the government to provide some money, as it did when it helped JPMorgan Chase & Co. buy Bear Stearns in March, because they would get little to nothing in return for their help.

The government has drawn a line in the sand over using taxpayer money to help rescue Lehman Brothers, however.

The official said the talks were tense and neither side appeared willing to back down.

Besides selling the company whole or piecemeal, Lehman could be liquidated, perhaps with financial firms agreeing to still do business with the company as it wound down.

Or, a financial company or companies could buy Lehman's "good" assets. Its shunned or devalued real-estate assets could be placed in a "bad bank" financed by other banks.

Saturday's participants included Treasury Secretary Henry Paulson, Timothy Geithner, president of the New York Fed, and Securities and Exchange Commission Chairman Christopher Cox. Citigroup Inc.'s Vikram Pandit, JPMorgan Chase & Co.'s Jamie Dimon, Morgan Stanley's John Mack, Goldman Sachs Group Inc.'s Lloyd Blankfein, and Merrill Lynch & Co.'s John Thain were among the chief executives at the meeting.

Representatives for Lehman Brothers were not present during the discussions.

Federal Reserve Chairman Ben Bernanke is actively engaged in the deliberations but wasn't in attendance.

Geithner convened the meeting Friday evening and told bankers gathered at the New York Fed to come up with a solution or risk being the next to go under, investment banking officials with direct knowledge of the talks said. They spoke on condition of anonymity because the talks were ongoing.

Other potential buyers could include Japan's Nomura Securities, France's BNP Paribas and Deutsche Bank AG. All have declined to comment.

Participants in Saturday's meeting were also trying to tackle a broader agenda that includes problems at American International Group Inc. and Washington Mutual Inc., said the investment bank officials, who were briefed on the talks.

Lehman's stock closed at $3.65 Friday - an all-time low and down nearly 95 percent from its 52-week high of $67.73.

Global fears intensified Saturday that Lehman's collapse would stagger markets and undercut confidence in the U.S. financial system.

Germany's Finance Minister Peer Steinbrueck urged that a resolution be found before Asian markets open, warning ominously, "the news that is coming out of the U.S. is bad."

Lehman Brothers Holdings Inc. put itself on the block earlier this week. Bad bets on real-estate holdings - which have factored into bank failures and taken out other financial companies - have thrust the 158-year-old firm in peril. It has been dogged by growing doubts about whether other financial institutions would continue to do business with it. This causes a self-fullfilling proficy.

Richard S. Fuld, Lehman's longtime CEO, pitched a plan to shareholders Wednesday that would spin off Lehman's soured real estate holdings into a separately traded company. He would then raise cash by selling a majority stake in the company's unit that manages money for people and institutions. That division includes asset manager Neuberger Berman.

Government officials want to avoid a Bear Stearns-like bailout; the Fed in March agreed to provide a loan of nearly $29 billion as part of JPMorgan Chase & Co.'s takeover of the firm. Unlike Bear, Lehman can go directly to the Fed to draw emergency loans if it needs a quick source of ready cash. In recent weeks, though, there's been no indication that Lehman has done so.

Bear's sudden meltdown led the Fed to engage in its broadest use of lending powers since the 1930s. Fearful that other firms could be in jeopardy, the Fed temporarily opened its emergency lending program to investment firms, a privilege that for years was granted only to commercial banks, which are subject to tighter regulation.

Producers take a hit

- The Producer Price Index for August fell -.9% versus estimates of a -.5% decline and a 1.2% increase in July.

- The PPI Ex Food & Energy for August rose .2% versus estimates of a .2% gain and a .7% increase in July.

- Advance Retail Sales for August fell -.3% versus estimates of a .2% gain and a downwardly revised -.5% decline in July.

- Retail Sales Less Autos for August fell -.7% versus estimates of a -.2% decline and a .3% increase in July.

- Preliminary Univ. of Mich. Consumer Confidence for September jumped to 73.1 versus estimates of 64.0 and a reading of 63.0 in August.

OPEC

The oil market is balanced, said Ali Naimi, Saudi Arabia’s powerful oil minister, making it less likely the Opec oil cartel will formally decide to cut its output at a meeting later on Tuesday.

Mr Naimi said as he arrived in Vienna in the early hours of Tuesday: “The market is fairly well balanced and we have worked very hard since June’s meeting to bring prices to where they are now.”

e added: “Whatever the customers want, we will satisfy.”

Mr Naimi’s keenly-awaited words mark the first time he has spoken publicly about Saudi Arabia’s oil policy in several weeks. Oil prices fell by more than $1 with Nymex October West Texas Intermediate down $1.42 to $106.47 while ICE October Brent lost 74 cents at $102.70 a barrel.

Most analysts and traders this week predicted Opec would have to discuss reducing its output to shore up oil prices that have fallen more than 25 per cent since July. But they forecast that ultimately the group would maintain the status quo, at least formally, when they met in Vienna later on Tuesday.

Ed Morse, chief energy economist at Lehman Brothers, argued that Saudi Arabia, Opec’s de facto leader, had an interest in even lower prices to reignite demand. ”Opec output is likely to remain unchanged at the upcoming meeting,” he said in a note to clients.

Those predictions were mirrored by comments from other ministers, such as Galo Chiriboga, Ecuador’s energy minister, who forecast on Monday morning that Opec would change nothing.

Mohammed Abdullah Al-Aleem, Kuwait’s energy minister who sits on the committee that helps steer Opec’s decisions through economic analysis warned that supply was outpacing demand. But, he said: “For the time being ... there is no need to cut production.”

Mr Naimi’s comments a few hours later were widely interpreted as making this outcome even more likely. However, nothing is final until ministers meet after sundown on Tuesday and many analysts suspect Saudi Arabia will continue quietly to cut its own production if it feels the market is oversupplied.

Iran and Venezuela, Opec’s most hawkish members, had called for the 13-country group to reduce production, but even their message was less ardent than at past meetings. Opec members with better ties to Washington were also keen not to anger their biggest customer ahead of the presidential elections in November.

It is possible Opec in Tuesday’s communiqué will remind members of their quota obligations, which many brushed aside when oil prices rose to records of more than $147. This would signal to the market the group was prepared to act if prices fell further and give Saudi Arabia some cover to quietly cut back the extra barrels it pumped on the market this summer.

Opec members are likely continue to watch prices closely in the runup to their next meeting, which is to be held in Algeria in December.

They face a delicate balancing act, having to weigh the benefit lower oil prices have in stimulating demand for their most precious resource with the drawback of reduced revenue if prices continue to fall significantly.

In volatile trading on Monday, Nymex October West Texas Intermediate fell to an intraday low of $104.70 a barrel, the lowest level since April. It had risen as high as $109.89 on concerns about hurricane Ike keeping oil and gas production in the Gulf of Mexico shut.

The drop came as the US dollar surged to its highest level against the euro since October 2007 at $1.4095, an issue seized on by ministers on Monday.

Chakib Khelil, Algeria’s energy minister and Opec’s president said on Monday: ”What we are seeing now is that the inverse relation between the U.S. dollar and the oil price is verified.”

Copyright The Financial Times Limited 2008

Buy Fossil Fuels

Every cloud, no matter how big, has a silver lining. The same is true fur Gustav. According to the U.S. Minerals Management Service over 96 percent of U.S. Gulf oil production and 82 percent of natural gas output had been closed as of Sunday afternoon; that means that the futures and spot energy markets will flurish.

In reality we have enough output and reserves to last us for a few months, and refining capacity is already maxed out, but for months now the energy markets have not opperated on fundamentals.

For medium term investors look for bargins in companies that build and repair drilling rigs and other oil and gas infrastructure. Some of those companies are:

CONSTELLATION ENERGY (CEP); ROWAN COS INC (RDC); ATWOOD OCEANICS INC (ATW); and PRIDE INTL INC (PDE). These are companies that will take a loss over the next few days, but they have very strong upside and incredible earning potential. If you are in a position to buy and hold for a few weeks or even months, you will certainly see some profits. A word to the wise, once you buy do not look at the price until after the storm is over.

There are some companies that will bring profits in the short run, those are the companies that have surplus product and can ramp up production to meet the world's needs. GeoGlobal Resources Inc is a very good choice, they explore mainly in India and ahve a very short cycle for getting product to market. Devon Energy (DVN) is another strong choice, mainly because it can weather the storm(s) and not to mention that the stock is currently trading at 12 times P/E. The third on our Pick List is PETROHAWK ENERGY CP (HK). Last, look into TRANSOCEAN INC (RIG). These are all very strong pics for the Holiday shortened week.

Penson Financial Services

Every now and again the truth is stranger than fiction. I was sitting a my home going over my own financial statement from Penson when I got a phone call from a buddy of mine. The friend happens to be a reporter. This reporter friend told me that there was an attorney that I should get in touch with because he was looking to bring legal action against Penson, and those exact thought have crossed my mind as well.

Similar to Bruce Kelly's, of Investment News, report I too feel that I was defrauded by Penson over CMOs.

SAMCO Financial Services Inc. of Phoenix and its former clearing firm, Penson Financial Services Inc. of Dallas, has been tagged with a $15 million arbitration claim by more than 80 investors.

The claim centers on investments in Collateralized Mortgage Obligations, or CMOs.

Half of the group of investors is over 60 years old, and six are in their eighties, according to a statement by the attorneys handling the claim, which has been filed with the Financial Industry Regulatory Authority.

Two of the claimants are a couple in their eighties who lost their life savings, according to the statement by the attorneys, Robert Rex and Gregory Tendrich, both of Boca Raton, Fla.

The claim, which names a number of executives from both companies, alleges that that Penson and others failed to supervise a group of brokers at SAMCO’s Boca Raton office from 2004 to 2006 and that the CMOs were mishandled.

Further, that office was also not registered with the Florida office of Financial Regulation, according to the claim. Margin calls on CMOs, a risky type of mortgage-backed security, were at the center of the collapse of Brookstreet Securities Corp. of Irvine, Calif., earlier this summer.

Until last year, SAMCO and Penson shared common owners. According to its FINRA records, SAMCO is no longer a registered broker-dealer.

Durable Goods

Washington AP - U.S. factories saw a surprisingly hefty increase in their orders for big-ticket products in July, reflecting continued strength in export sales and a boost to business investment from the government's tax stimulus package.
Economists, however, remain worried that spreading economic weakness overseas and a rebound in the value of the dollar could spell an end to the export boom later this year.

The Commerce Department said Wednesday that orders for durable goods rose 1.3 percent last month, far above the slight 0.1 percent increase Wall Street had been expecting.

The July increase matched a 1.3 percent rise in June, which was revised up from an earlier reading of 0.8 percent. The matching gains were the strongest since orders for durable goods, items expected to last at least three years, jumped by 4.1 percent in December.

Wall Street investors were encouraged by the better-than-expected gain in durable goods orders. The Dow Jones industrial average rose 89.64 points to close at 11,502.51.

A huge rebound in orders for commercial aircraft, which had fallen sharply in June, led last month's strength. But even outside the volatile aircraft category, there was widespread growth, indicating that American companies are continuing to benefit from a boom in exports due mainly to the decline in the value of the dollar earlier this year.

"These upbeat capital goods numbers amid a downtrodden U.S. consumer sector indicates how helpful a weak dollar is in the current cycle," said Daniel J. Meckstroth, chief economist for the Manufacturers Alliance/MAPI, an industry trade group.

But some economists expressed concerns over how much longer the export boom can last, given spreading economic weakness in Europe, Japan and other major overseas markets. They noted that the dollar, which had been on a long slide, has come off its recent lows, which could translate into less of a price advantage for U.S. exporters.

"The recent downturn in growth abroad and stabilization of the dollar could put pressure on capital goods spending in the months ahead," said Zach Pandl, an economist at Lehman Brothers.

Other analysts were impressed with the staying-power demonstrated in the new orders figures for June and July, and some said it showed the boost manufacturers are getting from increased demand by businesses hiking their investment spending to take advantage of $51 billion in business tax breaks included in the $168 billion economic stimulus package passed by Congress in February.

The government will release its revised estimate for economic growth in the April-June quarter on Thursday, and economists said they were revising upward their estimates for both second quarter and third quarter gross domestic product growth based on the better-than-expected orders numbers. GDP measures the value of all goods and services produced within the U.S. and is the broadest barometer of the country's economic health.

David Wyss, chief economist at Standard & Poor's in New York, said he believed the current estimate of 1.9 percent GDP growth for the second quarter will be boosted to between 2.5 percent and 3 percent, while growth in the current quarter will be around 1.7 percent.

"Exports are holding up a lot better than we thought they would with the weakness in Europe and Japan, and we are seeing the impact of the stimulus package on business investment decisions," he said.

Demand for commercial aircraft shot up 28 percent in July. Economists cautioned against reading too much into that one-month surge since it followed a 21.3 percent decline in June in what is a very volatile category. While there is concern that airplane makers will be hurt by soaring jet fuel prices that has forced airlines to cancel or delay contracts for new planes, other analysts said such weakness could be offset by increased orders by many booming Asian countries.

Chicago-based Boeing Co. wrapped up the huge Farnborough, England, international air show last month with orders for 197 planes, including a headline grabbing deal with Air China for 45 planes. European rival Airbus did even better, signing orders for 247 planes.

Boeing is currently negotiating a new contract with the International Association of Machinists. The union is warning the company that a greatly improved offer is needed if it wants to avoid a strike when the current contract expires on Sept. 3.

Elsewhere, orders for motor vehicles also rose by 1.2 percent in July. While it was the second straight monthly increase, it mainly reflected a rebound following curtailed activity related to the strike at auto parts supplier American Axle rather than a sign of any sustained rebound in the beleaguered sector.

Detroit's automakers have watched demand slump this year because of the anemic economy and soaring gasoline prices which hurt sales of previously hot models such as light trucks and sport utility vehicles. Auto sales fell in July to the slowest pace in 16 years with General Motors Corp. reporting a drop of 26 percent compared to July 2007, while Ford Motor Co. experienced a 15 percent decline.

Overall, orders for transportation equipment were up 3.1 percent last month after a 1.9 percent drop in June. Outside of transportation, orders posted a 0.7 percent increase, far better than the 0.3 percent decline analysts had expected.

Strength outside of transportation reflected strong gains in such categories as primary metals, including steel, and machinery, both areas which have been helped by overseas demand.

Non-defense capital goods excluding aircraft, a category seen as a good proxy for business investment, jumped by 2.6 percent last month, the best showing since April. Analysts attributed part of this gain to decisions by companies to take advantage of provisions in the economic stimulus bill that rewards tax benefits to companies who purchase equipment this year.

Brazil pushed up oil cost

Just a few weeks ago Brazil's President came on Fox News and said that he wanted Brazil to get into the World oil market, and now this? Brazil helped push oil prices up $5 to a new record - $147 a barrel on Friday as strike threats and deepening geopolitical tensions raised fears over the safety of supplies.

Having rallied more than $5 overnight, Brent crude rose a further $5.22 to $147.25 a barrel.

A union of employees from Petrobras, the Brazilian state-controlled oil company, in the Campos basin – where 80 per cent of Brazil’s oil is produced – said that they would shut down rigs to press for better pay.

When Petrobras employees refused to work for five days in 2001, oil production fell sharply and Brazil had to import extra oil. However, since then Petrobras and the unions have resolved their disputes without severe stoppages.

Oil also got a boost from news that the main militant group in Nigeria’s oil-rich Niger Delta was abandoning a ceasefire in response to Britain’s offer to help tackle lawlessness in the area.

Militants have helped cut Nigeria’s oil exports by more than 20 per cent since 2006 by attacking pipelines and other installations. It seems that we are colonializing the wrong part of the world, in a feeble attempt to stabalize oil prices and production.

News that Iran test-fired more missiles on Thursday had little impact on the oil market. MF Global said traders were increasingly reluctant to bid up prices on “what if?” headlines. Crude hit a record above $145 a barrel last week on speculation about conflict between the west and Iran over Tehran’s nuclear programme.

Meanwhile, the Organisation of the Petroleum Exporting Countries forecast that world oil demand would rise by 1.3m barrels per day annually to 2012 before easing to 1.2m bpd in the longer term.

In its World Oil Outlook 2008, Opec said that the key to future oil demand growth would be transport, especially in developing countries. The oil cartel said almost $800bn would have to be invested in increasing refinery capacity to meet the additional demand expected by 2030.

The need for oil from Opec countries will soon fall, the International Energy Agency said Thursday, forecasting global oil demand growth would slow next year while production would rise.

The IEA increased its forecast for 2008 oil demand by 80,000 barrels a day, or 0.1 per cent, to 86.85m barrels a day.

Freddie turmoil

Shares in Freddie Mac and Fannie Mae plummeted further in early trading on Friday amid speculation that a bailout of the government-sponsored mortgage financiers was imminent, and that such a bail-out would leave little if any value for current shareholders.

Fannie was down 44.7 per cent early on Friday morning, while Freddie’s shares fell 44.5 per cent. That came after frantic trading on Thursday in New York had already dragged both mortgage giants’ shares down to their lowest levels since 1991.

The US Treasury and Bush administration have discussed “contingency plans” that would co-ordinate a rescue of the two government-sponsored enterprises, but no such rescue would be undertaken unless and until the agencies are deemed undercapitalised, according to people involved in the talks.

In response to the reports of contingency plans for a rescue, Hank Paulson, Treasury secretary, said in a short statement that he was committed to supporting the two mortgage finance companies in “their current form” and gave no hint that the government was about to bail them out.

“Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission,” Mr Paulson said. “We are maintaining a dialogue with regulators and with the companies.’”

Mr Paulson, together with the companies’ regulator and Federal Reserve chairman Ben Bernanke, has given repeated assurances in recent days that Fannie and Freddie remain ”adequately capitalised” under current regulatory standards.

Other participants in the mortgage market, including Lehman Brothers, also suffered steep falls on Thursday, although the overall stock market climbed higher. Lehman fell a further 14 per cent on Friday morning.

Investors were unnerved on Thursday by a warning from Bill Poole, former president of the Federal Reserve Bank of St Louis, that the chances that a bail-out of Fannie and Freddie might be needed were increasing.

Mr Poole said Freddie Mac owed $5.2bn (£2.6bn) more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules.

Freddie Mac argues that such a measure does not reflect the economics of the company, which holds mortgages to maturity but has to account for them at today’s market prices.

Fannie and Freddie account for nearly three-quarters of new US mortgages, and their difficulties add to worries about the US economy. Many investors assume that the US government would have to take action to prevent a collapse of Fannie and Freddie, potentially at a big cost to taxpayers.

Speaking before the House financial services committee on Thursday, Mr Paulson and Mr Bernanke sought to calm the markets.

“Fannie Mae and Freddie Mac are...  working through this challenging period,” Mr Paulson said. “They play an important role in our housing markets today and need to continue to play an important role in the future. Their regulator has made clear that they are adequately capitalised.”

Mr Bernanke added: “I believe they are well capitalised in a regulatory sense.” However, he added that, like other financial institutions, Fannie Mae and Freddie Mac should also try to raise more capital.

Mr Bernanke and Mr Paulson were testifying at the first congressional hearing called to examine changes to the US financial regulatory system in the wake of the credit crisis.

The future of Fannie and Freddie was also discussed on the presidential election campaign trail, where John McCain, the Republican candidate, said the two companies “are vital to Americans’ ability to own their own homes... They will not fail; we cannot allow them to fail.”

Freddie vs Fannie

July 10 (Bloomberg) -- Fannie Mae and Freddie Mac, the two biggest providers of financing for U.S. home loans, tumbled to the lowest levels in 17 years in New York trading after a former Federal Reserve president said the companies may need a government bailout.

Fannie Mae tumbled as much as 24 percent and Freddie Mac slumped as much as 34 percent in New York Stock Exchange composite trading after UBS AG analysts said in a report today that Freddie Mac's decline creates ``challenges'' for the company's plan to raise $5.5 billion.

Chances are increasing that the U.S. will bail out Fannie Mae and Freddie Mac because they don't have enough capital to weather the worst housing slump since the Great Depression, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules. The fair value of Fannie Mae assets fell 66 percent to $12.2 billion, data provided by the Washington- based company show, and may be negative next quarter, Poole said.

``Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,'' Poole, 71, who left the Fed in March, said in the interview yesterday.

Poole roiled markets in 2003 when he said the government should consider severing its implied backing of Fannie Mae and Freddie Mac and the companies lack the capital to weather financial market disruptions. In 2006 and 2007 he called for lawmakers to strip Fannie Mae and Freddie Mac of their charters.

McCain

The companies, created to boost homeownership and promote market stability, own or guarantee about half the $12 trillion in U.S. home loans outstanding. In addition to those obligations, Fannie Mae has $831 billion in company bonds outstanding, while Freddie Mac has $644 billion, according to Bloomberg data.

Senator John McCain, the presumptive Republican presidential nominee, said the federal government can't allow them to fail.

Fannie Mae and Freddie Mac ``are vital to Americans' ability to own their own homes,'' McCain said in response to a reporter's question during a campaign stop at a diner in Livonia, Michigan. ``They will not fail; we cannot allow them to fail.''

Fair value accounting measures a company's net worth if it had to liquidate all of its assets to repay liabilities. Fannie Mae and Freddie Mac, both of which have the implicit backing of the government, make money by borrowing in the bond market and reinvesting the proceeds in higher-yielding mortgages and securities backed by home loans.

Stock Price Target

Fannie Mae slumped $1.64 to $13.67 at 11:15 a.m., extending declines for the year to 66 percent. Freddie Mac tumbled $2.17 to $8.09, taking its 2008 slide to 76 percent. UBS AG analysts led by Eric Wasserstrom in New York increased their estimates for losses at Freddie Mac and cut their price target for the stock to $10 from $28 after meeting with Freddie Mac's chief financial officer Anthony Piszel and controller David Kellerman, according to a report today.

Fannie Mae and Freddie Mac have raised a combined $20 billion since December to cover losses of more than $11 billion generated since the credit crisis began last year. Freddie Mac has yet to raise a planned $5.5 billion, scheduled for mid-year.

Paulson, Bernanke

U.S. Treasury Secretary Henry Paulson told lawmakers in Washington today that he's been assured by the regulator for Fannie Mae and Freddie Mac that the companies have enough capital.

The Office of Federal Housing Enterprise Oversight ``has made clear that they are adequately capitalized,'' Paulson said in testimony to the House Financial Services Committee. Federal Reserve Chairman Ben S. Bernanke also appeared.

The Treasury has been discussing what to do if Fannie Mae and Freddie Mac fail for months as part of its contingency planning, the Wall Street Journal reported today, citing three people familiar with the matter. The government doesn't expect the companies to fail and it doesn't have a rescue plan in place, the Journal said.

``At some point we're going to reach that inflection, where the government is going to have to either guarantee explicitly or Fannie and Freddie are going to have be left to fend for themselves,'' Peter Boockvar, an equity strategist at Miller Tabak & Co. in New York, said in an interview with Bloomberg Television yesterday. ``We're getting to that point where a decision has to be made by Washington.''

`Well-Capitalized'

The government is counting on Fannie Mae and Freddie Mac, which own or guarantee about half the $12 trillion in home loans outstanding, to help revive the housing market. Congress lifted growth restrictions on the companies, eased their capital requirements and allowed them to buy bigger ``jumbo mortgages'' to spur demand for home loans as competitors fled the market.

``We are managing our business and maintaining a capital position that will allow us to fulfill our congressionally chartered mission now and in the future,'' Brian Faith, a spokesman for Fannie Mae, said.

Poole is ``a long-time critic,'' said Sharon McHale, a spokeswoman for McLean, Virginia-based Freddie Mac.

``Freddie Mac is doing exactly what Congress intended when it chartered the company and, more recently, when it passed the Economic Stimulus Act,'' McHale said. ``We are well capitalized and positioned to continue to serve our vital housing mission.''

Government Ties

Congress created Freddie Mac and expanded Fannie Mae in 1970 to promote home buying in the U.S. The companies' charters give the Treasury the authority to buy as much as $2.25 billion in each of their securities in the event of possible default.

The government will likely be forced to take over the companies because of the mortgage meltdown, Poole said.

``We know in a crisis the Federal Reserve tap would be open,'' said Poole, now a senior fellow at the Cato Institute.

The bailout of Bear Stearns Cos. by JPMorgan Chase & Co., arranged by the Fed, demonstrates the government's unwillingness to allow ``large, systemically important'' financial institutions to fail, he said. Bear Stearns collapsed after customers fled amid speculation the company faced a cash shortage.

``I worry about those institutions,'' retired Richmond Fed President Alfred Broaddus said. ``They are huge. They dwarf the Bear Stearns issue. In the very worst case scenario, I don't know how you do it other than extend money and the public takes the loss.''

$20 Billion Raised

The companies have access to the Fed's so-called Fedwire payments system allowing them to access funding if needed, said Vincent Reinhart, the Fed's chief monetary-policy strategist from 2001 until September 2007.

They can withstand the slump in part because most of their investments are mortgages made before 2006 when lending standards were tighter, making them less likely to default, said Eileen Fahey, a Chicago-based analyst at Fitch Ratings.

``We do not believe they are technically insolvent,'' Fahey said. ``People seem to lose sight of the fact that a majority of the mortgages that they are holding and are guaranteeing were originated pre-2006.''

Comments by the companies' regulator this week that they are adequately capitalized also eased concern, said Lawrence Yun, chief economist of the National Association of Realtors in Washington. The companies have about $80 billion of regulatory capital supporting $5.2 trillion of mortgages.

``Just given the size of the two companies, surely the government would not stand aside'' and let them fail, Yun said.

Record Spreads

Fannie Mae sold $3 billion of two-year notes yesterday to yield 74 basis points more than Treasuries. A basis point is 0.01 percentage point. That's the widest spread since Fannie Mae first sold two-year notes in 2000 and triple what it paid in June 2006.

Fannie Mae's spreads relative to two-year interest-rate swap spreads, considered a gauge of investors' perception of credit risk, remain about 12 basis points below a four-year high that was reached in March, Bloomberg data show.

Fannie Mae debt was trading 13 basis points tighter than two-year swap spreads today compared with 2 basis points tighter on March 19, Bloomberg data show. Freddie Mac spreads are about 19 basis points tighter than swap spreads after trading at the same level as swaps on March 17. Swap spreads are the difference between interest-swap rates above Treasury yields.

Credit-Default Swaps

The price of credit-default swaps, contracts used to speculate on the creditworthiness of Fannie Mae and Freddie Mac, doubled in the past two months to more than 80 basis points for the senior debt, according to London-based CMA Datavision.

The median credit-default swap on debt rated Aaa by Moody's was 36 basis points as of yesterday, data from the rating firm's strategy group show. It was 87 basis points for debt rated A3.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

American Car Company

The Chrysler building, an Art Deco icon of the New York City skyline, has sold to a fund controlled by Abu Dhabi for $800m.

The building, completed in 1930 for the automotive company Chrysler, was briefly the tallest building in the world. The Abu Dhabi Investment Council, a sovereign wealth fund controlled by the oil-rich sheikdom paid $800m for the 77-story building, Bloomberg reported. The seller was a fund managed by Prudential Financial and the sale was finalized yesterday.

The graceful tower overlooks the corner of 42nd Street and Lexington Avenue in Manhattan. It is beloved for the upper stories' ornamental arches and the stylised eagle sculptures that jut out from near the top of the tower, as if keeping watch over the city.

Middle Eastern investors have spent $1.8bn this year on commercial real estate in the US, more than other international buyers, Real Capital Analytics, a New York-based property research firm, told Bloomberg.

Two years ago furore erupted when Dubai Ports World sought to buy a London company that operated six shipping ports on the east coast of the US. The deal died over national security concerns.

Foreign acquisition of New York landmarks isn't a new phenomenon. In May, a consortium of US interests and Kuwait and Qatar the General Motors building and three other midtown towers for $3.95bn.In 1989 Japanese investors bought Rockefeller Centre, a suite of buildings home to NBC, General Electric and other high-profile companie

Citi gets smart

I wonder when banks got out of the business of making loans, and go into everything else. I also wonder, why bankers are so fee crazy that they charge themselves. I guess it is a way to scratch each others' back.

Citogroupis planning to overhaul its bonus system for hundreds of top managers in an effort to increase co-operation and minimise in-fighting among the disparate parts of the sprawling financial services conglomerate.

The move is part of an ambitious plan by Vikram Pandit, chief executive, to restore Citi’s battered fortunes by harnessing synergies between its investment banking, commercial banking and wealth management divisions.

Citi is the latest Wall Street bank to rethink its bonus system in the wake of the credit crunch. However, while firms such as Merrill Lynch are trying to reduce incentives for bankers to take short-term risks and outsized bets, Citi’s efforts are mainly aimed at getting the most out of its huge and diverse business.

Since taking over from Chuck Prince in December, Mr Pandit has rebuffed calls to break up Citi and vowed to eliminate barriers between the company’s businesses to fully exploit its “universal banking” model.

“The new compensation plan is absolutely crucial to put teeth behind Vikram Pandit’s strategy,” a Citi executive said. “We have to put a premium on partnership-like behaviour.”

People close to the situation said Mr Pandit wanted to change the way bonuses were calculated to reward co-operation across different divisions and the performance of the company as a whole.

At present, bonuses at Citi, like those at most other banks, are largely dependent on the results of a manager’s division and individual performance.

People familiar with the matter said the ultimate goal was to link bonuses of senior managers and junior employees to Citi’s overall performance. However, they added that the first stage was likely to involve skewing bonuses to take into account how much shared business each manager generated.

Citi employees already get paid for referrals, when, for example, a wealth management adviser helps a client open a credit card or a checking account. However, Citi insiders say those sums are modest.

A change to Citi’s compensation structure could face internal resistance. Many senior managers may object to having their pay tied to businesses outside their control, especially when they are as volatile and cyclical as investment banking.

However, Mr Pandit has told senior colleagues he wants a new system in place by the end of the year, when annual bonuses are decided. John Donnelly, head of human resources, has been asked to draft detailed plans during the next few weeks.

Collateralized Mortgage Obligations Part 2

This CMO glossary defines terms used in quotes in the text and additional terms that may be helpful to an investor considering an investment in CMOs.
Accretion bond:
See”Z-tranche.”

Accrual bond:
See “Z-tranche.”

Accrued interest:
Interest deemed to be earned on a security but not yet paid to the investor.

Active tranche:
A CMO tranche that is currently paying principal payments to investors.

Amortization:
Liquidation of a debt through installment payments.

Average life:
On a mortgage security, the average time to receipt of each dollar of principal, weighted by the amount of each principal prepayment, based on prepayment assumptions.

Basis point:
One-one hundredth (1/100 or .01) of one percent. Yield differences among bonds are stated in basis points.

Beneficial owner:
One who benefits from owning a security, even if the security’s title of ownership is in the name of a broker or bank (“street name”).

Bid:
The price at which a buyer is willing to buy a security.

Bond equivalent yield:
An adjustment to a CMO yield which reflects its greater present value, created because CMOs pay monthly or quarterly interest, as opposed to semiannual interest payments on most other types of bonds.

Book-entry:
A method of recording and transferring ownership of securities electronically, thereby eliminating the need for physical certificates.

Call risk:
For a CMO, the risk that declining interest rates may accelerate mortgage loan prepayment speeds, causing an investor’s principal to be returned sooner than expected. As a consequence, investors may have to reinvest their principal at a lower rate of interest.

Cap:
The upper limit for the interest rate on an adjustable-rate loan or security.



Clean CMO:
See “Sequential-pay CMO.”

CMO (Collateralized Mortgage Obligation):
A multi-class bond backed by a pool of mortgage pass-through securities or mortgage loans. See “REMIC.”

CMT (Constant Maturity Treasury):
A series of indexes of various maturities (one, three, five, seven, or ten years) published by the Federal Reserve Board and based on the average yield of a range of Treasury securities adjusted to a constant maturity corresponding to that of the index.

COFI (Cost of Funds Index):
A bank index reflecting the weighted average interest rate paid by savings institutions on their sources of funds. There are national and regional COFI indexes.

Collateral:
Securities or property pledged by a borrower to secure payment of a loan. If the borrower fails to repay the loan, the lender may take ownership of the collateral. Collateral for CMOs consists primarily of mortgage pass-through securities or mortgage loans, although it may also encompass letters of credit, insurance policies, or other credit enhancements.



Companion tranche:
A CMO tranche that absorbs a higher level of the impact of collateral prepayment variability in order to stabilize the principal payment schedule for a PAC or TAC tranche in the same offering.

Confirmation:
A document used by securities dealers and banks to state in writing the terms and execution of a verbal arrangement to buy or sell a security.

Conventional mortgage loan:
A mortgage loan granted by a bank or thrift institution that is based solely on real estate as security and is not insured or guaranteed by a government agency.



CPR (Constant Prepayment Rate):
The percentage of outstanding mortgage loan principal that prepays in one year, based on the annualization of the Single Monthly Mortality (SMM), which reflects the outstanding mortgage loan principal that prepays in one month.

Current face:
The current remaining monthly principal on a mortgage security. Current face is computed by multiplying the original face value of the security by the current principal balance factor.



CUSIP number:
A unique nine-digit identification number permanently assigned by the Committee on Uniform Securities Identification Procedures to each publicly traded security at the time of issuance. If the security is in physical form, the CUSIP number is printed on its face.

Extension risk:
For a CMO, the risk that rising interest rates may slow the anticipated prepayment speeds, causing investors to find their principal committed longer than expected. As a consequence, they may miss the opportunity to earn a higher rate of interest on their money.

Face value:
The par value of a security, as distinct from its market value.

Factor:
A decimal value reflecting the proportion of the outstanding principal balance of a mortgage security which changes over time in relation to its original principal value. The Bond Buyer publishes the “Monthly Factor Report.” which contains a list of factors for Ginnie Mae, Fannie Mae and Freddie Mac securities. Fannie Mae, Freddie Mac and trustees of private-label CMOs also publish CMO tranche factors.

Floating-rate CMO:
A CMO tranche which pays an adjustable rate of interest tied to a representative interest index such as the London Interbank Offered Rate Z1BOR), the Constant Maturity Treasury (CMI) or the t f Funds Index (COFI).

Floor:
The lower limit for the interest rate on an adjustable-rate loan or security.

Hedge:
A commitment or investment made with the intention of minimizing the impact of adverse movements interest rates or securities prices and offsetting potential losses.



Inverse floater:
A CMO tranche that pays an adjustable rate of interest that moves in the opposite direction from movements in a representative interest rate index such as the London Interbank Offered Rate (LIBOR), the Constant Maturity Treasury (CMT), or the Cost of Funds Index (COFI).

I0 (interest-only) security:
In the case of a CMO, an IO tranche is created deliberately to pay investors only interest and not principal. I0 securities are priced at a deep discount to the “notional” amount of principal used to calculate the amount of interest due.

Issue date:
The date on which a security is deemed to he issued or originated.

Issuer:
An entity which issues and is obligated to pay amounts due on securities.

Jump Z-tranche:
A Z-tranche that may start receiving principal payments before prior tranches are retired if market forces create a “triggering” event, such as a drop in Treasury yields to a defined level, or a prepayment experience that differs from assumptions by a specific margin. “Sticky” jump Z-tranches maintain their changed payment priority until they are retired. “Non- sticky” jump Z-tranches maintain their priority only temporarily for as long as the triggering event is present. Although jump Z-tranches are no longer issued, some still trade in the secondary market.

LIBOR (London Interbank Offered Rate):
The interest rate banks charge each other for short-term Eurodollar loans ranging from overnight to five years in maturity.

Lockout:
The period of time before a CMO investor will begin receiving principal payments.

Maturity date:
The date on which the principal amount of a security is due and payable.



Mortgage:
A legal instrument that creates a lien upon real estate securing the payment of a specific debt.

Mortgage loan:
A loan secured by a mortgage.

Mortgage pass-through security:
A security representing a direct interest in a pool of mortgage loans. The pass-through issuer or servicer collects the payments on the loans in the pool and “passes through” the principal and interest to the security holders on a pro rata basis. Mortgage pass-through securities are also known as mortgage-backed securities (MBS) and participation certificates (PC).

Negative convexity:
A characteristic of CMOs and other callable or pre-payable securities that causes investors to have their principal returned sooner than expected in a declining interest rate environment or later than expected in a rising interest rate environment. In the former scenario, investors may have to reinvest their funds at lower rates (“call risk”); in the latter, they may miss an opportunity to earn higher rates (“extension risk”).

Offer:
The price at which a seller will sell a security.

Original Face:
The face value or original principal amount of a security on its issue date.

PAC (planned amortization class) tranche:
A CMO tranche that uses a mechanism similar to a sinking fund to determine a fixed principal payment schedule that will apply over a range of prepayment assumptions. The effect of the prepayment variability that is removed a PAC bond is transferred to a companion tranche.

Par:
A price equal to the original face amount of a securities as distinct from its market value. On a debt security, the par or face value is the amount the investor has been promised to receive from the issuer at maturity.

Payment date:
The date that principal and interest payments are paid to the record owner of a security.

P&I (principal and interest):
The term used to refer to regularly scheduled payments or prepayments of principal and of interest on mortgage securities.

Plain-vanilla CMO:
See “Sequential-pay CMO.”

PO (principal-only) security:
In the case of a CMO, a P0 tranche is created deliberately to pay investors principal only and not interest. P0 securities are priced at a discount from their face value.

Pool:
A collection of mortgage loans assembled by an originator or master servicer as the basis for a security. In the case of Ginnie Mae, Fannie Mae, or Freddie Mac mortgage- pass-through securities, pools are identified by a number assigned by the issuing agency.

Prepayment:
The unscheduled partial or complete payment the principal amount outstanding on a mortgage or other debt before it is due.

Price:
The dollar amount to be paid for a security, which also be stated as a percentage of its face value or par in case of debt securities.

Principal
With mortgage securities, the amount of debt outstanding on the underlying mortgage loans.

Private label:
The term used to describe a mortgage security whose issuer is an entity other than a U.S. government agency or U.S. government-sponsored enterprise. Such issuers may be subsidiaries of investment banks, financial institutions, or home builders.

Ratings:
Designations used by investors’ services to give relative indications of credit quality.

Record date:
The date for determining the owner entitled to the next scheduled payment of principal or interest in a mortgage security.

REMIC:
Real Estate Mortgage Investment Conduit. As a result of a change in the 1986 Tax Reform Act, most CMOs are today issued in REMIC form to create certain tax advantages for the issuer. The terms “REMIC” and “CMO” are now used interchangeably.

Residual:
In a CMO, the residual is that tranche which collects any cash flow from the collateral that remains after obligations to the other tranches have been met.

Scenario analysis:
Examining the likely performance of an investment under a wide range of possible interest rate environments.

Sequential-pay CMO:
The most basic type of CMO, in which all tranches receive regular interest payments, but principal payments are directed initially only to the first tranche until it is completely retired. Once the first tranche is retired, the principal payments are applied to the second tranche until it is fully retired, and so on.

Servicing:
Collection and pooling of principal, interest, and escrow payments on mortgage loans and mortgage pools, as well as certain operational procedures such as accounting, bookkeeping, insurance, tax records, loan payment follow-up, delinquency loan follow-up, and loan analysis. The party providing the servicing receives a servicing fee.

Servicing fee:
The amount retained by the mortgage servicer from monthly interest payments made on a mortgage loan.

Settlement date:
The date agreed upon by the parties to a transaction for the delivery of securities and payment of funds.

Sinking fund:
Money set aside on a regular basis, sometimes from current earnings, for the specific purpose of redeeming debt.

SMM (Single Monthly Mortality):
The percentage of outstanding mortgage loan principal that prepays in one month.

Standard Prepayment Model of The Bond Market Association:
A model based on historical mortgage prepayment rates that is used to estimate prepayment rates on mortgage securities. The Association’s model is based on the Constant Prepayment Rate (CPR), which annualizes the Single Monthly Mortality (SMM), or the amount of outstanding principal that is prepaid in a month. Projected and historical prepayment rates are often expressed as “percentage of PSA” (Prepayment Speed Assumptions). A prepayment rate of 100% PSA implies annualized prepayment rates of 0.2% CPR in the first month, 0.4% CPR in the second month, 0.6°o CPR in the third month, and 0.2% increases in every month thereafter until the thirtieth month, when the rate reaches 6%. From the thirtieth month until the mortgage loan reaches maturity, 100% PSA equals 6% CPR.

Super PO:
A principal-only security structured as a companion bond.

Superfloater:
A floating-rate CMO tranche whose rate based on a formulaic relationship to a representative interest rate index.

Support tranche:
See “Companion tranche.”

TAC trcanche:
Targeted amortization class tranche. A TAC tranche uses a mechanism similar to a sinking fund to determine a fixed principal payment schedule based on an assumed prepayment rate. The effect of prepayment variability that is removed from the TAC tranche is transferred to a companion tranche.

Toggle tranche:
See “Jump Z-tranche.”

Tranche:
A class of bonds in a CMO offering which shares the same characteristics. “Tranche” is the French word for “slice.”

Transfer agent:
A party appointed to maintain records of securities owners, to cancel and issue certificates and to address issues arising from lost, destroyed, or stolen certificates.

Trustee:
An individual or institution that holds assets for the benefit of another.

Weighted average coupon (WAC):
The weighted average interest rate of the underlying mortgage loans or pools that serve as collateral for a security, weighted by the size of the principal loan balances.

Weighted average loan age (WALA):
The weighted average number of months since the date of the loan origination of the mortgages in a mortgage pass- through security pool issued by Freddie Mac, weighted by the size of the principal loan balances.

Weighted average maturity (WAM):
The weighted average number of months to the final payment of each loan backing a mortgage security, weighted by the size of the principal loan balances. Also known as weighted average remaining maturity (WARIVI) and weighted average remaining term WART.

Window:
In a CMO bond, the period of time between the expected first payment of principal and the expected last payment of principal.

Yield:
The annual percentage rate of return earned on a security, as computed in accordance with standard industry practices. Yield is a function of a security’s purchase price and interest rate.

Z-tranche:
Often the last tranche in a CMO, the Z-tranche receives no cash payments for an extended period of time until the previous tranches are retired. While the other tranches are outstanding, the Z-tranche receives credit for periodic interest payments that increase its face value but are not paid out. When the other tranches are retired, the Z-tranche begins to receive cash payments that include both principal and continuing interest.

Copyright 2006. The Bond Market Association. Reprinted with permission.

Collateralized Mortgage Obligations Part 1

Lately it seems that you can not turn on the evening news, or open a newspaper without hearing about the housing market and the poor economy. One of the factors that has lead to the credit crunch here in the USA is the issuance of bonds that are backed by mortgages. Basically, if a bond is issued based on a homeowners ability to pay, and then the homeowner never pays then the bond insurance company is forced to step in. These bonds are cheap, but not very liquid right now because the market for them has tanked.

With all of the bad news, it seems that we at Landes have developed a niche for these bonds. In fact we have seen so many over the past few months that if I never see another CMO, it will be too soon. All of that aside, I feel like its a good idea to explain what CMOs are.

In 1983, the introduction of Collateralized Mortgage Obligations (CMOs) by the Federal Home Loan Mortgage Corporation established a new investment vehicle for investors not traditionally involved in the mortgage market. The Tax Reform Act of 1986 authorized the establishment of Real Estate Mortgage Investment Conduit (REMICs) which provided monthly pay possibilities to investors and a tax advantage to issuers. For investment purposes, REMIC securities are indistinguishable from CMOs. Today, virtually all CMOs issued are actually REMICs. The CMO market has grown to hundreds of billions of dollars in size since its inception in 1983 and today accounts for an ever increasing and important segment of the overall mortgage market. Please contact us for information on CMOs and how they react to different market conditions.


What are CMOs?

CMOs are multi-class bonds that are collateralized by mortgage backed securities such as Ginnie Maes (Government National Mortgage Association), Fannie Maes (Federal National Mortgage Association), Freddie Macs (Federal Home Loan Mortgage Corporation), or by whole loan mortgages. The cash flows generated by the collateral are used to pay principal and interest to the CMO bondholder.


Who Issues CMOs?
CMOs are most often issued by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC), both government sponsored corporations. While FHLMC and FNMA dominate the new issue market, many private issuers regularly bring CMOs to market also.


What are the Benefits of CMOs?

CMOs may offer substantially higher yield than other securities with comparable credit quality. Each CMO issue offers a variety of different maturities, allowing investors to choose the class that best meets their investment objectives. CMOS also have market risk and a risk of pre-payment.