THE BASIS POINT

73 Banks Failed This Year, 10yr Yields At 2008 Crisis Levels, Student Loans As Part of Healthcare Bill?

Current Financial Reform Bill Status
The House-Senate conference committee is where the action will be on the Financial Reform Bill. Several key issues will have to be resolved there, including restrictions on derivatives trading by banks, mortgage broker compensation and yield spread premium, the proposed liquidation fund to be financed by financial firms and the relationship between the Fed and the new consumer financial protection agency. One can expect a vote by the July 4th recess.

73 Banks Failed Year To Date
The FDIC “only” took over one bank Friday: Pinehurst Bank (MN) is now owned, lock, stock, and barrel, by Coulee Bank, based in La Crosse, Wisconsin. The failure of Pinehurst Bank, #73 this year, double the pace of 2009, is expected to cost the deposit insurance fund about $6 million.

FDIC Settle WAMU Suit
In other FDIC news, the Board of Directors of the FDIC approved a global settlement of the bankruptcy case involving Washington Mutual (for which FDIC was appointed receiver in September, 2008). The FDIC is a participant in the global settlement because of claims and counterclaims involving the company resulting from its role as receiver. The agreement also settles claims between WMI and JPMorgan Chase, the acquirer of the failed Washington Mutual Bank. The FDIC also announced that commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported an aggregate profit of $18.0 billion in the first quarter of 2010, a $12.5 billion improvement from the $5.6 billion the industry earned in the first quarter of 2009. More than 52% reported year-over-year improvements in their quarterly net income, and about 19% reported net losses for the quarter, compared to 22.3 percent a year earlier. Check out the entire report.

10yr Yields At Same Levels As When Lehman Failed
Volatility is in everyone’s vocabulary after last week’s roller coaster in both the fixed income and equity markets. Looking at the entire week, however, 10-yr yields dropped 25 basis points, and 30-yr current coupon MBS’s improved 15 basis points in yield. This puts the yield on the 10-yr back to where it was in late 2008, right after Lehman Brothers failed. But given where other key indices are trading, current yields reflect slow economic growth and low inflation rather than a real panic – nice to hear. Economists everywhere are changing their rate forecasts, believing that rates will stay low for the remainder of 2010. There is no inflation – in fact the CPI’s year-over-year core rate had the lowest reading in 40 years.

Student Loans As Part of Healthcare Bill?
How do politics work? The recently enacted federal health-care overhaul prohibits private lenders from making federal student loans after June 30. Don’t ask me how a health care bill impacts student loans, but going forward the overhaul ends the current program that subsidizes banks and other financial institutions for issuing loans, instead “allowing” students to borrow directly from the federal government. Starting July 1, all new federal student loans will be delivered and collected by private companies under performance-based contracts with the Department of Education. It is no surprise that Wells Fargo, and probably others, announced that it is starting a student loan for parents or other sponsors, allowing college students access to more funds to cover educational expenses without increasing their own debt.

Quick Market Week Preview
Mortgages have done pretty well, although as usual in any kind of rally they will lag Treasury price movements due to prepayment risk. The current coupon is now thought of as 4.0% MBS’s, made up of 3.25-4.625% mortgages, but there has been little issuance of that security ($190 billion in conventional 4.0s outstanding versus $661 billion of 4.5’s and $738 billion of 5.0’s), so because of the small issuance don’t look for hedging companies to use Fannie or Freddie 4’s to hedge. This week we have another set of auctions with which to grapple. $42 billion in 2-year notes, $40 billion of 5-yr, and $31 billion of 7-yr. notes. We have Existing Home Sales today and New Home Sales on Wednesday. Durable Good is on Wednesday, and on Thursday one of the usual GDP revisions for the 1st quarter (old news). The Chicago PMI manufacturing index and Personal Income & Consumption are scheduled for Friday. The current 10-yr is at 3.21% and mortgage prices are worse by about .250.

Daily Humor
A 75 year old lady calls her local hospital and this conversation follows:

“Hello, I’d like some information on a patient, Mrs. Tiptree. She was admitted last week with chest pains and I just want to know if her condition has deteriorated, stabilized or improved?”

“Do you know which ward she is in?”

“Yes, ward P, room 2B.”

“I’ll just put you through to the nurse station.”

“Hello, ward P, how can I help?”

“I would just like some information on a patient, Mrs. Tiptree, I was wondering if her condition had deteriorated, stabilized or improved?”

“I’ll just check her notes. I’m pleased to say that Mrs. Tiptree’s conditioned has improved. She has regained her appetite, her temperature has steadied and after some routine checks tonight, she should be well enough to go home tomorrow.”

“Oh that’s wonderful news, I’m so happy, thank you ever so much!”

“You seem very relieved, are you a close friend or relative?”

“No, I’m Mrs. Tiptree in room 2B. Nobody tells you anything around here.”

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