THE BASIS POINT

Fed To Buy Up Commercial Paper To Ease Credit Crunch, Other Bank/Lender News Roundup

Fed/Treasury to Buy Short-Term Paper
“Commercial paper” is defined as an unsecured, short-term loan issued by a corporation, often for financing accounts receivable and inventories, and typically at a discount which reflects current market rates. In yet another step in showing just how far they will go to help alleviate the crisis, the U.S. Federal Reserve is reportedly looking at getting into unsecured lending by directly purchasing commercial paper, with the Treasury guaranteeing any losses. The report by the Financial Times said the Fed had never done so in its history, but doing so could allow it to participate in the frozen inter-bank money market and the contracting commercial paper market.

The Fed is certainly the focus on much of what is going on out there in the financial markets, with the general feeling that this problem is so large that single companies can have very little impact. And although the Fed does not determine mortgage rates, they do set the overnight Fed Funds rate, and prices show a 100% chance of a half-point reduction in the 2.0% level prior to the next FOMC meeting (Oct. 28-29). And given rate cuts overseas, there is a greater than 50% chance that the Fed will cut .75%. If rates were 0%, would that help? Investors around the world are increasingly worried that the recent federal bailout plan will do little to stave off a deep global recession, hence the recent stock market activity and the DOW closing below 10,000 for the first time in four years.

Bank of America Earnings Weaker, Will Cut Dividend
The Bank of America reported a weaker-than-expected third-quarter profit and announced plans to raise $10 billion in new capital while cutting its dividend by 50%. Bank of America said it will raise $10 billion in cash through the sale of common stock.

Wachovia Deal Not Resolved Yet
Speaking of banks, Federal Reserve officials have supposedly asked Wachovia, Citigroup and Wells Fargo (whose stock has sagged lately) to take today off from their wrangling. Experts believe that pieces of Wachovia will be divided between the two companies. Initially the FDIC supported the $2.1 billion Citi deal, but it required taxpayer backing, and the bid was only for a portion of the company. But then Friday Wells Fargo (“that bank on the West Coast”) agreed to acquire Wachovia in a deal worth $15.1 billion. Either way, Wachovia is often described as “ailing”, and there is a sense of urgency in the talks.

Treasury Market
Yesterday, the 2-yr Treasury was +13/32, the 5-yr was +35/32, and the 10-yr Note was +49/32 (down to a yield of 3.46%). Mortgages were unable to keep pace with the strong flight quality bid but still improved in pricing – just not as much as Treasury prices. It is highly doubtful that money managers and investors are selling their stocks and buying mortgage-backed securities right now!

Union Bank Eliminates 2nd Mortgages
Effective after the end of next week, UBOC announced that their Piggy Back / Purchase Money Second Program will no longer be available. Loans must fund by the end of the year. In addition, they clarified the PUD Project eligibility guidelines. “Project eligibility requires the development be administered by a mandatory homeowner’s association. Additionally, whether or not the appraiser has checked the box indicating the property is a PUD, if there is a mandatory HOA fee, UBOC considers the property a PUD. A correction to the appraisal is not necessary. If a name is not given for the PUD project, the property address is used.”

Daily Humor
I was explaining to my two youngin’s my investment strategy, why money can’t buy happiness, and some basic stock market definitions. Like the following:

BEAR MARKET — A 6 to 18 month period when the kids get no allowance, the wife gets no jewelry, and the husband gets no “fun”.

BROKER — What my financial advisor has made me.

BULL MARKET — A random market movement causing an investor who mistakes himself for a financial genius.

CASH FLOW– The movement your money makes as it disappears down the toilet.

FINANCIAL PLANNER — A guy whose phone has been disconnected.

INSTITUTIONAL INVESTOR — Former investor who’s now locked up in a nuthouse.

MARKET CORRECTION — The day after you buy stocks.

P/E RATIO — The percentage of investors wetting their pants as the market keeps crashing.

PROFIT — An archaic word no longer in use.

STOCK ANALYST — Idiot who just downgraded your stock.

STOCK SPLIT — When your ex-wife and her lawyer split your assets equally between themselves.

VALUE INVESTING — The art of buying low and selling lower.