Wells Back In Play on Wachovia Deal, California Need Fed Aid, Oil Psychology, Jobs Down, Rates Even

Oil psychology
The good news is that with the drop in oil prices down into the low $90’s per barrel, I will save $150 per year in gasoline. The bad news is that in the last two weeks, my stock portfolio and 401(k) is down by $8,920. The question is, “Will the average consumer be impacted more or less, psychologically, by paying a little less to fill up their tank every week?” Most economic psychologists would say, “Constantly spending a little less will have more of an impact than the large hit to their investments and retirements plans”.

California Seeks Federal Funds
California’s governor sent a letter to Henry Paulson asking for $7 billion to access the credit markets.

Fannie Mae goes back on fee
Here is some good news that will trickle down to other investors: Fannie Mae has announced that they will cancel the planned adjustment to the Adverse Market Delivery Charge (AMDC) that was scheduled to be effective on November 1. “The AMDC will remain at the current level of 0.25 percent. The loan-level price adjustment (LLPA) changes that were scheduled to be implemented on November 1, 2008 will proceed as announced.”

Accounting change?
Would our world be any different if investors didn’t have to mark their mortgage-backed securities to market for financial reporting? You bet it would. A proposal contained in the rescue bill reaffirms the Securities and Exchange Commission’s existing authority to suspend “mark-to-market” accounting. In the aftermath of the savings-and-loan collapse twenty years ago, this accounting pegs the value of assets to their current market price, rather than the price paid for them. Banks have complained the strict application of mark-to-market rules has forced them to write down billions of dollars worth of mortgage-related securities, intensifying the squeeze in the credit markets.

Wells & Citi & Wachovia
Wells Fargo has offered $15.1 billion to buy Wachovia (all of it) without any Federal assistance, beating Citigroup’s bid (for just the banking) from earlier this week. Especially since Citi was asking for financial backing from the FDIC, so apparently the Wells’ offer benefits taxpayers? I am sure that Wells’ stockholders are excited about their new portfolio of $122 billion of ARM products, 58% of which are in California! Wachovia shareholders get 0.1991 shares of Wells Fargo common stock for each share they own. Wells Fargo expects charges related to the acquisition of about $10 billion, and the company said it will issue as much as $20 billion of new securities, mostly common stock. After the combination, the bank would have $1.42 trillion in assets, $787 billion in deposits and 10,761 branches.

Current market
As if all this isn’t enough for one day, Nonfarm Payrolls in September were unexpectedly -159k with the Unemployment Rate at 6.1%. Employment weakness was across all parts of the economy. It is not immediately obvious how the Fed will react to this number given they already had a rather weak forecast for the labor market. The employment report is clearly recessionary territory. Prior to the number, the Chicago Board of Trade showed a 92% chance the Fed will cut the overnight lending rate by 50 bps at its Oct 29th meeting. Average Hourly Earnings grew by just 0.2%, the slowest rate since April, and Average Weekly Hours declined to 33.6 from 33.7. After the news, the 10-yr is chopping around 3.60%, but mortgages are roughly unchanged from Thursday afternoon.

Where now? Well, we have the House voting on the rescue bill. It is unlikely that House leaders would allow the vote unless they are confident it will pass – if not, it is likely that they will delay the vote until later in the day, or potentially to the weekend, when they can find more support. If the bill comes up for a vote and is defeated for a second time House leaders could attempt to quickly amend the bill to gain additional votes, though it may be difficult to bring an amended bill back to the floor the same day, and then it would go back to the Senate. Assuming the bill passes in the House tomorrow, it will go to the President for signature. This could occur as early as Friday evening, or this weekend.