Rates At Bottom For Now, History Lesson on Financial Crises, Thornburg update

Quick history lesson
If one looks at previous financial crises, one sees that they generally last longer than one year. Whether it was the Great Depression (1929-1941), the Japanese banking crisis (1990-1999), our S&L crisis (1986-1995), or the Asian Banking crisis (1998-2000), these things take time to work themselves out. People who are accustomed to instant meals, instant internet access, traffic light sensors, or movies-on-demand tend to forget these things. There are certainly signs of improvement in the credit markets, but there are also headline grabbing events like we had over the weekend.

Let’s hope that one victim is not Thornburg Mortgage, but things appear to have taken a turn for the worse. Thornburg said it may run short of cash after getting surprise margin calls that threaten a restructuring critical to its survival. Thornburg said its lenders “have made a series of unanticipated margin calls and have withheld funds payable to the company,” which Thornburg said was “in direct conflict” with its lending agreement. Thornburg said if it can’t resolve the demands for collateral, it could face “greatly diminished” liquidity compared with what it expected when it began an exchange offer for some preferred stock. That offer is tied to a $1.35 billion rescue that Thornburg lined up in March from a group of investors following other margin calls, keeping it out of bankruptcy. Absent a resolution, Thornburg said it won’t complete the offer because of restrictions by the applicable law from paying the cash portion.

Market update
Rates improved yesterday, and again today. In fact, 30-yr bond yield is supposedly at an all time low, under 4%. The 10-yr Treasury is down to 3.31%, but mortgage prices are unchanged from yesterday afternoon – there is just too much nervousness about the mortgage market. The Fed meeting today overshadows anything as mundane as today’s Consumer Price Index (-0.15 in August, the first decline in nearly two years, due to energy costs, as expected; core CPI rose 0.2%; y-o-y CPI is +5.4% percent and core prices were up 2.5%). In addition to oil being down to $91/barrel on continued world-wide perceived economic weakness, we also saw Goldman Sachs’ earnings, which were better than expected but still down significantly from previous reporting periods.

Today’s big economic news will be the FOMC announcement at 2:15PM, 11:15AM PST. Estimates range from leaving overnight rates unchanged to a cut of .50%. Every lender is hoping that the latter doesn’t happen, otherwise they will be forced to explain all over again why overnight rates don’t necessarily impact 30-yr mortgage rates. Fed Fund futures point to about a 66% chance that the Fed will lower overnight rates by 25 bps. And of course bonds are watching stocks, which are pointing to a lower opening after yesterday’s Dow drop of 504 pts and are down 18% for the year. Time to buy? Getting back to the Fed for a moment, it may help things in the long run since it boosted its program for lending Treasuries to bond dealers by $25 billion, and arranged for a group of 10 banks that includes JPMorgan Chase & Co., Goldman Sachs Group Inc. and Citigroup to form a $70 billion fund to ensure market liquidity.

The IRS decides to audit Ralph, and summons him to the IRS office. The IRS auditor is not surprised when Ralph shows up with his attorney.
The auditor says, “Well, sir, you have an extravagant lifestyle and no full-time employment, which you explain by saying that you win money gambling. I’m not sure the IRS finds that believable.”
“I’m a great gambler, and I can prove it,” says Ralph. “How about a demonstration?”
The auditor thinks for a moment and said, “Okay. Go ahead.”
Ralph says, “I’ll bet you a thousand dollars that I can bite my own eye.”
The auditor thinks a moment and says, “No way! It’s a bet.”
Ralph removes his glass eye and bites it.
The auditor’s jaw drops. Ralph says, “Now, I’ll bet you two thousand dollars that I can bite my other eye.”
The auditor can tell Ralph isn’t blind, so he takes the bet.
Ralph removes his dentures and bites his good eye.
The stunned auditor now realizes he has wagered and lost three grand, with Ralph’s attorney as a witness. He starts to get nervous.
“Want to go double or nothing?” Ralph asks “I’ll bet you six thousand dollars that I can stand on one side of your desk, and piddle into that wastebasket on the other side, and never get a drop anywhere in between.” The auditor, twice burned, is cautious now, but he looks carefully and decides there’s no way this guy can manage that stunt, so he agrees again.
Ralph stands beside the desk and unzips his pants, but although he strains mightily, he can’t reach the wastebasket on other side, so he pretty much urinates all over the desk.
The auditor leaps with joy, realizing that he has just turned a major loss into a huge win. But Ralph’s attorney moans and puts his head in his hands.
“Are you okay?” the auditor asks.
“Not really,” says the attorney. “This morning, when Ralph told me he’d been summoned for an audit, he bet me twenty thousand dollars that he could come in here and piddle all over your desk and that you’d be happy about it.”