One year later, what have we learned from the credit crisis
September 13, 2009 by admin
The collapse of Lehman Brothers is credited with creating one of the worst economic recessions since the great depression. Lehman Brothers, was only one of hundreds of companies that were poorly regulated and overleveraged, creating a credit system that was built on a house of cards and doomed to fail. The anniversary of the collapse of Lehman Brothers has been marked with ups and downs in the stock market, millions more job losses and a growing sentiment that the worst is over.
The main reason we study history is because it proves to be invaluable in teaching lessons and helping us learn from our mistakes. The collapse of the credit markets around the world can teach us many valuable lessons as we create finance markets in the future. The collapse of the current system can be traced in two major categories, lack of oversight and too much leverage in the systems. Banks and lenders have historically operated under a principle of lending on margin. These companies have the luxury of collecting capital (money) and utilizing this capital to lend to individuals or businesses, historically at ratios of ten to one or less. Essentially for every dollar they collect in capital, they lend this out ten times, increasing there ability to earn a profit on their borrowed funds. The downfall during the credit collapse was the lack of oversight in managing the leverage which banks and other financial related companies were participating in to try and increase their profitability. Companies such as AIG, took the concept of leverage to new extremes, by offering to insure companies who were leveraging assets known as derivative securities. These securities, often leveraged at ratios of 100 to 1, became insolvent as borrowers began to default on their mortgage loans, greatly diminishing the value of the assets and forcing these companies to increase their required capital to stay within guidelines. As the system began to collapse, the entire credit system froze as the collateral and cash required to lend money forced companies out of business or on life support through loans from the government. The lack of oversight in allowing these companies to create a casino like market to gamble for record profits can clearly be blamed as one of the root causes for the credit collapse and recession. Governments create regulations for the financial markets to protect individuals and consumers who can not protect their own interest due to a lack of understanding or knowledge of the intricacies of the market. The lack of oversight that allowed these companies to post record profits in the early part of the decade, fueled by a housing market that was growing to fast are the root cause for the crisis of today’s economy.
Today, the reality is that no one truly knows where the economy is heading over the next twelve months; optimism abounds in the stock market, up over forty percent since the low point of March. The labor markets have shed over three million jobs in the past year, and the national unemployment rate is fast approaching ten percent. The housing market is showing signs of life, thanks in part to historically low mortgage rates. Consumers though, remain cautious and it could take years to rebuild the wealth lost over the last twelve months for millions of Americans. The lack of employers committed to hiring remains the red flag in the future of the economy. The credit and lending markets are beginning to return to normal, but the damage has certainly been done and we can only hope that history does not repeat itself.
Geithner testifies to Congress, economy has weathered the storm
September 10, 2009 by admin
Today, the Secretary of Treasury, Timothy Geithner testified in front of Congress addressing the state of the U.S. economy and banking system. The testimony comes one full year after the collapse of Lehman Brothers, which is credited as the event the pushed the financial industry into a credit crisis and caused one of the largest financial meltdown in the past fifty years. The testimony highlighted key areas of the economy, including the banking system, state of the credit markets, housing market and labor markets.
This week has provided further evidence that the economy is slowly growing its way out of the recession. The Fed’s beige book report released earlier in the week highlighted the many growth accomplishments within the economy over the past three months. Today, the weekly jobs report showed a slight improvement in job losses.
The testimony today was well received by the stock market and helped push the opportunity to extend gains for the month of September for the third day in a row. The banking and credit markets were a major focus of the questions from Congress. The larger concern over the amount of small to medium sized banks that appear to be undercapitalized and likely could fall into receivership is not a major concern for the government according to testimony today. Secretary Geithner reported that the market share for nine thousand of the smallest banks, was less than thirty five percent and he believed the FDIC would be adequately capitalized to cover any potential future losses. The health of the banking market, with improved capital across the industry has helped to mitigate the risk of loss and collapse to the banking industry. There will still be banking losses in the future, but the largest banks appear to be in much better shape.
One of the areas of testimony that represents the countries advancement over the last twelve months is the stabilization of the secondary markets and the reduction of entities that are relying on the government for financing. The pairing down of government subsidizes to the private sector helps to reduce the government’s debt load and provide capital for other programs. The secondary market has improved, excluding the mortgage market has begun to function at levels last seen in early 2008. The mortgage industry appears to be an obstacle for financing alternatives that are not influenced by government agencies. The mortgage industry is still relying solely on Fannie Mae, Freddie Mac and HUD through FHA loans to provide secondary financing for mortgage products. The lack of financing in the secondary marketplace has yet to significantly impact the consumer mortgage market (excluding the jumbo loan market) as consumers have benefitted from historically low mortgage rates to refinance their homes or purchase new homes and help stabilize the housing market.
Testimony today covered a number of areas that will be closely followed for the balance of the year and into 2010. Numerous members of Congress remain concerned that the home loan modification program, put forward by the government (Making Home Affordable) was having little impact on curbing the rate of home foreclosures. This challenge could hang over the economy for the next few years without an improvement by loan servicers to commit to helping more home owners. The housing market and labor market remained the two areas of the economy most likely to be challenged over the next twelve months.
Health insurance debate regains focus
September 9, 2009 by admin
The Washington political lines appear to be drawn and the health insurance reform is likely to take center stage for political banter in the near term. Reforming the American health care system is becoming one of the hottest debate political items in recent history. The prospect of offering universal health insurance coverage to every citizen has been a campaign promise of hundreds of politicians who have reached out to the millions of Americans who lack insurance with the promise of future reforms and equality.
The proposal by President Obama to offer health insurance coverage to every citizen has brought the political lightening rod of Washington to main street and town halls across the country. The basis for much of the debate is the idea of a government run health insurance organization that would be used to compete directly against the private health insurance sector. The prospects of another government run agency is drawing criticism from millions of people who feel the country is quickly falling into a socialism based government.
A major portion of President Obama’s insurance reform proposal is based on creating an agency that is large enough to compete against private insurance companies that are in a monopolistic position across the country. Numerous reports have been presented showing that private health insurance has benefitted from a forty percent increase in their premiums over the past five years, well outpacing the rate of inflation. Presently, every state is responsible for the regulation of health insurance companies that are offered within their boundaries. This regulation has worked against the fostering of competition, leaving consumers with limited choices in exploring health insurance. The President believes that the only way to bring a true competitor to the marketplace and help to alter the current premium structure in the marketplace is with a government backed company. The appeal of a government based insurance company that offers lower priced products, without the restrictions of preexisting condition clauses will certainly be welcomed by those who currently don’t have health insurance or have coverage that leaves them unprotected in many cases.
The government’s public health insurance plan has drawn criticism in a number of areas. Certainly the present health insurance industry and likely, pharmaceutical industry are concerned that the new competitions could eat into corporate profits. These companies are helping to finance the political debate against a government based plane. Most individuals who are arguing against the government’s insurance proposal base this on the government’s inability to be financially responsible in running a business. The larger concern could be the likely increase in taxes facing millions of citizens. The government is proposing that a majority of the cost for the new agency would be financed by altering the present tax code and placing a tax on the health insurance premiums that are presently covered by the beneficiary’s employer. The present tax system does not collect taxes against premiums paid by companies for the benefit of their employer. This so called tax loophole would place an additional tax on beneficiaries who receive premium coverage over a certain dollar threshold. This is likely the lightening rod that is stirring the debates in town hall meetings across the country. Increasing taxes, in today’s tough economic times is not going to be a popular discussion, no matter what the social benefits appear to be. This critical part of the government’s insurance reform proposal will likely be the piece that makes or breaks the opportunity ahead for true health care and insurance reform, offering coverage to the millions of Americans who lack health insurance coverage.
September 8, 2009
September 8, 2009 by admin
The stock market is attempting to extend its winning streak to three straight, following the Labor day holiday. Long term fixed mortgage rates are moving higher, as equity investors are shifting dollars out of the bond market, raising the yield on bonds and forcing long term rates to move upward. The stock market is closing in on the anniversary of the beginning of the credit collapse that brought the world economy to a standstill and forced billions of dollars of government subsidizes to help keep the financial markets working.
The stock market today is light on economic news. The market reacted favorably to the August jobs report released last week, which saw the economy lose another 200,000 jobs and the national unemployment rate rise above 9.7%, the highest rate of unemployment in the past twenty years. Investors focused on the continued decline of the job losses, versus the rising unemployment percentage in pushing equities sharply higher to end the week. Today, a report released from Manpower indicated that hiring could be at its lowest level in the last thirty five years. The company surveyed over twenty thousand firms in the United States, and the report demonstrates a low percentage of firms that would be hiring in the fourth quarter of the year. This news could begin to weigh on the market and the economy. Including August figures, there are now close to fifteen million Americans who are unemployed. The larger concern is that while the number of individuals losing their jobs as begun to slow, there appears to be no signal that companies are again hiring. Corporations, appear to be closely following in most consumers’ pattern of a conservative outlook to spending and increased savings to weather the current recession. Many economists believe that the employment market is lagging indicator in the economic picture, and that while the employment numbers are soft, the recession should be over at some point this year. This is a story that is likely to gain attention by investors and consumers alike for the balance of the year.
The mortgage industry will try to wide the wave of refinance and purchase loans through the balance of the year. The market has resisted the normal tendency to push interest rates higher, as investors move out of bonds and into equities. Long term rates are under pressure today on two fronts. The improvement in the job outlook and equity market pushed the yield on the ten year bond up to 3.45% last week, an increase of ten basis points. This move, lifted long term rates by about one eighth of one percent. Today, oil has moved up above seventy dollars per barrel, almost three percent higher. Oil and energy is one of the only areas of the economy that can add inflationary pressure into the market, which tends to push interest rates higher. These two influences have moved to push rates on thirty year fixed loans to five and a quarter percent, with most national mortgage lenders. Fifteen year fixed rate loans, remain well under five percent, offering a great avenue to consumers who have yet to refinance their homes.
Stocks move lower in September, mortgage rates follow similar path
September 3, 2009 by admin
The month of September has been seen long term mortgage rates heading lower, approaching levels last seen in March of this year as the equity market continues to lose ground. Long term fixed rate mortgage loans dipped below five point and a quarter percent in the past week with most major national mortgage lenders, for the first time in the past six months. Fifteen year fixed rate loans are now well into the four percent range and all indications show long term rates remaining at attractive levels for the month of September.
Historically, the month of September has always presented challenges to the equity markets. Following the movement of the stock market is critical in understanding the direction mortgage rates are likely to follow. Mortgage rates, as a commodity generally move in the opposite direction as the stock market. Investors increasing their positions in equities, tend to drive long term rates higher, selling off of equities, helps bring more buyers into conservative financial products such as bonds, driving rates lower, helping to bring long term rates down on mortgages along the way. A closely monitored bond is the ten year Treasury bond, which touched 3.3% this past week, the lowest it has been since March of this year. The upward movement in the equity market this year has not significantly altered interest rates, but the recent downward move is helping to bring rates lower, great news for potential home buyers and home owners who have yet to refinance their mortgage loans. This abnormality is linked strongly to actions taken by the Federal Reserve in December of last year and again in March to help keep mortgage bonds attractive.
This month has started on a similar course as the equity market is facing four days of declines, prior to the release of the ever important non farm payroll report due to be released later this week. Stocks tend to struggle in the month of September as there is little corporate news and often the economic data is mixed as consumers move out of the summer mode and into fall. The challenge this year for equities will be increasingly difficult. The market has rallied since March, posting over a forty percent gain and investors are increasingly demanding more assurance that the market can sustain its growth level. The economic news to date has been very supportive. The housing market is continuing to churn out reports of better than expected home sales, price improvements and declining inventory. Manufacturing is improving and retail sales for the month of August appear to be better than anticipated. These reports have not completely won over the market as their remains a lingering concern with job creation.
The month of September could very well be determined with this Fridays jobs report. A better than expected report could keep investors on track for another positive month with equities, but even a small miss with this report could lead to a large market correction. The good news is that long term rates appear to be in a great position to benefit with either scenario. A miss with the jobs report could push long term fixed rate thirty year mortgage loans to move closer to five percent, levels that are near historic lows. A better than expected report, appears to have little potential to driving rates significantly higher, good news for the housing markets.