I have one more word on the mortgage industry implosion. With the Fed lowering the effective primary credit rate to ease liquidity constriction in the banking industry and the world’s central banks pumping billions into the cash strapped markets, its starting to look like panic out there! Now the big news over last couple days has been the cash crisis with the country’s largest mortgage lender, Countrywide Financial (CFC), who earlier in the week tapped 11.5 bln line-of-credit to handle monthly operating expenses. Facing the possibility of CFC insolvency, the folks in the know are reeling, as it would be an unprecedented disaster to the mortgage business. Given that CFC has a bank subsidiary, all the panic surrounding their financial woes has led to a run on the bank, as detailed in this LA Times Story. The reporter covering the story managed to catch the Irvine, CA Impac Mortgage Holdings’ President in line at the bank, withdrawing 500k! If you want to see what your bank’s exposure is to MBS, it is easy to do, just visit the FDIC’s Institutional Directory. Search for your bank and view the ‘Assets and Liabilities’ report, and examine the ‘Securities’ sub-report. Look at the Memoranda section and examine the line in the ‘Mortgage Backed Securities’ section under ‘Privately issued’. This number, especially expressed as a percentage of the bank’s total asset holdings, is a relative indicator of their exposure to the sub-prime and Alt-A loans that have lost value in this mess. I examined the reports for a national bank that I use, and it wasn’t pretty.
Cosmos: other blogs linking
RSS Entries
thanks for breaking things down, layman style..I really am not interested enough in some things to keep up on them. It all gets really technical. I like your site because I know I’ll get up to date data with some down to earth homefry flair when I come here…Do you think moving mutual funds into CDO’s is a good idea right now?
Hey Heidi,
Do you own mutual funds? FYI, I don’t know much about investment strategy and I won’t give advice per se, but here’s my two cents:
The Collateralized Debt Obligations (CDOs) are a bunch of re-packaged mortgages (think bad) that were sold, in bond form, to institutional investors (like banks and funds).
Mutual Funds are generally diversified stock holdings, commodities, etc., that you, as an individual investor, can purchase a stake in through investment firms and money managers. The investment firms manage the funds to produce a steady low-risk yield, based on the income of the fund’s portfolio, and take a cut of the earnings as a management fee.
Should you talk to your fund manager about the fund’s exposure to CDO’s? Yes, definitely. My understanding is that the major funds that are marketed to people like you and I typically don’t invest in risky assets, but they may own large pieces of companies, like international banks, that may have lots of risky mortgage securities on their books.
I don’t have a gambler’s constitution or a deep understanding of the markets, so I don’t invest their either. I don’t think that mutual funds have been recently earning more than 5-6% anyway, and you can get that from an internet bank without the need to risk your hard earned dinero.
If you have less than 100k to invest, an FDIC insured account can be had from more than a few major national banks this way, currently earning around 5.0%. The banks may go under, but atleast its insured by the Federal Government. If it ever gets bad enough that FDIC insurance can’t cover the loss, then the jig will finally be up and it won’t matter anyway.