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Five Things You Need to Know: The Joke's On Us. Also, the Tab.


You know that plan awaiting action in the Senate to help ease the foreclosure crisis and how it's not really a bailout of banks? It turns out it's really a bailout of banks.


Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. The Joke's On Us. Also, the Tab.

You know that plan awaiting action in the Senate to help ease the foreclosure crisis and how it's not really a bailout of banks? It turns out it's really a bailout of banks, which makes sense considering it was actually proposed by banks.

The Washington Post today takes a look at the mechanics of the proposal, first suggested by Credit Suisse (CS), which will essentially allow hundreds of thousands of homeowners to refinance their mortgages with lower-cost government-backed loans, very conveniently relieving the banks of the impaired debt. Bank of America (BAC) soon got in on the act with a more elaborate proposal of their own.

According to the Post article, lobbyists for the banks suggested banks take less than full payment for the distressed loans but, importantly, be allowed to take cash out of foreclosed properties that would otherwise sit on their books. "Since the new loans would be guaranteed by the Federal Housing Administration (FHA), taxpayers would ultimately pay for defaults," the Post notes. The price tag, according to the Congressional Budget Office? $1.7 billion over five years.

"The alternative to having the banks as participants was a massive federal bailout," House Financial Services Committee Chairman Rep. Barney Frank told the newspaper. "They [the banks] benefit, but they benefit by losing less."

2. Credit Markets In Driver's Seat

While the media focus this morning is on Research In Motion (RIMM), Oracle (ORCL) and tech stocks, markets are really under pressure because of the news from Belgium-based bank Fortis, which last night said it will need to raise capital to the tune of $12.5 billion USD. The bank also canceled its dividend.

This has rattled European credit markets, particularly the credit default swaps market, and has spilled over into U.S. credit markets.

Equities will eventually recognize that their future path is credit-contingent and that share prices are a manifestation of financial market health and stability, not a driver of it. That process of recognition may be happening even now.

3. Speaking of Foreclosures...

According to a piece this morning in USA Today, 61% of local and state homeless coalitions report seeing a rise in homelessness since the foreclosure crisis began in 2007. A study released in April by the National Coalition for the Homeless asked respondents where they into to move once their property is foreclosed on. Seventy-six% of displaced homeowners and renters said they were moving in with relatives and friends. About 54% reported moving to emergency shelters. And 40% said they were already on the streets.

"Six cities reported a rise in the number of homeless people who used emergency shelter and transitional housing programs in the past year, and 10 cities reported an increase in households with children seeking help, according to a 2007 survey done in part by the U.S. Conference of Mayors," the newspaper reported.

According to data from the Mortgage Bankers Association, the rate of new foreclosures hit 0.99% in the first quarter, the highest since record-keeping began in 1979. USA Today also noted "mounting utility bills, the surge in gas prices and the rise in unemployment" as factors contributing to tilting former homeowners into homelessness.

4. Discover Reports Increased Delinquencies

Discover Financial Services (DFS) is off nearly 4% today after reporting second-quarter profit was hurt by an increase in customers delinquent on monthly payments. Delinquent loans by 30 days or more rose to 3.54% from 2.71% a year ago and 3.63% in the first quarter. DFS said they expect their fully-year averag managed loss rate to come in somewhere above 5%.

The company said card sales volume for the quarter was up 2%, driven largely by increased consumer spending on fuel, but lower levels of spending on categories such as home improvement.

Meanwhile, DFS noted that funding the business is "challenging" given issues being seen in the asset-backed securities market. "Spreads are wider than a year ago, the buyer universe is narrower, and subordinated bonds generally are being retained by the issuers," Roy A. Guthrie, Executive Vice President, Chief Financial Officer said on the firm's call.

5. Oshkosh Reveals Intensifying Lack of Housing Containment

Oshkosh (OSK) probably isn't on a lot of folks' radar. The company makes specialty commercial and military trucks, rescue vehicles, fire and emergency trucks. Probably seems kind of niche to many people. But think about who their primary customers are; namely, municipalities. The company, which reported earnings today and slashed third quarter guidance, delivered a grim conference call. Among the items of interest:

  • "The reduction in our earnings estimates... is being driven by the broad effects of the weaker economies and weaker commercial construction."
  • "Specifically in our Access Equipment segments we have experienced lower order levels and have received communications from a number of our larger customers that they plan to significantly reduce their capital spending for the remainder of this year."
  • "We have seen this weakness in both North America and certain markets in Western Europe."
  • "Our domestic Fire & Emergency businesses continue to be impacted by weak municipal spending, which we believe is result of lower cash receipts due to continued weakness in the residential housing market."

Hard to believe that it was already 14 months ago since Five Things was combatting phrases such as "well contained":

Five Things You Need to Know, April 24, 2007:

Housing Slump Well Contained

If ever you find yourself beginning to doubt that problems in the economy related to housing are not well contained, just sit down and listen for a moment. Because soon enough a Federal Reserve official or the US Treasury Secretary will remind you that housing problems are indeed "well contained." Take a look.

  • February 21, 2007: "I'm waking up less at night than I was [over the slowdown in housing]. So far, there's been remarkably little effect [from housing] on the rest of the economy."
    - San Francisco Fed President Janet Yellen
    (Source: MarketWatch)
  • March 28, 2007: "At this juncture...the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained."
    - Federal Reserve Chairman Ben Bernanke
    (Source: AFX News)
  • April 5, 2007: "The damage from the subprime market has been largely contained."
    - Dallas Fed President Richard Fisher
    (Source: Dallas News)
  • April 20, 2007: "I don't see (subprime mortgage market troubles) imposing a serious problem. I think it's going to be largely contained."
    - US Treasury Secretary Henry Paulson
    (Source: Reuters)
  • April 20, 2007: "We do see some stabilization of demand in the housing market ... there is some indication that the market could be bottoming out."
    - Federal Reserve Governor Frederic Mishkin
    (Source: Reuters)
No positions in stocks mentioned.

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