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September 2008 Entries
House Rejects Financial Rescue Plan
After a weekend of intense negotiations, the White House and Congress agreed Sunday on a plan for the biggest banking rescue in U.S. history.
But the bailout plan was in doubt Monday after it fell 12 votes short of the 218 it needed to pass the House of Representatives. Democrats voted 141 to 94 in favor of the plan, while Republicans voted 65 to 133 against, according to a news update from CNNMoney.com.
In a statement issued Monday afternoon, the NATIONAL ASSOCIATION OF REALTORS® expressed disappointment that the bill didn't pass, saying the legislation "is critical to stopping the economic turmoil that millions of Americans are facing."
"Across the country, REALTORS® see and feel the loss of confidence experienced by both buyers and sellers in the real estate market and they know firsthand that buyers are finding it harder to get mortgages," NAR President Dick Gaylord said. "This legislation, if implemented, would quickly restore liquidity to the mortgage market, which would stabilize the housing market and protect homeowners."
The bill, which also would require approval from the Senate, would have allowed the government to buy as much as $700 billion in distressed financial assets from banks, freeing up the credit market so that loans will become more available.
Struggling home owners also would get some reprieve, as the bill calls for the Treasury Department and other government agencies to modify home loans when possible to avoid foreclosures.
"I am confident this legislation gives us the flexibility to unclog our financial markets and increase the ability of our financial institutions to deliver the credit that will help create jobs," Treasury Secretary Henry Paulson said in a statement Sunday.
He said the bill would provide the necessary tools to deploy up to $700 billion to address the urgent needs of the U.S. financial system—whether by purchasing troubled assets, insuring troubled assets, or averting the disorderly failure of large financial institutions.
In a measure to protect taxpayers, the bill states that if the government has a net loss after five years, the president will have to submit a legislative proposal to seek reimbursement from the financial institutions that participated.
The House of Representatives voted on the bill Monday, and the Senate is expected to consider it later in the week, possibly as early as Wednesday.
"Quick, effective and bipartisan action sends a signal to investors large and small, here and abroad, that we are committed to taking the necessary actions to protect our financial system and our economy," Paulson said.
In other news Monday, federal regulators said they had brokered a deal for Wachovia, the fourth largest bank in the U.S., to sell its banking assets to Citigroup. Shares in Wachovia crashed on Friday amid concerns over its exposure to subprime mortgage debt.
Source: NAR, The Wall Street Journal, CNN.com, U.S. Department of the Treasury
Information Regarding Recent Federal Reserve Actions
September 29, 2008
Statement regarding AIG transaction
Federal Reserve Ready to Provide Liquidity in Wachovia Transition
Federal Reserve and other central banks announce further coordinated actions to expand significantly the capacity to provide U.S. dollar liquidity
Statement by Chairman Bernanke on agreement by the Congress and the Administration
September 26, 2008
Federal Reserve and other central banks announce operations to address funding pressures over quarter end
September 24, 2008
Federal Reserve and other central banks announce additional measures to address elevated pressures in funding markets
Testimony on the economic outlook by Chairman Ben S. Bernanke before the Joint Economic Committee, U.S. Congress
Testimony on U.S. financial markets by Chairman Ben S. Bernanke before the Committee on Financial Services, U.S. House of Representatives
Chairman Bernanke presented identical remarks to the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, on September 23, 2008
September 23, 2008
Testimony on U.S. financial markets by Chairman Ben S. Bernanke before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate
September 22, 2008
Board announces the approval of a policy statement on equity investments in banks and bank holding companies
Board announces that Goldman Sachs and Morgan Stanley transactions may be consummated immediately
September 21, 2008
Board approves, pending a statutory five-day antitrust waiting period, the applications of Goldman Sachs and Morgan Stanley to become bank holding companies and also authorizes the Federal Reserve Bank of New York to extend credit to the London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley, and Merrill Lynch
September 19, 2008
Board approves two interim final rules in connection with initiative to provide liquidity to markets by extending loans to banking organizations to finance their purchases of high-quality asset-backed commercial paper (ABCP) from money market mutual funds
Federal Reserve Board announces two enhancements to its programs to provide liquidity to markets
September 18, 2008
Federal Reserve and other central banks announce further measures to address elevated pressures in funding markets
September 16, 2008
Federal Reserve Board, with full support of the Treasury Department, authorizes the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG)
September 15, 2008
Federal banking agencies evaluating FASB's accounting proposals
Request for comment on draft interagency proposed rule to permit a banking organization to reduce the amount of its goodwill deduction from tier 1 capital by any associated deferred tax liability
September 14, 2008
Federal Reserve Board announces several initiatives to provide additional support to financial markets, including enhancements to its existing liquidity facilities
September 7, 2008
Federal banking agencies issue joint release on Fannie Mae and Freddie Mac
Statement by Chairman Bernanke on Fannie Mae and Freddie Mac
List of all Federal Reserve Board press releases
Last update: September 29, 2008
News Release
September 29, 2008
Richmond Fed Ready to Provide Liquidity in Wachovia Transition
Richmond, VA — The banking operations of Wachovia Corp., which is headquartered in Charlotte, N.C., are being acquired by Citigroup Inc. The transaction is being facilitated by the Federal Deposit Insurance Corporation and concurred with by the Board of Governors of the Federal Reserve and the Secretary of the Treasury.
Citigroup will acquire the bulk of Wachovia's assets and liabilities, including five depository institutions and assume senior and subordinated debt of Wachovia. Wachovia will continue to own AG Edwards and Evergreen.
In support of this transition, the Federal Reserve Bank of Richmond stands ready to provide liquidity as needed.
The Federal Reserve Bank of Richmond is one of 12 District Reserve Banks that together with the Board of Governors in Washington, D.C., make up the Federal Reserve System. The Richmond Fed serves the Fifth Federal Reserve District, which encompasses the District of Columbia, Maryland, North Carolina, South Carolina, Virginia, and most of West Virginia.
Press Release
Release Date: September 29, 2008
For release at 10:00 a.m. EDT
In response to continued strains in short-term funding markets, central banks today are announcing further coordinated actions to expand significantly the capacity to provide U.S. dollar liquidity. Central banks will continue to work together closely and are prepared to take appropriate steps as needed to address funding pressures.
Federal Reserve Actions
The Federal Reserve announced today several initiatives to support financial stability and to maintain a stable flow of credit to the economy during this period of significant strain in global markets.
We will continue to adapt these liquidity facilities as necessary and will keep them in place as long as circumstances require.
Actions by the Federal Reserve include: (1) an increase in the size of the 84-day maturity Term Auction Facility (TAF) auctions to $75 billion per auction from $25 billion beginning with the October 6 auction, (2) two forward TAF auctions totaling $150 billion that will be conducted in November to provide term funding over year-end, and (3) an increase in swap authorization limits with the Bank of Canada, Bank of England, Bank of Japan, Danmarks Nationalbank (National Bank of Denmark), European Central Bank (ECB), Norges Bank (Bank of Norway), Reserve Bank of Australia, Sveriges Riksbank (Bank of Sweden), and Swiss National Bank to a total of $620 billion, from $290 billion previously.
These steps are being undertaken to mitigate pressures evident in the term funding markets both in the United States and abroad. By committing to provide a very large quantity of term funding, the Federal Reserve actions should reassure financial market participants that financing will be available against good collateral, lessening concerns about funding and rollover risk.
84-Day Maturity TAF Auctions
The increase to $75 billion per auction will triple the supply of 84-day maturity credit to $225 billion from $75 billion. TAF credit at the 28-day maturity will remain at $75 billion. The total amount of TAF credit available in the 28-day and 84-day auction cycles will double to $300 billion from $150 billion.
Forward TAF Auctions
The forward TAF auctions are a new program designed to provide reassurance to market participants that term funding will be available over year-end. The timing and terms of the two forward TAF auctions will be determined after consultations with depository institutions that utilize the TAF program.
It is anticipated that there will be two auctions in November totaling $150 billion. These auctions will provide short-term (one- to two-week term) TAF credit over year-end.
Foreign Exchange Swap Lines
The Federal Open Market Committee (FOMC) has authorized a $330 billion expansion of its temporary reciprocal currency arrangements (swap lines). This increased capacity will be available to provide funding for U.S. dollar liquidity operations by the other central banks. The FOMC has authorized increases in all of the temporary swap facilities with other central banks. These larger facilities will now support the provision of U.S. dollar liquidity in amounts of up to $30 billion by the Bank of Canada, $80 billion by the Bank of England, $120 billion by the Bank of Japan, $15 billion by Danmarks Nationalbank, $240 billion by the ECB, $15 billion by the Norges Bank, $30 billion by the Reserve Bank of Australia, $30 billion by the Sveriges Riksbank, and $60 billion by the Swiss National Bank. As a result of these actions, the total size of outstanding swap lines is $620 billion.
All of the temporary reciprocal swap facilities have been authorized through April 30, 2009.
Dollar funding rates abroad have been elevated relative to dollar funding rates available in the United States, reflecting a structural dollar funding shortfall outside of the United States. The increase in the amount of foreign exchange swap authorization limits will enable many central banks to increase the amount of dollar funding that they can provide in their home markets. This should help to improve the distribution of dollar liquidity around the globe.
Information on Related Actions Being Taken by Other Central Banks
Information on the actions that will be taken by other central banks is available at the following websites:
Bank of Canada 
Bank of England
Bank of Japan
Danmarks Nationalbank (National Bank of Denmark)
Norges Bank (Bank of Norway)
European Central Bank
Reserve Bank of Australia
Sveriges Riksbank (Bank of Sweden)
Swiss National Bank
Last update: September 29, 2008
Press Release
Release Date: September 29, 2008
For release at 8:30 a.m. EDT
I welcome the agreement by the Congress and the Administration on a comprehensive plan to stabilize our financial system and support our economy. This legislation should help to restore the flow of credit to households and businesses that is essential for economic growth and job creation, while at the same time affording strong and necessary protections for taxpayers. I look forward to swift passage of the legislation.
In addition, the Federal Reserve Board supports the timely actions taken by the Federal Deposit Insurance Corporation, which demonstrate our government's unwavering commitment to financial and economic stability.
Last update: September 29, 2008
Release Date: September 29, 2008
For immediate release
The Federal Reserve Board on Monday announced the annual indexing of the reserve requirement exemption amount and of the low reserve tranche for 2009. These amounts are used in the calculation of reserve requirements of depository institutions. The Board also announced the annual indexing of the nonexempt deposit cutoff level and the reduced reporting limit that will be used to determine deposit reporting panels effective 2009.
All depository institutions must hold a percentage of certain types of deposits as reserves in the form of vault cash, as a deposit in a Federal Reserve Bank, or as a deposit in a pass-through account at a correspondent institution. Reserve requirements currently are assessed on the depository institution's net transaction accounts (mostly checking accounts). Depository institutions must also regularly submit deposit reports of their deposits and other reservable liabilities.
For net transaction accounts in 2009, the first $10.3 million, up from $9.3 million in 2008, will be exempt from reserve requirements. A 3 percent reserve ratio will be assessed on net transaction accounts over $10.3 million up to and including $44.4 million, up from $43.9 million in 2008. A 10 percent reserve ratio will be assessed on net transaction accounts in excess of $44.4 million.
These annual adjustments, known as the low reserve tranche adjustment and the reserve requirement exemption amount adjustment, are based on growth in net transaction accounts and total reservable liabilities, respectively, at all depository institutions between June 30, 2007 and June 30, 2008.
For depository institutions that report weekly, the low reserve tranche adjustment and the reserve requirement exemption amount adjustment will apply to the fourteen-day reserve computation period that begins Tuesday, December 2, 2008 and the corresponding fourteen-day reserve maintenance period that begins Thursday, January 1, 2009.
For depository institutions that report quarterly, the low reserve tranche adjustment and the reserve requirement exemption amount adjustment will apply to the seven-day reserve computation period that begins Tuesday, December 16, 2008, and the corresponding seven-day reserve maintenance period that begins Thursday, January 15, 2009.
The Board also announced changes in two other amounts, the nonexempt deposit cutoff level and the reduced reporting limit, that are used to determine the frequency with which depository institutions must submit deposit reports. The attached Federal Register notice contains a description of the new boundaries for deposit reporting that will be effective in 2009.
The Board's notice is attached.
Attachment (26 KB PDF)
Testimony
Chairman Ben S. Bernanke
Economic outlook
Before the Joint Economic Committee, U.S. Congress
September 24, 2008
Chairman Schumer, Vice Chair Maloney, Representative Saxton, and other members of the committee, I appreciate this opportunity to discuss recent developments in financial markets and to present an update on the economic situation. As you know, the U.S. economy continues to confront substantial challenges, including a weakening labor market and elevated inflation. Notably, stresses in financial markets have been high and have recently intensified significantly. If financial conditions fail to improve for a protracted period, the implications for the broader economy could be quite adverse.
The downturn in the housing market has been a key factor underlying both the strained condition of financial markets and the slowdown of the broader economy. In the financial sphere, falling home prices and rising mortgage delinquencies have led to major losses at many financial institutions, losses only partially replaced by the raising of new capital. Investor concerns about financial institutions increased over the summer, as mortgage-related assets deteriorated further and economic activity weakened. Among the firms under the greatest pressure were Fannie Mae and Freddie Mac, Lehman Brothers, and, more recently, American International Group (AIG). As investors lost confidence in them, these companies saw their access to liquidity and capital markets increasingly impaired and their stock prices drop sharply.
The Federal Reserve believes that, whenever possible, such difficulties should be addressed through private-sector arrangements--for example, by raising new equity capital, by negotiations leading to a merger or acquisition, or by an orderly wind-down. Government assistance should be given with the greatest of reluctance and only when the stability of the financial system, and, consequently, the health of the broader economy, is at risk. In the cases of Fannie Mae and Freddie Mac, however, capital raises of sufficient size appeared infeasible and the size and government-sponsored status of the two companies precluded a merger with or acquisition by another company. To avoid unacceptably large dislocations in the financial sector, the housing market, and the economy as a whole, the Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac into conservatorship, and the Treasury used its authority, granted by the Congress in July, to make available financial support to the two firms. The Federal Reserve, with which FHFA consulted on the conservatorship decision as specified in the July legislation, supported these steps as necessary and appropriate. We have seen benefits of this action in the form of lower mortgage rates, which should help the housing market.
The Federal Reserve and the Treasury attempted to identify private-sector solutions for AIG and Lehman Brothers, but none was forthcoming. In the case of AIG, the Federal Reserve, with the support of the Treasury, provided an emergency credit line to facilitate an orderly resolution. The Federal Reserve took this action because it judged that, in light of the prevailing market conditions and the size and composition of AIG's obligations, a disorderly failure of AIG would have severely threatened global financial stability and, consequently, the performance of the U.S. economy. To mitigate concerns that this action would exacerbate moral hazard and encourage inappropriate risk-taking in the future, the Federal Reserve ensured that the terms of the credit extended to AIG imposed significant costs and constraints on the firm's owners, managers, and creditors. The chief executive officer has been replaced. The collateral for the loan is the company itself, together with its subsidiaries.1 (Insurance policyholders and holders of AIG investment products are, however, fully protected.) Interest will accrue on the outstanding balance of the loan at a rate of three-month Libor plus 850 basis points, implying a current interest rate over 11 percent. In addition, the U.S. government will receive equity participation rights corresponding to a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders, among other things.
In the case of Lehman Brothers, a major investment bank, the Federal Reserve and the Treasury declined to commit public funds to support the institution. The failure of Lehman posed risks. But the troubles at Lehman had been well known for some time, and investors clearly recognized--as evidenced, for example, by the high cost of insuring Lehman's debt in the market for credit default swaps--that the failure of the firm was a significant possibility. Thus, we judged that investors and counterparties had had time to take precautionary measures.
While perhaps manageable in itself, Lehman's default was combined with the unexpectedly rapid collapse of AIG, which together contributed to the development last week of extraordinarily turbulent conditions in global financial markets. These conditions caused equity prices to fall sharply, the cost of short-term credit--where available--to spike upward, and liquidity to dry up in many markets. Losses at a large money market mutual fund sparked extensive withdrawals from a number of such funds. A marked increase in the demand for safe assets--a flight to quality--sent the yield on Treasury bills down to a few hundredths of a percent. By further reducing asset values and potentially restricting the flow of credit to households and businesses, these developments pose a direct threat to economic growth.
The Federal Reserve took a number of actions to increase liquidity and stabilize markets. Notably, to address dollar funding pressures worldwide, we announced a significant expansion of reciprocal currency arrangements with foreign central banks, including an approximate doubling of the existing swap lines with the European Central Bank and the Swiss National Bank and the authorization of new swap facilities with the Bank of Japan, the Bank of England, and the Bank of Canada, among others. We will continue to work closely with colleagues at other central banks to address ongoing liquidity pressures. The Federal Reserve also announced initiatives to assist money market mutual funds facing heavy redemptions and to increase liquidity in short-term credit markets.
Despite the efforts of the Federal Reserve, the Treasury, and other agencies, global financial markets remain under extraordinary stress. Action by the Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy. In this regard, the Federal Reserve supports the Treasury's proposal to buy illiquid assets from financial institutions. Purchasing impaired assets will create liquidity and promote price discovery in the markets for these assets, while reducing investor uncertainty about the current value and prospects of financial institutions. More generally, removing these assets from institutions’ balance sheets will help to restore confidence in our financial markets and enable banks and other institutions to raise capital and to expand credit to support economic growth.
I will now turn to a brief update on the economic situation.
Ongoing developments in financial markets are directly affecting the broader economy through several channels, most notably by restricting the availability of credit. Mortgage credit terms have tightened significantly and fees have risen, especially for potential borrowers who lack substantial down payments or who have blemished credit histories. Mortgages that are ineligible for credit guarantees by Fannie Mae or Freddie Mac--for example, nonconforming jumbo mortgages--cannot be securitized and thus carry much higher interest rates than conforming mortgages. Some lenders have reduced borrowing limits on home equity lines of credit. Households also appear to be having more difficulty of late in obtaining nonmortgage credit. For example, the Federal Reserve's Senior Loan Officer Opinion Survey reported that as of July an increasing proportion of banks had tightened standards for credit card and other consumer loans. In the business sector, through August, the financially strongest firms remained able to issue bonds but bond issuance by speculative-grade firms remained very light. More recently, however, deteriorating financial market conditions have disrupted the commercial paper market and other forms of financing for a wide range of firms, including investment-grade firms. Financing for commercial real estate projects has also tightened very significantly.
When worried lenders tighten credit, then spending, production, and job creation slow. Real economic activity in the second quarter appears to have been surprisingly resilient, but, more recently, economic activity appears to have decelerated broadly. In the labor market, private payrolls shed another 100,000 jobs in August, bringing the cumulative drop since November to 770,000. New claims for unemployment insurance are at elevated levels and the civilian unemployment rate rose to 6.1 percent in August. Households' real disposable income was boosted significantly in the spring by the tax rebate payments, but, excluding those payments, real after-tax income has fallen this year, which partly reflects increases in the prices of energy and food.
In recent months, the weakness in real income together with the restraining effects of reduced credit flows and declining financial and housing wealth have begun to show through more clearly to consumer spending. Real personal consumption expenditures for goods and services declined in June and July, and the retail sales report for August suggests that outlays for consumer goods fell noticeably further last month. Although the retrenchment in household spending has been widespread, purchases of motor vehicles have dropped off particularly sharply. On a more positive note, oil and gasoline prices--while still at high levels, in part reflecting the effects of Hurricane Ike--have come down substantially from the peaks they reached earlier this summer, contributing to a recent improvement in consumer confidence. However, the weakness in the fundamentals underlying consumer spending suggest that household expenditures will be sluggish, at best, in the near term.
The recent indicators of the demand for new and existing homes hint at some stabilization of sales, and lower mortgage rates are likely to provide some support for demand in coming months. Moreover, although expectations that house prices will continue to fall have probably dissuaded some potential buyers from entering the market, lower house prices and mortgage interest rates are making housing increasingly affordable over time. Still, homebuilders retain large backlogs of unsold homes, which should continue to restrain the pace of new home construction. Indeed, single-family housing starts and new permit issuance dropped further in August. At the same time, the continuing decline in house prices reduces homeowners' equity and puts continuing pressure on the balance sheets of financial institutions, as I have already noted.
As of midyear, business investment was holding up reasonably well, with investment in nonresidential structures particularly robust. However, a range of factors, including weakening fundamentals and constraints on credit, are likely to result in a considerable slowdown in the construction of commercial and office buildings in coming quarters. Business outlays for equipment and software also appear poised to slow in the second half of this year, assuming that production and sales slow as anticipated.
International trade provided considerable support for the U.S. economy over the first half of the year. Economic activity has been buoyed by strong foreign demand for a wide range of U.S. exports, including agricultural products, capital goods, and industrial supplies, even as imports declined. However, in recent months, the outlook for foreign economic activity has deteriorated amid unsettled conditions in financial markets, troubled housing sectors, and softening sentiment. As a consequence, in coming quarters, the contribution of net exports to U.S. production is not likely to be as sizable as it was in the first half of the year.
All told, real gross domestic product is likely to expand at a pace appreciably below its potential rate in the second half of this year and then to gradually pick up as financial markets return to more-normal functioning and the housing contraction runs its course. Given the extraordinary circumstances, greater-than-normal uncertainty surrounds any forecast of the pace of activity. In particular, the intensification of financial stress in recent weeks, which will make lenders still more cautious about extending credit to households and business, could prove a significant further drag on growth. The downside risks to the outlook thus remain a significant concern.
Inflation rose sharply over the period from May to July, reflecting rapid increases in energy and food prices. During the same period, price inflation for goods and services other than food and energy also moved up from the low rates seen in the spring, as the higher costs of energy, other commodities, and imported goods were partially passed through to consumers. Recently, however, the news on inflation has been more favorable. The prices of oil and other commodities, while remaining quite volatile, have fallen, on net, from their recent peaks, and the dollar is up from its mid-summer lows. The declines in energy prices have also led to some easing of inflation expectations, as measured, for example, by consumer surveys and the pricing of inflation-indexed Treasury securities.
If not reversed, these developments, together with a pace of growth that is likely to fall short of potential for a time, should lead inflation to moderate later this year and next year. Nevertheless, the inflation outlook remains highly uncertain. Indeed, the fluctuations in oil prices in the past few days illustrate the difficulty of predicting the future course of commodity prices. Consequently, the upside risks to inflation remain a significant concern as well.
Over time, a number of factors should promote the return of our economy to higher levels of employment and sustainable growth with price stability, including the stimulus being provided by monetary policy, lower oil and commodity prices, increasing stability in the mortgage and housing markets, and the natural recuperative powers of our economy. However, stabilization of our financial system is an essential precondition for economic recovery. I urge the Congress to act quickly to address the grave threats to financial stability that we currently face. For its part, the Federal Open Market Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.
Footnotes
1. Specifically, the loan is collateralized by all of the assets of the company and its primary non-regulated subsidiaries. These assets include the equity of substantially all of AIG's regulated subsidiaries. Return to text
Press Release
Release Date: September 24, 2008
For release at 1:00 a.m. EDT
Today, the Federal Reserve, the Reserve Bank of Australia, the Danmarks Nationalbank, the Norges Bank, and the Sveriges Riksbank are announcing the establishment of temporary reciprocal currency arrangements (swap lines) to address elevated pressures in U.S. dollar short-term funding markets. These facilities, like those already in place with other central banks, are designed to improve liquidity conditions in global financial markets. Central banks continue to work together during this period of market stress and are prepared to take further steps as the need arises.
Federal Reserve Actions
The Federal Open Market Committee has authorized the establishment of new swap facilities with the Reserve Bank of Australia, the Sveriges Riksbank, the Danmarks Nationalbank, and the Norges Bank. These new facilities will support the provision of U.S. dollar liquidity in amounts of up to $10 billion each by the Reserve Bank of Australia and the Sveriges Riksbank and in amounts of up to $5 billion each by the Danmarks Nationalbank and the Norges Bank.
In sum, these new facilities represent a $30 billion addition to the $247 billion previously authorized temporary reciprocal currency arrangements with other central banks: European Central Bank ($110 billion), Bank of Japan ($60 billion), Bank of England ($40 billion), Swiss National Bank ($27 billion), and Bank of Canada ($10 billion).
These reciprocal currency arrangements have been authorized through January 30, 2009.
Information on Related Actions Being Taken by Other Central Banks
Information on the actions that will be taken by other central banks is available at the following websites:
Reserve Bank of Australia
Danmarks Nationalbank (National Bank of Denmark) (54 KB PDF)
Norges Bank (Bank of Norway)
Sveriges Riksbank (Bank of Sweden)
August Existing-Home Sales Slide
Existing-home sales were down in August following a healthy gain in July as tight mortgage credit curtailed activity, according to the NATIONAL ASSOCIATION OF REALTORS®. Sales rose in the Midwest and South, but fell in the Northeast and West.
Nationally, existing-home sales — including single-family, townhomes, condominiums and co-ops — declined 2.2 percent to a seasonally adjusted annual rate of 4.91 million units in August from an upwardly revised pace of 5.02 million in July, but are 10.7 percent below the 5.50 million-unit pace in August 2007.
NAR President Richard F. Gaylord notes the pendulum in the mortgage market has swung too far. “The difficulty in obtaining a mortgage increased over past couple months, making it more challenging for creditworthy borrowers to find financing,” he says. “Our hope is that overly tight lending criteria can be loosened with reasonable standards and credit so that sales activity can catch up with demand.
"Interest rates have already declined, but there is a serious question as to whether a cash infusion by the U.S. Treasury into Wall Street would help consumers by improving mortgage funding," says Gaylord.
According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage rose to 6.48 percent in August from 6.43 percent in July; the rate was 6.57 percent in August 2007. However, last week the 30-year fixed had dropped to 5.78 percent.
Lawrence Yun, NAR chief economist, says the recent drop in interest rates is an immediate impact of recent government action. “August sales reflect higher interest rates before the government takeover of Freddie Mac and Fannie Mae, and the sudden drop in mortgage interest rates over the past couple weeks is improving housing affordability,” he says. “With higher loan limits and a beefing up of the FHA program, all the mechanisms have been falling into place to increase mortgage availability.
“However, home sales will be constrained without a freer flow of credit into the mortgage market. The faster that happens, the sooner we’ll see a broad stabilization in home prices that in turn will help the economy recover,” Yun says. “Historically, housing has led the nation out of economic doldrums. There will not be an economic recovery without a housing recovery.”
Median Price Drops
The national median existing-home price for all housing types was $203,100 in August, down 9.5 percent from a year ago when the median was $224,400.
“The median home price reflects more transactions related to subprime loans,” Yun adds. “Fewer than 10 percent of home owners have subprime loans, but these mortgages are accounting for a disproportionately high share of sales in the current market. On the other hand, areas that have had sharp price cuts are seeing a turnaround in sales, which are rising very fast now in parts of California, Florida and Nevada.”
Total housing inventory at the end of August fell 7.0 percent to 4.26 million existing homes available for sale, which represents a 10.4-month supply3 at the current sales pace, down from a revised 10.9-month supply in July.
Single-family home sales slipped 1.4 percent to a seasonally adjusted annual rate of 4.35 million in August from an upwardly revised pace of 4.41 million in July, but are 9.6 percent below the 4.81 million-unit level a year ago. The median existing single-family home price was $201,900 in August, down 9.7 percent from August 2007.
Existing condominium and co-op sales dropped 8.2 percent to a seasonally adjusted annual rate of 560,000 units in August from an upwardly revised level of 610,000 in July, and are 19.0 percent below the 691,000-unit pace in August 2007. The median existing condo price4 was $212,600 in August, which is 7.2 percent below a year ago.
Regional Results
- Midwest Regionally, existing-home sales in the Midwest rose 0.9 percent in August to a pace of 1.14 million but are 12.3 percent below August 2007. The median price in the Midwest was $168,000, down 5.6 percent from a year ago.
- South In the South, existing-home sales increased 0.5 percent to an annual pace of 1.86 million in August, but are 15.1 percent below a year ago. The median price in the South was $176,500, which is 3.4 percent lower than August 2007.
- West Existing-home sales in the West fell 5.3 percent to an annual rate of 1.07 million in August, but are 4.9 percent higher than August 2007. The median price in the West was $251,600, down 23.9 percent from a year ago. “The highest concentration of foreclosures is in the West, which is weighing down the median price because many buyers are taking advantage of deeply discounted prices,” Yun said.
- Northeast In the Northeast, existing-home sales dropped 6.6 percent to an annual pace of 850,000 in August, and are 15.0 percent below a year ago. The median price in the Northeast was $271,000, down 3.8 percent from August 2007.
—NATIONAL ASSOCIATION OF REALTORS®
Home Prices Fall to 2005 Levels
U.S. home prices fell 5.5 percent in July compared with the same month a year ago and are about equal to where they were in Oct. 2005, according to the Federal Housing Finance Agency.
Prices were down 0.6 percent from June on a seasonally adjusted basis, according to the agency.
James Lockhart, director of the agency, urged Fannie Mae and Freddie Mac to loosen lending standards to encourage more sales.
"I expect any changes to reflect both safe and sound business strategy and attentiveness to the (companies') mission," Lockhart said Tuesday in testimony prepared for a Senate Banking Committee hearing. He also said that modifying loans for troubled borrowers should be a "high priority."
But some observers think availability of mortgages is only part of the problem. "The crash of other financial assets has made folks rather uncomfortable," said Keith Gumbinger, a senior vice president with HSH Associates financial publisher. "It's not about keeping Fannie and Freddie afloat any more."
Source: The Associated Press, Alan Zibel (09/23/2008)
Practitioner Charged With Fair Housing Violations
The U.S. Department of Housing and Urban Development has charged a Jonesboro, Ga., practitioner with steering clients to different neighborhoods based on race.
The agency says an undercover sting found that Rodney Foreman, formerly associated with Coldwell Banker-Joe T. Lane Realty, made derogatory statements about African-Americans, refused to take white clients into predominantly black neighborhoods and told them that he kept different listings for whites and African-Americans, HUD said.
Foreman, who currently works for Coldwell Banker-Bullard Realty, faces fines if he is found guilty. HUD also charged Coldwell Banker-Joe T. Lane Realty with violations of the Fair Housing Act.
Source: The Associated Press (09/23/2008)
Fire Sprinklers Will Be Required for New Homes
Beginning on Jan. 1, 2011, fire sprinklers will be required in new one- and two-family homes and townhouses under a rule approved recently by the International Code Council that will be published in the 2009 International Residential Code.
The mandate's supporters say it will give residents more time to exit during a fire, but the National Association of Home Builders is concerned about the higher home prices and maintenance costs that will result.
Though costs vary by community, the Fire Protection Research Foundation says sprinkler systems run an average of $1.61 per square foot of space covered.
Wall Street Journal, Anjali Athavaley (09/23/08)
Mortgage Applications Fall After Two-Week Spurt
Mortgage application volume fell 10.6 percent on a seasonally adjusted basis to 591.4 compared with 661.7 the previous week, according to the Mortgage Bankers Association weekly survey.
Mortgage applications had risen after the U.S. government took over Fannie Mae and Freddie Mac, but in the wake of more bad economic news and rising interest rates both buyers and refinancers stepped back.
On an unadjusted basis the index decreased 11.1 percent compared with the previous week and was down 9.3 percent compared with the same week last year.
Refinance applications fell 11.2 percent and purchase applications declined 10 percent.
Meanwhile, mortgage rates jumped last week:
- 30-year fixed-rate mortgages increased to 6.08 percent from 5.82 percent.
- 15-year fixed-rate mortgages increased to 5.84 percent from 5.54 percent.
- 1-year ARMs increased to 7.01 percent from 6.95.
Source: Mortgage Bankers Association (09/24/2008)
Financial Bailout Plan Advances
Under pressure from the Bush administration to act swiftly, the plan to revive the U.S. financial system continues to move forward.
Treasury Secretary Henry Paulson Jr. and Federal Reserve Chairman Ben Bernanke pitched the bailout plan during testimony before the Senate banking committee on the morning of Sept. 23. (See NAR Gets Behind Efforts to Restore Market.)
"In order to avoid a continuing series of financial institution failures and frozen credit markets that threaten American families' financial well-being, the viability of businesses both small and large, and the very health of our economy," Paulson told the Senate Banking committee this morning.
Bernanke said there was no other option. "Action by the Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy," Bernanke said.
Some lawmakers from both parties have already expressed concern about the $700 billion price tag and its chances for success.
Meanwhile, Senate Banking Committee Chairman Christopher Dodd (D-Conn.) and his staffers have drafted a counter-proposal that works in many of the priorities outlined by Senate Democrats.
Source: New York Times, David M. Herszenhorn and CNN Money, Chris Isidore (09/23/08).
This is Not the Great Depression
Comparing the current crisis to the Great Depression is just plain wrong, say historians and veteran financial experts.
"The nomenclature of the word 'crisis' has cheapened," says Roy Smith, a professor at New York University's Stern School of Business and former partner at Goldman Sachs .
“The Great Depression had thousands of banks failing and people losing their life savings, 25 percent unemployment and social unrest and tent cities of the poor," says Allan Sloan, Washington Post and Fortune magazine columnist.
"With just 6 percent unemployment, we are having a debate as to whether we are even in a recession," says Richard Sylla, professor of the history of financial institutions and markets at New York University.
Source: Reuters News, Robert MacMillan (09/22/08)
Can Bankruptcy Law Reform Help?
Even if the government buys hundreds of billions of dollars worth of mortgage-backed securities, it is unlikely that it will be able to protect many Americans from losing their homes, analysts say.
Financial experts say that 90 percent or more of subprime mortgages are held in trusts that have been sold to institutional investors around the world. Unless every investor agrees, the terms of a mortgage can’t be changed.
''We are literally spending hundreds of billions of dollars on subsidies for financial institutions,'' says Christopher Mayer, a professor of real estate finance and vice dean at the Columbia School of Business. ''This won't do anything to help the housing market. This plan is about buying mortgage-backed securities, not mortgages, and there is a big difference.''
House and senate Democrats as well as consumer advocates are demanding that the law approving the bailout include a change in the U.S. bankruptcy law to allow judges to adjust the terms of the mortgage on a primary residence.
''That is by orders of magnitude the best thing that can be done to keep people in their homes,'' says Eric Stein, senior vice president of the Center for Responsible Lending.
The banking and securities industries, meanwhile, are fighting the change, as they did when it came up with the housing bill that was adopted in July.
''Authorizing write-downs of mortgages by bankruptcy judges will increase the risks of mortgage lending at a time when the market is already struggling, and this will harm consumers,'' wrote Floyd E. Stoner, a top lobbyist for the American Banking Association, in a statement on Monday.
Source: The New York Times, Edmund L. Andrews (09/23/08)
New York Launches Home Improvement Web Site
The New York Attorney General Andrew Cuomo says he has introduced a new home improvement Web site to help home owners avoid scams and dishonest contractors. His office has handled more than 1,550 complaints about the industry since January 2007.
The Web site, NYKnowYourContractor.com, offers a database that lists contractors that have had a complaint or a lawsuit filed against them. The site also offers information for home owners who are dealing with a lousy contract.
Source: The Associated Press (09/22/08)
Press Release
Release Date: September 22, 2008
For release at 4:15 p.m. EDT
The Federal Reserve Board on Monday announced the approval of a policy statement on equity investments in banks and bank holding companies. The policy statement provides additional guidance on the Board's position on minority equity investments in banks and bank holding companies that generally do not constitute "control" for purposes of the Bank Holding Company Act.
The policy statement is attached.
Policy statement on equity investments in banks and bank holding companies (831 KB PDF)
Last update: September 22, 2008
Testimony
Chairman Ben S. Bernanke
U.S. financial markets
Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate
September 23, 2008
Chairman Dodd, Senator Shelby, and members of the Committee, I appreciate this opportunity to discuss recent developments in financial markets and the economy. As you know, the U.S. economy continues to confront substantial challenges, including a weakening labor market and elevated inflation. Notably, stresses in financial markets have been high and have recently intensified significantly. If financial conditions fail to improve for a protracted period, the implications for the broader economy could be quite adverse.
The downturn in the housing market has been a key factor underlying both the strained condition of financial markets and the slowdown of the broader economy. In the financial sphere, falling home prices and rising mortgage delinquencies have led to major losses at many financial institutions, losses only partially replaced by the raising of new capital. Investor concerns about financial institutions increased over the summer, as mortgage-related assets deteriorated further and economic activity weakened. Among the firms under the greatest pressure were Fannie Mae and Freddie Mac, Lehman Brothers, and, more recently, American International Group (AIG). As investors lost confidence in them, these companies saw their access to liquidity and capital markets increasingly impaired and their stock prices drop sharply.
The Federal Reserve believes that, whenever possible, such difficulties should be addressed through private-sector arrangements--for example, by raising new equity capital, by negotiations leading to a merger or acquisition, or by an orderly wind-down. Government assistance should be given with the greatest of reluctance and only when the stability of the financial system, and, consequently, the health of the broader economy, is at risk. In the cases of Fannie Mae and Freddie Mac, however, capital raises of sufficient size appeared infeasible and the size and government-sponsored status of the two companies precluded a merger with or acquisition by another company. To avoid unacceptably large dislocations in the financial sector, the housing market, and the economy as a whole, the Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac into conservatorship, and the Treasury used its authority, granted by the Congress in July, to make available financial support to the two firms. The Federal Reserve, with which FHFA consulted on the conservatorship decision as specified in the July legislation, supported these steps as necessary and appropriate. We have seen benefits of this action in the form of lower mortgage rates, which should help the housing market.
The Federal Reserve and the Treasury attempted to identify private-sector approaches to avoid the imminent failures of AIG and Lehman Brothers, but none was forthcoming. In the case of AIG, the Federal Reserve, with the support of the Treasury, provided an emergency credit line to facilitate an orderly resolution. The Federal Reserve took this action because it judged that, in light of the prevailing market conditions and the size and composition of AIG's obligations, a disorderly failure of AIG would have severely threatened global financial stability and, consequently, the performance of the U.S. economy. To mitigate concerns that this action would exacerbate moral hazard and encourage inappropriate risk-taking in the future, the Federal Reserve ensured that the terms of the credit extended to AIG imposed significant costs and constraints on the firm's owners, managers, and creditors. The chief executive officer has been replaced. The collateral for the loan is the company itself, together with its subsidiaries.1 (Insurance policyholders and holders of AIG investment products are, however, fully protected.) Interest will accrue on the outstanding balance of the loan at a rate of three-month Libor plus 850 basis points, implying a current interest rate over 11 percent. In addition, the U.S. government will receive equity participation rights corresponding to a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders, among other things.
In the case of Lehman Brothers, a major investment bank, the Federal Reserve and the Treasury declined to commit public funds to support the institution. The failure of Lehman posed risks. But the troubles at Lehman had been well known for some time, and investors clearly recognized--as evidenced, for example, by the high cost of insuring Lehman's debt in the market for credit default swaps--that the failure of the firm was a significant possibility. Thus, we judged that investors and counterparties had had time to take precautionary measures.
While perhaps manageable in itself, Lehman's default was combined with the unexpectedly rapid collapse of AIG, which together contributed to the development last week of extraordinarily turbulent conditions in global financial markets. These conditions caused equity prices to fall sharply, the cost of short-term credit--where available--to spike upward, and liquidity to dry up in many markets. Losses at a large money market mutual fund sparked extensive withdrawals from a number of such funds. A marked increase in the demand for safe assets--a flight to quality--sent the yield on Treasury bills down to a few hundredths of a percent. By further reducing asset values and potentially restricting the flow of credit to households and businesses, these developments pose a direct threat to economic growth.
The Federal Reserve took a number of actions to increase liquidity and stabilize markets. Notably, to address dollar funding pressures worldwide, we announced a significant expansion of reciprocal currency arrangements with foreign central banks, including an approximate doubling of the existing swap lines with the European Central Bank and the Swiss National Bank and the authorization of new swap facilities with the Bank of Japan, the Bank of England, and the Bank of Canada. We will continue to work closely with colleagues at other central banks to address ongoing liquidity pressures. The Federal Reserve also announced initiatives to assist money market mutual funds facing heavy redemptions and to increase liquidity in short-term credit markets.
Despite the efforts of the Federal Reserve, the Treasury, and other agencies, global financial markets remain under extraordinary stress. Action by the Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy. In this regard, the Federal Reserve supports the Treasury's proposal to buy illiquid assets from financial institutions. Purchasing impaired assets will create liquidity and promote price discovery in the markets for these assets, while reducing investor uncertainty about the current value and prospects of financial institutions. More generally, removing these assets from institutions’ balance sheets will help to restore confidence in our financial markets and enable banks and other institutions to raise capital and to expand credit to support economic growth.
At this juncture, in light of the fast-moving developments in financial markets, it is essential to deal with the crisis at hand. Certainly, the shortcomings and weaknesses of our financial markets and regulatory system must be addressed if we are to avoid a repetition of what has transpired in our financial markets over the past year. However, the development of a comprehensive proposal for reform would require careful and extensive analysis that would be difficult to compress into a short legislative timeframe now available. Looking forward, the Federal Reserve is committed to working closely with the Congress, the Administration, other federal regulators, and other stakeholders in developing a stronger, more resilient, and better regulated financial system.
Footnotes
1. Specifically, the loan is collateralized by all of the assets of the company and its primary non-regulated subsidiaries. These assets include the equity of substantially all of AIG's regulated subsidiaries. Return to text
10 ways to protect your money now
As the country's financial system teeters on the brink of disaster, you need a game plan to minimize the damage.
By The Wall Street Journal
Here are 10 things you can do amid the current financial panic:
1. Check that your bank accounts are federally insured.
The Federal Deposit Insurance Corp. (FDIC) guarantees deposits up to $100,000 per person. If you have to hold more than that, spread it across multiple banks. As a taxpayer, you are paying for this insurance, so use it.
2. Make sure your brokerage accounts are federally insured, too.
The Securities Investor Protection Corp. (SIPC) guarantees you at places like Lehman Bros. (LEH, news, msgs), Merrill Lynch (MER, news, msgs) and E-Trade Financial (ETFC, news, msgs) up to $500,000, including $100,000 in cash. The same rules apply: If you have more to invest, spread it across multiple firms. Note that the SIPC only makes sure you get your shares and bonds back if a brokerage fails. It does not, obviously, guarantee those investments' value.
3. Put money in thy purse.
If this market and this economy get any tougher, cash isn't going to be just king anymore. It's going to be king, queen, emperor, lord high chamberlain and the whole court. The easiest way to make or find a buck is to save it. So take an ax to those family budgets -- the restaurant meals, the Superduper Everything Cable package, the rip-off checking account with the high fees and low interest. It's all costing you.
4. Set up a home-equity line of credit while you still can.
Normally it would not be advisable to take on more debt, but if access to ready cash might be a lifesaver, it's best to line it up now. That's true especially if you are worried about your job. Credit is already tight, and it may get a lot tighter.
5. Refinance your mortgage.
The panic on Wall Street just caused a collapse in the interest rate on long-term U.S. Treasury bonds, as lots of investors rushed there for safety. And that usually leads to a fall in long-term mortgage rates.
6. Don't wait for your worst investments to "recover."
If you ever saw John Cleese and Michael Palin perform their famous skit about the dead parrot, you know exactly what I mean. No, your Fannie Mae (FNM, news, msgs) shares aren't "resting." They're lying at the bottom of the cage with their feet in the air. What more do you need to know? Stop waiting for them to "recover" before you sort out your portfolio.
7. Don't panic.
Journalists, like markets, tend to move in herds. And by the nature of their jobs, they write about the plane that crashes instead of the thousands that land safely. Remember, too, that pundits want to seem really wise by putting on serious expressions and saying things like "We don't know how this thing is going to play out" and "The situation could get a lot worse." Bah.
Guess what. We never know how things are going to play out. And the situation could get a lot better, too.
8. When it comes to your short-term money needs, nothing has changed.
Any money you might need within the next year or two should be held in cash or equivalents. That was true two years ago, and it is true now. The stock market is no home for money you may need urgently. It could fall 30% or jump 30%. Nobody knows. You can get a one-year CD paying 5% right now, and it's federally guaranteed.
9. If you are investing for five years or more, buy some stock.
The investment outlook is much, much better today than it has been for several years, because shares are much cheaper. World markets overall have fallen 27% from last year's peak. They're not a steal at current levels, but they are not particularly expensive either. Invest globally. Vanguard Total World Stock (VTWSX) gives you the whole world and low fees.
If you are looking for a value, Morningstar analyst Bridget Hughes likes Oakmark Global (OAKGX). Another good one is Tweedy, Browne's new Worldwide High Dividend Yield Value ( | |