patrick.net

Randy,

You wrote:
>And…all cash will be honored even if it’s more than the FDIC limit; even if they have to print it up for you; even if they have to prohibit the sale or ownership of gold. Banking failure in the modern economy is not a tolerable option. It would derail society.

But failures of single banks do happen occasionally and are tolerated to happen. And deposits over 100k can get lost, as recently found on Mish's blog, under
http://www.post-gazette.com/pg/07217/807090-28.stm?cmpid=HBEHTML
I agree with you in so far, however, that the Fed's primary job (even before inflation fighting) is keeping the banking SYSTEM alive.

But failures of single banks do happen occasionally and are tolerated to happen.

Just deposit in a bank that is "too big to LET fail." :)

Oh sh*t, Yen just breached 117, yen carry trade unwinding plus subprime blowup, it is not going to be pretty tomorrow. When it rains, it pours.

Reflexivity at work. Everything is feeding back into everything.

What is the best way to dump US Peso?

Peter T,

I can't believe that poor guy had over $500K in a SINGLE bank.

I have accounts at several banks, and don't keep much more than $100K in any one of them (e.g. $102K). Just enough with the MM accounts to get the highest interest paid, generally on amounts over $100K.

Money Market funds at risk by commercial paper downgrades

Subprime Problems Spread Into Commercial Loans

By GRETCHEN MORGENSON and JENNY ANDERSON
Published: August 15, 2007

Turmoil in the subprime mortgage market spread again yesterday — this time to a type of short-term security held by money market mutual funds. These funds have become the investment of choice for many people seeking a safe haven.

Standard & Poor’s, the ratings agency, warned yesterday that it might downgrade several issuers of commercial paper, a short-term I.O.U. by companies that promise to repay loans typically within a few weeks to a year.

In these cases, S.& P. said, the commercial paper was backed by residential mortgages.

The amount of commercial paper in the United States has grown to $2.2 trillion, according to Lehman Brothers, with about $1.2 trillion backed by residential mortgages, credit card receivables, car loans and other bonds. The major buyers include pension funds, insurance companies, hedge funds and short-term money market funds.

The S.& P. highlighted four issuers of commercial paper for possible downgrading. Broadhollow Funding, which was set up by American Home Mortgage Investment, a lender that filed for bankruptcy last week; KKR Atlantic Funding Trust and KKR Pacific Funding Trust, two affiliates of the buyout firm Kohlberg Kravis Roberts; and Ottimo Funding, an affiliate of Aladdin Capital Management, an investment manager in Stamford, Conn.

Among the money market funds that held commercial paper issued by the companies singled out for possible downgrading were two offered by Evergreen Investments. As of May, the $16.6 billion Evergreen Institutional Money Market Fund held $385 million in Broadhollow Funding and $72 million in Ottimo Funding. The $4.5 billion Evergreen Prime Cash Management Money Market Fund held $50 million in Ottimo Funding as well.

http://www.nytimes.com/2007/08/15/business/15fund.html?pagewanted=1&_r=3&adxnnl=0&ref=business&adxnnlx=1187197471-GOakR85KTQ9XPYUJzpBW/A

Am I missing something? If you put the funds (awaiting investment) in an SIPC brokerage account, aren't you insured up to $500K?

To me, bank accounts are just for paying bills.

The exposures of MM funds to the credit crunch has been predicted on this blog months ago.

I am looking forward to less-crowded restaurants. Hopefully, there will be enough people to keep the best restaurants in business and enough empty tables to accommodate me. :)

jeffollie,

It appears that is correct. Barry Rithotlz did a great piece on mmkt "Substitutes" (as he liked to call them). Where Sentinel was concerned, he felt that they are not a trad. mmkt. They make int. rate bets to deliver yld. and felt they should be described as an "ultra-short term bond fund". A very different thing.

It looks like the market has already priced in the down grade on the senior subordinated debt paper. So far.

Peter P,
But brokerage accounts only pay around 2% in comparison of the 5+% of banks/CUs. Any money not being invested in my brokerage account gets skimmed off pronto and goes into the CU.

For those who didn't follow OO's link, here's some good news for folks looking at higher end homes. Fear -- even scarier on the way down.

The buyers could have gotten a mortgage at a substantially higher rate - just under 8 percent - Hogan said, but "they crunched the numbers and said, 'Hell, no, maybe this is a sign for us to get out.' "

The buyers walked away from the deal, forfeiting their $73,000 deposit. The home is back on the market for $2.2 million, its original asking price.

http://www.dqnews.com/RRBay0807.shtm

Bay Area home prices steady, slow sales

> I can’t believe that poor guy had over $500K in a SINGLE bank.

Greed and Ignorance. He got higher interest at the now folded bank. And (he claims) he didn't know about the 100k limit.

Why are my posts from today missing?

Oops, wrong thread, sorry.

EBGuy,

So what exactly sent these high end buyers packing? To walk away from that kind of money takes real fear! Uh... was this the first they'd heard there "might" be a housing bubble? When their 10% down payment wasn't going to be enough? What do you MEAN our loan didn't go through!?

"and enough empty tables to accommodate me :)"

Yes, there's nothing like the feeling of being the waiter's only shot at a tip!

Yeah, Bay Area home price steady my ass.

I saw something that I never saw throughout my 15+ years in the Bay Area, open house at night. There was an open house sign on Almaden Expressway turning into Almaden Road saying Open House 5-7PM. I drove by that neighborhood but was not curious enough to follow the sign.

Then when I think about it, this is truly an ominous sign. What kind of traffic does the realtor want to draw with such adhoc open house? I searched online, this open house was not even listed.

SIPC covers $500K, but isn't theoretically impervious to failure. It's not the same as FDIC, which I believe is a direct extension of a Congressional act and therefore must be honored as a matter of law.

But I think Peter P hits the nail on the head: just put your money somewhere that cannot be allowed to fail. Banks like BofA, Wells Fargo, Citi will not be allowed to fail. Money markets at brokers like Vanguard and Fidelity will not be allowed to fail. Putting your money in excess of FDIC/SIPC all in some regional, local or small bank/fund is a risk because such institutions can and do fail. But the big boys have lots of institutional cash, and that won't be allowed to evaporate. Think of it this way. How much cash do the big pension funds alone cycle through big institutions? You think any politician in his or her right mind would allow that cash to disappear? Not if they don't want 45mm seniors rioting in the streets with their walkers and canes.

On the success of VMWare IPO, a reader comments to the Mercury News:

Silicon Valley does it again. It never ceases to amaze me. I guess this explains why we are immune to the "housing bubble". The weather, abundance of smart people, culture of risk takers, network of people who's "been there and done that" ... As an east cost native, I'm wondering why everyone in the whole world doesn't live here. If nothing else, for the weather. It sure is nice being able to ride my motorcycle 12 months out of the year (most of the time).

"Banks like BofA, Wells Fargo and Citi will not be allowed to fail"

Didn't hear Wamu mentioned in there? (Evidently in Randy's mind they didn't make the cut?)

OO

I've seen quite a few weird 'open house' hours on Craigslist. 5-7 or 6-8 on weekday nights. I have no idea who they're trying to get to show up at that time of night.

Randy,

but what if the money is almost fully invested at these brokerages? Let's say I am holding 1M shares of C at a no-name online brokerage, if that brokerage goes under, I am still holding the stocks, or maybe I am being too naive?

OO,

Most full service firms provide additional insurance for their clients up to 25 mil. I can't speak for the discount houses but my guess is that if they go under the accounts will be bought up by either another discounter or broker and you'll be assigned a new account number and get a "welcome letter".

I have heard of rare instances where no one wanted some "gut bucket shop's" accounts so they go through a "paying agent" and certificates are issued. PITA. It can take months.

But brokerage accounts only pay around 2% in comparison of the 5+% of banks/CUs. Any money not being invested in my brokerage account gets skimmed off pronto and goes into the CU.

You can also use your brokerage account to participant in Treasury auctions.

Real banks are for the very rich (private banking) and the very poor ($23.67 checking accounts).

Dow at 12,861.47. I predict that it will fall down to 12,000 at least, if not 11,000. The bubble bursting is finally having its impact. Home prices will follow suit, no doubt. Perhaps we'll see some deflation as people can't afford the basics when they lose their jobs and their homes.

Let’s say I am holding 1M shares of C at a no-name online brokerage, if that brokerage goes under, I am still holding the stocks, or maybe I am being too naive?

Why would you go for a no-name online brokerage when Fidelity charges around $10 per transaction? :)

Perhaps we’ll see some deflation as people can’t afford the basics when they lose their jobs and their homes.

You have too much faith in our central bank. They will simply print more Peso.

"Real banks are for the very rich"

The rest are at Wamu? I know that sometimes CU's can offer higher yields (generally) but mmkt yields don't have as big a difference a Dennis implied. I remember when I first started in the business they would let you "pitch" the mmkt b/c it didn't require a license. I used to know the prospectus inside out!

Obviously I have a lot to re-learn about how they function today?

The Dow is below 13000, Countrywide may face bankruptcy, Homebuilder confidence yet lower on the latest survey, S+P 500 erases all of its gains for the year.

Another typical day in the "great credit/real estate unwind"???

Another very profitable day.

Peter, I use Scottrade, I don't know why anyone would use anyone else. Check them out, I can vouch for their service.

Peter, I believe as long as you have the certificates of your holdings you can move them pretty effortlessly. When I was with Ameritrade they used to describe the proces on their page, but I'm not certain what the documentation is. As I recall I think you had to actually have the stock certificate themselves.

I am watching Kudlow and Company in complete disbelief! Kudlow claims to be a capitalist, yet he a socialist all the way through. If I were his boss, I would force him to hold up a copy of the “The Communist Manifesto” and goosestep around in front of the camera. He will support capitalism if it works in his favor but turn socialist when he and his rich buddies can’t afford their lavish life styles.

Where the world is the personal accountability the “conservatives” keep preaching about? I rate right wing people as socialist morons when they talk about the “fed” saving the day. I say let the chips fall where they will and if this means “deflation” then so be it. If people have their homes taken away and they have to *gasp* rent like me, I will support it even more. I hope there is no bail out and the banks that survive will learn from the past and have a 20% down payment requirement that is nonnegotiable in the future. Hell an economic reset might be good for us in the long run! Our trade imbalances with the rest of the world can’t continue and will hurt more later than taking our lumps now.

Kudlow, Capitalism does not mean Private Profit and Public Risk you socialist fool!

RE: the Chronic-le article about the jumbo mortgage squeeze on high-end buyers, what I found interesting was that the prospective buyers had a 10% down payment on a $2.45m home. That's asinine. They are supposedly living in a $5m home. Even if they are full of equity to the hilt in the primary residence, borrowing over $2m for what I can only assume is an investment property is retarded. At the very least, you'd think they could spring for a 20% down payment to at least avoid PMI.

Yes there are those with lots of money who prefer to park the cash in other investment vehicles rather than tying it up in a home, but how does servicing a $2m mortgage make any sense? Am I missing something?

Peter, I use Scottrade, I don’t know why anyone would use anyone else. Check them out, I can vouch for their service.

I have heard good things about them too. I personally use Fidelity. But any brokerage with a large number of physical branches should be fine.

I believe CD's placed in trust under the name of a family member (parent, sibling ) is also insured to 100k.

skibum,

I think I told a story here before of someone I know who took on a almost $2M mortgage on a $3M home on his primary residence. And that someone is working at a hedge fund, expecting his annual bonus to keep marching high from 05 onwards. Contrary to what you would have guessed, he doesn't have enough savings to cover his loan. He also took on an ARM.

It is quite amazing how one's risk perception can be so out of whack.

I use Schwab and Scottrade, and I am afraid neither of them may qualify to be "too large to fail". I have very little cash at any bank, only enough to cover monthly expenditure.

Ah, it's wonderful to come back just as I am seeing the predictions that most people here have been making for the past couple of years.

Despite what my neighbors and a couple of Realtor friends are saying I predict that people who can't afford houses without 20% down payments won't be able to buy them, which will substantially release the nutty upward pressure that we have seen on prices, even in, gasp- prime areas of San Francisco.

I also noticed the oddity of people putting 10% down on a $2.45 million house. There's no tax advantage to be gained from the large mortgage. Perhaps they have cash tied up in investments that are doing better than the lower rate, but not as well as the 8% on the new mortgage?
I'm guessing that's not what was going on, but that the people merely appeared to be rich and are simply leveraged. Had they really liked the house and had the cash they would have just upped the downpayment to keep the lower rate. Once the leveraged-living people are out of the game they high middle/lower upper houses will have far fewer people lined up to buy the houses and the prices will decline.

SFWoman!

Good to hear from you! And yes, I think you've summed that little scenario up quite nicely.

@Malcom,

I'm pretty sure you mean "statements" *not "certificates"? I don't know a lot of people that use certificates any more? If you had the physical stock certificate, likely as not you're the type that keeps them in a safe deposit box. Keep an eye on those bearer bonds! (just kidding)

Remember, NAAVLP stands for National Association for the Advancement of Very Leveraged People. Perhaps we can get a grant for the government to "reach out" to those poor souls. :lol: