Bank News and Mutual Fund Problems

ECONOMY:

• Housing Starts (950k est.; 954k prior; 895k act.): Builders

broke ground on fewer houses than expected in August, as

rising foreclosures led to even tighter lending conditions.

FIXED INCOME & RATES:

Yesterday: Yields climbed 6bp as market activity swirled around

American International Group and word surfaced Barclays would

buy Lehman from bankruptcy. Today: Yields are down 6bp as

investors deal with the government takeover of AIG, while the 3M

T-Bill has dipped to its lowest level since 1954. Investors remain

deeply concerned that financial turmoil could get worse before it

gets better.

BANK NEWS:

• Mutual Fund Problem: Reserve Primary Fund became the

first mutual fund in 14Ys to expose investors to losses, after

“breaking the buck” on its money market mutual fund. The fund

wrote off $785mm of debt issued by Lehman that it owned,

which in turn led investors to dump more than 60% of fund

assets through redemptions. The fear at this point is that if this

problem spreads through the mutual fund sector, it could lead

to withdrawals from other funds. While good for banks (since

the money would likely flow back into the safety of bank

deposits), it would further exacerbate the crisis.

• ID Theft: A new study finds 57% of small businesses don’t

think they need a formal plan to secure their data. The FCC

reports the average cost to replace a stolen identity is $8k

Source: Bank News Daily

Bank News, Lehman & Goldman Sachs

ECONOMY:

• CPI (-0.1% est.; +0.8% prior; -0.1% act.): Lower gasoline

prices and a slowing economy pushed consumer prices lower

for the first time in 2Ys. Excluding food and energy costs, core

inflation came in as expected.

• FOMC Rate Decision (2.00% est.; 2.00% prior): While many

think the FRB may cut rates 25bp (or perhaps even as much

as 50bp), we think they will leave rates at 2% for now. Global

central bankers are cutting rates overseas and the U.S. is

already pretty low (plus, doing so doesn’t really get us very

much), so we just don’t see it in the offing right now.

FIXED INCOME & RATES:

Yesterday: Yields were slammed about 44bp lower, as market

fears reached epic proportions. News that Lehman had filed the

largest bankruptcy in U.S. history, Merrill Lynch had been

acquired by Bank of America and sharp late-day deterioration in

the stock of insurance giant AIG left investors spinning and

depressed. Today: The FOMC meeting couldn’t come at a better

time and it will be interesting to see what actions and

commentary occur. Yields are down 9bp as fears continue and

Goldman Sachs reports sharply lower earnings.

BANK NEWS:

• Goldman Sachs: The Wall Street firm reported 3Q profit fell

70%, the biggest decline in its 9Ys as a public company.

• Fed Funds: In an effort to keep Federal funds at lower levels

and ensure enough liquidity is in the system, the FRB turned

on the spigots and flooded $50B into the system. This action

comes after yesterday’s $70B flow, which served to eventually

push the Fed Fund rate down to 0.25%.

Source: Bank News Daily

Bank News & Failed Banks

FIXED INCOME & RATES:

Friday: Yields rose 13bp on a jobs report that wasn’t as bad as

the market thought and a bounce back in equities. Banks were

heavy purchasers of agency mortgages, as the forward curve

shifted down and the likelihood of future rate increases abated.

Today: Yields are up 7bp on the GSE news and banks are

starting to sell their Agency debt and MBS. Look for this to

continue for some time.

BANK NEWS:

• Failure: Silver State Bank ($2B, NV) was closed on Friday with

branches and non-brokered deposits sold to Nevada State

Bank.

• Ousted: The Board of WAMU fired CEO Kerry Killinger and

announced it had entered into a memorandum of

understanding with the OTS. The nation’s largest thrift said the

MOU related to risk management and compliance.

• Under Pressure: The OTS has issued a C&D on Downey

Financial Corp. ordering the thrift to reduce assets, provide an

REO disposition plan, strengthen its executive management,

decrease its risk to option ARMs and stated-income loans and

maintain a minimum Tier total risk-based capital ratio of 14%.

Bank News and Bankruptcies Surge

Factory Orders (1.0% est.; 1.7% prior): Orders are expected

to have increased in July, as export strength continued to

support production.

FIXED INCOME & RATES:

Yesterday: Yields slipped 6bp, as lower oil prices could not

offset stronger than expected weakness reported in construction

and manufacturing. For the most part, banks were content to

watch and wait for higher yields. Today: Yields are down 1bp, as

investors worry economic softness in Europe is likely to last

longer and be deeper than previously expected.

BANK NEWS:

• Construction Lending: The national delinquency rate

(calculated as loans 30 days or more past due) for construction

loans climbed to 8.1% in the 2Q, up from 7.2% in the 1Q and

2.4% in the 2Q of 2007.

• Text Banking: USAA Federal Savings Bank rolled out their

Text Banking which allows customers to check balances, pay

bills and initiate transfers all with a text message.

• Rising Bankruptcies: The latest data shows bankruptcy filings

jumped 29% in the 12 months ended June 30, as business

filings soared 41% and personal filings climbed 28%.

• New Bank Deposits: The average de novo branch opened in

the past 5Ys carries $19mm in deposits.

• Branch Location: A recent study of 5k bank branches finds

location drives about 70% of branch success.

• Remote Capture: A new survey finds 25% of small businesses

plan to use remote capture by the end of next year, as they

seek lower costs, later deadlines, faster availability and

increased time savings.

Source; Bank News Dailiy

Bank News, REO’s Double, Foreclosures, and Housing Overhang

ECONOMY:

• Producer Price Index (-0.5% est., 1.2% prior, -0.9% act.):

PPI fell for the first time this year and is a result of lower

energy costs. Less food and energy, prices went up 0.2% for a

core 3.6% annualized rate (on expectations).

• Advanced Retail Sales (0.2% est., -0.5% prior, -0.3% act.):

Sales unexpectedly dropped, due to lower wages and greater

concern over the future of the economy.

FIXED INCOME & RATES:

Yesterday: The yield curve steepened, going down 3bps in the

short-tend and up 2bp in the intermediate section (5Ys). The

change in the shape indicates the market believes that problems

with Wamu, Lehman and others may force the Fed to lower rates

in the near term, before raising them. For the first time, we heard

calls for a 50bp cut by year-end in the Fed Funds target rate. The

action slowed bank selling, as many thought they will hold off to

see what developed. Today: Weaker retail sales and a flight to

safety are serving to push yields down 5bp.

BANK NEWS:

• More Pain: A new RealtyTrac report shows foreclosure filings

reached another new record in August, jumping 27% from the

same period last year and 12% more than the prior month.

Meanwhile, bank seizures into REO more than doubled over

last year, defaults climbed 10% and auctions increased 7%. By

state, NV came in #1 in foreclosures for the 20th consecutive

month (1 in 91 homes in default), followed by CA (1 in 130)

and AZ (1 in 182).

• Housing Overhang: The latest data finds there are 3.9mm

unsold homes on the market (the most since 1982) and an

11.1 month supply at the current sales pace. That compares to

a more normalized rate of about 6 months signaling conditions

have stabilized.

• HMDA: The FFIEC released the 2007 HMDA data that will act

as a basis for origination policy. While home lending fell 25%

from 2006, loans to Hispanics were down 49% and loans to

African-Americans fell 35%.

Source: Bank News Daily