A Little Comfort in Uncertain Times
Posted on | October 7, 2008 | No Comments
Well, the economy sure has been pretty interesting lately. The below letter was emailed to me my Katie Mahoney, of Carolina One Mortgage. Carolina One Mortgage is a division of Guaranty Bank, and the letter was written by the Treasurer of the bank. It is comforting, if not uplifting, in a time of uncertainty. As always, I’m here to help, as is Katie. Please let us know if you have any questions we can address for you.
“As you are aware – the global and domestic financial markets suffered a sharp decline in overseas trading yesterday and in our markets today. U.S. stock ended up off the lows of the trading day – but down sharply. Economic weakness continues to evolve overseas and that is what is driving some of the most recent financial market downturn. Unfortunately, investors and markets are hyper-sensitive to any news of an investment firm failure or stress. While governments and central banks are acting with sizable liquidity injections and rescues, investor concern is outweighing the efforts currently. Significant coordinated and independent central banking and treasury efforts are however underway to unfreeze the credit markets and get liquidity moving through the financial systems.
Out of sync with media hype there are some positives to point out: energy and oil prices have continued their decline and certain U.S. interest rates have fallen. Talk is growing of a Fed ease in response to some recent economic data reflecting weakness and that the Fed previously announced they will use any and all tools available to them to assist in stabilizing the market. This implies a possible sharp reduction in the Fed Funds and Discount rates (which will in turn drive a drop in the Prime rate). The recent increase in LIBOR, which some of our ARM indices are tied to could result in some increased questions from borrowers. restoring financial confidence.
What does this mean for us?
You, your staff, and our customers will see, hear or read news articles tonight and tomorrow about the significant stock market declines. It would be natural for some of our customers to react with some alarm. While some significant drops have taken place – we are seeing some signs of investment rebound. To put things in a historical context – while we are moving to some near term lows in the equity markets – we are now only just falling below U.S. stock market levels seen about 4 years ago. Garnering some market attention – the recent increase in FDIC insurance to $250,000 up from $100,000 per account should help our deposit customers with some potential deposit safety fears.
Guaranty Bank is regularly exercising its liquidity mechanisms and it might be helpful for you to know we aren’t witnessing any funding challenges. If we get more than an anticipated decline in short term interest rates – we may see mortgage rates fall somewhat as well – which could imply some pick-up in mortgage refinance. While the Fed Funds effective rate is 2% – we are enjoying borrowing costs well below that level as a result of Fed liquidity actions – demonstrating that the coordinated liquidity efforts are working. Mortgage investors are continuing to purchase our originated mortgages – also demonstrating market liquidity.
Recent and possible actions:
Overseas – European governments crafted independent rescue plans and shored up weak banks. Certain European governments are insuring all private bank deposits. Domestically – the Fed significantly increased its auctions of cash to banks and “is ready to take additional actions as necessary” to foster liquid money market conditions. European and various domestic banks have been stock-piling cash. While the U.S. Treasury plan, which was put into law last week is expected to go into action in about 4 weeks, will provide needed liquidity, it is likely the Treasury may begin purchasing securities in advance of the auction process to help provide liquidity. More liquidity injections and strong steps to shore up banking systems are expected globally. Work on the TARP is well underway and the Treasury is aggressively working to structure the systems to accommodate the resulting auctions.
We’ll forward market summaries to the senior management team to assist you and your teams. ”
Bill James, CFA
Treasurer, Senior Vice President
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