Week in Review
October 27, 2008
Paulson Outlines Recapitalization For Banks, Thrifts
WASHINGTON - Treasury Secretary Henry Paulson on Monday outlined the process for banks and thrifts to request capital from the government. In a brief press conference, Paulson emphasized that all banks may apply, and that the $125 billion program "is not being implemented on a first-come-first-served basis. Sufficient capital has been allocated so that all qualifying banks can participate," he said.
Paulson said regulators have created a single form that any interested bank or thrift may submit to their primary federal regulator by Nov. 14. Once the regulator reviews an application, it will send it along with its recommendation to the Office of Financial Stability at the Treasury Department. "Once Treasury receives the application with the regulator's recommendation, we will review it and decide whether or not to make the capital purchase," Paulson said. "Treasury welcomes the expertise of the financial regulators, and will give considerable weight to their recommendations."
All approved transactions will be announced to the public within 48 hours of execution. Paulson said Treasury will not announce any applications that are withdrawn or denied.
"This efficient process, with standardized forms and standardized review, will encourage banks and thrifts of all sizes to participate in the program," he said. "By so doing, they will increase their capital base so that they can provide the lending necessary to support the U.S. economy as we work through this difficult period." Nine of the largest banks have already agreed to accept $125 billion in funds from Treasury in return for equity stakes.
In a joint statement on Monday, federal bank regulators encouraged all eligible institutions to use Treasury's capital purchase program and a separate program from the Federal Deposit Insurance Corp. that would temporarily back bank debt.
Federal regulators said eligible institutions will be able to sell equity interests to Treasury in amounts equal to 1% to 3% of an institution's risk-weighted assets. These interests will constitute Tier 1 capital for banks and thrifts, regulators said.
Diversified Stock Funds Tumble 10% in 3rd Quarter
Eighty-seven percent of stock mutual funds were in the red in the third quarter, with the average diversified stock fund falling 10% in the quarter and the average stock mutual fund declining 11% in September alone, according to Lipper data. September was the biggest one-month tumble for U.S. equity funds since 1998.
Three of the biggest casualties were natural resources funds, down 32.7% in the quarter; gold funds, down 30.7%; and international core funds, down 20.9%.
Knowing that chasing last year's best-performing sectors hardly ever pays off for investors, financial planners continue to advise that investors diversify holdings, including money market funds. Moving into a bank certificate of deposit, while insured up to $250,000, is not a good move, advisers say, because the average bank CD pays 2%.
Homebuyers Tapping Into 401(k) Savings
Following recent talk of 401(k) debit cards and tighter credit, it was bound to happen that homebuyers would turn to their 401(k) to help finance a home purchase, despite stern warnings against doing so by most financial advisers.
While borrowing against a 401(k) plan typically costs prime plus 1.5%, putting the current rate at 6.5%, the time and investment opportunity lost can significantly reduce the account over the long term, according to the Contra Costa Times.
"Borrowing against your 401(k) is a very dumb idea," said Jim Titus, a financial consultant with Charles Schwab. "No. 1 is the opportunity costs of borrowing. You end up losing the [tax-deferred growth potential] when you take the money out of your 401(k), and the interest you pay back [on the loan] is unlikely to earn as much of a return as your 401(k) investment."
Nonetheless, other financial advisers believe that now is a good time for buyers to enter the real estate market, because prices are depressed, having declined very steeply in the markets hurt the worst by foreclosures and the subprime crisis. In some cases, home purchasers don't have any recourse but to tap into their 401(k), since lenders are now imposing stricter requirements as well as higher down payments. In addition, unlike other 401(k) loans that have to be repaid in five years, there is no time limit for loans used to purchase a primary home.
Investors Bail Out of Closed-End Mutual Funds
Ninety-percent of closed-end funds are trading at discounts, some as high as 15% to 35% of their net asset values, a marked spread from their 4.4% average discount since 1997, The Wall Street Journal reports. And the spreads appear not only to be lasting longer, but to be growing larger.
Whereas in other market conditions, this might tempt investors to grab closed-end fund shares, their high exposure to debt instruments-two-thirds of closed-end funds focus on such debt as mortgages, corporate and foreign debt-has investors running for the hills. In addition, about 72% of closed-end funds use leverage.