Apr. 14, 2008: What do Wachovia and Washington Mutual have in common?

Apr. 14, 2008: What do Wachovia and Washington Mutual have in common? Rob Chrisman

They both need/needed at least $7 billion in additional capital to stay afloat. Wachovia, the fourth-largest U.S. bank, reported an unexpected loss because of subprime- infected mortgage holdings, cut its dividend, and said it will raise about $7 billion in a share sale to replenish capital. The company’s market value has dropped 50% since its $25 billion takeover of Golden West Financial Corp. in 2006 at the peak of the housing market. (Talk about good timing on Golden West’s part!) Wachovia also announced that it will cut 500 investment banking jobs.

Legislation update: The Bush administration announced last week steps to help more homeowners head off foreclosure by using an existing Federal Housing Administration program to enable more low- and moderate-income homeowners to refinance into government-insured mortgages with monthly payments they can afford. But the administration’s idea would reach far fewer borrowers than the Democrats’ proposal — roughly 100,000 rather than 1 million to 2 million — without requiring lenders to take large losses. While this was happening, the Senate passed a package of measures including a tax credit for buyers of foreclosed properties, funds to state and local governments to buy and rehabilitate foreclosed homes, and tax breaks for home builders. It has not yet gone to the House.

The housing market is showing signs of stabilization! Housing starts and sales have both increased slightly since December, while inventories of homes for sale have declined significantly. Although home prices are still falling, this is now viewed as a necessary condition to bring buyers back into the market. Home affordability has jumped to a level consistent with housing starts 75% higher than currently but this positive impact is on hold until consumer confidence rises from the current recession level reading. How quickly housing starts recover depends on how long and deep the economic recession is.

This is a big week for economic data. After Retail Sales this morning (unexpectedly +.2%), we’ll have the Producer Price Index tomorrow, expected +.4%, core +.2%, and then on Wednesday we have the Consumer Price Index, March Housing Starts, Industrial Production and Capacity Utilization, and finally Leading Economic Indicators. Expectations for future Fed eases increased slightly last week, and economists are giving a 46% chance of a 50 bp easing to 1.75% at the next FOMC meeting on April 29-30.  Speaking of the Fed, they will post the Fed Beige Book report at 2PM EST Wednesday. This report, which is named simply after the color of its cover, details economic conditions throughout the U.S. by region. Since the Fed relies heavily on it during their FOMC meetings, its results can have a fairly big impact on the financial markets and mortgage rates if it reveals any surprises. After the Retail Sales number, the 10-yr languishes in the mid 3.40’s and 30-yr A-paper prices are a tad better than Friday afternoon.

A crusty old Marine Sergeant Major found himself at a gala event hosted by a local liberal arts college. There was no shortage of extremely young idealistic ladies in attendance, one of whom approached the Sergeant Major for conversation. "Excuse me, Sergeant Major, but you seem to be a very serious man. Is something bothering you?"

"Negative, ma’am – just serious by nature." She looked at his awards and decorations and said, "It looks like you have seen a lot of action." "Yes, ma’am, a lot of action." The young lady, tiring of trying to start up a conversation, said, "You know, you should lighten up a little. Relax and enjoy yourself." The Sergeant Major just stared at her in his serious manner. Finally the young lady said, "You know, I hope you don’t take this the wrong way, but when is the last time you were with a woman?" "1955, ma’am." "Well, there you are. That sure explains it. You really need to chill out and quit taking everything so seriously!”

One thing led to another, and afterwards, panting for breath, she leaned against his bare chest and said, "Wow, you sure didn’t forget much since 1955." The Sergeant Major, glancing at his watch, said in his serious voice, "I hope not; it’s only 2130 now.”

Rob