Mortgage Relief Plan effects on stockholders

IMO it depends on your time frame. If you are interested in the short-medium term (less than 10 years), nobody knows. At any rate this type of situation is why many advisors ask individual stock investors to limit their holdings in any one business sector (i.e., banks) to 10% of overall holding.

Long-term (10+ years) and assuming the good ole USA remains capitalist, I can't imagine well-run banks being a bad investment - again, subject to 10% limit.

-HW "Skip" Weldon Columbia, SC

"sandybeth" wrote

Some mortgage companies (not necessarily publicly owned and so traded on the market) have already gone belly up. The smaller the publicly traded ones are, the riskier, IMO, based on general and not specific reading on credit problems. Subject to less scrutiny and so the power of market interaction, they could get away with more, and they did for awhile. Now they pay the piper.

Generally I agree with Skip on the larger banks.

Washington Mutual is the worst hit. The fact that it is taking drastic measures (cutting the dividend 70%; laying off people) to try to rein in costs bodes well, in general. Going back some 17 years, neither WM, C, BAC has ever cut its dividend before this year. So far, C's board of directors has said it will not, while its CEO has qualified this to say a cut will remain an option. BAC's dividend appears secure, based on chatter by analysts. I mention this because one 'advantage' for the long term investor of this dip in stock prices is that dividend reinvestment can purchase more shares than usual. A compounding effect then kicks in when the share price recovers. Granted, this is if it recovers, but I think they will in five years or less. There is chatter (of course?) about many of these large bank stocks being available at bargain prices.

Tighter regulation via the Fed and Congress will help confidence in these large banks. I note that there have been a few blips for each of BAC, C, WM in the last dozen years or so, where stock prices dove on the order of what we are seeing today. And each recovered, if that's any reassurance.

Seriously undertaken investigations of WaMu by the NY Attorney General and by the SEC is bad for it yet they sound warranted. WaMu also faces a shareholder class action lawsuit. It's not likely to bring a cent to shareholders, but I think (at first blush) it will be a deterrent to bad business management in the future.

Large banks trade at low P/Es because they are risky. Arguably they pay a large dividend partly for the same reason.

Specifics on each company's financials are often brought into online media reports. Except for WaMu, I feel pretty good about my own three large bank positions. I knew going in they could be volatile, so that helps. Being diversified has buffered the short-term blow. I look to the long term.

It is said that the worst (for the banking and lending industry) has not hit yet. I think we are looking at a few rough years for the middle and lower classes in particular. When they're hit hard, the whole economy suffers. Government intervention is a good thing, insofar as lending standards are tightened to something rational.

Whenever credit is too freely available, things get out of control, people (the educated and less educated alike) get stupid. I remember acquaintances talking about the property they bought and planned to "flip," and how they thought stocks were way too risky. Like weren't they so clever. I just nodded, "We'll see." Sgt. Sausage is right that these folks could only learn the hard way, with the dollar signs in their eyes blinding them to all reason about rational markets, growth, how wealth is built, etc.

I appreciate all the great information. However, my main questions is: are my bank/mortgage company stocks going to be in better shape WITH a bailout or WITHOUT a bailout? SandyBeth

What kind of bailout are we discussing? The devil is in the details.

-- Doug

When this issue was first raised, I recall we discussed how FEW people it would actually help. I suspect that the impact will be minimal on banking and/or mortgage company stocks due to this. If it were more widespread, impacting a much higher percentage of subprime loans, I'd think it would be a positive. One might claim a zero-sum game where such a bailout simply transfers wealth from the bondholders/banks to the borrowers, and to a degree, that may be true, but a continued drop in housing is not zero sum, the drop is value lost and the impact has something of a domino effect. That may be slowed down a bit by this proposal, but the real effect remains to be seen.

As a holder of a CMO*, I'd prefer to get a lower rate than I expected rather than find the value of my bond collapsed altogether.

(*I am not a holder of CMOs, I am speaking hypothetically) JOE

I'd bet "WITH."

Congress and the President are looking to bolster consumer confidence in the wake of an overextension of credit and hence evaporation of "wealth." They will use approaches which will have a direct effect on those facing foreclosure. But also this President (and Republicans) could be said to be not as interested in welfare as they are averting a recession or minimizing the effects of same. Proposals includes, for example, providing federal mortgage insurance to back borrowers and so giving lenders more confidence; ordering lenders to refinance in manners favorable to borrowers; continuing the federal income tax deduction of mortgage insurance premiums (when certain conditions are met). These acts, among others, are hoped to have a trickle down (or more) effect to the economy as a whole, which should help bank stocks.