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An historic week was capped off with an incredible Friday
of government announcements.
There are three huge announcements that
are changing the financial markets around the world. First, we have been
talking about the fear over the safety of savings for many Americans. Banks
are on the brink of collapse, bonds are losing some or all of their value,
and stocks are dropping at an alarming rate, all causing tremendous fear and
anxiety for investors. This fear caused a flight to quality of such magnitude that
the return on Treasuries was actually negative. People are
actually willing to pay money in order not to lose money...forgetting
all about any type of return for their investment.
Yesterday this panic lead to a modern day "run on the
bank". There was $180 billion taken out of money market funds due to a
lack of confidence. This resulted in a "breaking of the buck", which means
that the Net Asset Value or NAV of some money market funds dropped below
$1. Virtually all investors consider money market funds very safe and do
not expect any change in the principal value, so a $1 invested will always
result in a $1 balance plus any interest. But once the $1 valuation was
broken investors panicked and the flood gates opened. This caused the
Treasury to step in. This morning, Treasury Secretary Paulson announced that
the US government will guarantee money market funds. It
should be noted that this does not include high yield, enhanced type, or riskier
money market funds. This action is helping settle the markets and as a
result stocks around the world are marching
higher.
The second big announcement is helping to
calm global markets and regain confidence. The Federal
Reserve will create a market for illiquid mortgage
debt. The big problem is that there are no buyers for this debt in
the current marketplace. So the Fed is stepping in to create a entity
to make these purchases of mortgage debt and provide a liquid marketplace.
This move has been very well received and should do a lot of long term good
to help the housing and lending environment. Stocks around the world
have responded very favorably to this.
The final announcement is that the SEC has placed a
ban on short selling in 799 financially-related stocks. This ban will last
through October 2nd and can be extended if needed in 30 day increments.
Some other countries around the globe are also instituting similar
bans. There are already some lawsuits challenging the legality of this ban,
but it may help the financial stocks in the immediate future and allow the
government to impose more regulation of short-selling.
As the stock market stabilizes, home loan rates will rise
again. | 
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