…And pretty soon you hit some serious write-downs. Today Bear Stearns announced they would write-off another 1.2 billion dollars in the fourth quarter. Yesterday Bank of America announced a write-down of 3 billion of mortgage-related investments and spent $600 million to prop up its money market funds. HSBC said it would write-down $3.4 billion in bad loans.
The total of write-offs at the large banks has now gone over the $50 billion mark, and this is just the beginning. Many industry watchers believe the world-wide bank losses will exceed $500B. Soon it will be a question if the capital structure of some of these institutions can handle the losses.
A number of banks such as Goldman Sachs have stubbornly refused to take write-downs, smugly secure with the notion that the credit crunch will pass. Recent announcements indicate that the firm has piled into a short position in housing debt to offset the loss on the price of other assets. Despite CreditSights and other firms estimating Goldman needs to take $5 billion in charges, the firm is still sticking by its line that it will have no significant write-offs.
With some banking firms taking a continual stream of write-downs and others with their heads apparently stuck in the ground, is it time to start a bank “death-watch” pool?
Reference:
BOFA’s Turn: $3B Write-Down
http://www.nypost.com/seven/11142007/business/bofas_turn__3b_write_down_326374.htm
Goldman's CEO sees no big write-down
http://www.marketwatch.com/news/story/goldman-ceo-sees-no-big/story.aspx?guid=%7B4AF9FAF2%2DB0E2%2D4ACA%2D8134%2D5BBD5FCACFD6%7D
Wednesday, November 14, 2007
Tuesday, November 13, 2007
Are your Brokerage Assets safe at E*Trade?
As outlined yesterday, there is an increasing probability that E-Trade Finanical will need file for bankruptcy. Customer assets at E-Trade are generally divided into two classes; the first being brokerage assets. These would be the stocks, bonds, mutual funds, and other items found in your brokerage account. Brokerage account assets are insured by SIPC up to a value of $500,000; this does not protect against market losses but guards your account in case the broker goes out of business. Usually the assets in your account will simply be transfered to another brokerage firm if the current one goes under. SIPC insurance has been demonstrated to work well in the past in situations where brokerage firms have declared bankruptcy. The following article provides an overview:
Investor assets said safe in E-Trade accounts
http://www.marketwatch.com/news/story/investor-assets-e-trade-accounts-said/story.aspx?guid=%7B07DF25B1%2D350B%2D460C%2D9D49%2D665E9DFB5DD9%7D&siteid=yhoof
So what should you be concerned about at E-Trade?
Brokerage money market accounts offered directly by E-Trade and not backed by FDIC insurance are at risk. Many of these money market accounts are not likely to be covered by the SIPC if E-Trade goes under (despite the SIPC coverage for up $100K in cash and $500K in securities).
E-Trade also has a division which operates as a standard bank (E-Trade Bank). This is different then your brokerage account. If you perform your banking at E-Trade then these accounts are covered up to the $100,000 FDIC limit. However any money kept in your bank deposit accounts above this limit will be lost. This is why is is critical that you transfer cash above the FDIC limit out of your E-Trade bank account now.
Unless you have brokerage assets above $500K then the stocks, bonds, mutual funds, and other instruments in your brokerage account are also safe. There is no need to panic or take action with your assets at E-Trade if they are below the SIPC (brokerage) or FDIC (bank) insurance limits. Everyone should note that most of the analysts are giving E-Trade a 1 in 6 chance of going under, so it is important to transfer assets above these limits if you are not comfortable with the current sizeable risk of losing your money.
Investor assets said safe in E-Trade accounts
http://www.marketwatch.com/news/story/investor-assets-e-trade-accounts-said/story.aspx?guid=%7B07DF25B1%2D350B%2D460C%2D9D49%2D665E9DFB5DD9%7D&siteid=yhoof
So what should you be concerned about at E-Trade?
Brokerage money market accounts offered directly by E-Trade and not backed by FDIC insurance are at risk. Many of these money market accounts are not likely to be covered by the SIPC if E-Trade goes under (despite the SIPC coverage for up $100K in cash and $500K in securities).
E-Trade also has a division which operates as a standard bank (E-Trade Bank). This is different then your brokerage account. If you perform your banking at E-Trade then these accounts are covered up to the $100,000 FDIC limit. However any money kept in your bank deposit accounts above this limit will be lost. This is why is is critical that you transfer cash above the FDIC limit out of your E-Trade bank account now.
Unless you have brokerage assets above $500K then the stocks, bonds, mutual funds, and other instruments in your brokerage account are also safe. There is no need to panic or take action with your assets at E-Trade if they are below the SIPC (brokerage) or FDIC (bank) insurance limits. Everyone should note that most of the analysts are giving E-Trade a 1 in 6 chance of going under, so it is important to transfer assets above these limits if you are not comfortable with the current sizeable risk of losing your money.
Monday, November 12, 2007
What are Level 3 assets?
The Financial Accounting Standards Board (FASB) recently issued the FAS 157 standard which is being implemented starting on November 15th. This standard requires that firms divide their assets into three categories called Level 1, Level 2, and Level 3.
Level 1 means assets that can be marked-to-market, where an asset's worth is based on a real price. One example would be a liquid stock traded on an exchange.
Level 2 are assets which are marked-to-model, an estimate based on observable market inputs but no direct available quoted prices. The firm can get several bids to derive the price, or base the pricing assumptions on what similar assets have sold for recently.
Level 3 values are based on "unobservable" inputs reflecting companies' "own assumptions" about the way assets should be priced. In other words, Level 3 assets are based on effectively best guess, or in many situations what firms want to value these items for in order to improve the situation in the books.
The majority of derivative instruments carried on the books of brokerages are Level 3 assets. The recent credit crunch has revealed the greater part of these items to be toxic waste, not worth pennies on the dollar of the value that the firms have them listed for in their books. Pressure from shareholder and regulators coupled with the new FASB standard are driving large banks to come clean about the proper value of these assets.
Just how big are the Level 3 assets?
Many of the banks have far more Level 3 assets than they have capital. Some examples that have been talked about in recent articles are provided below:
Citigroup
Equity base: $128 billion
Level 3 assets: $134.8 billion
Level 3 to equity: 105%
Goldman Sachs
Equity base: $39 billion
Level 3 assets: $72 billion
Level 3 to equity ratio: 185%
Morgan Stanley
Equity base: $35 billion
Level 3 assets: $88 billion
Level 3 to equity ratio: 251%
Bear Stearns
Equity base: $13 billion
Level 3 assets: $20 billion
Level 3 to equity ratio: 154%
Lehman Brothers
Equity base: $22 billion
Level 3 assets: $35 billion
Level 3 to equity ratio: 159%
Merrill Lynch
Equity base: $42 billion
Level 3 assets: $35 billion
Level 3 to equity ratio: 38%
This discussion does not even touch on the problems with Level 2 assets; many of these have lost value and are distressed. The disconcerting situation with Level 3 alone makes it evident that there are still significant write-downs at these firms which must occur. Recent information points to an expectation of losses over $500 billion across the sector. Some banking entities may be in such poor shape that they topple or are forced to merge.
In some sense the situation is both a liquidity crisis as well as a confidence crisis. Banks agreed to create the Super-SIV fund to improve liquidity, but the effective traction on implementation has been slow. Confidence further erodes with the continuing stream of bad news, and is not likely to improve over the upcoming month as banks reveal further losses. All of this leads to the likely situation of the credit crunch continuing for the forseeable future and having a broader economic impact.
Reference:
FASB - Summary of Statement 157
http://www.fasb.org/st/summary/stsum157.shtml
FASB FAS 157 - Fair Value Measurements
http://www.fasb.org/pdf/fas157.pdf
Level 1 means assets that can be marked-to-market, where an asset's worth is based on a real price. One example would be a liquid stock traded on an exchange.
Level 2 are assets which are marked-to-model, an estimate based on observable market inputs but no direct available quoted prices. The firm can get several bids to derive the price, or base the pricing assumptions on what similar assets have sold for recently.
Level 3 values are based on "unobservable" inputs reflecting companies' "own assumptions" about the way assets should be priced. In other words, Level 3 assets are based on effectively best guess, or in many situations what firms want to value these items for in order to improve the situation in the books.
The majority of derivative instruments carried on the books of brokerages are Level 3 assets. The recent credit crunch has revealed the greater part of these items to be toxic waste, not worth pennies on the dollar of the value that the firms have them listed for in their books. Pressure from shareholder and regulators coupled with the new FASB standard are driving large banks to come clean about the proper value of these assets.
Just how big are the Level 3 assets?
Many of the banks have far more Level 3 assets than they have capital. Some examples that have been talked about in recent articles are provided below:
Citigroup
Equity base: $128 billion
Level 3 assets: $134.8 billion
Level 3 to equity: 105%
Goldman Sachs
Equity base: $39 billion
Level 3 assets: $72 billion
Level 3 to equity ratio: 185%
Morgan Stanley
Equity base: $35 billion
Level 3 assets: $88 billion
Level 3 to equity ratio: 251%
Bear Stearns
Equity base: $13 billion
Level 3 assets: $20 billion
Level 3 to equity ratio: 154%
Lehman Brothers
Equity base: $22 billion
Level 3 assets: $35 billion
Level 3 to equity ratio: 159%
Merrill Lynch
Equity base: $42 billion
Level 3 assets: $35 billion
Level 3 to equity ratio: 38%
This discussion does not even touch on the problems with Level 2 assets; many of these have lost value and are distressed. The disconcerting situation with Level 3 alone makes it evident that there are still significant write-downs at these firms which must occur. Recent information points to an expectation of losses over $500 billion across the sector. Some banking entities may be in such poor shape that they topple or are forced to merge.
In some sense the situation is both a liquidity crisis as well as a confidence crisis. Banks agreed to create the Super-SIV fund to improve liquidity, but the effective traction on implementation has been slow. Confidence further erodes with the continuing stream of bad news, and is not likely to improve over the upcoming month as banks reveal further losses. All of this leads to the likely situation of the credit crunch continuing for the forseeable future and having a broader economic impact.
Reference:
FASB - Summary of Statement 157
http://www.fasb.org/st/summary/stsum157.shtml
FASB FAS 157 - Fair Value Measurements
http://www.fasb.org/pdf/fas157.pdf
Warning: Etrade
A good number of people use E-Trade for banking services as well as their brokerage. The bad news is there is a high probability that E-Trade is heading for bankruptcy and their banking deposits over the $100,000 FDIC limit are not safe.
"Citi Investment Research analyst Prashant Bhatia cut E-Trade's rating to "Sell" from "Hold." Bhatia said there is a 15 percent chance E-Trade will have to declare bankruptcy".
I would urge that investors take immediate steps to transfer bank deposit assets out of E-Trade that are above the $100,000 limit. Also keep in mind that money kept in money market accounts at E-Trade that are not backed by FDIC insurance may not be secure.
Out of the Gate: E-Trade Financial Falls
http://biz.yahoo.com/ap/071112/apfn_e_trade_out_of_the_gate.html
"Half of deposit accounts, representing about $15 billion, are higher than the Federal Deposit Insurance Corp.'s $100,000 threshold."
"Citi Investment Research analyst Prashant Bhatia cut E-Trade's rating to "Sell" from "Hold." Bhatia said there is a 15 percent chance E-Trade will have to declare bankruptcy".
I would urge that investors take immediate steps to transfer bank deposit assets out of E-Trade that are above the $100,000 limit. Also keep in mind that money kept in money market accounts at E-Trade that are not backed by FDIC insurance may not be secure.
Out of the Gate: E-Trade Financial Falls
http://biz.yahoo.com/ap/071112/apfn_e_trade_out_of_the_gate.html
"Half of deposit accounts, representing about $15 billion, are higher than the Federal Deposit Insurance Corp.'s $100,000 threshold."
Sunday, November 11, 2007
Parallels: Winning Traits
I had the pleasure this weekend of watching my oldest daughter’s soccer team play in the Final Four of the State Cup. Her team overcame many obstacles this season and despite being rated an underdog made it to the Final and walked off the field with silver medals. My daughter’s personal journey included bouncing back from a serious car accident in the middle of the season. Fighting through injuries, struggling early on, and working to constantly improve during the season, the team of girls managed to peak going into the state cup tournament series held over the past three weeks.
While cheering for the team the banter among the parents on the sidelines included soccer, safe cars for teens, the weakening real estate market, public financing of sports venues, and personal finance. A couple thoughts struck me as I watched the game and conversed with the adults. The first was the disparity between the parents who were confident about their personal finances as compared to those whom were disorganized and adrift.
The immediate second thought was how the ideals that drive a victorious soccer team also align with the successful finances for families. Winning sports teams possess several attributes that also have investing parallels:
While cheering for the team the banter among the parents on the sidelines included soccer, safe cars for teens, the weakening real estate market, public financing of sports venues, and personal finance. A couple thoughts struck me as I watched the game and conversed with the adults. The first was the disparity between the parents who were confident about their personal finances as compared to those whom were disorganized and adrift.
The immediate second thought was how the ideals that drive a victorious soccer team also align with the successful finances for families. Winning sports teams possess several attributes that also have investing parallels:
- Have a plan - Each game is mapped from a plan of how you execute. Teams work towards creating strategies that play into their strengths and cover their shortcomings. Similarly, any financial plan is mapped to your strengths and needs. It is critical to have a well understood plan in sports or family budgeting.
- Stick with the plan - It is not simply enough to have a plan, you must execute on the plan. Sports teams that don’t stick with a plan flounder, this is no different for the fiscal situation for families. Planning is important, but worthless if you do not stick with the plan over time. In order to have a successful financial situation, it is important for families to faithfully follow through each month to meet their objectives.
- Solid Technicals - In soccer, technicals are how you touch the ball. In investing, it involves how you perform the minute details of the strategy. Do you know how to go online and sell your stock? Can you read a chart and figure out the current value? Can you go online and pay your bills easily while balancing your checkbook? Technicals are your “monetary touch”, in this case how you execute your basic financial tasks. Does every first touch in a soccer game need to be exactly perfect to win? Or should we ask do you have to always buy a stock at the exact low of the day to win? The answer is no, but the basic technicals must be place in order to be successful in either venue.
- Tactical Strength – In soccer, tactical includes your structure, communication, and execution of your strategy. In a similar vein, the tactical side of investing involves proper implementation of diversification, and utilizing the instruments that will get you to the finish line.
- Align with the Plan – On a soccer team all the players must be “rowing together” in order to be successful. Similarly, household finances quickly become shambles if one spouse saves while the other regularly runs up sizable credit card bills. It is important that both partners align with the same vision of planning their financial future and then jointly march to the same tune. Nothing causes chaos in households more quickly than not having members share the same fiscal outlook.
- Passion – Athletes who win have a passion for the sport. Investors who win have a passion for making the right choices in terms of debt, credit, spending, investing, and finances. To triumph at personal finances it is important that you have passion to do what is right for your family over binge purchases using credit card debt and other prevalent omissions. In some sense passion is self-control. On the other hand, it is the ability to step up and make the right choices with heartfelt conviction.
- Athleticism – Some facets of athleticism are innate; other aspects players can be trained on. Improvements in speed and strength can be achieved with training. In the same way, “financial athleticism” involves your understanding of investing. Similar to the situation on the field, it is not simply a situation of “what you are born with is what you got”. Investors can always work to improve their knowledge and savvy.
- Proper Coaching – One of the most important aspects to winning is consistent, knowledgeable coaching. In addressing finances many families use paid planners; others may simply read advice from experts. There are a number of ways to get coaching for your investments. However it is critical that the coaching is does not drift all over the map, and is coming from sources with your best interest in mind as opposed as coming from someone who simply wants to make commissions or sell a product. Coaching for your finances is a valuable service, but it needs to be aligned with your long term needs with no improper bias.
Clearly there is a mapping between qualities that drive achievement in sports and personal finance. More importantly, families that are successful financially demonstrate the attributes outlined above. Other families mired in debt and facing fiscal dilemmas appear to possess few of these characteristics. The good news is that it is always possible to turn around and become successful over time by focusing on the essentials; in the same manner that by concentrating on the fundamentals struggling soccer teams can become triumphant squads at the end of a season.
I would like to thank the NCYSA for organizing another excellent State Cup playoff series, the Refs for putting up with the parents on the side lines, the Coaches for their dedication & time, and the Parents for their support of the players.
Friday, November 9, 2007
Lifecycle that makes sense
Many savvy financial experts are hesitant to recommend lifecycle or target-date funds because many are just a pyramid of fees; burdening the investor with the expenses of both the underlying funds and additional fees for the management of the life-cycle fund. These funds come across to many as just another way for fund families to increase their revenue. Coupled with the reality that very few of these funds outperform their associated indexes, most investors would be better off managing their own diversification.
The crux of the problem is the expenses; automatic lifecycle as a concept works if the fees can be reduced. Fortunately there are a number of ETFs now offered that provide expenses that are typical less then half of most life cycle funds in the market. Target date funds are popular conceptual with investors simply because you can “set & forget”; the advent of life-cycle ETFs are likely to enhance their broad acceptance with the probable added benefit of driving many large mutual fund families to reduce their fees for these vehicles.
TD Ameritrade and XShares have launched five new target-date ETFs; TDAX Independence 2010 ETF (TDD), TDAX Independence 2020 ETF (TDH), TDAX Independence 2030 ETF (TDN) and TDAX Independence 2040 ETF (TDV) and TDAX In-Target ETF (TDX). These target-date ETFs have expense ratios of 0.65%, compared with about 1.3% for the average comparable mutual fund, Other ETF underwriters plan to offer other lifecycle choices shortly, many of these will have even lower expense ratios.
The recent round of pension reform, in which QDIAs were defined by the U.S. Department of Labor, will place lifecycle offerings as the default investments in numerous 401K plans. Many of these retirement plans will likely start considering the ETF lifecycle products as employees clamor for lower fees.
New ETFs Target Retirement Market
http://finance.yahoo.com/focus-retirement/article/103739/New-ETFs-Target-Retirement-Market?mod=retirement-401k
The crux of the problem is the expenses; automatic lifecycle as a concept works if the fees can be reduced. Fortunately there are a number of ETFs now offered that provide expenses that are typical less then half of most life cycle funds in the market. Target date funds are popular conceptual with investors simply because you can “set & forget”; the advent of life-cycle ETFs are likely to enhance their broad acceptance with the probable added benefit of driving many large mutual fund families to reduce their fees for these vehicles.
TD Ameritrade and XShares have launched five new target-date ETFs; TDAX Independence 2010 ETF (TDD), TDAX Independence 2020 ETF (TDH), TDAX Independence 2030 ETF (TDN) and TDAX Independence 2040 ETF (TDV) and TDAX In-Target ETF (TDX). These target-date ETFs have expense ratios of 0.65%, compared with about 1.3% for the average comparable mutual fund, Other ETF underwriters plan to offer other lifecycle choices shortly, many of these will have even lower expense ratios.
The recent round of pension reform, in which QDIAs were defined by the U.S. Department of Labor, will place lifecycle offerings as the default investments in numerous 401K plans. Many of these retirement plans will likely start considering the ETF lifecycle products as employees clamor for lower fees.
New ETFs Target Retirement Market
http://finance.yahoo.com/focus-retirement/article/103739/New-ETFs-Target-Retirement-Market?mod=retirement-401k
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