Interest Rate Roundup

Thursday, August 23, 2007

The confidence game

I'm out of the office for some R&R the next couple of days. But I can never totally pull myself away from the markets -- not with all this volatility. The latest development worth mentioning on the mortgage front, of course, is the news that Bank of America invested $2 billion in Countrywide Financial by purchasing non-voting preferred stock.

Bank of America's comment on the move:

"In the current turmoil, the stock market has been underestimating the value in Countrywide's operations and assets," Bank of America Chief Executive Kenneth Lewis said in a statement. "We hope this investment will be a step toward a return to more normal liquidity in the mortgage markets."

Clearly, the government and the major banks are doing a full-court press to restore confidence in the financial system. It seems like every other day, Treasury Secretary Henry Paulson is on TV talking about how great the underlying economy is. And of course, four major financial institutions slid up to the Fed's discount window to borrow $2 billion yesterday in an attempt to erase the stigma of such borrowings.

That's all well and good. But no amount of PR can change the fact the underlying fundamentals are deteriorating rapidly in the banking industry, thanks to the mortgage and housing bust. So the jury is definitely still out on whether or not this novel approach to confidence-building will work. It certainly is working in the short-term by boosting stock futures.


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