Financial Update

TSX tumbles as banks get hit hard

· TSX -306.52pts (Reuters) - The TSE's main index sank more than 2% in a broad decline sparked by losses in financial-services shares -down 4.1% from this past week's strong 6 session rally, as sour data provided a reminder of the dreadful state of the U.S. housing sector and concerns over the U.S. economic outlook, which showed a 2.6% drop in sales in existing U.S. homes. All of the major banks were down, including Canadian Imperial Bank of Commerce, which lost 5.9% after the filing of a multibillion dollar class action law suit.
· Dow -283.10pts also sharply lower amid mixed corporate results, including an $8.7b quarterly loss posted by Ford and a dismal housing report and another selloff of financial stocks.
· Dollar -.22c to $98.73US
· Oil +$1.05to $125.49US per barrel. Americans used 2.4% less fuel over the past 4 weeks than they did last year, the latest figures by the U.S. Energy Department's Administration show. While that may not sound like much, industry experts say it represents a significant shift by the world's largest energy consumer. A bigger-than-expected increase in gasoline supplies only added to concerns that drivers are cutting back. "We've grounded airplanes. People are driving less, they're trading in their SUVs," said James Cordier, president of Liberty Trading Group and OptionSellers.com. "For the foreseeable future - at least for the next 6 to 12 months - we have demand destruction." · Gold +$4.40 to $928.400US per ounce Gold regained strength after an earlier drop to a 2 week low attracted buying from jewellers, the electronics sector and bargain hunters

Some great info in the attached article to assist you when clients question the need for documentation…..

A message to lenders: know your borrowers

By Burton Frierson - Analysis

NEW YORK (Reuters) - The sweltering days of late July may seem an odd time to revisit the Christmas classic "It's a Wonderful Life," but the 1946 movie teaches a timeless lesson in finance: that lenders must always know their borrowers and have a stake in the debts being repaid.

As the United States struggles to cope with the worst housing slump since the Great Depression, some have sought to explain the latest boom and bust in mortgages as innovation gone awry.
But much of it is not new at all. There were six U.S. mortgage meltdowns between 1870 and World War Two and all taught the same lesson -- that some loans should never be made.
"Apparently no single person on Wall Street knew about these six earlier blow-ups. If they had they would have held back," said Robert E. Wright, financial historian at New York University's Stern School of Business.

"They all happened for the same reason and that is the same reason that the seventh one blew up: the originators had incentives to make as many mortgages as quickly as possible and not to really care about the borrowers' long-term ability to pay."

To prevent future housing crashes, analyst suggestions run the gamut from returning to more community-focused banking to market mechanisms to prevent bubbles from developing.
Meanwhile, lawmakers in Washington have crafted a package to rescue the market and shore up Fannie Mae and Freddie Mac, which own or have guaranteed almost half of the $12 trillion in U.S. mortgage debt outstanding.

There are also efforts to tighten standards among the brokers who made the high-risk loans that were repackaged into complex securities and sold on around the world to investors eager for the extra bit of interest on offer.

NOTHING NEW

According to research by Kenneth Snowden, associate professor of economics at the University of North Carolina at Greensboro, mortgage securitization appeared in 6 different forms between 1870 and 1940. Each time the market for mortgage-backed securities grew rapidly for a few years and then collapsed.

The expansions included financing booms for building cities in the American West, settlement of the Great Plains and agricultural expansion during and after World War I. In all of the breakdowns, the willingness of bankers and agents to write loans that never should have been made played a crucial role.

"In securitization what you have are originators who are really very distinct from the ultimate holders of the risk," Snowden told Reuters in a telephone interview.
"How are the incentives maintained through that chain to maintain good credit quality? That's what's key. That's what's proven to be hard to do," says Snowden, adding, though, that he thinks securitization is beneficial when properly done.

Snowden says as housing markets grow increasingly exuberant, maintaining credit standards becomes more difficult, especially as companies fight to maintain market share. He suggests putting in place regulatory mechanisms to cool off markets off when they begin to expand too rapidly.

KNOW WHERE THE MONEY IS

For the Hollywood audience, It's a Wonderful Life leading man James Stewart demonstrated the valuable link between lender and borrower in the film's bank-run scene. Here, protagonist George Bailey convinces small-town depositors to stick with the local building and loan he runs.
Bailey's clinching argument is that they know their money is safe because they have loaned it to other residents of Bedford Falls, whose financial prospects they know intimately.

"Well, your money's in Joe's house. That's right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others," Stewart, as Bailey, tells distressed depositors. "Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can."

The community building and loan survives because the investors know who they are underwriting.

"That's the scene where he explains basically the philosophy and rationale of community banking," says Wright, the financial historian at Stern School of Business. "In fact that's the part of the movie where I cry."

Fast-forward to the latest debacle and ask whether investors have the same confidence. The answer is a resounding 'no', expressed in loss of confidence throughout the global financial system.

Wright says the credit crunch shows the virtues of the community banking system, where financial institutions operate locally, originate their own loans and tend to hold onto the debts as investments.

Greater emphasis on this approach may also help lay the foundations for a more stable housing market in the future

They know their borrowers," Wright added.

Some argue that an end to securitization and a return only to community banking would not look nearly as idyllic as it does on film. A "return to the old days of the Bailey Building and Loan," analysts at Merrill Lynch wrote in a July 16 research note, would be "to the detriment of U.S. growth prospects" by making capital and credit more difficult to obtain.

If that's the case then the onus is on regulators and financiers to figure out the conundrum that has been the undoing of so many U.S. mortgage booms.

"Who shouldn't write a bad loan?" asks Snowden. "When you think of incentives, who should say 'no' to a poor quality loan?"

Have a great day! I will be back from vacation Aug 11!