ETNs Put to the Test and Other Assorted Market Madness

By Jim Wiandt

It's clear that the debates we've been having about the credit issues around ETNs are rapidly becoming a theory-meets-reality situation.

With ETN issuer (and note writer) Lehman Brothers (LEH) now...gone, the issue of default for ETNs is getting a very quick toss into the fire as Matt Hougan mentions in his blog and Murray Coleman details in his feature on the Opta ETNs.  And the Lehman bond indices, THE bond indices are up for bid in a fire sale?

It's getting TOUGH to keep on top of all of this stuff, but Murray, Heather and Eric are all working on it. Can you tell Paul mailed in his feature from vacation?  Paul - who's been ALL ABOUT ETNs and credit risk, has an incongruous Shariah ETFs feature posted to the site. Pretty funny.

And you know what else is funny (well that may not be the word)?  Our own Heather Bell was WORKING at Lehman just a year ago.  Nice timing, Heather.  You're like one of those people who missed their flight that crashed & are interviewed on TV. "We forgot our passport, and got caught in some traffic and JUST missed the deadline at the counter..."

MUCH funnier is the email I got THIS MORNING from Institutional Investor.  Are you serious?  Here is the email:

Lehman Is Tops In Fixed Income
Adding 12 team positions in High Yield sectors, Lehman Brothers finishes with 47, 11 more than second-place JPMorgan, to lead the All-America Fixed-Income Research Team for a ninth straight year.

Release Schedule
Day 1 Wednesday, September 10, 2008 - Structured Securities
Day 2 Thursday, September 11, 2008 - Strategy & Economics
Day 3 Friday, September 12, 2008 - Investment Grade
Day 4 Monday, September 15, 2008 - Emerging Markets
Day 5 Tuesday, September 16, 2008 - High Yield

I'm leaving the link in there, just to prove that the email was real.

Apparently, crazy markets make for humorous situations generally, because I saw the following ad on the Wall Street Journal last night. Right next to an article talking about the bailout of AIG was an ad from iPath promoting four AIG-linked ETNs. They must have set it up for keyword AIG...and yesterday it became "marketing gone wild"

Other bric a brac from yesterday's meltown.  LOTS of panicked emails and some interesting data.  Here's a sampling.

Here's the daily factoid piece from Dow Jones about the Dow, reprinted in full:

Dow Jones Industrial Average

• The DJIA, down 504.48 points, or -4.42%, to close at 10917.51  

• Fell for the second straight day.

• At its high, the DJIA reached 11416.45.    

• At its low, the DJIA dipped to 10917.51.   

• Biggest point drop since the first day of trading after 9-11 (September 17, 2001).

• Biggest percentage drop since July 19, 2002.

• This is the sixth biggest point drop in the DJIA's history.

• Lowest close in over two years, since July 21, 2006.

• It has dropped 3247.02 points, or -22.92%, from its record close of 14164.53, hit on October 9, 2007.    

• It has dropped -16.39% from its 2008 close high of 13058.20, hit on May 2.    

• Month-to-date, the DJIA is down -5.42%. In August, it closed up 1.45%.     

• Year-to-date, it is down -17.70%.

• Down 19% from 52 weeks ago.

And FTSE sent me this information about a presentation  on 5 things that need to happen for us to avert disaster:

Scott Rothbort, finance professor at Seton Hall University's Stillman School of Business and president of LakeView Asset Management, has national media experience and is available today for interviews on the financial crisis. Seton Hall is only 14 miles from NYC. He can be contacted at his office [phone], his cell [phone] or via e-mail at [e-mail] e-mail address is being protected from spambots. You need JavaScript enabled to view it or [e-mail] e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Rothbort believes these five actions that must happen right now:

1. ECB CUTS RATES-- These jokers are still fighting inflation while the banking system burns.
2. FOMC TO CUT RATES-- Why wait for the meeting later this week. Do it now.
3. SEC TO REINSTITUTE UPTICK RULE-- Face it. The removal of the uptick rule was a failure. We need to go back to pre-2007 uptick rules.
4. FASB TO REPEAL FAS 157-- If the housing market was a proximate cause of the financial problems, then this was the gasoline which was tossed on the proximate cause.
5. REG T TO BE RELAXED FOR EQUITY INVESTORS-- Relax Regulation T on a temporary basis so that the initial and maintenance margins for equities are 40% and 20%, down from 50% and 30%.

Rothbort, an investment advisor, previously held many high-level positions at Merrill Lynch, Morgan Stanley and County Nat West Securities.

And while we're at it, emailed from the "CMPS Institute":

Hurricane Wall Street: Four Steps Consumers Can Take to Protect Themselves

Ann Arbor, MI September 15, 2008 - "With Wall Street engulfed in the biggest financial crisis in a generation, there are a few things that consumers can do to protect themselves from this perilous storm," said Gibran Nicholas, Chairman of the CMPS Institute, an organization that certifies mortgage bankers and brokers. 

#1 - Make Sure Your Investments Are Protected Through the SIPC

The Securities Investor Protection Corporation (SIPC) was created in 1970 as a non-profit, non-government organization funded by its members: broker-dealers that trade in stocks, bonds, mutual funds and other investments in the financial markets. The primary role of the SIPC is to return funds and investments to investors if the broker-dealer holding these assets becomes insolvent. "The SIPC does not cover you if the value of your investments goes down," said Nicholas. "The SIPC makes sure that you recover the assets in your investment accounts if your stock brokerage firm or the financial institution where you hold your investment account goes bankrupt. For example, if you have an account at Lehman Brothers or any other financial institution that goes bankrupt, the SIPC will make sure that you recover the assets you hold in the investment account. However, if the stocks or other investments that you hold in your investment accounts have lost value due to a decline in stock prices or market conditions, the SIPC will not reimburse you for the lost value of your investments."

SIPC coverage is limited to $500,000 per customer, including up to $100,000 for cash. "This does not mean that you will only recover $500,000 worth of your account," said Nicholas. "Under virtually all circumstances, you will recover the full amount as part of the unwinding and liquidation of the brokerage firm." If sufficient funds are not available in the firm's customer accounts to satisfy all the claims, the reserve funds of the SIPC are used to supplement the distribution, up to a ceiling of $500,000 per customer, including a maximum of $100,000 for cash claims. Additional funds may be available to satisfy the remainder of customer claims after the cost of liquidating the brokerage firm is taken into account. According to the SIPC web site, it typically takes one to three months for investors to recover their property from an account at a failed brokerage firm.

SIPC covers stocks, bonds, mutual funds and other securities registered with the Securities and Exchange Commission [SEC], which is the government agency that oversees the SIPC. The SIPC does not cover unregistered investments such as commodity futures contracts or commodity options. In response to the impending collapse of Lehman Brothers yesterday, the SEC issued a press release specifically indicating that it is taking actions to ensure that those who have accounts at Lehman Brothers will recover the assets in their accounts in the event that Lehman becomes insolvent.

#2 - Make Sure All Your Bank Accounts Are Covered with FDIC Insurance

The Federal Deposit Insurance Corporation (FDIC) is an independent federal agency that was created in 1933 to insure bank depositors and protect them against the failure of their bank. The current limit on FDIC insurance is $100,000 for bank accounts and $250,000 for retirement accounts. "You should make sure that all deposits over the limit are held in separate accounts owned by different individuals or entities," said Nicholas. "This means that if you are married with two children, you can have one account in your name, one account in the name of your spouse and one account each in the names of your two children, all with the maximum of $100,000 in deposits, and you would still be fully insured for the full $400,000." 

Additionally, if you have a corporation or limited liability company (LLC), your business can also have an account at that same bank and it will also be insured up to the $100,000 limit. The only caveat is that the company must be engaged in an "independent activity," meaning that the entity is operated primarily for some purpose other than to simply increase your insurance coverage. When two or more insured banks merge, the deposits from the assumed bank continue to be insured separately for at least six months after the merger. This grace period gives you the opportunity to restructure your accounts, if necessary.

If your deposits at one bank exceed the FDIC limits, it's advisable to move the money and open up some new accounts at other banks that are not affiliated with one another and that are not owned by the same parent company. Additionally, you may consider asking your bank if they participate in the CDARS^® network. CDARS^® stands for Certificate of Deposit Account Registry Service^®, and it is offered by nearly 2,500 financial institutions across the country. When you place a large deposit with a financial institution that is part of the CDARS network, the financial institution uses CDARS to place your funds into certificates of deposit issued by other banks in the network. This occurs in increments of less than $100,000 to ensure that both principal and interest are eligible for full FDIC insurance.

#3 - Max Out Your Home Equity Line of Credit Before Your Lender Cuts Off the Limit

"Lenders have been arbitrarily reducing credit limits on home equity lines of credit," said Nicholas. "If you still have credit available on your home equity line, it could be very beneficial for you to draw out the money now before the lender reduces your limit. In this environment, it's probably a safer bet to have the cash sitting in your FDIC-insured bank account in case you lose your job or in case you need the funds for any other reason."  

#4 - Stop Making Extra Mortgage Payments and Take Out a Mortgage Even If You Don't Need One

"Cash is king in a liquidity crunch," said Nicholas. "The worst thing you can do in this environment is dump more of your cash into your home equity because you may not be able to get access to it if you run into financial difficulties, if the housing market continues to decline, or if the credit crunch gets worse.  Although it sounds counter-intuitive, you should have as big a mortgage as possible - even if you don't need it - and leave as much cash as possible in a safe, liquid place that is readily available to you. This empowers you to weather the storm and also have your funds available to take advantage of bargain opportunities that are becoming available because others have not followed this advice. In this environment, the one with the most cash wins."

Is all of that sensible advice? "Max out your home equity line of credit before your lender cuts off the limit"? Now that is something they did NOT teach me in my high school personal finance class.

And what does "CMPS Institute" stand for? Certified Mortgage Planning Specialist Institute.