Caveat Emptor Bond Investors

Repeat and Remember: when interest rates rise, bond prices generally fall

If You’re a Bond Investor, Beware of the Seesaw - NYTimes.com: " . . . . the S.E.C. has been giving a warning of a different sort. Bearing the general title “Interest Rate Risk,” this latest bulletin is a cry for understanding. It’s about bonds, and for most people, the subject is confounding. The problem isn’t a new scam but a lack of knowledge about how bonds work, which can be dangerous in a time of rising interest rates. In its bulletin, the agency points out that investors need to understand that when rates rise, bond prices generally fall. This inverse relationship is a fact of life in the bond market. Like gravity in the physical world, it’s constant, powerful and important. But outside trading floors, business schools, banks and brokerage firms, bond dynamics are fairly obscure, surveys find. That’s troubling in a time like this, said Lori Schock, director of the agency’s Office of Investor Education and Advocacy. “We’re not predicting what’s going to happen to interest rates or when,” she said, “but we do know that rates can’t go much lower. And we know that they can go a lot higher.”. . ." (read more at link above)

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Big Banks, Bad Mortgages, Caveat Emptor

The American Banker newspaper is reporting that banks may be hiding losses from their shareholders:

The nation’s four largest banks are holding $57 billion of seriously delinquent loans that they’ve been slow to move into foreclosure over concerns that the Federal Housing Administration, the government mortgage insurer, will refuse to cover the losses and hit them with damages, according to industry sources.

The Guarantee That Banks May Fear to Invoke - NYTimes.com: " . . . Rebel Cole, a former Federal Reserve Board economist who is now a professor of finance and real estate at DePaul University in Chicago, says the banks could face heavy losses on the loans because the F.H.A. might refuse to cover them. The article adds: Some lenders acknowledge that they will likely end up eating losses on defaulted loans held on their balance sheets and settlements related to past claims. They are also likely to try to avoid the risk of getting hit with damages by forgoing the FHA claims process and absorbing some losses themselves. . . ." (read more at links above)

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