By MarketWatch
NEW YORK (MarketWatch) — Thursday’s bloodshed on Wall Street took bank stocks down with it, but not as much as you might have expected given their reputation as bottom feeders.
The KBW Philadelphia Bank Index
/quotes/zigman/627445 BKX
-2.68%
was down just 2.77% compared to a 2.9% decline for the S&P 500
/quotes/zigman/3870025 SPX
-3.19%
and 3.3% for the Dow Jones Industrial Average
/quotes/zigman/627449/delayed DJIA
-3.51%
in late-morning trading.
Fed’s lifeline to a struggling housing market
WSJ’s Nick Timiraos reports the Fed’s decision to reinvest payments from mortgages into government-backed mortgage securities signals a renewed effort to help consumers take advantage of interest rates. Photo by David Paul Morris/Getty Images
Perhaps the divergence is because market pessimism has more to do with the Federal Reserve’s negative outlook than its new quasi-stimulus package: “Operation Twist.”
In theory, Operation Twist will lower interest rates for long-term loans to corporations and consumers. The Fed plans to buy more long-term debt, thereby lowering the yield paid on benchmarks.
The upshot is that corporations and consumers will soon be able to take on new debt or refinance at cheaper rates, thereby freeing cash to be spent into the economy. With rates near 4% already, there’s a strong possibility a 30-year-mortgage could fall close to 3%.
So, how would that help banks? Well, it would spur a lot of activity. Fees for refinancing and new lending would be juiced. More bank workers would keep their jobs, not a small side-effect given Bank of America Corp.’s
/quotes/zigman/190927/quotes/nls/bac BAC
-5.02%
announced plans to layoff 30,000 and other layoffs in finance.
Moreover, many homeowners on the edge of being underwater on their home loans would have an opportunity to cut their housing costs. What the banks lose in profit margins — they are currently borrowing for nearly nothing and lending for 4% or more — would potentially be offset by fewer bad loans.
That’s how it’s supposed to work, at least: more money for companies and consumers, give the housing market a goose and doing so without adding much to the Fed’s already bloated balance sheet (printing money).
Of course, the Fed’s moves arguably have had little impact so far. Two rounds of quantitative easing and a bond-buying program have failed to lift borrowing meaningfully or spur the economy.
It’s a twist in that story line that’s needed.
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MarketWatch First Take: The 3% mortgage and the banks
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