Auction-Rate Mess Results in Billion Dollar Settlements

Top financial services giants have been hit with billions of dollars in buy backs after the U.S. Securities and Exchange Commission (SEC) unveiled a major enforcement action following reports of misrepresentation in the institutions' marketing and sales of securities. Citigroup agreed this week to buy back about $7 billion of auction-rate securities it sold to its customers in addition to $100 million in penalties to settle charges that were pending. Within the same week, the Swiss bank UBS reached a $19.4 billion agreement along with $150 million in fines.

Merrill Lynch agreed to buy back an estimated $12 billion in auction-rate securities from its clients over a one-year period commencing on Jan. 15, 2009. Bank of New York Mellon Corp. is currently under investigation while Bank of America received subpoenas from various state and federal regulators. Citigroup, Inc. (C) closed this week at $19.39. UBS Ag. (UBS) closed this week at $21.15. Bank of New York Mellon Corp. (BK) closed this week at $37.45. Bank of America Corp. (BAC) closed this week at $32.25.

Malaysia to Enjoy Krispy Kremes in the Near Future

Krispy Kreme Doughnuts, Inc. announced that it has entered into a franchise agreement with Berjaya Krispy Kreme Doughnuts in Malaysia for the development of approximately 20 Krispy Kreme retail shops over the next five years. Berjaya Krispy Kreme Doughnuts Sdn Bhd is a 70%-owned subsidiary of Berjaya Corp. Berhad, or BCorp. Berjaya currently holds the Starbucks, Wendy's, Kenny Rogers Roasters and Papa John's Pizza franchises in Malaysia.

Krispy Kreme can now be found in 14 countries, including Australia, Kuwait, the Philippines, Qatar, the Kingdom of Saudi Arabia, the United Arab Emirates and the United Kingdom. Krispy Kreme went public in 2001. While it experienced early success, the doughnut maker has struggled with accounting problems, diet trends and other issues. Krispy Kreme Doughnuts Inc. (KKD) closed this week at $4.24. Berjaya Corporation Bhd. (BRYAF) closed this week at $0.21.

Fannie Mae's Grim Quarter Results

Fannie Mae reported a net loss of $2.3 billion or $2.54 per share in the second quarter of 2008, compared with a first quarter 2008 net loss of $2.2 billion or $2.57 per share. Results were driven primarily by an increase in the provision for credit losses that more than offset higher revenue and fair value gains. The mortgage-buyer giant followed the heels of its smaller sibling, Freddie Mac, earlier this week in slashing its quarterly dividends.

Bleak conditions at both mortgage companies have prompted the government to be ready for a bailout if it becomes necessary. Under a housing bill signed by President Bush on July 30th, the Treasury may extend an unlimited line of credit to both companies in addition to buying their stock if their capital levels are determined to be too low. Fannie Mae (FNM) closed this week at $9.05. Freddie Mac (FRE) closed this week at $5.90.

The Dow started the week at 11,326 and closed at 11,734. The NASDAQ began the week at 2,310 and finished at 2,414. The S&P 500 started at 1,260 and ended at 1,296.

Market Losses and Unemployment Affect Treasurys

Treasurys headed for a second straight weekly gain as traders predicted that falling employment and further credit-market losses will keep the Federal Reserve from raising interest rates this year. Traders now see a 35% chance that policy makers will raise interest rates by year-end, compared with a 65% likelihood a week ago. Oil touched a three-month low below $116 today, easing concern that inflation will accelerate.

Yields on 10-year notes and 30-year bonds held near the lowest since mid-July after the government sold a combined $27 billion of the securities in quarterly auctions. Traders' expectations for inflation over the next decade fell to the least in almost five years as oil dropped to the lowest since May. Yields on Treasurys whose payments are tied to inflation slowed.

The 10-year Treasury note began the week at 3.95% and finished at 3.95%. The 30-year Treasury bond began at 4.57% and finished at 4.56%.

Housing Market Results in Flat Long-Term Rates

This week's Primary Mortgage Market Survey from Freddie Mac showed the 30-year fixed-rate mortgage (FRM) averaged 6.52% for the week ending August 7, 2008, unchanged from last week when it averaged 6.52%. Last year at this time, the 30-year FRM averaged 6.59%. The 15-year FRM this week averaged 6.10%, up from last week when it averaged 6.07%. A year ago at this time, the 15-year FRM averaged 6.25%.

"The housing market is continuing to act as a drag on the economy," said Frank Nothaft, Freddie Mac Vice President and Chief Economist. "Mortgage applications for home purchases in the past few weeks fell to the slowest pace since the week ending February 21, 2003, according to the Mortgage Bankers Association. Finally, although showing some initial signs of improvement, the inventory of unsold homes remains at historically high levels."

The 30-year loan rate started at 6.26% and finished at 6.46%. The 15-year loan began at 5.84% and finished at 5.99%. The money market fund began at 2.46% and finished at 2.44%. The $10,000 money market fund started at 2.68% and finished at 2.64%. The 1-year CD started at 3.58% and finished at 3.61%.