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Al's Morning Meeting

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Al Tompkins
Story ideas that you can localize and enterprise. Posted by 7:30 a.m. Mon-Fri.
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A dozen sites
I'm diggin'


*1. The Electronic Frontier Foundation has outlined how the IRS uses social media in investigations.

2. What's with all the Google anti-trust lawsuits?

*3. The Washington Post reports on why TV reporters have to be  Jacks of All Trades now.

*4. Look at this list of expenses that you might think are tax deductible, but aren't.

5. The number of U.S. millionaires rose 16 percent last year.

6. Find out why there will be a national Eggo waffle shortage until summer.

7. The New York Times explains how women in the work force helped save Social Security.

8. Here are some great databases that newsrooms have created to help connect people with their community.

*9. Watch this online interactive story of the death of journalist Arthur Kasherman.

10. CBS Radio News' Peter King explains how he broadcast from Haiti in the early days after the quake.

11. Find out how healthy your county is.

12. Levelcam lets you stabilize your handheld video.

All of my Diggin' sites are saved on Poynter's del.icio.us page.

EDITOR'S NOTE: Al's Morning Meeting is a compendium of ideas, edited story excerpts and other materials from a variety of Web sites, as well as original concepts and analysis. When the information comes directly from another source, it will be attributed and a link will be provided whenever possible. The column is fact-checked, but relies on the accuracy and integrity of the original sources cited. We will correct errors and inaccuracies when we become aware of them.


"Bank Liquidity" and Why It Sent a Shock Through Wall Street
When the stock markets open Monday, no doubt you will hear the term "bank liquidity" again, just as we did on Friday. Last week, when Bear Stearns announced it had "liquidity" problems, the market dove downward and analysts used that that word as if everybody understands what it means. I doubt they do.

The story is so important that the Fed, in a rare weekend move, dropped a key interest rate Sunday evening by a quarter of a point. That followed an unusual deal to buy out Bear Sterns. What a weekend!

What is liquidity?

Banks and investment firms try to balance between how much money they need on hand to do daily business and how much they have invested -- to make more money.

Think of it like your savings and checking accounts. Your checking account must have enough in it to pay your bills, but you also want to keep money in your savings account to earn interest. You don't want to keep too much in a low- or no-interest checking account, but you do need enough in there to give you the cash you need to function. In a larger way, that is how banks work.

The Federal Reserve Bank explains liquidity this way
:

Bank liquidity refers to a bank's ability to meet its obligations at a reasonable cost when they come due. The point at which a bank becomes illiquid is hard to determine. At that point, the bank may find it difficult, if not impossible, to raise funds quickly at any cost.

Except for failing banks that experience a deposit run, few banks ever reach the point of being totally illiquid. Instead, most banks operate in some middle area, balancing their need for liquidity with their need for earnings. (All else being equal, more liquid assets tend to provide lower returns than do less liquid assets.) Over time, this balance may shift one way or the other depending upon circumstances. What may have been an appropriate level of liquidity when loan demand is low may not be adequate when demand is high. What once may have been a coveted funding source may be displaced by another.

So what caused last week's stock market problems?

MarketWatch said:

Some market participants have been worried about Bear's exposure to the dwindling mortgage business and its holdings of securities backed by home loans.

Dow Jones Newswires reported on the Securities and Exchange Commission's decision to extend emergency funding to Bear Stearns:

SEC officials said in a statement that they had been monitoring Bear Stearns's financial situation on a daily basis in recent weeks, and had no cause for alarm earlier in the week. Bear's holding company capital exceeded regulatory standards at the end of February, and information supplied by Bear Stearns to the SEC on Tuesday showed the holding company had a "substantial capital cushion," according to the SEC. As of that date, the firm had more than $17 billion in cash and unencumbered liquid assets, the SEC said.

"Beginning on that day, however, and increasingly throughout the week, lenders and customers of Bear Stearns began to remove funds from the firm, despite its stable capital position. As a result, Bear Stearns's excess liquidity rapidly eroded," the statement says.

Could Bear Stearns' problems cause further unrest? Yes it could, but that's not certain. Last week, analysts predicted that Bear Stearns would be acquired by another firm, and on Sunday, The Washington Post reported that a deal to do just that had been reached over the weekend:

After a weekend of marathon negotiations in New York and Washington, the central bank undertook a broad effort to prevent key financial players from going under, including the unprecedented offer of short-term loans to investment banks and an unexpected cut in a special bank interest rate.

As part of the deal, J.P. Morgan Chase, a major Wall Street bank, will buy Bear Stearns for a bargain-basement price, paying $2 a share for a venerable institution that still plays a central role in executing financial transactions. Bear Stearns stock closed at $57 on Thursday and $30 on Friday. J.P. Morgan was unwilling to assume the risk of many of Bear Stearns's mortgage and other complicated assets, so the Federal Reserve agreed to take on the risk of about $30 billion worth of those investments.

Posted by Al Tompkins at 6:34 AM on Mar. 17, 2008
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