Portfolio Manager's Commentary
October 2008

Listed below are some actions by the FED, Treasury, SEC, FDIC etc. that will improve the financial system.

1. On October 8th, in a very important coordinated move with the European Central Bank and the Bank of England, the FED cut the federal funds rate to 1.5% from 2.0% to spur the economy and provide more liquidity.

2. On October 7th, the FED and Treasury moved to guarantee commercial paper in the open market by creating the Commercial Paper Funding Facility (CPFF).

3. Various indicators of liquidity, while still near record levels, showed signs of improvement on October 7th suggesting the government's actions may be having an effect.

4. On October 3rd, the government passed the Emergency Economic Stabilization Act of 2008 (rescue) which will allow for the purchase of $700 billion in bad assets.

5. On October 3rd, the FDIC temporarily raised deposit insurance to $250,000 through 2009.

6. On Tuesday, September 30th, The SEC eased "mark to market" accounting rules that have wreaked havoc on banks, mortgage lenders, and the housing sector.

7. On September 29th, the FDIC arranged help for Wachovia Bank.

8. The FED approved the conversion of investment banks Morgan Stanley and Goldman Sachs to bank holding companies so that they could have readier access to capital and avoid the fate of Bear Stearns and Lehman Brothers.

9. On September 19th, the Treasury offered temporary insurance (similar to FDIC insurance on deposit accounts) on money market funds after the Reserve Primary Fund "broke the buck."

The FED, Treasury, SEC, and FDIC have a number of other tools they can utilize to further stabilize the financial system.

1. The Treasury could use Fannie Mae and Freddie Mac to lower conforming mortgage rates to make houses more affordable. The 30-year Treasury Yield is 4% while mortgage rates are still 6% leaving plenty of room to cut.

2. The SEC could be more aggressive in relieving mark-to-market pressure on banks and insurance companies.

3. The FED could now pay interest on excess bank deposits and can increase the rate it pays to attract more deposits and then invest at a higher rate in commercial paper. The FED could publicize its massive new power and, if necessary, can profitably invest in municipal paper or other asset classes with no real limits. This FED expansion would imply growth and inflation, not deflation.