by Calculated Risk on 8/09/2007 08:40:00 PM

Countrywide Financial Corporation (CFC) filed their 10-Q today with the SEC. Since CFC is the largest mortgage lender in the U.S. it is worth reading their outlook. Here are a few recommended sections:

Outlook

Near the end of the second quarter and shortly thereafter, market demand for the securities that we create in our loan securitization activities was negatively affected by investor concern about credit quality and demand for higher yields. As a result of these changes, we expect in the short term to retain more loans in our portfolio of loans held for investment or to hold additional loan or security inventory until market conditions improve.

Similarly, during the third quarter, funding liquidity to mortgage companies became constrained. We believe we have adequate funding liquidity to accommodate these marketplace changes in the near term; however, the secondary market and funding liquidity situation is rapidly evolving and the potential impact on the Company is unknown. Continuation of these conditions or further deterioration could result in further reductions in the Company’s funding volume. Our strategy of retaining a larger portion of loans or securities may impact our gain on sale margins in the short-term.

Prospective Trends

We believe the current environment of rapidly changing and evolving markets will provide increasing challenges for the financial services sector, including Countrywide. Specifically, in the near term, we may experience:

· Continued pressure on housing values and mortgage origination volumes

· Increasing delinquencies and foreclosures

· Continued disruptions in the secondary mortgage and debt capital markets and

· More restrictive legislative and regulatory environments.

Under Risk Factors, CFC has added a new risk:

Debt and secondary mortgage market conditions could have a material adverse impact on our earnings and financial condition

We have significant financing needs that we meet through the capital markets, including the debt and secondary mortgage markets. These markets are currently experiencing unprecedented disruptions, which could have an adverse impact on the Company’s earnings and financial condition, particularly in the short term.

Current conditions in the debt markets include reduced liquidity and increased credit risk premiums for certain market participants. These conditions, which increase the cost and reduce the availability of debt, may continue or worsen in the future. The Company attempts to mitigate the impact of debt market disruptions by obtaining adequate committed and uncommitted facilities from a variety of reliable sources. There can be no assurance, however, that the Company will be successful in these efforts, that such facilities will be adequate or that the cost of debt will allow us to operate at profitable levels. The Company’s cost of debt is also dependent on its maintaining investment-grade credit ratings. Since the Company is highly dependent on the availability of credit to finance its operations, disruptions in the debt markets or a reduction in our credit ratings, could have an adverse impact on our earnings and financial condition, particularly in the short term.

The secondary mortgage markets are also currently experiencing unprecedented disruptions resulting from reduced investor demand for mortgage loans and mortgage-backed securities and increased investor yield requirements for those loans and securities. These conditions may continue or worsen in the future. In light of current conditions, we expect to retain a larger portion of mortgage loans and mortgage-backed securities than we would in other environments. While our capital and liquidity positions are currently strong and we believe we have sufficient capacity to hold additional mortgage loans and mortgage backed securities until investor demand improves and yield requirements moderate, our capacity to retain mortgage loans and mortgage backed securities is not unlimited. As a result, a prolonged period of secondary market illiquidity may reduce our loan production volumes and could have an adverse impact on our future earnings and financial condition.

by Calculated Risk on 8/09/2007 05:15:00 PM

From MarketWatch: S&P: 76 ratings on 19 U.S. cash-flow, hybrid CDOs may be cut (hat tip Gary)

Standard & Poor's Ratings Services on Thursday placed ratings on 76 tranches from 19 U.S. cash-flow and hybrid collateralized debt obligation transactions on creditwatch with negative implications. The affected tranches have a total issuance amount of $2.16 billion, the agency said.

It seems the pace of the Negative Watch or downgrade stories is picking up.

by Calculated Risk on 8/09/2007 03:03:00 PM

From MarketWatch: Big liquidation triggers hedge fund turmoil (hat tip barely and Gort)

The liquidation of a big hedge fund or investment bank trading portfolio is causing havoc in some parts of the hedge fund business, according to managers and investors.

Black Mesa Capital, a hedge fund firm that uses computer models to track down investment ideas, has told investors that at least one very large hedge fund or investment bank is liquidating "massive" trading portfolios, according to a letter the Santa Fe, NM-based firm sent to investors on Wednesday.

That's causing disruptions and triggering big losses among other so-called market-neutral hedge funds, Black Mesa said in its letter, a copy of which was obtained by MarketWatch on Thursday.

"Clearly, something is amiss in the markets that few in our strategy, if anyone, have experienced before," Black Mesa's managers Dave DeMers and Jonathan Spring wrote. DeMers declined to comment on Thursday.

The firm's hedge fund, which has about $1.9 billion in long positions and $1.9 billion in short positions, is down roughly 7.5% this month through Aug. 7. It could be down as much as 10% since then, Black Mesa noted.

From the WSJ: Blind to Trend, 'Quant' Funds Pay Heavy Price

Global Alpha, Goldman's widely known internal hedge fund, is now down about 16% for the year after a choppy July, when its performance fell about 8%, according to people briefed on the matter. The fund, based in New York, manages about $9 billion.

The fund's traders in recent days have been selling certain risky positions, according to these people. Early this week, those moves sparked widespread rumors on Wall Street that the entire fund might be shut down. A Goldman spokesman has said the rumors are "categorically untrue."

Campbell & Co., an $11 billion hedge fund that trades in the futures market as well as in stocks and bonds and is completely driven by such computer programs, was down 10% to 12% by the end of July.

From the WSJ: Second Goldman Hedge Fund Moves to Sell Some Positions

A second Goldman Sachs Group Inc. hedge fund has hit a rocky patch and has sold down some of its positions, according to a person familiar with the matter.

Goldman's North American Equity Opportunities hedge fund had $767 million under management earlier this year. The Fund was down over 15% this year, through July 27, according to investors and was down more than 11% in July alone. It is not known how much the fund has sold in recent days.
...
Tykhe Capital, a New York hedge-fund firm that manages about $1.8 billion, has suffered losses of about 20% so far in August, and is moving quickly to trim its investment positions, according to an investor in the firm briefed by Tykhe executives. The selling by Tykhe and a range of similar hedge funds is putting pressure on the holdings of a number of funds.

by Calculated Risk on 8/09/2007 12:02:00 PM

Quote added (hat tip dis):

So, today the monetary base in the North Atlantic economies is 7% higher than it was yesterday--an annualized growth rate of 2100% per year.

This is indeed a significant liquidity event...
Professor DeLong, August 9, 2007

From the WSJ: Fed Enters Market To Tamp Down Rate

The scramble for liquidity in Europe spilled over into the U.S. The federal funds rate, the rate at which banks make overnight loans to each other, was between 5.375% and 5.5% in early trading in New York, analysts said, well above the Federal Reserve's 5.25% target.

The Fed, in an effort to get the funds rate back down and meet the spike in demand for cash, lent $24 billion through its open market operations. It did so through two operations: A 14 day "repo," the name for an operation that adds reserves to the banking system and alleviates upward pressure on rates, and an additional $12 billion through an overnight repo. It is common for the Fed to do the two types of operations, but analysts said the amount added was relatively high, exceeding what it would have injected to cover expiring repos.

From the WSJ: ECB Injects €94.8 Billion To Ease Jittery Markets

Mounting fears that the U.S. subprime crisis is spreading to Europe prompted the European Central Bank to loan €94.841 billion ($130.2 billion) in emergency funds to European banks this morning, the first time it has taken this type of action since just after the terrorist attacks of Sept. 11, 2001.

Concern that European banks face growing losses on investments linked to U.S. mortgages shot the euro zone's overnight borrowing rates to 4.7% today, their highest since October 2001 and well above the ECB's benchmark financing rate of 4%.

From Bloomberg: Bank of Canada Says It Will `Provide Liquidity' to Aid Markets

The Bank of Canada said it will ``provide liquidity'' to support financial markets, the same day the European Central Bank lent money to ease a credit crunch that started with the U.S. subprime mortgage collapse.

The Ottawa-based central bank will ``support the stability of the Canadian financial system and the continued functioning of financial markets,'' ...

by Calculated Risk on 8/09/2007 10:49:00 AM

From MarketWatch: Consumers spent less as economic worries weighed

Retailers struggled ... in July as shoppers spent less while they grappled with economic anxieties and volatility that has rocked financial markets.

With nearly all of the nation's major retailers reporting sales results to the International Council of Shopping Centers, the cumulative gain stands at 2.6%, according to Thursday's data.

... the early results suggest that consumers across the board are far more concerned about credit and financing woes sparked by the slowdown in the U.S. housing market and the collapse of the subprime mortgage business.

"I had thought that we'd have a number that was better than this," said ICSC chief economist Mike Niemira. "Certainly the macroeconomic slowdown that we've seen since last summer has taken its toll on consumer spending -- directly through the housing channel and indirectly through the home-value concerns."

This is our first look at July retail sales. Following the sharp slowdown in the growth of Personal Consumption Expenditures (PCE) in Q2 - that many analysts blamed on gasoline prices - it will be interesting to see if consumer spending is slow in Q3 too.

The Census Bureau is scheduled to release the July advance monthly retail sales on Monday, August 13th.

by Anonymous on 8/09/2007 09:15:00 AM

I wish to observe that I have never advocated frittering away one's valuable productivity on reading those silly blogs on one's employer's time, on one's employer's equipment. You owe it to your employer to stick to Bloomberg.

That said, I get emails periodically from unnamed persons whose employers seem to be blocking access to all blogspot.com sites. I have been asked if there is any "work-around" for this. I know of none, but I love the idea of working around the the work rules for work-avoidance so that you can read a blog that is, as our commenters frequently point out, a lot of work to read, so I thought I'd open a thread for those of you who haven't alienated your IT people yet to possibly propose solutions.

My first idea was just to go the Sys Admin and show some leg, but I gather that doesn't work for everyone.

by Anonymous on 8/09/2007 08:47:00 AM

Says the MBA-in-Chief:

For his part, Mr. Bush, in a verbal tour of the current economic scene, was eager both to calm the markets and knock down the Democratic calls for the administration to intervene, predicting that the turmoil in the housing sector would end with a “soft landing” and would not damage the larger economy.

“I believe that markets ultimately look at the fundamentals of any economy,” Mr. Bush said. “And the fundamentals of our economy are strong. Inflation is down. Real wages are increasing. The job market is a strong job market. People are working. Small businesses are flourishing.”

Mr. Bush, who has a master’s degree in business administration from Harvard, confidently used phrases like liquidity, risk assessment and market adjustment to describe complex economic conditions.

Asked about collapsing housing markets, and the risk of them declining further, Mr. Bush said: “In a way it’s a necessary reaction to a flood of liquidity that came into the market in the past couple years.” That was financial jargon referring to the past several years of easy money, some of it from overseas, at low interest rates.

Mr. Bush said that as a result of the deep pools of money available, “housing got really hot” and that a decline was inevitable. He added that “if the market functions normally” it will lead to a soft landing. “That’s kind of what it looks like so far,” he contended.

by Anonymous on 8/09/2007 07:49:00 AM

From Bloomberg:

Aug. 9 (Bloomberg) -- The European Central Bank said it will launch an unlimited fine-tuning operation today to add liquidity at 4 percent after demand for cash in the European money market drove interest rates higher. . . .

Money-market traders are reporting a reluctance to lend money after concern over U.S. subprime mortgage losses roiled credit markets. That pushed overnight rates to as high as 4.7 percent today, compared with the ECB's benchmark refinancing rate of 4 percent.

``The underlying issue here reverts back to something we have mentioned before in that no one really knows how big the current credit problems are,'' said Charles Diebel, head of European rate strategy at Nomura International Plc in London in a note e-mailed after the ECB announced it's liquidity providing operation. ``This is undermining confidence in the system as a whole and hence the reaction this morning.''

BNP Paribas SA, France's biggest bank, halted withdrawals from three investment funds today because it couldn't ``fairly'' value their holdings. BNP joins Bear Stearns Cos. and Union Investment Management GmbH in stopping fund redemptions. Dutch investment bank NIBC Holding NV said today that it lost at least 137 million euros ($188 million) on U.S. subprime investments this year.

``There is a lot of uncertainty in the market about the subprime crisis and which banks may be affected by it,'' said Ina Steinke, a money-market trader at NordLB in Hannover. She added that overnight rates have fallen back to around 4.25 percent. ``Every bank is being suspected now, so no one is willing to lend money to anyone.''

by Anonymous on 8/09/2007 07:31:00 AM

This is the sort of thing that can help drive up the MBA Application Index:

Like Mr. Sanders, Joel Kaufman, president of Pittsburgh National Lending, works primarily with subprime lenders. When he saw problems developing in the subprime market several months ago, his South Side-based company changed its approach to getting customers qualified for loans. In the past, Mr. Kaufman would submit a customer's loan application to a single lender, then submit it to a different lender only if the first one did not work out.

Now, he said, "We like to submit our loans to at least three different lenders" from the outset.

by Calculated Risk on 8/08/2007 06:25:00 PM

Minneapolis Federal Reserve President Gary H. Stern spoke today: Comments on Release of the Nation’s Report Card: Economics 2006

... I regret to note that today we are again witnessing some painful and belated learning, by policy-makers and consumers alike, in our consumer financial markets.

As you are probably well aware, consumers today have access to a wide array of borrowing and savings options. In itself, variety is good, because it expands choice and opportunity. However, variety also fosters complexity, which challenges both consumers in their decision-making and financial regulators in their writing and enforcement of rules.

... I view consumer regulation and consumer education as substitutes. If consumers are more educated and able to make good decisions on their own, regulations can be narrower and more focused on clearly abusive practices such as deceit and fraud.

This is valuable, because as the scope of regulation widens, so does the cost. ...

... In some cases it is necessary and appropriate that we bear these costs in order to prevent even greater abuses elsewhere. However, regulation involves a tradeoff between preventing harm to some and allowing innovation, gains from trade, and free choice for others. At any given time, we write regulations as best we can to balance that trade off. Over time, however, we hope that better economic education will soften the trade off and allow us to rely more on the informed decision-making of consumers and less on formal restrictions.

Stern's subject was economic education. He appears to suggest policy makers overestimated the skills of American consumers, and therefore underestimated the need for more regulation - obviously referring to the housing slump.

This assertion seems absurd.

It was the policy makers who didn't recognize rampant speculation in the housing market. While we joked about "liar loans" here on Calculated Risk, the policy makers were congratulating themselves on the "ownership society". I'd argue home buyers who used no money down option ARMs were making a rational choice: they were balancing the odds of a big payday with little financial risk - if the property continued to appreciate - with the stigma of a foreclosure on their record. Obviously many home buyers felt the stigma was worth the risk. I don't see that as a lack of economic education, rather a rational choice given the circumstances.

But I can't think of a good excuse for the inaction of the policy makers.