by Calculated Risk on 12/13/2007 04:33:00 PM

From CFO.com: Employees Raiding 401(k)s, CFOs Say (hat tip Lyle)

The latest Duke University/CFO Magazine Global Business Outlook Survey, which polls 573 finance chiefs in the U.S. and 1,275 globally, finds that year-end employee bonuses will fall by 10 percent this year compared to 2006. That decline could be especially painful at a time when more employees are dipping into their retirement accounts in order to pay bills.

The survey finds that nearly 20 percent of companies have seen increased hardship withdrawals from 401(k) accounts, often to cover mortgage payments or to avoid personal bankruptcy.

"In the last four or five months we have seen an absolute onslaught of people trying to do hardship withdrawals and loans out of 401(k)s," Mark Anderson, CFO of Granite City Electric, told CFO magazine in October. "What has happened with housing and the economy has really blown up for people at the lower end of the spectrum."

CFOs attribute the 401(k) withdrawals to the effects of the shaken credit markets and higher costs of living, among other reasons. Those concerns have affected companies from top to bottom. Nearly a third of CFOs polled in the survey said their firms have been directly hurt by credit conditions.

This article is from last week. With home equity extraction slowing, consumers are turning to other sources for cash, like credit cards and 401(k) withdrawals. Whatever the source, it appears - at least in November - that they are still spending.

by Calculated Risk on 12/13/2007 12:31:00 PM

From the Fed weekly report on commercial paper this morning, here is the discount rate spread:

Click on graph for larger image.

Worse than August.

Worse than 9/11.

UPDATE: A simple explanation of this chart: This is the spread between high and low quality 30 day nonfinancial commercial paper.

What is commercial paper (CP)? This is short term paper - less than 9 months, but usually much shorter duration like 30 days - that is issued by companies to finance short term needs. Many companies issue CP, and for most of these companies the risk of default is close to zero (think companies like GE or Coke). This is the high quality CP. Here is a good description.

Lower rated companies also issues CP and this is the A2/P2 rating. Correction: This doesn't include the Asset Backed CP - that is another category and is even at a higher rate (see commercial paper table).

The spread between the A2/P2 and AA paper shows the concern of default for the A2/P2 paper. Right now the spread is indicating that "fear" is very high. It is actually very rare for CP defaults, but they do happen (see table 5 in the above Fed link).

by Calculated Risk on 12/13/2007 11:48:00 AM

From Jonathan Weil at Bloomberg: CIBC's Big Subprime Secret Might Cost Billions (hat tip Justin)

CIBC last week [said some company] is insuring $3.47 billion, or about a third, of the collateralized- debt obligations it holds that are tied to U.S. subprime mortgages.

The [insurer]'s identity matters because the bank said these hedged CDOs were worth just $1.76 billion at Oct. 31, down almost half from their face amount. If the guarantor goes poof, CIBC loses its hedge on these derivative contracts. And the Toronto-based bank would have to recognize the loss, which is growing.

If ACA is the insurer, this would be bad for CIBC ... ACA Financial ... had $425.5 million of statutory capital at Sept. 30 and $1.1 billion of so-called claims-paying resources to back its guarantees -- for all its customers. That's not enough to cover the CDOs in question at CIBC.

Weil is speculating that ACA is the counterparty to CIBC, but it does seem likely.

I've also been told that on the Lehman conference call this morning, a Lehman executive said (paraphrased by source) that they "don’t have visibility into--and can’t count on--some counterparties so they have bought CDS’s to hedge that exposure."

by Calculated Risk on 12/13/2007 11:33:00 AM

From Financial News: HBOS pain takes UK bank writedowns to £2bn in a week (hat tip Barley)

HBOS has become the fourth UK lender in a week to announce a multi-million pound writedown on the back of the turmoil in global credit markets, taking the total written off by UK banks in the last seven days to almost £2bn (€4bn).

The bank this morning said it wrote down £520m on its investments, three days after Lloyds TSB revealed a £200m hit on its own portfolio and a week after Royal Bank of Scotland reduced the value of its assets by £950m as a result of its exposure to US sub-prime.

Northern Rock continued to add to the woes of the UK banking sector, saying this morning it had written down its collateralised debt obligation portfolio by £281m.

And the beat goes on ...

by Calculated Risk on 12/13/2007 11:00:00 AM

Click on graph for larger image.

Office vacancy rates have spiked in California's Inland Empire and Orange County according to the USC Lusk Center’s Casden Real Estate Economics Forecast.

Jeff Collins at the O.C. Register reports: USC sees vacancies chilling O.C. office rents in ‘08

Construction of new office buildings and layoffs in the financial services and mortgage industries will keep office vacancies high in Orange County through 2008, halting the upward spiral of lease rates, according to the USC Lusk Center’s Casden Real Estate Economics Forecast.

But despite a slight slowdown in sales and rent increases, industrial real estate should remain strong next year, with continued low vacancies, added Delores Conway, director of the Casden Forecast.

Tighter credit, almost no job growth, and falling consumer confidence is leading to a lot of uncertainty, Conway explained. But the slowdown will amount to “a short-term adjustment,” even in the office sector.

Note that the Casden Forecast doesn’t expect a recession next year.

by Calculated Risk on 12/13/2007 09:15:00 AM

From CoStar: TROUBLE IN TEXAS: Huge Multifamily Owner Nears Collapse (hat tip Nick)

MBS Cos., one of the largest multifamily property owners in the country, is delinquent, in default or in danger of becoming so, on more than $900 million in loans.

... if MBS defaults, it ... will ... generate a huge spike up in CMBS delinquencies, expected to be reported this week or next.

PNC Financial Services Group originated almost all of the loans made to MBS Cos., about 90% of MBS's total loan exposure. Most of those loans are no longer on PNC's books because they were off-loaded into commercial mortgage backed securities (CMBS) ...

As of last month, Smuck-affiliated companies had as many as 65 other loans totaling more than $900 million spread across 36 CMBS deals. Most of the loans were taken out since 2000, some as recently as this year. Nearly two-thirds of those were reported to be at least 30 or more days delinquent ...

by Calculated Risk on 12/13/2007 09:05:00 AM

From MarketWatch: Retail sales rise across the board in November

U.S. retail sales rose sharply in November, pushed higher by rising gasoline prices, the Commerce Department reported Thursday.

The early Thanksgiving holiday, which allowed for more Christmas shopping, may have played a role in the strong showing.

Auto sales were the only area of weakness in November.

Retail sales rose 1.2% in November after rising 0.2% in October. This is the strongest sales pace since May. Retail sales are up 6.3% in the past 12 months.
...
In a separate report, the Labor Department said producer prices jumped 3.2% in October, the largest since 1973 and the core rate rose 0.4%. See full story.

by Calculated Risk on 12/12/2007 07:55:00 PM

Here are the Kennedy-Greenspan estimates (NSA - not seasonally adjusted) of home equity extraction for Q3 2007, provided by Jim Kennedy based on the mortgage system presented in "Estimates of Home Mortgage Originations, Repayments, and Debt On One-to-Four-Family Residences," Alan Greenspan and James Kennedy, Federal Reserve Board FEDS working paper no. 2005-41.

Click on graph for larger image.
For Q3 2007, Dr. Kennedy has calculated Net Equity Extraction as $133.0 billion, or 5.2% of Disposable Personal Income (DPI). Note that net equity extraction for Q2 2007 has been revised upwards to $159.2 billion.

This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, both in billions of dollars quarterly (not annual rate), and as a percent of personal disposable income. MEW was still strong in Q3 2007, even with tighter lending standards.

As homeowner equity declines sharply in the coming quarters - household real estate equity declined $128 Billion in Q3 - combined with tighter lending standards, equity extraction should decline significantly and impact consumer spending.

by Calculated Risk on 12/12/2007 05:22:00 PM

From Bloomberg: Security Capital's AAA Rating May Be Cut by Fitch (hat tip Brian)

Security Capital Assurance Ltd. may lose its AAA credit rating at Fitch Ratings ...

The company's capital is at least $2 billion below what it needs to retain the AAA, Fitch said. SCA has four to six weeks to come up with ``firm capital commitments'' to meet the guidelines, or the rating will fall two levels to AA, Fitch said.
...
Security Capital is among seven AAA rated bond insurers that have been probed by Moody's Investors Service, Standard & Poor's and Fitch Ratings for the past month after declines in the credit quality of the securities they guarantee.

by Calculated Risk on 12/12/2007 02:55:00 PM

This morning, Tanta mentioned that the House was considering Cram Downs.

Now from the AP: House Panel Approves Bankruptcy Bill (hat tip Branden)

... House lawmakers on Wednesday advanced legislation that would enable homeowners to shrink their mortgages in bankruptcy court.

The bill ... was passed by the House Judiciary Committee 17 to 15 ...

House leaders appeared unlikely to bring the bill up for a vote before year-end. ...

Mortgage-industry leaders argue that giving judges this power, which they term a "cramdown," would force lenders to charge higher rates to offset any unpaid loan balances that would be reduced in court.