by Calculated Risk on 3/17/2008 01:14:00 PM

Fortune has a Q&A piece with Professor Krugman: How bad is the mortgage crisis going to get?

Fortune: By year-end, 15 million Americans could have mortgages worth more than the value of their homes. What happens then?

Krugman: Actually, I think home prices will fall enough for us to produce about 20 million people with negative equity. ... if you have negative equity, you can end up being foreclosed on, and then some people will just find it to their advantage to walk away. We're probably heading for $6 trillion or $7 trillion in capital losses in housing. Some fraction of that will fall on owners of mortgages. I still think the estimates people are putting out there - $400 billion or $500 billion in losses - are too low. I think there'll be $1 trillion of losses on mortgage-backed securities showing up somewhere.

Much more in the Q&A.

by Calculated Risk on 3/17/2008 01:01:00 PM

Click on graph for larger image. The NAHB reports that builder confidence was at 20 in March, unchanged from 20 in February.

Here are the individual components.

From NAHB: Builder Confidence Remains Unchanged In March

Builder confidence in the market for new single-family homes remained unchanged in March, according to the latest NAHB/Wells Fargo Housing Market Index (HMI), released today. The HMI held firm at 20, which is near its historic low of 18 set in December of 2007 (the series began in January of 1985).
...
Two out of three of the HMI’s component indexes were unchanged in March from the previous month. The index gauging current sales conditions for newly built single-family homes held firm at 20 while the index gauging traffic of prospective buyers stayed at 19 following a significant gain in February. The index gauging sales expectations for the next six months edged downward by a single point to 26.

Regionally, the HMI was mixed, with the Northeast posting a two-point decline to 21, the Midwest holding even at 16, the South reporting a two-point gain to 26 and the West showing a one-point decline to 15.

by Anonymous on 3/17/2008 11:03:00 AM

If you can spare a few minutes from contemplating the Great Bear Stearns Two-Buck Upchuck, an amusing tale from the San Francisco Chronicle, via Atrios.

First, the title: "More in foreclosure choose to walk away."

Second, the examples. There are two. The first one is one Army Sgt. 1st Class Nicklaus Skaggs of Vacaville. For some reason, that name sounded familiar, so I asked Mr. Google about it. It came up with an article I posted on a couple of weeks ago from the Wall Street Journal, published February 29, which also makes the claim that "walkaways" are an increasing trend. The WSJ piece gives exactly one example: Sgt. Skaggs.

Note to reporters: one borrower does not constitute a "trend." Also, the same borrower counted twice does not constitute a "growing trend."

Oh well, the Chronicle also has this guy, who won't use his name for obvious reasons:

A Discovery Bay man who asked not to be identified said he is "upside down" on his house by about $260,000. Instead of bemoaning the situation, he plans to capitalize on it.

"I refinanced a couple of years ago and pulled out $100,000 and put in a fabulous pool," he said. "Now I've got this fabulous pool and fabulous house, but it's not worth anything. Why shouldn't I be building equity over the next four to five years instead of playing catch-up?"

The man said he has not made a mortgage payment for five months.

"I'm playing the bank game," he said. "I'm playing chicken with them. I already got them to agree to put (the unpaid) payments on the tail end of the loan. What I'm really pushing them to do is to (adjust my mortgage) for the current market value and write off the rest. I'd love (to have it) lopped down to a $450,000 basis rather than $710,000."

If the bank won't negotiate, he'll walk away, the man said.

If ever there were a case for which a lender would go to the considerable trouble of pursuing a deficiency judgment, Mr. Discovery Bay would be it. Playing this kind of "chicken" on a recourse loan? That's some chutzpah.

by Calculated Risk on 3/17/2008 10:42:00 AM

Last night we discussed the conference call real time in the comments.

For those that missed the call, the WSJ has the transcript this morning. Here is the presentation material.

There is some good detail.

Guy Moszkowski - Merrill Lynch - Analyst
Okay, so then just to cap it off, it certainly doesn't sound as if when you went in there you found a massive problem with respect to risk management or hedging. It sounds like given that you're saying that it's very similar to your own, it sounds like you found something that you're fundamentally comfortable with. Is that fair?

Bill Winters - JPMorgan Chase - Co-CEO, JPMorgan Investment Bank
That's right. In fact what we've -- we were very pleasantly surprised to see that it was a very well run, tight operation with good risk controls and a risk discipline that was very similar to our own.

And on the $30 billion from the Fed:

[W]e have put in place with the Federal Reserve a special lending facility. It's a non-recourse facility to JPMorgan Chase for up to $30b or so of illiquid assets, largely mortgage-related. So that is in doing our due diligence an area that we needed to get comfort upon, was some of the more illiquid assets on the balance sheet. So obviously couldn't be in stronger hands than to be -- arrange for financing through the Federal Reserve and again with no recourse to JPMorgan Chase.

by Calculated Risk on 3/17/2008 09:22:00 AM

From the WSJ: PMI Posts $1.01 Billion Loss Amid Housing, Credit Woes

PMI Group Inc. swung to a fourth-quarter loss as the company recorded huge losses due to its stake in Financial Guaranty Insurance Co., as well as losses at its U.S. mortgage insurance operations amid turmoil in the housing and credit markets.

The confessional will be busy again this week.

by Calculated Risk on 3/16/2008 09:25:00 PM

From the WSJ on JPMorgan and Bear Stearns: J.P. Morgan Rescues Bear Stearns

Meanwhile, worries are deepening that other securities firms and commercial banks might be on shaky ground. Lehman Brothers Holdings Inc. Chief Executive Richard Fuld, concerned about the markets and possible fallout from Bear Stearns's troubles, cut short a trip to India and returned home Sunday, ahead of schedule, according to people familiar with the matter. The decision came after a series of calls Saturday to both senior executives at the firm and Treasury Secretary Henry Paulson, these people say.

Stock Futures:

Here is a live DOW future (at the CBOT):

Here are a couple of other places to track the futures market:

Added: Live currency quotes. (hat tip central_scrutinizer)

Bloomberg Futures.

Barchart.com Indices

by Calculated Risk on 3/16/2008 07:47:00 PM

Webcast

Presentation Material (pdf)

Press Release: JPMorgan Chase To Acquire Bear Stearns

JPMorgan Chase will host a conference call today, Sunday, March 16, 2008, at 8:00 p.m. (Eastern Time) to review the acquisition of Bear Stearns. Investors can call (800) 214-0745 (domestic) / (719) 457-0700 (international), with the access code 614424, or listen via live audio webcast. The live audio webcast and presentation slides will be available on http://investor.shareholder.com/jpmorganchase/presentations.cfm under Investor Relations, Investor Presentations. A replay of the conference call will be available beginning at 11:00 p.m. (Eastern Time) on March 16, 2008, through midnight, Monday, March 31, 2008 (Eastern Time), at (888) 348-4629 (domestic) or (719) 884-8882 (international) with the access code 614424. The replay also will be available on www.jpmorganchase.com.

Details:

The transaction will be a stock-for-stock exchange. JPMorgan Chase will exchange 0.05473 shares of JPMorgan Chase common stock per one share of Bear Stearns stock. Based on the closing price of March 15, 2008, the transaction would have a value of approximately $2 per share.

Effective immediately, JPMorgan Chase is guaranteeing the trading obligations of Bear Stearns and its subsidiaries and is providing management oversight for its operations. Other than shareholder approval, the closing is not subject to any material conditions. The transaction is expected to have an expedited close by the end of the calendar second quarter 2008. The Federal Reserve, the Office of the Comptroller of the Currency (OCC) and other federal agencies have given all necessary approvals.

In addition to the financing the Federal Reserve ordinarily provides through its Discount Window, the Fed will provide special financing in connection with this transaction. The Fed has agreed to fund up to $30 billion of Bear Stearns’ less liquid assets.

by Calculated Risk on 3/16/2008 07:18:00 PM

From the Federal Reserve:

The Federal Reserve on Sunday announced two initiatives designed to bolster market liquidity and promote orderly market functioning. Liquid, well-functioning markets are essential for the promotion of economic growth.

First, the Federal Reserve Board voted unanimously to authorize the Federal Reserve Bank of New York to create a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets. This facility will be available for business on Monday, March 17. It will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities. The interest rate charged on such credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.

Second, the Federal Reserve Board unanimously approved a request by the Federal Reserve Bank of New York to decrease the primary credit rate from 3-1/2 percent to 3-1/4 percent, effective immediately. This step lowers the spread of the primary credit rate over the Federal Open Market Committee’s target federal funds rate to 1/4 percentage point. The Board also approved an increase in the maximum maturity of primary credit loans to 90 days from 30 days.

The Board also approved the financing arrangement announced by JPMorgan Chase & Co. and The Bear Stearns Companies Inc.

by Calculated Risk on 3/16/2008 07:08:00 PM

Here is the story: J.P. Morgan to Buy Bear Stearns

by Calculated Risk on 3/16/2008 04:06:00 PM

UPDATE: WSJ: Bear Stearns Closes in on Deal To Sell Itself to J.P. Morgan

People familiar with the discussions said all sides were pushing hard to complete an agreement before financial markets in Asia open for Monday trading.

... the company is likely to fetch considerably less on a per-share basis than its stock price of $30 in New York Stock Exchange composite trading Friday at 4 p.m.

The Financial Times reports: Bear races to forge deal with JPMorgan

Bear Stearns ... was this weekend fighting against the clock on a deal to sell itself to JPMorgan Chase ... “We’re definitely in the mix,” a senior person at JPMorgan said.
...
JPMorgan has been contacting clients to inform them of the coming consolidation.

... people close to the situation said ... it was ... likely the firm would be acquired as a whole and split later.

My guess is a deal will be reached before the market opens tomorrow.