by Calculated Risk on 3/25/2008 11:08:00 PM

From USA Today: FDIC Plans Staff Boost for Bank Failures

The Federal Deposit Insurance Corp. wants to add 140 workers to bring staff levels to 360 workers in the division that handles bank failures, John Bovenzi, the agency's chief operating officer, said Tuesday.

"We want to make sure that we're prepared," Bovenzi said ...

Gerard Cassidy, managing director of bank equity research at RBC Capital Markets, projects 150 bank failures over the next three years, with the highest concentration coming from states such as California and Florida where an overheated real estate market is in a fast freeze.

This is a follow-up to the WSJ story last month of the FDIC bringing back 25 retirees with experience in handling bank failures.

The bank failures are coming.

by Calculated Risk on 3/25/2008 04:13:00 PM

From the WSJ: Clear Channel Communications' Privatization Deal Is Near Collapse

The $19 billion privatization of Clear Channel Communications Inc. was near collapse as the private equity firms behind the deal and the banks financing it failed to resolve their differences over the terms of the credit agreement ...

This is a deal no one wants - except Clear Channel's current owners.

by Calculated Risk on 3/25/2008 02:41:00 PM

From Bloomberg: Wall Street May Face $460 Billion Credit Losses, Goldman Says

Wall Street banks, brokerages and hedge funds may report $460 billion in credit losses from the collapse of the subprime mortgage market ... according to Goldman Sachs Group Inc.

A few excerpts from the report: Leveraged Losses—Still Out There (no link)

Residential mortgage losses will represent about half the damage, with another 15%-20% coming from commercial mortgages. Credit card loans, auto loans, commercial and industrial lending, and nonfinancial corporate bonds make up the remainder.
...
The losses to leveraged US financial institutions make up only a part of total credit losses, which we expect to be $1.2 trillion.
...
Thus far, our banks team has tallied approximately $120 billion in announced writeoffs from US leveraged institutions since the credit crisis began (including foreign institutions, this number rises to about $175 billion).
...
Most of the write-offs to date relate to residential mortgages, so here we may be halfway through the process, perhaps even a bit further. Elsewhere, though, we suspect significant write-offs remain in store, even after the full set of first-quarter results for financial firms becomes available.

It's hard to tell the actual losses to date, because hedge funds will probably not announce losses, and some losses are actually gains for other institutions. But it appears that the process has just started for commercial mortgages, credit card and auto loans, corporate bonds, and other lending.

by Calculated Risk on 3/25/2008 01:45:00 PM

Looking at the Case-Shiller house price indices in real (inflation adjusted) terms give us an idea of how much further house prices might fall.

Click on graph for larger image.

This graph shows the inflation adjusted Case-Shiller indices for San Diego, Chicago and the composite indices for 10 and 20 cities. (I'd add more cities, but the graph is too messy!)

Looking at this graph, I'd guess prices have fallen somewhat less than half way (in real terms) to the eventual bottom. Of course, more inflation means less prices need to fall in nominal terms.

Also look at the length of the housing bust in the early '90s. It took over six years from peak to trough in some cities. If this bust takes the same amount of time, prices will not bottom in some cities until 2012 (or there about).

by Calculated Risk on 3/25/2008 10:14:00 AM

OFHEO is now releasing a monthly House Price Index. Note that this is a National index, but only uses data from Freddie and Fannie.

From OFHEO: New U.S. Monthly House Price Index Estimates 1.1 Percent Price Decline in January

U.S. home prices fell approximately 1.1 percent on a seasonally-adjusted basis between December 2007 and January 2008, according to OFHEO’s new monthly House Price Index. For the 12 months ending in January, U.S. prices fell 3.0 percent. Since its peak in April 2007, the monthly index is down 4.1 percent.

The monthly index is calculated using purchase prices of houses backing mortgages that have been sold to or guaranteed by Fannie Mae or Freddie Mac.

Click on graph for larger image.

This graph from OFHEO shows the monthly change for the Purchase Only index.

When comparing the national Case-Shiller and OFHEO indices, there are a number of differences: OFHEO covers more geographical territory, OFHEO is limited to GSE loans, OFHEO uses both appraisals and sales (Case-Shiller only uses sales), and some technical differences on adjusting for the time span between sales.

OFHEO economist Andrew Leventis’ research suggests that the main reason for the recent price difference between the Case-Shiller and OFHEO indices was that prices for low end non-GSE homes declined significantly faster than homes with GSE loans. This was probably due to the lax underwriting standards on these non-GSE subprime loans. Note that Leventis' research focused on the differences in the indices for the period from Q3 2006 through Q3 2007. I suspect the Case-Shiller index will continue to see larger price declines than OFHEO as lending standards have now been tightened significantly for other non-GSE loans (especially jumbo loans).

by Calculated Risk on 3/25/2008 10:03:00 AM

From MarketWatch: Home prices fall a record 10.7% in past year

Home prices in 20 major U.S. metro areas have plunged a record 10.7% in the past year as prices continued to decelerate, Standard & Poor's said Tuesday.

The 20-city Case-Shiller home price index fell a record 2.4% in January, the 18th consecutive decline in prices. For 10 major cities, prices fell 2.3% in January and 11.4% for the past 12 months.

"No markets seem to be completely immune from the housing crisis,' said David Blitzer, chairman of the index committee at S&P.

The article mentions Charlotte is up year-over-year, but prices are now falling there too.

Here is the S&P/ Case-Shiller data. Note that the most recent data is for January, and this is NOT the Case-Shiller national index (these are prices for 20 of the largest cities, and a composite index of those cities).

by Anonymous on 3/25/2008 08:42:00 AM

Yves at naked capitalism had a good post yesterday on the infamous Bear Stearns Ten Buck Rechuck, that I think needs repeating:

According to Sorkin, the $2 price for Bear was the Fed's and Treasury's idea; JP Morgan was prepared to pay more, but they nixed the idea, saying they did not like the "optics" of the deal. The implication is that the officials overstepped their bounds. That is a pretty outrageous spin when the government is putting up taxpayer money.

Had it been an option, the Fed should have nationalized Bear. It was going to declare bankruptcy Monday if there was no deal; its shareholders would have been wiped out. Why am I so confident of this view? If bondholders, as rumored, were buying shares to make sure the JPM deal went through (and thus would take losses on their stock purchases when the deal closed), that meant that they thought their bonds were worth well under 100 cents on the dollar in a bankruptcy. Shareholders are subordinate to bondholders, so equity owners would have gotten zilch.

I can think of a host of reasons, however, why the Fed did not go the nationalization route, the biggest being that it lacked clear authority (it couldn't declare Bear to be insolvent, as it could a member bank). And letting Bear fail (and having accounts frozen) was what the Fed was trying to avoid, so letting it fail and then seizing control (even assuming it could do that) was never an option. No doubt, the central bank also did not want to assume administrative control of an entity that it had never regulated (ie, its supervisors had never kicked its tires) that dealt actively in markets in which the Fed has little expertise. Even in an orderly liquidation scenario, that it a lot to take on.

Sorkin nevertheless argues that the Fed did Bear a dirty because:

.....the night that Bear signed the original bid, the Fed opened what’s known as the discount window to companies like Goldman Sachs and Lehman Brothers — oh, yes, and to Bear, too. Except that the Fed didn’t tell Bear that it planned to open the window when it was signing its deal with JPMorgan.

This verges on being revisionist history. First and most important, the discount window was opened to keep the panic about Bear from spreading to other firms, most notably Lehman. It almost certainly would not have happened then if Bear was not on the verge of imploding. Remember, a mere week and a day ago, there was pervasive fear that the wheels were about to come off the financial system, particularly if counterparties started getting leery of dealing with Lehman.

Moreover, usage of the new discount window the first week was light due to worries about stigma. If Bear had gone and used it aggressively, it may well have reinforced rather than allayed fears about the trading firm's health. If other firms continued to refuse to deal with Bear, its collapse was assured. There was a very real possibility that even if Bear had remained independent and used the window, its bankruptcy merely would have been delayed a day or two. And it would have been well nigh impossible to put together a three party takeover deal between the close of business in New York and market opening in Asia on a weekday.

But the most appalling aspect of Sorkin's account: he acts as if Bear had the right to be informed of the Fed's plans. Sorkin seems to have forgotten the golden rule: he who has the gold makes the rules. The Fed had every right to be calling the shots. They were taking the biggest risk in this transaction. The notion that a firm about to fail is entitled to be treated as a being on an equal footing with its rescuers is absurd. And the fact that Sorkin (and presumably others on Wall Street) sympathize with this view says the industry badly needs to be leashed and collared.

This, frankly, is the reason why I am so incredibly appalled by this:

Wells Fargo CEO John Stumpf said the financial crisis is presenting the bank with more acquisition opportunities.

"I would not be averse to a Fed-assisted transaction," Stumpf said in a recent interview with the San Francisco Business Times. "Fixer-uppers don't bother us."

The San Francisco banker said any deal would have to meet the company's traditional acquisition targets and benefit the bank's acquired customers.

To even mention, in public, that one "wouldn't be averse to a Fed-assisted transaction" is to hint that the acquisition targets you are looking at are in as dire straits as Bear Stearns. What is Stumpf trying to do, start a run on an insured bank? Or, well, the other option is that Stumpf doesn't believe that Bear was such a mess--that, precisely, it is "on an equal footing with its rescuers."

Either way you slice it, the very fact that he could say such a thing in public tells you how far down the wrong road we've gone. I vote for the leash and collar, pronto.

by Anonymous on 3/25/2008 07:52:00 AM

This may make more sense if you've read this.

by Calculated Risk on 3/25/2008 01:08:00 AM

From the WSJ: Foreclosure Rate Outpaces Sales by Lenders

Foreclosures are occurring at the highest rate in decades -- and as a result, lenders are acquiring homes faster than they can sell them off.

Last year, sales of foreclosed homes rose just 4.4%, while the supply more than doubled, according to First American CoreLogic.
...
This year, sales of homes owned by lenders will likely total 480,000 properties, or 10% of all sales of previously occupied homes this year, [Mark Zandi, chief economist of Moody's Economy.com] estimates.

With foreclosed properties accounting for 10% or more of the housing market, house prices will be under significant pressure all year.

As far as the supply of foreclosed homes increasing, I checked the Countrywide site, and I was a little surprised to see Countrywide's REO inventory declining.

Click on graph for larger image.

This is a graph from the Countrywide Foreclosures Blog showing that Countrywide's REO inventory appears to be declining. Puzzling. Perhaps Countrywide is being more aggressive than other lenders because of the pending acquisition by BofA.

Also from the WSJ: Wave of Foreclosures Drives Prices Lower, Lures Buyers

A glut of foreclosed homes of historic proportions is starting to drive down U.S. home prices faster as lenders put more properties on the market and buyers show signs of interest.

The ability of America's lenders to manage this fire sale will be crucial to determining how long the housing market stays in the dumps -- and how quickly blighted neighborhoods can heal. The oversupply is severe: In some major markets, including Las Vegas and San Diego, foreclosure-related sales have accounted for more than 40% of all sales in recent months.

by Calculated Risk on 3/24/2008 10:44:00 PM

From San Francisco Business Times: Wells Fargo CEO says he's open to conducting a Fed-assisted acquisition

Wells Fargo CEO John Stumpf said the financial crisis is presenting the bank with more acquisition opportunities.

"I would not be averse to a Fed-assisted transaction," Stumpf said in a recent interview with the San Francisco Business Times. "Fixer-uppers don't bother us."

The article mentions National City Bank as a possible acquisition.

Note: for some reason I picture Tanta's Mortgage Pig feeding at the public trough.