by Calculated Risk on 4/01/2008 01:24:00 AM

From Bloomberg: UBS Seeks SF15 Billion Capital Increase, Has First-Quarter Loss

UBS AG ... will seek to raise 15 billion francs ($15.1 billion) in a capital increase after writing down $19 billion in debt securities.

Chairman Marcel Ospel will step down ...

by Calculated Risk on 4/01/2008 01:06:00 AM

From Reuters: Centex sells 8,500 U.S. housing lots for a loss

Centex Corp ... sold a portfolio of real estate to a group of investment funds for $455 million, which represents a discount to the properties' $528 million book value.

Dallas-based Centex said it sold 8,500 developed, partly developed and undeveloped lots in 11 states ... Most of the properties are in Nevada and California.

Centex said its proceeds include the $161 million purchase price and an anticipated $294 million tax refund.

The tax refund made the deal work. The buyers paid $161 million, and the actual cost to Centex was higher than $528 million (these properties had already been written down significantly).

by Calculated Risk on 3/31/2008 07:56:00 PM

Update: According to the Financial Times, the latest writedowns are expected to be released Tuesday or Wednesday (hat tip sk)

From the Financial Times: UBS set for further writedowns (hat tip crispy&cole)

UBS is poised to reveal further writedowns of up to $18bn and seek a capital increase of about SFr13bn ($13.1bn) ...

Details of the latest writedowns and capital-raising are expected to be released alongside the agenda for the bank’s annual meeting on April 23, which is to be published on Tuesday or on Wednesday.

Just a reminder that the confessional is still open, and the numbers will be huge.

by Calculated Risk on 3/31/2008 05:18:00 PM

From Bloomberg: Lehman to Sell $3 Billion of Shares to Institutional Investors (hat tip Tim)

Lehman Brothers Holdings Inc. ... is selling at least $3 billion of new shares to U.S. institutions to reassure investors it has ample access to capital.

Here are the details from the press release: Lehman Brothers to Offer 3.0 Million Shares of Convertible Preferred Stock (hat tip Dwight)

The non-cumulative dividend rate, conversion rate and other terms are yet to be determined.

TBD?

Update from Reuters: Lehman converts seen having 7-7.5 percent dividend

Lehman Brothers Holdings Inc's $3 billion of convertible preferred shares are seen having a dividend of 7 percent to 7.5 percent and a conversion premium of 30 percent to 35 percent ... The deal is expected to be sold by Tuesday before market close ...

by Calculated Risk on 3/31/2008 02:07:00 PM

Remember when the Shanghai stock market declined 9% on Feb 27, 2007? That caused shock waves around the world, including a 400 points decline in the DOW index the following day. Well, that was nothing and hardly shows up on the following graph.

Click on graph for larger image.

After falling to 2772 in Feb 2007, the SSE composite index more than doubled! Now the index has fallen back to 3,472 - still well above the close after the one day sell off - but 43% below the peak.

Is this sell off in anticipation of a slowing Chinese economy? Or is this sell off just giving back some of the "irrational exuberance" of the last year?

There are some concerning signs. From the WSJ last week: Tables Turn Quickly on Chinese Developers

Just six months ago, Chinese property developers were on a shopping spree ... borrowing heavily to snap up more, and more expensive, pieces of land.

How quickly things have changed.

Three months into 2008, China's property developers are under siege. Property prices are showing signs of weakness in many of the country's key markets, and capital markets have all but seized up for these -- and other -- offerings. The Chinese government is on a high-profile campaign to clamp down on new bank loans, hoping to curb inflation, rising at its fastest clip in a decade.

Another concern for foreign manufacturers is the new labor laws in China. Over the weekend I spoke with an executive of a U.S. based company that manufactures in China. He told me the new Chinese labor laws, combined with other factors, have increased their manufacturing costs in China by 30%!

Here is an article from Crain's Manchester Business: Made in China

Manchester-based importers who source in China are about to pass on price rises of between 10 and 15 per cent. They say that currency fluctuations, Chinese wage inflation, raw material cost increases and higher freight charges mean that stable or falling prices of manufactured goods are now a thing of the past.
...
“Four of the factories that we do business with in China won't take dollars now,” said [Stuart Illingworth, managing director of Widdop, Bingham & Co, the Oldham-based giftware importer]. ...

Meanwhile, new labour laws came into force in January which have restricted Chinese workers' hours and led to an increase in labour unit costs.

I've always been skeptical of the decoupling argument, so I wouldn't be surprised to finally see a slowdown in China after the Olympics this summer. In the long run, this rebalancing of the world economy, and these new labor laws are healthy - but in the short term this might lead to more inflation in the U.S.

Note: a slowing Chinese economy might have a positive impact on the U.S. economy by leading to lower oil prices, as I speculated in Petroleum Prices and GCC Spending

by Anonymous on 3/31/2008 11:51:00 AM

UPDATE: I don't have time to spend the day deleting racist trolling. I have therefore closed the comments on this thread. We simply are not here to host such things.

Alphonso Jackson resigned as Secretary of HUD today. And not a moment too soon. Think Progress has the list:

A look at Jackson’s tenure of incompetence and corruption:

Loyalty Over Merits: During a speech on April 28, 2006, Jackson recounted a conversation he had with a prospective contractor who had a “heck of a proposal.” This contractor, however, told Jackson, “I don’t like President Bush.” Jackson subsequently refused to award the man the contract. A former HUD assistant secretary confirmed that Jackson told agency employees to “consider presidential supporters when you are considering the selected candidates for discretionary contracts.”

Political Retaliation: In 2006, Jackson allegedly demanded that the Philadelphia Housing Authority (PHA) “transfer a $2 million public property” at a “substantial discount” to Kenny Gamble, a developer, former soul-music songwriter, and friend of Jackson’s. When PHA director Carl Greene refused, Jackson and his aides called Philadelphia’s mayor and “followed up with ‘menacing’ threats about the property and other housing programs in at least a dozen letters and phone calls over an 11-month period.”

Contracts For Golfing Buddies: In October 2007, federal investigators looked into whether, after Hurricane Katrina, Jackson lined up an emergency “no-bid contract” at the HUD-controlled Housing Authority of New Orleans for “golfing buddy” and friend William Hairston. According to HUD, the emergency contract paid Hairston $392,000 over a year and a half; Hairston’s partner companies also received “direct contracts” with HUD. One of the companies which received a contract in New Orleans, Columbia Residential, had “significant financial ties to Jackson.” Jackson’s wife also had “ties to two companies that did business with the New Orleans authority.”

Awarding Corrupt Companies: Shirlington Limousine and Transportation Inc. is the firm that defense contractor Brent Wilkes used to “transport congressmen, CIA officials, and perhaps prostitutes to his Washington parties.” The firm’s president had a “lengthy history of illegal activity,” detailed in his 62-page rap-sheet, and his limo company “operates in what looks to be a deliberately murky way.” Despite all this, Jackson’s HUD awarded Shirlington a contract worth $519,823.

Lucrative Salaries For Cronies: Atlanta lawyer Michael Hollis, another Jackson friend, “appears to have been paid approximately $1 million for managing the troubled Virgin Islands Housing Authority,” despite having “no experience in running a public housing agency.” A “top Jackson aide” reportedly made it clear to officials within HUD that “Jackson wanted Hollis” for the job. Hollis received more than four times the salary of his predecessor.

Let's hope someone gets this taken down before the end of the day.

by Anonymous on 3/31/2008 11:11:00 AM

Forbes, via Atrios.

Thornburg, which is based in Santa Fe, N.M., has been beset by "margin calls," or lenders demanding their money back.

The company reached a deal under which its lenders would stop issuing margin calls if Thornburg raised $948 million.

A bond sale arranged to raise money at a 12 percent interest rate failed, and now the company is trying to sell $1.35 billion in bonds at an 18 percent interest rate.

by Calculated Risk on 3/31/2008 10:24:00 AM

Paul Krugman explains the Paulson plan in the NY Times: The Dilbert Strategy

Anyone who has worked in a large organization — or, for that matter, reads the comic strip “Dilbert” — is familiar with the “org chart” strategy. To hide their lack of any actual ideas about what to do, managers sometimes make a big show of rearranging the boxes ...

You now understand the principle behind the Bush administration’s new proposal for financial reform, which will be formally announced today: it’s all about creating the appearance of responding to the current crisis, without actually doing anything substantive.

One of the key points is this plan was mostly in place to further deregulate the financial industry:

... the new plan was originally conceived of as “promoting a competitive financial services sector leading the world and supporting continued economic innovation.” That’s banker-speak for getting rid of regulations that annoy big financial operators.

Now, using the credit crisis as cover, the plan is being sold as "a fix" for the current problems.

I’ve been disappointed to see some news outlets report as fact the administration’s cover story — the claim that lack of coordination among regulatory agencies was an important factor in our current problems.

The truth is that that’s not at all what happened. The various regulators actually did quite well at acting in a coordinated fashion. Unfortunately, they coordinated in the wrong direction.

For example, there was a 2003 photo-op in which officials from multiple agencies used pruning shears and chainsaws to chop up stacks of banking regulations. The occasion symbolized the shared determination of Bush appointees to suspend adult supervision just as the financial industry was starting to run wild.

by Calculated Risk on 3/31/2008 10:01:00 AM

From Bloomberg: New York City Real Estate Market Slows as Wall Street Cuts Jobs

New York City's residential real estate market is showing the first signs of fallout as U.S. banks and securities firms cut the most jobs in seven years.

Manhattan apartment sales fell in January and February from a year earlier and new properties came to the market at the fastest pace since at least 2000 ... Transactions slid 6.4 percent to 3,250, while the number of condominiums, co- operatives and townhouses for sale at the end of last month climbed to 6,225, 15 percent more than at the start of the year.

With sales falling, and inventory rising, price declines will follow.

by Calculated Risk on 3/30/2008 02:05:00 PM

John Mauldin writes: Where is the Bottom in Housing? (hat tips: many!)

Mauldin provides a good overview of the housing market. His analysis is based on information from John Burns Real Estate Consulting and T2 Partners. Both Burns and T2 have made their presentations public.

There is all kinds of charts and information available, but I'll comment on a couple of points. Mauldin writes:

Bottom Line? There is no Bottom in Sight

[Burns] most likely timeline is that resale stability will come back by 2011, and it will be even earlier for the homebuilders. He is projecting 6,000,000 home sales (new and existing) in 2008, but falling to only 4,000,000 in 2009. Low sales volume and high foreclosures will delay inventory reduction, which is required for there to be a stable market.

This means that home ownership will fall to 66% of the population in 2009 from the recent high of 69%. He thinks that may overcorrect to 65% in 2010. When I asked him why the overcorrection, he said it has to do with psychology. Housing will go from the greatest investment in 2006 to a bad one by 2009. The market typically overcorrects at the end of every cycle. It will take rising prices to lure the marginal homebuyer back into the market.

We discussed the recent rise in the price of the homebuilder stocks, which he attributes to short covering. Many of the homebuilders, public and private, are selling land at 16% of book value, or are trying to. He suggests that many of the privately owned homebuilders are in the worst shape.

Bottom line? We are nowhere near the bottom in the home markets.

First, on sales, I think Burns is too optimistic for 2008 and too pessimistic for 2009. Right now we are on pace for just under 5 million existing home sales in 2008, and 600 thousand new home sales (and sales will probably fall further). A forecast for 6 million total sales in 2008 is probably too high.

Similarly a forecast of 4 million total sales in 2009 is probably too pessimistic. The reason Burns is probably too pessimistic on total sales in 2009 is because prices will likely decline further than Burns is forecasting (helping sales). Burns is only forecasting a 16% nationwide price decline from peak to trough. Based on the Case-Shiller National index, house prices are already off 10.1% as of the end of 2007 - with much more declines likely in 2008.

Also according to Burns, there are "3.5 million excess homes that need to be filled by qualified buyers". This is really a confusing metric. Burns arrives at this total by adding excess vacant units to his estimate of future vacant homes due to the declining homeownership rate.

But this approach really confuses a few numbers and concepts. Burns estimate of 1.55 million "vacant homes" is about right, but this includes about 560 thousand excess vacant rental units! (see Inventory, Inventory, Inventory) So a decline in the homeownership rate cannot be added to this number directly - or there would be some double counting.

Also Burns is probably too pessimistic on the decline in the homeownership rate. Recent academic research by Matthew Chambers, Carlos Garriga, and Don E. Schlagenhauf (Sep 2007), "Accounting for Changes in the Homeownership Rate", Federal Reserve Bank of Atlanta, suggests that there were two main factors for the increase in homeownership rate between 1994 and 2004: 1) mortgage innovation, and 2) demographic factors (a larger percentage of older people own homes, and America is aging).

The authors found that mortgage innovation accounted for between 56 and 70 percent of the recent increase in homeownership rate, and that demographic factors accounted for 16 to 31 percent. Even as we unwind some of the excesses of recent years, not all innovation is going away (securitization and some smaller down payment programs will stay). And the population is still aging, so the homeownership rate will probably only decline to 67%, or maybe "over correct" to 66% - but will probably not decline to 65% or lower. (No one has a crystal ball, so maybe Burns pessimistic view will be proven correct).

And one more point on the declining homeownership rate: this is probably better viewed as a head wind for demand, not as additional supply. Using an excess inventory number of 1.6 million or so is probably more useful when discussing supply.

Even with these minor flaws, this is a good overview.