by Calculated Risk on 4/03/2008 10:38:00 AM

From the NY Fed: Portfolio Overview

Following is an overview of the portfolio supporting the loan to be extended by the Federal Reserve in connection with the proposed acquisition of Bear Stearns by JPMorgan Chase.

The $29 billion credit extension is supported by assets that were valued at $30 billion by Bear Stearns, which valued the assets at market value on March 14. JPMorgan Chase will extend a subordinated loan for $1 billion that will absorb losses, if any, on the sale of these assets before the Federal Reserve.

The portfolio supporting the credit extensions consists largely of mortgage related assets. In particular, it includes cash assets as well as related hedges.

The cash assets consist of investment grade securities (i.e. securities rated BBB- or higher by at least one of the three principal credit rating agencies and no lower than that by the others) and residential or commercial mortgage loans classified as “performing”. All of the assets are current as to principal and interest (as of March 14, 2008). All securities are domiciled and issued in the U.S. and denominated in U.S. dollars.

The portfolio consists of collateralized mortgage obligations (CMOs), the majority of which are obligations of government-sponsored entities (GSEs), such as the Federal Home Loan Mortgage Corporation (“Freddie Mac”), as well as asset-backed securities, adjustable-rate mortgages, commercial mortgage-backed securities, non-GSE CMOs, collateralized bond obligations, and various other loan obligations.

The assets were reviewed by the Federal Reserve and its advisor, BlackRock Financial Management. The assets were not individually selected by JPMorgan Chase or Bear Stearns.

The Federal Reserve would be required by GAAP to report the valuation of the portfolio on an annual basis. We will report the valuation and recoveries from liquidation of the portfolio on a quarterly basis, subject to annual review by our outside auditors Deloitte Touche Tohmatsu.

The Federal Reserve will make arrangements with the appropriate Committee staffs to allow review of the list of assets on a confidential basis that permits appropriate Congressional oversight of the Federal Reserve's actions while also protecting the ability of the Federal Reserve to minimize risk of loss and danger to markets and preserve privacy and other confidentiality concerns.

by Calculated Risk on 4/03/2008 10:21:00 AM

The 4-week moving average of weekly unemployment insurance claims reached 374,500 this week.

From the Department of Labor:

In the week ending March 29, the advance figure for seasonally adjusted initial claims was 407,000, an increase of 38,000 from the previous week's revised figure of 369,000. The 4-week moving average was 374,500, an increase of 15,750 from the previous week's revised average of 358,750.

Click on graph for larger image.

This graph shows the weekly claims and the four week moving average of weekly unemployment claims since 1989. The four week moving average has been trending upwards for the last few months, and the level is now solidly above the possible recession level (approximately 350K).

Labor related gauges are at best coincident indicators, and this indicator suggests the economy is in recession. Notice that following the previous two recessions, weekly unemployment claims stayed elevated for a couple of years after the official recession ended - suggesting the weakness in the labor market lingered. The same will probably be true for the current recession (probable).

Note: There is nothing magical about the 350K level. We don't need to adjust for population growth because this indicator is just suggestive and not precise.

by Anonymous on 4/03/2008 07:35:00 AM

This morning we introduce a new blog feature, the EMI or Escaped Memo Index. The EMI brouhaha was, of course, inaugurated by the famous Chase Zippy Tricks memo, which Chase tells us wasn't "official bank policy." Now Wachovia has a memo out on restricting Option ARMs in some California markets, and the story seems to be that it wasn't really "unofficial," you see, it was just an early draft.

Whatever. The LAT got ahold of it:

Wachovia Corp. signaled that it may no longer offer some Californians the controversial "option ARM" mortgages that give borrowers the choice of paying so little that their balances actually rise.

In a memo Monday, Wachovia's top California managers told employees that the loans would no longer be offered in 17 California counties where property values have declined the most, including Riverside, San Bernardino and San Diego, plus the Central Valley.

However, the bank said Wednesday that the memo had been sent prematurely and that it had not decided whether it would stop making the loans.

Tanta's Rule of Business Communication: if you decide you'd rather look incompetent and waffle on your policy rather than competently toughing out the whining you know you're going to get, you are, in fact, signalling a certain kind of internal policy. I'd say, brokers, go for Wachovia with those marginal applications. They appear willing to cave in at the slightest touch.

Then there's this:

Kevin Stein, associate director of the lower-income advocacy group California Reinvestment Coalition, said he had reservations about the marketing of option ARMs as "affordability products," when in fact they were appropriate for only a limited number of borrowers.

However, Stein said, since Wachovia argues that its option ARMs are good loans, it should offer them throughout California and not exclude some areas.

Possibly this is excellent strategy. If you can credibly threaten Wachovia with the charge of "unfair" lending patterns, you can force it into that corner where it will have to admit that no, these aren't really "good loans."

Possibly this is more of the kind of thing that makes me want to smack a lot of "advocacy" groups: a definition of "equal access" that means we'll fight for our constituency's right to get fleeced along with everyone else. Yeah, that helps.

by Calculated Risk on 4/03/2008 01:06:00 AM

From Louis Uchitelle at the NY Times: Unsold Homes Tie Down Would-Be Transplants

The rapid decline in housing prices is distorting the normal workings of the American labor market. Mobility opens up job opportunities, allowing workers to go where they are most needed. When housing is not an obstacle, more than five million men and women, nearly 4 percent of the nation’s work force, move annually from one place to another — to a new job after a layoff, or to higher-paying work, or to the next rung in a career, often the goal of a corporate transfer. ...

Now that mobility is increasingly restricted. Unable to sell their homes easily and move on, tens of thousands of people... are making the labor force less flexible just as a weakening economy puts pressure on workers to move to wherever companies are still hiring.

Less worker mobility is kind of like arteriosclerosis of the economy. It lowers the overall growth potential.

Perhaps as many as 15 to 20 million households will be saddled with negative equity by 2009. Even if most of these homeowners don't "walk away", there might still be a negative impact on the economy due to less worker mobility.

by Calculated Risk on 4/02/2008 07:34:00 PM

Since Chairman Bernanke allowed for the possibility of a recession in his testimony today - see NYTimes: Bernanke Nods at Possibility of a Recession - it might be fun to look back at a few Fed quotes from prior periods:

For the recession that started in April 1960:

“By and large, however, the economy seems quite solid.”
Federal Open Market Committee, May 1960

“[Chairman Martin] was by no means convinced that the situation was serious.”
Federal Open Market Committee, July 1960

“The Chairman reiterated his views ... There was a declining picture, ... but the economy was not going over a precipice by any means.”
Federal Open Market Committee, October 1960

For the recession that began in July 1990:

“In the very near term there’s little evidence that I can see to suggest the economy is tilting over [into recession].”
Chairman Greenspan, July 1990

“...those who argue that we are already in a recession I think are reasonably certain to be wrong.”
Greenspan, August 1990

“... the economy has not yet slipped into recession.”
Greenspan, October 1990

Source: "Booms, Busts, and the Role of the Federal Reserve" by David Altig

by Anonymous on 4/02/2008 04:38:00 PM

Someone we know is fond of remarking that it isn't really a credit crunch until a mortgage insurer goes down.

Ahem

Share price closed down 35% today.

(thanks, bub!)

by Anonymous on 4/02/2008 03:23:00 PM

I was slumming again this afternoon . . . here's your daily dose of amusement.

And yes, the comment thread to that post makes me realize how lucky I am. Most of the time.

by Calculated Risk on 4/02/2008 02:25:00 PM

Via CNNMoney: U.K., Spain housing markets face major corrections - S&P

Standard & Poor's Ratings Services said Europe's housing markets are finally, and overwhelmingly, turning down.

'And in those countries where the housing bubbles have been expanding for longer, Standard & Poor's believes the corrections could be severe and painful,' the agency added.

The article notes that the price-to-income level is at a record high, and household debt is at "unprecedented" levels compared to GDP. Sounds familiar.

by Calculated Risk on 4/02/2008 12:17:00 PM

Yesterday Bloomberg provided a table of the $232 billion in credit losses and write-downs taken so far by the world's biggest banks and securities firms.

Today Bloomberg has published a table of the capital raised by those banks: Banks Get $136 Billion From Governments, Private Sources: Table (hat tip Brian)

The following table shows banks and securities firms that have sold stakes or announced plans to do so, raising $136 billion of capital amid losses on subprime- related securities.

The financial institutions have turned to their own governments, sovereign wealth funds of other countries' governments and public investors.

See article for table. Citigroup leads the list with $30.4 billion in new capital, followed by UBS at $27.7 billion.

by Calculated Risk on 4/02/2008 09:46:00 AM

From Chairman Bernanke's testimony before the Joint Economic Committee:

Overall, the near-term economic outlook has weakened relative to the projections released by the Federal Open Market Committee (FOMC) at the end of January. It now appears likely that real gross domestic product (GDP) will not grow much, if at all, over the first half of 2008 and could even contract slightly. ... However, in light of the recent turbulence in financial markets, the uncertainty attending this forecast is quite high and the risks remain to the downside.

Nothing really new in Bernanke's economic outlook, but historically when the Fed Chairman starts talking about the possibility of a recession, the economy is already in a recession.

And on Bear Stearns:

On March 13, Bear Stearns advised the Federal Reserve and other government agencies that its liquidity position had significantly deteriorated and that it would have to file for Chapter 11 bankruptcy the next day unless alternative sources of funds became available. This news raised difficult questions of public policy. Normally, the market sorts out which companies survive and which fail, and that is as it should be. However, the issues raised here extended well beyond the fate of one company. Our financial system is extremely complex and interconnected, and Bear Stearns participated extensively in a range of critical markets. With financial conditions fragile, the sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence. The company’s failure could also have cast doubt on the financial positions of some of Bear Stearns’ thousands of counterparties and perhaps of companies with similar businesses. Given the current exceptional pressures on the global economy and financial system, the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain. Moreover, the adverse effects would not have been confined to the financial system but would have been felt broadly in the real economy through its effects on asset values and credit availability. To prevent a disorderly failure of Bear Stearns and the unpredictable but likely severe consequences of such a failure for market functioning and the broader economy, the Federal Reserve, in close consultation with the Treasury Department, agreed to provide funding to Bear Stearns through JPMorgan Chase. Over the following weekend, JPMorgan Chase agreed to purchase Bear Stearns and assumed Bear’s financial obligations.

JPMorgan didn't assume all of Bear's financial obligations. The U.S. taxpayers are also at risk.

And Bernanke concludes:

Clearly, the U.S. economy is going through a very difficult period.