by Calculated Risk on 7/11/2008 08:45:00 AM

Oil nearly $146.

Import Prices up 2.6%

From the WSJ: U.S. May Trade Gap Unexpectedly Shrinks

I'll be out today. Please send stories to Tanta. Best to all.

by Anonymous on 7/11/2008 08:44:00 AM

The whole essay is worth reading, if only as a refreshing change from the overheated rhetoric of the last few days. Note that Pearlstein will be having an online chat today at 11:00 Eastern to discuss Fannie and Freddie.

A financial crisis like this one calls for policymakers and regulators who can keep a cool head and remain flexible and practical rather than insisting on strict adherence to economic orthodoxies. Not every instance of regulatory forbearance need be viewed as a step down a slippery slope toward Japanlike stagnation. Nor is it particularly constructive to characterize every instance of government involvement in the private sector -- whether it be refinancing a troubled home mortgage, opening the Fed lending window to cash-strapped investment banks or orchestrating a private-sector rescue of a failing hedge fund -- as a massive government bailout.

As for Fannie and Freddie, nobody would be particularly happy if it became necessary for the Treasury to inject some fresh capital into the mortgage giants, in exchange, say, for newly issued preferred stock that could be sold back at a profit when the mortgage market recovers. But even the editorialists at the Wall Street Journal acknowledged yesterday that this wee bit of socialism might be the most effective and least costly way to keep the mortgage market functioning and prevent a meltdown in global credit markets.

A financial crisis is not a morality play. What matters most isn't the precedents that are set, the amount of taxpayer money that's implicated or whether people are made to suffer fully for their financial misjudgments. In the end, what matters most is that we get through it as quickly as possible with an economy and a financial system intact.

If this blog's comment threads are any kind of representation of a slice of reality--I am often agnostic on that question, but still--there are more than a few people who are more interested in getting a front-row ticket to a morality play than working through a financial crisis with the least (further) damage to the banking system. Lord knows that a lot of bad policy can be floated along under the guise of "pragmatism," but I for one would rather try debating with a pragmatist than a purist or a moralist.

by Calculated Risk on 7/11/2008 12:54:00 AM

Two articles ...

From the WSJ: Mortgage Giants Face Pressure Over Capital

Even as federal officials sought to reassure investors about the financial health of Fannie Mae and Freddie Mac, pressure mounted on the giant mortgage companies to raise fresh capital to offset the tumbling values of home loans they hold.
...
One possible scenario if Fannie and Freddie's financial position worsens: Under existing law, if either company were severely low on capital, it could fall under the control of their government regulator, which would then be responsible for the firm. That step -- known as placing it in a conservatorship -- would allow the mortgage company to continue operating, but the extent of its abilities in such a distressed situation remains unclear.

From the NY Times: U.S. Weighs Takeover of Two Mortgage Giants

Alarmed by the growing financial stress at the nation’s two largest mortgage finance companies, senior Bush administration officials are considering a plan to have the government take over one or both of the companies and place them in a conservatorship if their problems worsen, people briefed about the plan said on Thursday.
...
Under a conservatorship, the shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee — which could be staggering — would be paid by taxpayers.

The government officials said that the administration had also considered calling for legislation that would offer an explicit government guarantee on the $5 trillion of debt owned or guaranteed by the companies. But that is a far less attractive option, they said, because it would effectively double the size of the public debt.

Guaranteeing the debt of Fannie and Freddie would not double the public debt because they have somewhat offsetting assets. This would lower the borrowing costs for Fannie and Freddie and is probably the most effective solution (if one is needed). Its not clear to me how a conservatorship helps. Pretty scary discussion ...

by Calculated Risk on 7/10/2008 09:38:00 PM

From Michael Rosenwald at the WaPo: Slide by Marriott Signals Distress for Hotel Industry (hat tip John)

Let there be no mistaking it now: The hotel boom is kaput.

Marriott International, one of the world's largest hotel operators, released a stream of unsettling news for the industry yesterday: Its second quarter profit fell 24 percent, to $157 million; it lowered yearly profit estimates again; and most importantly, it said revenue per available room, a key measure of hotel strength, could decrease this year in the United States by 1 percent.

"There's no doubt we are in a very turbulent period," said Thomas Baltimore, the president of Bethesda's RLJ Development, one of the largest owners of Marriott hotels. "Clearly we are seeing softening demand -- there's no doubt about that."
...
Chief executive Bill Marriott said in a statement that "while our hotels outside the U.S. continue to benefit from solid global demand, business conditions have deteriorated in the U.S. . . . We expect weak economic growth and soft U.S. lodging demand to persist into 2009."

This fits with my post yesterday: Hotel Vacancies Rising

by Calculated Risk on 7/10/2008 06:23:00 PM

Check out the ABX-HE-AAA- 07-2 close today. More Cliff Diving!

Note: The ABX indices are based on credit default swaps (CDS) for various tranches of subprime mortgage-backed securities (MBS). For some background, here is a post at the Cleveland Fed back in March, 2007.
Most of the CMBX indices are setting new record lows again.

Note: Up is down for the CMBX indices. The CMBX is quoted as spreads, whereas ABX is quoted as bond prices. When the spreads increase - chart going up - the bond prices are going down.

Check out the CMBX-NA-BB-4 close today.

The CMBX is a CMBS (Commercial Mortgage-Backed Securities) credit default index just like the ABX - except up is down.

by Calculated Risk on 7/10/2008 04:23:00 PM

From the LA Times: Countrywide takeover will pay off, BofA's CEO says

[Lewis] said Bank of America paid so little for the lender that once the books on the deal were closed, the Countrywide operation would immediately show a profit -- with the potential for huge growth in income when the mortgage industry recovers.
...
Lewis initially said he wanted to study whether to keep the Countrywide brand, which was extremely well recognized even if it was tarnished.

"I went in thinking that there would be some way to use the Countrywide name," he said Wednesday. But as the mortgage meltdown worsened, with Countrywide at its center, that possibility disappeared.
...
As for the housing market, Lewis said Bank of America's latest forecast called for a further 15% decline in home prices nationwide, with the decline going into at least the first quarter of next year.

In the case of California, Florida and other markets that had the biggest booms, a further 20% decline is more realistic, he said.

Isn't Lewis saying "Don't buy yet!"?

by Calculated Risk on 7/10/2008 03:00:00 PM

Peter Viles at LA Times brings us another of his series on foreclosed properties in the LA area.

Peter features one on his blog L.A. Land: In Fontana, foreclosure discounts hit 50%. Check it out.

Here is another example - this one is in Lake Elsinore, an exurb of Los Angeles. This is one of the areas getting hit hard by the housing bust and high gas prices (because of the commute).

3313 Banyon Circle, Lake Elsinore 92530

Agent's description: "This 5 Bdrm, 4 BA gem is located in the Alberhill Ranch community. Boasts granite countertops, upgraded cabinets & stainless steel appliances. Travertine tile throughout downstairs, bathrooms & laundry room."

• Sales history from Redfin.com: Sold for $570,000 in August 2006

• Current listing price: $349,500

• Discount from sales price: 38.6%

by Calculated Risk on 7/10/2008 01:38:00 PM

From the WSJ: Senate Housing Rescue Bill Edges Closer to Passage

The Senate voted resoundingly Thursday to push closer to passage a massive mortgage rescue to help hundreds of thousands of stressed homeowners, even as the bill faced new obstacles in the House.

By a vote of 84-12, the Senate cleared away the last procedural hurdle hindering the measure, putting the election-year aid package on track for approval as early as Thursday afternoon.

by Calculated Risk on 7/10/2008 12:04:00 PM

From Nemo, CNBC's David Faber reacts to the decline in the Freddie Mac share price (37 seconds):

by Calculated Risk on 7/10/2008 10:38:00 AM

From MarketWatch: Lehman shares dive on fresh credit, mortgage fears

Click on graph for larger image in new window.

Cliff diving from Yahoo Charts.

This isn't a stock blog, but these are three critical companies right now in the credit and mortgage crisis.