by Calculated Risk on 7/17/2008 06:00:00 PM

Conference Call: (hat tip Brian) all emphasis added

Comments on the economy:

“While these credit metrics reflect modest credit pressure in the second quarter, there was a more pronounced deterioration in economic indicators. We assume this will translate into additional credit pressure in future quarters causing us to increase our [provisions for losses] in the second quarter. You may recall that we began tightening our under writing in the fourth quarter of 2007. You can see the affects of this tightening in our loan growth in quarter. Managed loans declined $800 million as we have been more selective in originating new loans. We have been focused on those business segments with [stronger profitability]”

Outlook for charges in the card business:

“The managed charge off rate increased in the quarter consistent with the low 6% range of expectations we discussed a quarter ago. The increase in charge off rate resulted mostly from the continuing deterioration of the U.S. economic environment. We expect average offs in the third quarter to remain in the low 6% range and rise to about 7% in the fourth quarter. We expect charge offs to increase as a result of three factors. First, expected seasonal patterns would result in higher charge off levels in the fourth quarter, all else equal. Second, [ we see deterioration] in economic indicators. The impact of economic weakening is likely to be evident in our U.S. charge offs in the fourth quarter and finally the initial impacts of the payments [regulations] that I discussed last quarter are expected to begin in the fourth quarter”

More bad news for the consumers looking for car loans:

“Looking beyond the second quarter our auto finance business continues to face challenges from the season of 2006 and 2007 originations and cyclical headwinds. Auto resale values are falling as a result of declining auto sales and the rapid shift in consumer preferences to more fuel efficient cars as gas prices continue to rise. To address these challenges we took aggressive steps to retrench and reposition our auto business last quarter... We are pulling back on originations and shrinking loans outstanding while improving the credit characteristics of the portfolio. We are leveraging pricing opportunities in the face of shrinking supply and we are reducing operating costs. Originations for the second quarter were $1.5 billion, 38% lower than the first quarter and 49% than a year ago. We expect auto loan originations for the full year of 2008 to be at least 40% lower than 2007 originations The total auto loan portfolio shrank by $1.7B to date.”

by Calculated Risk on 7/17/2008 05:19:00 PM

From the WSJ: Write-Downs Push Merrill Lynch Into Red for 4th Straight Quarter

Merrill Lynch & Co. posted its fourth consecutive quarterly loss on $9.75 billion in additional write-downs on assets tied to the tanking housing market.
...
The negative revenue resulted from $3.5 billion in write-downs on collateralized debt obligations, a $2.9 billion loss related to hedges with financial guarantors, a $1.7 billion write-down on the investment portfolio of Merrill Lynch's U.S. banks, and $1.3 billion write-down related to residential mortgage exposures and a $348 million write-down related to leveraged finance commitments.
...
Moody's Investors Service downgraded Merrill's senior long-term debt after the report one notch to A2 ...

This is far worse than expected. CNBC forecast write downs of $3 billion to $5 billion. Ouch.

by Calculated Risk on 7/17/2008 04:23:00 PM

Update: Here is the Merrill Press Release. (hat tip Dwight)

From MarketWatch: Merrill reports quarterly net loss of $4.65 billion

Merrill Lynch ... reported a $4.65 billion second-quarter net loss late Thursday as the brokerage firm continued to be hit by write-downs on large mortgage-related exposures.

On Capital One: Capital One income falls 40% on drop in U.S. card income

Capital One ... added $37.6 million to its second-quarter provision expenses. The managed charge-off rate for its national lending division increased 0.33 of a point to 5.67% from the first quarter.

The Merrill story (waiting for details) is more mortgage losses. The Capital One story is the spillover into credit card debt.

by Calculated Risk on 7/17/2008 02:47:00 PM

From DataQuick: Bay Area median price dives below $500K; sales near record low

The median price paid for a Bay Area home plunged to $485,000 in June, marking the first time in more than four years that it was below the half-million mark, DataQuick Information Systems reported.

The price barometer fell an unprecedented 27 percent from its record level a year ago as more sellers settled for less, lenders unloaded more aggressively-priced foreclosures and more sales activity shifted to less- expensive areas, mainly inland. Credit remained tightest for potential high- end buyers on the coast, where sales were generally anemic and prices showed signs of increased erosion, the real estate information service reported.

June's $485,000 median was 6.2 percent below May's $517,000 and 27.1 percent lower than the peak $665,000 median reached in June and July of 2007. Last month's median was the lowest since it was $469,500 in March 2004. The median first surpassed $500,000 in May 2004.

The median has fallen on a year-over-year basis for seven consecutive months, the result of both widespread depreciation, most pronounced inland, and a shift of sales towards lower-priced markets.
...
A total of 7,178 new and resale houses and condos sold across the nine- county Bay Area in June. That was up 15.5 percent from 6,216 in May but down 9.9 percent from 7,964 for June 2007.

Although last month's sales were the highest since last August, it was still the second-lowest June in DataQuick's statistics, which go back to 1988. The last time June sales were lower was in 1993, when 7,118 homes sold.
...
Last month foreclosure resales made up 28.7 percent of all Bay Area resales, up from 27.6 percent in May and 3.5 percent a year ago. They ranged from as little as 3 percent of resales in San Francisco to as much as 57.7 percent in Solano County.
...
Foreclosure activity is at record levels ...

Median prices are distorted by the mix - so I prefer the Case-Shiller repeat sales index for prices. Just like in SoCal, foreclosure resales are dominating the market in the lower priced areas - and foreclosures are increasing almost everywhere (although only 3% of San Francisco sales).

by Anonymous on 7/17/2008 02:14:00 PM

Mr. Dimon of JP Morgan, via Housing Wire:

“Prime [mortgage book] looks terrible,” he told analysts on the call. “And we’re sorry, and there’s nothing else we can say."

by Calculated Risk on 7/17/2008 01:29:00 PM

First, the reason overall starts were higher in June was because a pending change in the building code in New York temporarily boosted multi-family starts. See: New York Anomaly Lifts Housing Starts

“All the increase in headline starts and permits reflects a rush to begin multi-family construction projects ahead of a change in the N.Y.C. building code.”
Ian Shepherdson, an economist at High Frequency Economics

Next month multi-family starts will probably decline. As I noted this morning, single family starts are at the lowest level since 1991.

Also important is that single family completions will probably decline another 20% over the next 6 months.

Click on graph for larger image in new window.

This graph compares single family housing starts (shifted 6 months into the future) with single family completions. This suggests that unless housing starts rebound quickly (like in '91), completions will probably fall to under 700 thousand by the end of 2008.

This decline in completions will impact residential construction employment and suggests a further significant decline in residential investment.

So will starts rebound? The answer is probably in the home builder confidence index.

This is the builder confidence index from the NAHB. In 1991, the housing bottom looked like a "V" for both housing starts and builder confidence.

This time builder confidence is staying at record lows suggesting there will be no rebound this year - and completions, residential investment and residential construction employment will continue to decline sharply.

This is exactly what we expect based on supply and demand too. There is too much supply of existing homes, especially distressed supply like foreclosures and short sales,and too little demand with tighter lending standards, for any rebound in new home sales and single family starts this year.

by Calculated Risk on 7/17/2008 10:16:00 AM

Here is the Philadelphia Fed Index for July activity released today: Business Outlook Survey.

Here are a couple key point:

Manufacturing is contracting, but not getting crushed like in previous recessions. This is helping to keep the unemployment rate from rising too quickly.

Prices are rising. "The prices paid index increased six points, to 75.6, its highest reading since March 1980."

Click on graph for larger image in new window.

This graph shows the Philly index vs. recessions for the last 40 years. There were a times the index was this low without a recession - so the reading today doesn't mean the economy is in recession. However it is very likely that the economy is already in recession.

From the release, weaker conditions and higher prices :

Indicators Reflect Continued Weakening

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, edged slightly higher, from -17.1 in June to -16.3 this month. The index has now been negative for eight consecutive months. Other broad indicators remained negative and little changed. The survey’s new orders index was essentially unchanged at -12.1, and the current shipments index decreased one point, from -6.7 in June to -8.0 this month. Indexes for unfilled orders and delivery times, already negative, declined six points and three points, respectively.

Indicators for employment and hours worked were consistent with negative readings in other broad indicators. The current employment index declined from -6.9 in June to -7.3, its sixth negative reading in seven months. The percentage of firms reporting a decrease in employment (24 percent) exceeded the percentage reporting an increase (17 percent). The average workweek index fell four points; it has now been negative for seven consecutive months.

Manufacturers Continue To Report Price Pressures

A larger share of firms — 77 percent, up from 72 percent in June — reported higher input prices this month. The prices paid index increased six points, to 75.6, its highest reading since March 1980.

by Anonymous on 7/17/2008 08:43:00 AM

We had so much fun--I use this word advisedly--with IndyMac and moral hazard yesterday that I have to return to the well. It's a nice deep one.

From Bloomberg this morning:

July 17 (Bloomberg) -- IndyMac Bancorp Inc.'s collapse may spur withdrawals from banks ranging from First BanCorp in Puerto Rico to Los Angeles-based Nara Bancorp Inc. as customers trim accounts below the $100,000 limit on deposit insurance, according to Sandler O'Neill & Partners LP.

``IndyMac's failure has people worried about others,'' Mark Fitzgibbon, a principal at Sandler O'Neill, said in an interview. Fitzgibbon told clients in a report this week that signs of weakness may prompt customers ``to more actively move deposits to banks that are perceived to be healthier.''

The result could be a liquidity squeeze at banks that rely on ``jumbo'' deposits, Fitzgibbon said. His report, published July 15, included more than 50 companies with jumbo time accounts, typically certificates of deposit, that exceeded 25 percent of first-quarter deposits.

Topping the list was First BanCorp at 72 percent. Puerto Rico-based Doral Financial Corp. had 60 percent and Nara Bancorp had 53 percent, according to Sandler. Bank of America Corp., the biggest U.S. consumer bank, stood at 12 percent at the end of 2007; the report didn't have more recent data.

If any of you would like my personal opinion, for what it is worth, I wouldn't put $12.72 in a bank with 72% jumbo deposits. Certainly not after this:

Alan Cohen, senior vice president of marketing at First BanCorp, said in an interview that Fitzgibbon's report contained ``grave inaccuracies.'' In an e-mailed statement, the company said Sandler should have excluded brokered CDs, ``a stable source of funding.'' Without those, jumbo time deposits equal about 8 percent of total deposits, the bank said.

Whoa, Nellie.

Really, the issue with "jumbo" deposits is, precisely, the extent to which such large deposits are "brokered" versus "core." A bank's "core deposits" are those made by individuals and businesses in the bank's local market areas who have some retail relationship with the bank--checking accounts, loans, what have you. Brokered deposits are also frequently referred to as "hot money," and the idea that First BanCorp considers them a "stable source of funding" ought to raise a few eyebrows. Here's the federal regulators' take on the subject:

Deposit brokers have traditionally provided intermediary services for banks and investors. Recent developments in technology provide bankers increased access to a broad range of potential investors who have no relationship with the bank and who actively seek the highest returns offered within the financial industry. In particular, the Internet and other automated service providers are effectively and efficiently matching yield-focused investors with potentially high-yielding deposits. Typically, banks offer certificates of deposit (CDs) tailored to the $100,000 FDIC deposit insurance limit to eliminate credit risk to the investor, but amounts may exceed insurance coverage. Rates paid on these deposits are often higher than those paid for local market area retail CDs, but due to the FDIC insurance coverage, these rates may be lower than for unsecured wholesale market funding.

Customers who focus exclusively on rates are highly rate-sensitive and provide less stable funding than do those with local retail deposit relationships. These rate-sensitive customers have easy access to, and are frequently well informed about, alternative markets and investments, and may have no other relationship with or loyalty to the bank. If market conditions change or more attractive returns become available, these customers may rapidly transfer their funds to new institutions or investments. Rate-sensitive customers with deposits in excess of the insurance limits also may be alert to and sensitive to changes in a bank's financial condition. Accordingly, these rate-sensitive depositors, both under and over the $100,000 FDIC insurance limit, may exhibit characteristics more typical of wholesale investors.

It was, after all, one of Senator Schumer's biggest complaints about IndyMac in his famous letter to the regulators that, as of June 2008, 32% of IndyMac's total deposits were brokered and that the bank was insufficiently capitalized to withstand that risk.

We had a number of folks arguing yesterday that the $100,000 insurance limit should be raised to account for inflation. Atrios suggested that yesterday. Part of my own wariness over that stems from the fact that so many of the "jumbo deposits" of these banks are, indeed, "hot money," not your basic middle-class family with $250,000 in the local bank in nice stable core deposits. At First BanCorp, it appears that only a shade over 10% of jumbo deposits are core deposits.

Of course, it's hard to say how stable core depositors are, these days. The trouble with trying to assess the risk of bank runs or deposit destabilization is that people are, well, people, and they can respond very differently to the same situation. From Bloomberg:

Martha Duran made the 75-mile drive from Running Springs, California, to close her CDs. She waited from 8:30 a.m. to 4 p.m. on July 14, ending up with sunburn on her neck and an appointment for noon on July 15.

``This is a scare of a lifetime,'' said Duran, a 70-year-old retired office administrator. ``I worked hard for my money. I may not be a millionaire, but every little bit counts.''

Not everyone visiting the bank was there for withdrawals. Sanford Mazel, a 74-year-old retired U.S. Postal Service employee from Altadena, California, came to make a deposit, saying he was reassured by the government protection.

``It's FDIC, so who gives a damn?'' Mazel said. ``Let the world go to hell. The money will be there.''

I think it would be hard to write any banking policy that would discourage Martha from being part of a bank run or encourage Sanford to panic.

by Calculated Risk on 7/17/2008 08:42:00 AM

From the WSJ: J.P. Morgan's Net Falls 53%. A few excerpts:

Chief Executive Jamie Dimon said he expects "the economic environment to continue to be weak -- and to likely get weaker -- and for the capital markets to remain under stress." He added that "since substantial risks still remain on our balance sheet, these factors will likely affect our business for the remainder of the year or longer."
...
[C]redit-loss provisions more than doubled to $3.45 billion but fell 22% from the first quarter. Home-equity charge-offs surged to 2.16% from 0.44%, while subprime-mortgage charge-offs quadrupled. Charge-offs for prime mortgages surged to 0.91% from 0.05%.
...
The [credit card] charge-off rate surged to 4.98% from 3.62% a year earlier and 4.37% in the first quarter.

From the conference call (hat tip Brian):

Analyst Mike Mayo: Can you elaborate more, you mentioned home equity might be a little bit better than you expected. But prime mortgage going from 48 basis points up to 91 base business points linked quarter, can you just elaborate more on what you're seeing there and why?

JPM: Mike, it's exactly the same risk factors and all the other things. It's high LTV, it's stated income, it's California , Florida , Arizona . I you agree with you they're track staggering numbers. It's just really hard for us to tell. Our current expectations of those losses can triple from here. We're prepared for that and we will reserve for that appropriately going forward.

Mayo: Prime mortgage losses could go from 91 basis points to 270 basis points?

JPM: Yes. We had 100 million a quarter and we could go to 300 million a quarter. Not next quarter. But if you look at current trends, maybe we're being overly conservative, that could be 300 million a quarter sometime in '09.

We are all subprime now!

by Calculated Risk on 7/17/2008 08:35:00 AM

The key number in the release was that single-family starts were at 647 thousand in June; the lowest level since 1991. Single-family permits were at 613 thousand in June, suggesting starts will fall even further next month.

Multi-family starts is volatile month-to-month, so the headline number for starts increased.

Also employment (in residential construction) tends to follow completions. Completions will follow starts lower over the next few months. Single-family completions are still at 847 thousand - well above the level of single-family starts.

Click on graph for larger image in new window.

The graph shows total housing starts vs. single family housing starts.

Single family starts are at the lowest level since 1991.

Note that the current recession on the graph is not official.

Here is the Census Bureau reports on housing Permits, Starts and Completions.

Building permits decreased:

Privately-owned housing units authorized by building permits in June were at a seasonally adjusted annual rate of 1,091,000. This is 11.6 percent above the revised May rate of 978,000, but is 23.9 percent below the revised June 2007 estimate of 1,433,000.

Single-family authorizations in June were at a rate of 613,000; this is 3.5 percent below the May figure of 635,000.

The declines in single family permits suggest further declines in starts next month.

On housing starts:

Privately-owned housing starts in June were at a seasonally adjusted annual rate of 1,066,000. This is 9.1 percent above the revised May estimate of 977,000, but is 26.9 percent below the revised June 2007 rate of1,458,000.

Single-family housing starts in June were at a rate of 647,000; this is 5.3 percent below the May figure of 683,000.

And on completions:

Privately-owned housing completions in June were at a seasonally adjusted annual rate of 1,167,000. This is 1.2 percent above the revised May estimate of 1,153,000, but is 21.7 percent below the revised June 2007 rate of 1,491,000.

Single-family housing completions in June were at a rate of 859,000; this is 2.9 percent below the May figure of 885,000.

Notice that single-family completions are still significantly higher than single-family starts. More on starts and completions later.