by Calculated Risk on 7/29/2008 05:13:00 PM

A little spillover from the Merrill Lynch CDO sale ...

From Bloomberg: Citigroup Markdowns May Rise $8 Billion, Analyst Says

Citigroup Inc. will probably write down the value of collateralized debt obligations by $8 billion in the third quarter, Deutsche Bank AG analyst Mike Mayo said ...

by Calculated Risk on 7/29/2008 03:53:00 PM

As part of the monthly house price release, Case-Shiller presents tiered price indices for 20 major cities.

The following graphs are for Los Angeles using both nominal and real (inflation adjusted) prices.

Click on graph for larger image in new window.

The first graph shows the nominal Case-Shiller prices for homes in Los Angeles.

The low price range is less than $401,614. Prices in this range have fallen 36.5% from the peak.

The mid-range is $401,614 to $606,600. Prices have fallen 29.8%.

The high price range is above $606,600. Prices in this range have fallen 20.0% from the peak.

The second graph shows the same data in real terms (inflation adjusted using CPI less shelter).

Looking at the data in real terms probably provides a better idea of how much further prices will fall. If prices fall to the January 2000 level in real terms (shown as 100 on the graph), then the high end has fallen about half way from the peak, and the low end about 2/3 of the way from the peak in Los Angeles.

I've noted this before: In a number of previous housing busts, real prices declined for 5 to 7 years before finally hitting bottom. That is my expectation for the duration of the price declines in the bubble areas. The bottom for real prices will probably be in the 2010 to 2012 period. The less bubbly areas will probably bottom sooner.

If this bust follows the historical pattern, we will continue to see real price declines for several more years, and the rate of decline will probably slow (imagine somewhat of a bell curve on those graphs).

by Calculated Risk on 7/29/2008 02:42:00 PM

More to come ... all is OK here. We were definitely rockin'

USGS is calling it 5.8.

by Calculated Risk on 7/29/2008 12:27:00 PM

From the WSJ: Bennigan's, Steak &Ale Close Doors, File for Bankruptcy Protection (hat tip Michael)

Long-time, national restaurant chains Bennigan's and Steak & Ale have closed their doors and filed for Chapter 7 bankruptcy protection, shuttering more than 300 sites and letting go of thousand of employees.

It is one of the country's largest restaurant bankruptcies ... The chains will liquidate and are not likely to re-open.

More empty space available. More bad debt. More consumer ripples.

by Calculated Risk on 7/29/2008 11:54:00 AM

As I noted this morning, the rate of monthly price declines has slowed a little. Update: Note there is some seasonality too.

Click on graph for larger image in new window.

This graph shows the annualized monthly price changes for the Case-Shiller Composite 20 since the beginning of 2006.

The rate of price declines has slowed over the last couple of months, but prices were still falling at a 8.9% annual rate in May (from April).

The second graph shows the annualized month-to-month price declines for Los Angeles in the early '90s.

This shows that price declines tend to come in surges and we shouldn't read too much into the slowing monthly rate of decline.

In general prices are still too way too high, and will continue to fall for some time.

by Calculated Risk on 7/29/2008 10:12:00 AM

Words a banker doesn't want to hear: "We’ll talk to you on Friday"

From the NY Times: Lax Lending Standards Led to IndyMac’s Downfall (hat tip warlock)

IndyMac executives suspected the end was near even before the regulators turned up. Examiners do not warn banks they are coming, but they typically take over failing institutions on Fridays so they can have a weekend to put things in order and reopen under government control on Monday.

As the lines grew outside IndyMac branches during the week of July 7, Mr. Perry talked with an Office of Thrift Supervision official to assess the situation.

“We’ll talk to you on Friday,” the official said, according to one bank official briefed on the call. As word of the call spread through IndyMac, executives began packing their personal belongings.

by Calculated Risk on 7/29/2008 09:00:00 AM

S&P/Case-Shiller released their monthly Home Price Indices for May this morning. This includes prices for 20 individual cities, and two composite indices (10 cities and 20 cities). Note: This is not the quarterly national house price index.

Click on graph for larger image in new window.

The first graph shows the nominal Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index was off 10.4% annual rate in May (from April), and is off 19.8% from the peak.

The Composite 20 index was off 8.9% annual rate in May (from April), and is off 18.4% from the peak.

The rate of price declines has slowed a little

The second graph shows the Year over year change in both indices.

The Composite 10 is off 16.9% over the last year.

The Composite 20 is off 15.8% over the last year.

More on prices later ... including selected cities, real prices, and some thoughts on the slowing rate of price declines.

by Calculated Risk on 7/28/2008 11:45:00 PM

From the WSJ: Mervyn's Is Close To Bankruptcy Filing (hat tip sunlight)

Lawyers for Mervyn's LLC are telling creditors that the regional department-store chain will file for bankruptcy protection in the next few days, barring a last-minute cash infusion ...

Mervyn's, which operates 177 stores, mostly in California, has been struggling in the face of sharp sales declines this year in California and Arizona, where the real-estate markets have collapsed.

More problems for mall owners. And more ripples from the real estate bust.

by Calculated Risk on 7/28/2008 07:33:00 PM

As part of Merrill's major announcement today, Merrill is offering "new common shares with gross proceeds of approximately $8.5 billion."

When Merrill sold stock last December (at $48 per share), Merrill offered to compensate Temasek Holdings if Merrill sold additional stock, at a lower price, within one year.

From the Merrill announcement today:

Merrill Lynch plans to raise $8.5 billion through the public offering of common stock announced today ... Temasek Holdings, Merrill Lynch’s largest shareholder, has committed to purchase $3.4 billion of common stock in the offering ...

In satisfaction of Merrill Lynch’s obligations under the reset provisions contained in the investment agreement with Temasek Holdings, Merrill Lynch has agreed to pay Temasek $2.5 billion, 100% of which Temasek has contractually agreed to invest in the offering at the public offering price without any future reset protection.

Basically the $2.5 billion is a reset on the previous purchase price (dilution without additional capital). Here is the Merrill SEC filing from last December:

If Company sells or agrees to sell any common stock (or equity securities convertible into common stock) within one year of closing at a purchase, conversion or reference price per share less than $48, then the Company must make a payment to Purchaser to compensate Purchaser for the aggregate excess amount per share paid by Purchaser. At the Company’s option, the Company may issue additional shares of common stock in lieu of cash to Purchaser with a market value equal to such excess amount.

Merrill should have been highly motivated to avoid paying this price protection penalty, and this shows a certain desperation - although the good news is there is no future reset protection for Temasek.

by Calculated Risk on 7/28/2008 05:47:00 PM

From Merrill Lynch: Merrill Lynch Announces Substantial Sale of U.S. ABS CDOs, Exposure Reduction of $11.1 Billion

First, here are the write-downs:

As a result of the transactions announced today, the company expects to record a pre-tax write-down in the third quarter of 2008 of approximately $5.7 billion. This write-down is comprised of a $4.4 billion loss associated with the sale of CDOs, a $0.5 billion net loss on the termination of hedges with XL Capital Assurance and an approximately $0.8 billion maximum loss related to the potential settlement of other CDO hedges with certain monoline counterparties.

Here is the info on the CDO sale:

On July 28, 2008, Merrill Lynch agreed to sell $30.6 billion gross notional amount of U.S. super senior ABS CDOs to an affiliate of Lone Star Funds for a purchase price of $6.7 billion. At the end of the second quarter of 2008, these CDOs were carried at $11.1 billion, and in connection with this sale Merrill Lynch will record a write-down of $4.4 billion pre-tax in the third quarter of 2008.

On a pro forma basis, this sale will reduce Merrill Lynch’s aggregate U.S. super senior ABS CDO long exposures from $19.9 billion at June 27, 2008, to $8.8 billion, the majority of which comprises older vintage collateral – 2005 and earlier. The pro forma $8.8 billion super senior long exposure is hedged with an aggregate of $7.2 billion of short exposure, of which $6.0 billion are with highly-rated non-monoline counterparties, of which virtually all have strong collateral servicing agreements, and $1.1 billion are with MBIA. The remaining net exposure will be $1.6 billion. The sale will reduce Merrill Lynch’s risk-weighted assets by approximately $29 billion.

Merrill Lynch will provide financing to the purchaser for approximately 75% of the purchase price. The recourse on this loan will be limited to the assets of the purchaser. The purchaser will not own any assets other than those sold pursuant to this transaction.

There is much more in the press release.