by Calculated Risk on 8/23/2008 10:13:00 AM

A quote from Bloomberg: Freddie, Fannie Failure Could Be World `Catastrophe,' Yu Says

``If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,'' [Yu Yongding, a former adviser to China's central bank] said in e-mailed answers to questions yesterday. ``If it is not the end of the world, it is the end of the current international financial system.'

And from the WaPo: Treasury's Vigil On Fannie, Freddie

A top concern of Treasury Secretary Henry M. Paulson Jr. as he ponders whether to pull the trigger on a rescue plan for mortgage financiers Fannie Mae and Freddie Mac is the fate of its "preferred" shareholders, which include regional and community banks across the nation and central banks around the world, according to private analysts who closely follow the department.
...
Treasury officials are worried that a sell-off of these [preferred] shares poses serious risks to the broader financial system, the analysts said.

And from the NY Times: Uncertainty Over Fannie and Freddie

“We’re in a Catch 22,” said an executive with one of the mortgage firms who was not authorized to speak to the media. “As long as there is uncertainty over Treasury’s plan, we can’t raise money, and as long as we can’t raise money, there’s going to be more and more speculation about Treasury’s plan.”
...
“You would have to be insane to invest in these companies right now, and we’ve basically told them that,” said an investment professional with one firm that was approached by Freddie Mac, but who is not authorized to speak to the media. “When Treasury comes in, they are guaranteed to get a better deal than us, which would push down the value of our investment. So why would we ever invest before we know what Treasury is going to do?”

It seems like just a matter of when - not if - Paulson's hand will be forced and the Treasury will rescue Fannie and Freddie.

by Calculated Risk on 8/22/2008 08:27:00 PM

The Federal Reserve reports that delinquency rates rose in Q2 in all categories. (hat tip Rick)

Click on graph for larger image in new window.

This graph shows the delinquency rates at the commercial banks for three key categories: residential real estate, commercial real estate, and consumer credit cards.

Credit card delinquency rates are at 4.9%, about the same level as the peak of the '01 recession. Credit card delinquencies peaked at 5.45% during the '91 recession.

Commercial real estate delinquencies are rising rapidly, and are at the highest rate since Q1 '95 (as delinquency rates declined following the S&L crisis).

Residential real estate delinquencies are at the highest level since the Fed started tracking the data (since Q1 '91).

Although there is credit deterioration everywhere, the rise in CRE delinquencies is especially significant. The Fed defines commercial as "construction and land development loans, loans secured by multifamily residences, and loans secured by nonfarm, nonresidential real estate", and many of the problems are probably in the C&D loans.

My guess is commercial real estate delinquencies will be higher than residential in Q3, even though residential delinquencies are still increasing rapidly.

by Calculated Risk on 8/22/2008 07:12:00 PM

From the FDIC: Citizens Bank and Trust, Chillicothe, MO, Acquires the Insured Deposits of the Columbian Bank and Trust Company, Topeka, KS

The Columbian Bank and Trust Company, Topeka, Kansas, was closed today by the Kansas Bank Commissioner J. Thomas Thull, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Citizens Bank and Trust, Chillicothe, Missouri, to assume the insured deposits of The Columbian Bank and Trust Company.

The nine branches of The Columbian Bank and Trust Company will reopen on Monday as branches of Citizens Bank and Trust. Depositors of the failed bank will automatically become depositors of Citizens Bank and Trust. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage.

Over the weekend, customers of The Columbian Bank and Trust Company Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of June 30, 2008, The Columbian Bank and Trust Company had total assets of $752 million and total deposits of $622 million, of which there were approximately $46 million in uninsured deposits held in approximately 610 accounts that potentially exceeded the insurance limits. This amount is an estimate that is likely to change once the FDIC obtains additional information from these customers.

The Columbian Bank and Trust Company also had approximately $268 million in brokered deposits that are not part of today's transaction. The FDIC will pay the brokers directly for the amount of their insured funds.
...
Citizens Bank and Trust agreed to assume the insured deposits for a 1.125% premium. It will also purchase $85.5 million of the failed bank's assets. The assets are comprised mainly of cash, cash equivalents and securities. The FDIC will retain the remaining assets for later disposition.

The cost to the FDIC's Deposit Insurance Fund is estimated to be $60 million. The Columbian Bank and Trust Company is the first bank to fail in Kansas since Midland Bank of Kansas, Mission, Kansas, on April 2, 1993. This year, a total of nine FDIC-insured institutions have been closed.

by Calculated Risk on 8/22/2008 04:46:00 PM

It's Friday afternoon. Time to check with the FDIC.

Here is the FDIC Failed Bank List.

It's been three weeks since the last failure.

by Calculated Risk on 8/22/2008 02:56:00 PM

Fed Chairman Bernanke's urged changes in the financial structure in his speech this morning.

First, Bernanke pointed out the moral hazard in bailing out Bear Stearns:

As you know, in March the Federal Reserve acted to prevent the default of the investment bank Bear Stearns. ... [T]hose events also have consequences that must be addressed. In particular, if no countervailing actions are taken, what would be perceived as an implicit expansion of the safety net could exacerbate the problem of "too big to fail," possibly resulting in excessive risk-taking and yet greater systemic risk in the future. Mitigating that problem is one of the design challenges that we face as we consider the future evolution of our system.

Bernanke suggested that regulatory and statutory changes need to be made so that the Fed can wipe out the equity holders and give haircuts to some creditors when critical nonbanks fail:

A statutory resolution regime for nonbanks, besides reducing uncertainty, would also limit moral hazard by allowing the government to resolve failing firms in a way that is orderly but also wipes out equity holders and haircuts some creditors, analogous to what happens when a commercial bank fails.
emphasis added

by Anonymous on 8/22/2008 01:05:00 PM

Long-time readers will remember the MMI, or Muddled Metaphor Index, which was basically a long-running gag at the media's expense. Now I've been provoked again, and so I introduce the MTI, or Mortgage Telephone Index. I'm sort of hoping this will be the only entrant into the series, but you never know. The MTI features reporters and editors who apparently spend all their day on bad cell phone connections and do not actually read much about mortgages. This produces an effect like the old game of "Telephone," with equally hilarious results.

Today's Washington Post brings us "Bad Begets Worse," which is actually the title of this article and did I not make that up.

Freddie Mac, for instance, no longer finances no-money-down mortgages, nor does it continue to buy or guarantee mortgages given to people who have failed to document their finances. Fannie Mae has withdrawn from the market for all-day loans, which are considered risky because they require less documentation than traditional prime loans.

No, Fannie Mae has not suddenly decided that mortgage loans need to have terms of more than 24 hours to be eligible for purchase. It appears that someone said "Alt-A" and someone else heard "all-day."

Presumably we will be able to tell if we have any readers at the Washington Post by how long it takes for that to go away . . . .

(Hat tip, Michael!)

by Calculated Risk on 8/22/2008 12:41:00 PM

“The environment is still challenging. We see no reason for optimism and are managing our business accordingly.”
Glenn Murphy, chairman and CEO of Gap Inc., Aug 22, 2008

And more bad news for mall owners from GlobeSt.com: Gap Cutting Square Footage By Up to 15% (hat tip Sean)

Gap has dropped the number of store openings this year and will cut its overall square footage 10% to 15% over the next three to five years, executives said at the company’s second quarter conference call.

by Calculated Risk on 8/22/2008 10:00:00 AM

[T]he financial storm that reached gale force some weeks before our last meeting here in Jackson Hole has not yet subsided, and its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment. Add to this mix a jump in inflation ... and the result has been one of the most challenging economic and policy environments in memory. Fed Chairman Bernanke, Aug 22, 2008

Fed Chairman Ben Bernanke at the Jackson Hole Symposium: Reducing Systemic Risk

On Inflation:

In view of the weakening outlook and the downside risks to growth, the Federal Open Market Committee (FOMC) has maintained a relatively low target for the federal funds rate despite an increase in inflationary pressures. This strategy has been conditioned on our expectation that the prices of oil and other commodities would ultimately stabilize, in part as the result of slowing global growth, and that this outcome, together with well-anchored inflation expectations and increased slack in resource utilization, would foster a return to price stability in the medium run. In this regard, the recent decline in commodity prices, as well as the increased stability of the dollar, has been encouraging. If not reversed, these developments, together with a pace of growth that is likely to fall short of potential for a time, should lead inflation to moderate later this year and next year. Nevertheless, the inflation outlook remains highly uncertain ...
emphasis added

This is about as pessimistic as a Fed Chairman can be on the economic outlook.

by Calculated Risk on 8/22/2008 09:48:00 AM

From CNBC: S. Korea Bank Interested in Lehman, Boosting Stock

State-run Korea Development Bank said on Friday Lehman Brothers was one of its options for acquisitions, reviving expectations that the U.S. investment bank might still bring in a large investor.

"We are studying a number of options and are open to all possibilities, which could include (buying) Lehman," a KDB spokesman said.

Interesting. I have no opinion if this is likely to happen.

by Calculated Risk on 8/21/2008 11:12:00 PM

From the NY Times: Some Fear Commercial Property Loans Will Be Next Stage in Downturn

“The fear is the next shoe to drop may be commercial real estate,” said Jeffrey Harte, a banking analyst at Sandler O’Neil. “When consumer credit goes south, commercial will follow.”

At the end of the second quarter, Deutsche Bank held $25.1 billion worth of commercial loans. Morgan Stanley held $22.1 billion and Citigroup had $19.1 billion.

Lehman Brothers, which has the largest exposure to this type of security, is shopping about $40 billion worth of commercial real estate assets, as well as its entire commercial real estate business.

And the biggest concern are the CRE equivalent of stated income loans and Option ARMs. Some loans were made on pro forma income (aka wishful thinking like stated income), and the loans included reserves to pay interest until rents increased (like a negatively amortizing option ARM).

From Bloomberg: Commercial-Mortgage Bond Spreads Soar on Harlem Loan (hat tip Bob_in_MA)

Yields on commercial real estate securities relative to benchmarks rose to near record highs amid concern that Riverton Apartments, a high-rise complex in Manhattan's Harlem neighborhood, will default on a loan.
...
At Riverton, income projections (pro forma) factored in converting rent- stabilized apartments to market rates. ... The borrower burned through a $19 million reserve to cover the shortfall in cash flow that was expected from initially lower rent payments ...

``We expect that additional pro forma loans will likely suffer a fate similar to Riverton Apartments,'' ... Lehman analysts wrote.

Who coodanode.