by Calculated Risk on 9/15/2008 04:50:00 PM

Here is the TED Spread from Bloomberg (hat tip James, Glenn and others)

The TED spread has increased to 2.01% (from just over 1% last week). This is close to the highs reached in August 2007, late 2007 and in the spring of 2008 (the three previous waves of the credit crisis).

Note: the TED spread is the difference between the three month T-bill and the LIBOR interest rate. Usually the TED spread is less than 0.5%. The higher the spread, the greater the perceived credit risks (compared to "risk free" treasuries).

by Anonymous on 9/15/2008 04:28:00 PM

I thought maybe we'd need some comic relief on a day like today. And there's nothing like Gretchen Morgenson for comedy.

This may be the single dumbest thing Morgenson has ever written. I had to read this over several times, aloud, to make sure I wasn't misreading it:

Here is a modest suggestion for James B. Lockhart, chairman of the F.H.F.A., to consider: Do the new owners — us deep-pocketed taxpayers — a favor, and open up Mac ’n’ Mae’s books so we can see exactly what we own.

Also, force both companies to disclose details on every mortgage they guaranteed or purchased in the last 10 years. This would include loan type, the year when the loan was made, the original rating on the security and its originator.

That way, the new owners would be able to see how deep into the subprime loan swamp Fannie and Freddie waded during the lending spree. After all, according to Inside Mortgage Finance, an industry publication, Mac ’n’ Mae bought almost $170 billion in subprime mortgage-backed securities in 2005, roughly one-third of the total issuance that year. And they bought an additional $120 billion in subprime mortgage securities in 2006, or 27 percent of the total amount issued.

I can't even start with the fact that after all this time, Morgenson still can't keep straight on the difference between the rating of a security (or a tranche of one) and the "rating" of a mortgage loan. She has been making that mistake for about two years now, as far as my memory serves, and she will apparently never stop.

No, today we must contemplate the "modest" suggestion that Fannie and Freddie report loan-level data on every loan purchased or guaranteed in the last ten years, so that the taxpayers can see for themselves what we've got here.

By my rough calculation, the two GSEs purchased about $10.013 trillion in mortgage loans between 1997 and 2007. (Data here, Figure 26.) I do not have average loan size figures for all of those years, but in 2002, the midpoint, the average loan size was $160,000. Using that average, we get 62,581,250 loans.

(Wait, you say. The total mortgage debt outstanding for all holders of mortgage loans for the whole country at the end of 2007 was only $12 trillion. And total Fannie and Freddie portfolio (retained and MBS) at the end of 2007 was only about $5 trillion. Well, yes. But Morgenson wants data on every loan ever purchased in those years, whether they are still outstanding or not.)

So how are Billy Joe and Bobby Sue Taxpayer going to examine a database of 62.5 million loans? Fairly slowly, I'd guess. Since the Taxpayers don't generally run mainframes, it just wouldn't do to "disclose" this information on magnetic tape. A lot of them do have PCs, of course, and many of those PCs run Excel. Excel 2003 has a maximum number of rows per spreadsheet of 65,536, so you could get 62.5 million loans into no more than about 950 separate spreadsheets.

Maybe this could just be for the Taxpayers who run Access. Access has no limit for the number of records, although the database size is limited to 2GB. We don't really know how much data per 62.5 million loans Morgenson wants, so I don't really know how many separate databases we'd need here. I just know I wouldn't want to try to manipulate one on my home PC; I'd guess that it wouldn't exactly run very fast.

Of course there's always paper, which can be made available online as pdf. With a limited number of columns and a small font, you might be able to get 100 loans on a page. That would only require a 625,812.5 page "disclosure." That shouldn't create any server problems, and we could all go long on manufacturers of toner cartridges.

Now that I think about it, it would be sort of fun if Lockhart decided to take Morgenson up on her modest suggestion. That is, if he generated a 625,812.5 page report and emailed it to Morgenson. The Times must have pretty big servers, no?

You know you are in the presence of a not very well hidden agenda when someone proposes something this dumb. "The taxpayers" do not have the time or the expertise or the technology to browse through a disclosure regarding 62.5 million loans. Most sophisticated institutional investors don't have it, either. The GSEs disclose summary data because life is too damned short for anyone to get anything but summaries. All Morgenson is doing here is making a ridiculous demand that won't be met, so that she can then claim that Fannie and Freddie "refuse to disclose fully."

by Calculated Risk on 9/15/2008 03:32:00 PM

From MarketWatch:

Feds ask Goldman, JPMorgan Chase to lead AIG lending: report

AIG lending facility could be $70 bln-$75 bln: report

by Calculated Risk on 9/15/2008 03:19:00 PM

An open thread for comments ...

Both Wachovia and WaMu are off 26%.

AIG is off 56%.

No word from the NY Fed meeting on AIG.

by Calculated Risk on 9/15/2008 01:33:00 PM

Just headlines for now ...

NY Fed spokesman confirms meeting on AIG.

NY Fed hosting meeting with Treasury, Banks on AIG.

Geithner (NY Fed President), Dinallo (Superintendent of Insurance for New York State) at meeting that began at 11:30 AM ET.

CNBC reported the NY Fed hired Morgan Stanley to negotiate bridge loan for AIG.

Update: the last time the Fed hired Morgan Stanley was to advise on possible alternatives for Fannie and Freddie. That didn't work out too well for investors.

by Calculated Risk on 9/15/2008 11:53:00 AM

AIG was expected to announce a restructuring plan this morning. Apparently no news is bad news, and AIG stock is now off 63%.

MarketWatch is reporting: NY state governor to make statement about AIG at midday

Also, WaMu is off 20% and Wachovia is off 25%.

Update from MarketWatch: AIG allowed to access $20 bln in assets from subsidiaries

Update2: Governor Paterson (based on headlines):
AIG has liquidity problem.
Paterson urges Federal government to take action.
Paterson wants Fed's to provide bridge loan.
Paterson wants AIG to be able to shift capital (beware policy holders!)

by Calculated Risk on 9/15/2008 10:24:00 AM

At a news conference announcing the BofA purchase of Merrill, BofA CEO Ken Lewis just said that he expects the rest of 2008 and most of 2009 to be tough for financial services. Lewis expects the economy to recover in the 2nd half of 2009, but charge-offs to continue to rise until sometime in 2010.

Transcript (hat tip Brian):

NY Times: I wanted to see if each of you could tell us a little bit, as you look ahead, a year out, how you think the industry will look different -- areas like jobs, leverage ratios, business mix, competitive landscape. What do you think are going to be the most different-looking parts of the business in a year? And I mean industrywide?

KEN LEWIS: You mean financial services, not just investment banking and not just banks?

NY Times: Yes, yes.

KEN LEWIS: I think it's going to be -- I think the remainder of this year and all of next year will be a relatively tough time for the financial services industry. Now, having said that, we expect the economy to begin recovering in the second half of next year, but not at a pace that would cause charge-offs to dramatically decrease. I think that's probably a 2010 situation. So, I think revenue opportunities will be tough, and high levels of charge-offs will continue in the commercial banking side, and we're going to have to be very focused on being efficient and gaining market share to get the kind of revenue growth that we want. But I don't see the clouds parting as I would like them to in 2009.

JOHN THAIN: I think the only thing I would add to that is, for those firms who have large trading businesses and/or carry large amounts of less liquid assets, I think you'll see a continued reduction in risk, a continued shrinkage in leverage ratios, and a continued focus on improving core equity ratios to risk-weighted assets. Of course, with the demise of both Bear Stearns and Lehman, there's already been a pretty dramatic change to the shape of the industry.I also would say that, as we go forward, size is going to matter, so the ability to have a diversified stream of earnings, the ability to maintain high degrees of funding certainty are going to continue to be very important.

KEN LEWIS: You could probably look back and say, I would think, that we've gone through a golden era of banking and financial services in general, and things are just going to be -- they may be simpler because you're not going to have the highly complex structured products, etc., but it's going to be tougher and so there are going to be fewer companies, and we're going to have to be better at what we do.

by Calculated Risk on 9/15/2008 08:38:00 AM

Away from financials, the economy continues to weaken. The New York Fed reported this morning: Empire State Manufacturing Survey

The Empire State Manufacturing Survey indicates that manufacturing activity in New York State weakened in September. ... The general business conditions index fell 10.2 points in September to -7.4, reversing most of the gains in the preceding two months and suggesting some renewed weakening in business conditions.

There was some good news on prices, but overall the report was weak.

UPDATE: From MarketWatch: U.S. Aug. industrial output plunges 1.1%

Led by a big drop in auto production, industrial output plunged 1.1% in August, the biggest drop since Hurricane Katrina three years ago, the Federal Reserve reported Monday. ... Industrial production has now fallen 1.5% in the past year and 2% since the peak in January.

by Calculated Risk on 9/15/2008 07:55:00 AM

From Bloomberg: Lehman Files for Biggest Bankruptcy as Suitors Balk

Brothers Holdings Inc. ... a Chapter 11 petition with U.S. Bankruptcy Court in Manhattan today. The collapse of Lehman, which listed more than $613 billion of debt, dwarfs WorldCom Inc.'s insolvency in 2002 and Drexel Burnham Lambert's failure in 1990.
...
Lehman's filing was made by lawyers from New York's Weil Gotshal & Manges LLP led by Harvey Miller.

The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

And so the day begins ...

by Calculated Risk on 9/15/2008 12:57:00 AM

From Lehman Brothers: Lehman Brothers Holdings Inc. Announces It Intends to File Chapter 11 Bankruptcy Petition; No Other Lehman Brothers' U.S. Subsidiaries or Affiliates, Including Its Broker-Dealer and Investment Management Subsidiaries, Are
Included in the Filing

NEW YORK, September 15, 2008 – Lehman Brothers Holdings Inc. (“LBHI”) announced today that it intends to file a petition under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York. None of the broker-dealer subsidiaries or other subsidiaries of LBHI will be included in the Chapter 11 filing and all of the broker-dealers will continue to operate. Customers of Lehman Brothers, including customers of its wholly owned subsidiary, Neuberger Berman Holdings, LLC, may continue to trade or take other actions with respect to their accounts.

The Board of Directors of LBHI authorized the filing of the Chapter 11 petition in order to protect its assets and maximize value. In conjunction with the filing, LBHI intends to file a variety of first day motions that will allow it to continue to manage operations in the ordinary course. Those motions include requests to make wage and salary payments and continue other benefits to its employees.

LBHI is exploring the sale of its broker-dealer operations and, as previously announced, is in advanced discussions with a number of potential purchasers to sell its Investment Management Division (“IMD”). LBHI intends to pursue those discussions as well as a number of other strategic alternatives.
Neuberger Berman, LLC and Lehman Brothers Asset Management will continue to conduct business as usual and will not be subject to the bankruptcy case of its parent, and its portfolio management, research and operating functions remain intact. In addition, fully paid securities of customers of Neuberger Berman are segregated from the assets of Lehman Brothers and are not subject to the claims of Lehman Brothers Holdings’ creditors.