by Calculated Risk on 9/16/2008 10:28:00 AM

Since the Fed is meeting today, here is the latest Fed Fund probabilities from the Cleveland Fed.

Click on graph for larger image in new window.

Until the last couple of days market participants anticipated no change in the Fed Funds rate in Septemeber. Now, because of recent events, there is significant uncertainty.

The Fed will probably leave rates unchanged (although a 50bps cut is possible), but the wording of the announcement will probably show more concern about the slowing economy and credit markets, and less concern about inflation.

by Calculated Risk on 9/16/2008 09:13:00 AM

Still no announcement from AIG. Shares are trading around $2.32, 50% off the close from yesterday.

by Calculated Risk on 9/16/2008 08:59:00 AM

At least they are still making money ...

From the WSJ: Goldman's Net Drops 70%

Goldman Sachs Group Inc. posted a 70% drop in fiscal third-quarter net income on declining client activity and asset valuations as return on equity fell. ... For the quarter ended Aug. 29, [Goldman] reported net income of $845 million ... Net revenues fell 51% to $6.04 billion ... many worries remain as Goldman's latest numbers show even a firm that in the past was seen as golden is being badly hurt by deteriorating market conditions.

Goldman managed to avoid most of the housing and credit related problems, but the overall business is weak.

by Calculated Risk on 9/16/2008 08:32:00 AM

From the BLS: Consumer Price Index

On a seasonally adjusted basis, the CPI-U decreased 0.1 percent in August, following a 0.8 percent increase in July. The index for energy fell 3.1 percent in August after three consecutive sharp increases.

Core inflation:

The index for all items less food and energy increased 0.2 percent in August after increasing 0.3 percent in July.

Interesting, the BLS reported a sharp decline (1.1 percent) in the lodging away from index, suggesting pricing weakness for hotels.

This is a little bit of good news, and takes some of the pressure off the Fed. However, the CPI has still increased 5.1% (SAAR) during the first eight months of 2008 - way too high for comfort.

by Calculated Risk on 9/15/2008 10:36:00 PM

Click on graph for larger image in new window.

The Shanghai SSE composite index fell below 2000 tonight (still trading). This is the lowest level since late 2006. The index is off about two-thirds from the peak.

This is a stunning stock market crash, and it's not just the Shanghai composite - it's an Asian market rout:

The Hang Seng is off 6%.

The Nikkei 225 is off 5%.

The Seoul Composite is off close to 6%.

by Calculated Risk on 9/15/2008 09:56:00 PM

Some interesting details from the NY Times: Fed Takes Steps to Aid A.I.G

The complex discussions, continuing into the night as a deal was hoped for before United States markets open on Tuesday, involved New York state regulators, federal regulators, private equity firms and Wall Street banks that rely on A.I.G.’s ability to honor its derivatives contracts ...
emphasis added
...
The urgency of the talks grew by late Monday as A.M. Best Company, a credit rating organization specialized in insurance and health-care companies, downgraded the credit of A.I.G. and several of its major subsidiaries. Fitch Ratings also downgraded A.I.G.’s credit Monday evening.

Standard & Poor’s downgraded its long-term and short-term counterparty ratings on A.I.G. Monday evening.

But none of those downgrades appeared to be trigger events requiring A.I.G. to post billions of dollars of collateral to its swap counterparties.
...
People briefed on the matter said that if JPMorgan and Goldman Sachs were able to raise a $75 billion credit line by Tuesday, it could avert the all-important debt downgrades by Standard & Poor’s and Moody’s.

AIG seems to be hanging by a thread.

by Calculated Risk on 9/15/2008 07:26:00 PM

From the Wells Fargo 8-K filed with the SEC today:

In connection with the filing today by Lehman Brothers Holdings Inc. (Lehman Brothers) of a Chapter 11 bankruptcy petition, Wells Fargo & Company (the Company) will record other-than-temporary impairment and take a non-cash charge to earnings in third quarter 2008 for investments in senior unsecured notes and perpetual preferred securities issued by Lehman Brothers. The Company’s investments in the notes and preferred securities are included in securities available for sale at a cost of approximately $90 million and $109 million, respectively. The notes currently trade at 25-30 cents on the dollar. The preferred securities currently trade at less than one percent of par value. The Company estimates that as of September 12, 2008, it had approximately $50 million of unsecured counterparty exposure to Lehman Brothers. The Company has no direct lending exposure to Lehman Brothers, and the Wells Fargo Advantage Money Market Funds do not have any direct exposure to Lehman Brothers.

So the $90 million in notes is worth about $25 million, and the $109 million in preferred securities is essentially worthless. With the unsecured counterparty exposure, this loss could be close to $200 million. Just last week, Wells Fargo reported $450 million (or so) in losses associated with Fannie and Freddie.

The Lehman confessional is open!

by Calculated Risk on 9/15/2008 07:17:00 PM

From MarketWatch: Fitch Ratings downgrades AIG to 'A'

Fitch Ratings said late Monday that it downgraded American International Group because the insurer's ability to raise capital for its holding company has become "extremely limited."

Fitch also kept AIG on Rating Watch Negative.

by Calculated Risk on 9/15/2008 05:15:00 PM

From Bloomberg: WaMu Rating Lowered to Junk by S&P on Mortgage Losses (hat tip Justin)

Washington Mutual Inc. ... had its credit rating cut to junk by Standard & Poor's because of the deteriorating housing market.
...
``Increasing market turmoil and the related impact from managing its concentrated mortgage franchise in this troubled housing and credit cycle led to the downgrade,'' S&P wrote.

And the beat goes on ...

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).