by Calculated Risk on 9/19/2008 06:47:00 PM

From the NY Times: Congressional Leaders Stunned by Warnings

[A]s the Fed chairman, Ben S. Bernanke, laid out the potentially devastating ramifications of the financial crisis before congressional leaders on Thursday night, there was a stunned silence at first.
...
Senator Christopher J. Dodd [said] the congressional leaders were told “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.”
emphasis added

It's amazing how long it takes for some people to realize what is happening. There were plenty of warnings.

Oh well, it sounds like there will be more breaking news this weekend.

by Calculated Risk on 9/19/2008 05:40:00 PM

From the American Institute of Architects: More Negative Conditions for Architecture Billings Index

Click on graph for larger image in new window.

While conditions have improved somewhat for three consecutive months, the Architecture Billings Index (ABI) continues to point to unfavorable conditions for the nonresidential construction market. As a leading economic indicator of construction activity, the ABI shows an approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the August ABI rating was 47.6, up slightly from the 46.8 mark in July (any score above 50 indicates an increase in billings). emphasis added

The key here is that the index fell off a cliff in early 2008, and that there is "an approximate nine to twelve month lag time between architecture billings and construction spending". We should expect weaker non-residential structure investment in the second half of 2008 and throughout 2009.

by Calculated Risk on 9/19/2008 05:04:00 PM

From MarketWatch: Companies try to scramble aboard SEC lifeboat

Companies omitted include General Electric Co., American Express, Capital One, which all have huge financial-services businesses. ... A person familiar with the situation said [GE] has talked to the SEC about possibly being included on the list. American Express ... said it was just beginning to look into the possibility of being added.

CIT Group ... "made a formal request to be added to the list," spokesman Curtis Ritter said in an email to MarketWatch. ... Guaranty Financial Group Inc. said Friday that it should be added to the list too.

I'd be impressed if someone asked to get off the list.

by Calculated Risk on 9/19/2008 02:44:00 PM

Lost in the shuffle, Moody's announced last night: Moody's places Ambac and MBIA on review for possible downgrade (no link)

Moody's Investors Service has placed the Aa3 insurance financial strength rating of Ambac Assurance Corporation (Ambac) and the A2 insurance financial strength rating of MBIA Insurance Corporation (MBIA) on review for possible downgrade. Today's rating action follows Moody's announcement of an upward revision to cumulative loss projections for subprime RMBS exposures ...

From MarketWatch: Ambac, MBIA fall as Moody's warns it may cut again

by Calculated Risk on 9/19/2008 01:20:00 PM

From the California Employment Development Department: California’s Unemployment Rate Increases To 7.7 Percent (hat tip Harry)

California’s unemployment rate was 7.7 percent in August, up from a revised 7.4 percent in July, the state Employment Development Department (EDD) reported today. A year ago, in August 2007, California’s unemployment rate was 5.5 percent.

According to EDD’s monthly survey of employers, nonfarm payroll employment in California decreased by 7,700 jobs over the month, for a total of 15,109,000.
...
The number of people unemployed in California was 1,417,000 – up by 61,000 over the month, and up by 413,000 compared with August of last year.

The recession in California is getting worse, and rising unemployment will negatively impact the economy and the housing market, leading to lower house prices and more foreclosures - and probably more layoffs. A vicious cycle ...

by Calculated Risk on 9/19/2008 12:58:00 PM

Secretary Paulson said: "We're talking hundreds of billions."

The NY Times DealBook has other estimates: Putting a Price Tag on a Government Bailout

“It’s probably $500 [billion] to a trillion dollars, and that’s going to visit the taxpayers sooner or later,” [Sen. Richard Shelby] said. “It’s either going to be a debt charged to all of us or to all our children.”
...
Bloomberg News ... reported that the government is considering establishing an $800 billion fund to purchase so-called failed assets and a separate $400 billion pool at the Federal Deposit Insurance Corporation to insure investors in money-market funds.

However buying the assets isn't enough. These asset sales will lead to substantial write-downs, and that will reduce the regulatory capital at the banks.

So how do the banks recapitalize?

The hope is that by making the assets transparent, and selling off the toxic waste, that will rebuild confidence with investors. Maybe. But the U.S. Government might also have to help recapitalize the banks to keep them lending (like the Reconstruction Finance Corporation (RFC) did during the Depression). Either way, it appears the current shareholders face massive dilution.

Also - as an aside - when the banks make their assets transparent (should be a requirement for participation), we will discover if any executives misrepresented their assets and filed false reports with the SEC. That could be prosecuted under Sarbanes-Oxley, and perhaps a few executives spending time in jail might help with the moral hazard issues.

by Calculated Risk on 9/19/2008 10:50:00 AM

Paulson statement on TARP (Troubled Asset Relief Program): (note: the name isn't official, but as I mentioned in the previous thread, the TARP is intended to cover all of Wall Street's sins!)

Last night, Federal Reserve Chairman Ben Bernanke, SEC Chairman Chris Cox and I had a lengthy and productive working session with Congressional leaders. We began a substantive discussion on the need for a comprehensive approach to relieving the stresses on our financial institutions and markets.

We have acted on a case-by-case basis in recent weeks, addressing problems at Fannie Mae and Freddie Mac, working with market participants to prepare for the failure of Lehman Brothers, and lending to AIG so it can sell some of its assets in an orderly manner. And this morning we've taken a number of powerful tactical steps to increase confidence in the system, including the establishment of a temporary guaranty program for the U.S. money market mutual fund industry.

Despite these steps, more is needed. We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system's stresses.

The underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded. These illiquid assets are choking off the flow of credit that is so vitally important to our economy. When the financial system works as it should, money and capital flow to and from households and businesses to pay for home loans, school loans and investments that create jobs. As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to have significant effects on our financial system and our economy.

As we all know, lax lending practices earlier this decade led to irresponsible lending and irresponsible borrowing. This simply put too many families into mortgages they could not afford. We are seeing the impact on homeowners and neighborhoods, with 5 million homeowners now delinquent or in foreclosure. What began as a sub-prime lending problem has spread to other, less- risky mortgages, and contributed to excess home inventories that have pushed down home prices for responsible homeowners.

A similar scenario is playing out among the lenders who made those mortgages, the securitizers who bought, repackaged and resold them, and the investors who bought them. These troubled loans are now parked, or frozen, on the balance sheets of banks and other financial institutions, preventing them from financing productive loans. The inability to determine their worth has fostered uncertainty about mortgage assets, and even about the financial condition of the institutions that own them. The normal buying and selling of nearly all types of mortgage assets has become challenged.

These illiquid assets are clogging up our financial system, and undermining the strength of our otherwise sound financial institutions. As a result, Americans' personal savings are threatened, and the ability of consumers and businesses to borrow and finance spending, investment, and job creation has been disrupted.

To restore confidence in our markets and our financial institutions, so they can fuel continued growth and prosperity, we must address the underlying problem.

The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy. This troubled asset relief program must be properly designed and sufficiently large to have maximum impact, while including features that protect the taxpayer to the maximum extent possible. The ultimate taxpayer protection will be the stability this troubled asset relief program provides to our financial system, even as it will involve a significant investment of taxpayer dollars. I am convinced that this bold approach will cost American families far less than the alternative - a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion.

I believe many Members of Congress share my conviction. I will spend the weekend working with members of Congress of both parties to examine approaches to alleviate the pressure of these bad loans on our system, so credit can flow once again to American consumers and companies. Our economic health requires that we work together for prompt, bipartisan action.

As we work with the Congress to pass this legislation over the next week, other immediate actions will provide relief.

First, to provide critical additional funding to our mortgage markets, the GSEs Fannie Mae and Freddie Mac will increase their purchases of mortgage-backed securities (MBS). These two enterprises must carry out their mission to support the mortgage market.

Second, to increase the availability of capital for new home loans, Treasury will expand the MBS purchase program we announced earlier this month. This will complement the capital provided by the GSEs and will help facilitate mortgage availability and affordability.

These two steps will provide some initial support to mortgage assets, but they are not enough. Many of the illiquid assets clogging our system today do not meet the regulatory requirements to be eligible for purchase by the GSEs or by the Treasury program.

I look forward to working with Congress to pass necessary legislation to remove these troubled assets from our financial system. When we get through this difficult period, which we will, our next task must be to improve the financial regulatory structure so that these past excesses do not recur. This crisis demonstrates in vivid terms that our financial regulatory structure is sub-optimal, duplicative and outdated. I have put forward my ideas for a modernized financial oversight structure that matches our modern economy, and more closely links the regulatory structure to the reasons why we regulate. That is a critical debate for another day.

Right now, our focus is restoring the strength of our financial system so it can again finance economic growth. The financial security of all Americans - their retirement savings, their home values, their ability to borrow for college, and the opportunities for more and higher-paying jobs - depends on our ability to restore our financial institutions to a sound footing.''

In the Q&A, Paulson said "We're talking hundreds of billions."

by Calculated Risk on 9/19/2008 10:14:00 AM

Secretary Paulson just spoke and said the plan would be "hundreds of billions".

Update: A few excerpts:

"We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system's stresses.

The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy.

This troubled asset relief program must be properly designed and sufficiently large to have maximum impact, while including features that protect the taxpayer to the maximum extent possible."

I guess we know the name: Troubled Asset Relief Program (TARP). The tarp hides all sins.

by Calculated Risk on 9/19/2008 08:58:00 AM

From Bloomberg: U.S. Treasury to Insure Money-Market Fund Holdings

The U.S. Treasury plans to use as much as $50 billion from the country's Exchange Stabilization Fund to temporarily protect investors from losses on money- market mutual funds.

The Treasury will insure for a year holdings of publicly offered money-market funds that pay a fee to participate in the program. Retail and institutional funds are eligible, the department said today in a statement.

Update: The Fed is also extending non-recourse loans to certain institutions to buy commercial paper:

The Federal Reserve Board on Friday announced two enhancements to its programs to provide liquidity to markets. One initiative will extend non-recourse loans at the primary credit rate to U.S. depository institutions and bank holding companies to finance their purchases of high-quality asset-backed commercial paper (ABCP) from money market mutual funds. This should assist money funds that hold such paper in meeting demands for redemptions by investors and foster liquidity in the ABCP markets and broader money markets.

To further support market functioning, the Federal Reserve also plans to purchase from primary dealers federal agency discount notes, which are short-term debt obligations issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.

by Calculated Risk on 9/19/2008 01:58:00 AM

Here is the press release: SEC Halts Short Selling of Financial Stocks to Protect Investors and Markets

Here is the order from the SEC:

IT IS ORDERED that, pursuant to our Section 12(k)(2) powers, all persons are prohibited from short selling3 any publicly traded securities of any Included Financial Firm.
...
This Order shall be effective immediately and shall terminate at 11:59 p.m. EDT on October 2, 2008, unless further extended by the Commission.

The list is long - 799 financial companies - here is the first page:

AAME ATLANTIC AMERICAN CORP
AANB ABIGAIL ADAMS NATL BANCORP INC
ABBC ABINGTON BANCORP INC PA
ABCB AMERIS BANCORP
ABCW ANCHOR BANCORP WISCONSIN INC
ABK AMBAC FINANCIAL GROUP INC
ABNJ AMERICAN BANCORP OF NJ INC
ABVA ALLIANCE BANKSHARES CORP
ACAP AMERICAN PHYSICIANS CAPITAL INC
ACBA AMERICAN COMMUNITY BNCSHRS INC
ACE ACE LTD
ACFC ATLANTIC COAST FED CORP
ACGL ARCH CAPITAL GROUP LTD NEW
ADVNA ADVANTA CORP
ADVNB ADVANTA CORP
AEG AEGON N V
AEL AMERICAN EQUITY INVT LIFE HLDG C
AET AETNA INC NEW
AF ASTORIA FINANCIAL CORP
AFFM AFFIRMATIVE INSURANCE HLDGS INC
AFG AMERICAN FINANCIAL GROUP INC NEW
AFL A F L A C INC
AGII ARGO GROUP INTL HLDGS LTD
AGO ASSURED GUARANTY LTD
AGP AMERIGROUP CORP
AGX ARGAN INC
AHD ATLAS PIPELINE HOLDINGS L P
AHL ASPEN INSURANCE HOLDINGS LTD
AIB ALLIED IRISH BANKS PLC
AIG AMERICAN INTERNATIONAL GROUP