by Calculated Risk on 10/05/2008 06:04:00 PM

From Bloomberg: Hypo Real Estate Gets 50 Billion-Euro Government-Led Bailout (hat tip Sam)

The German government and the country's banks and insurers agreed on a 50 billion euro ($68 billion) rescue package for commercial property lender Hypo Real Estate Holding AG ...

The NY Times explained part of the problem at Hypo:

Depfa, a Dublin-based lender that Hypo acquired last year, is at the center of its problems. Depfa underwrote a package of municipal bonds which were subsequently downgraded by ratings agencies. That step obliged Depfa to buy the bonds back ...

So Hypo needs much of the €50 billion to buy back the muni bonds, and despite the downgrades, these munis are probably still worth somewhat close to €50 billion (not like the disastrous losses for some of the MBS that is hitting US and other European banks). So this sounds more like a liquidity issue rather than a solvency problem.

by Calculated Risk on 10/05/2008 03:54:00 PM

From L'Echo: La reprise de Fortis Banque par BNP est bouclée (hat tip Alain)

Alain translates: The "Belgian government keeps a 25% minority (blocking) stake in Fortis Banque Belgium and obtains 10% of BNP Paribas in an all share deal. Luxembourg keeps 33% stake in local subsidiary and gets 1.4% of BNP".

by Calculated Risk on 10/05/2008 03:36:00 PM

Once again Sunday is the new Monday. This week the action is in Europe ...

"Hypo Real Estate has to be stabilized otherwise the damage would be unpredictable."
German Finance Minister Peer Steinbrueck on television, Oct 5, 2008

From the NY Times: Germany Moves to Shore Up Confidence in Economy

Germany’s guarantee of its private savings — worth about 500 billion euros, or more than $700 billion— followed the news that a group of banks had pulled out of a deal to provide 35 billion euros, or $48.2 billion, to rescue the large German mortgage lender, Hypo Real Estate.

The Belgian government, meanwhile, scrambled Sunday to engineer a sale of the Belgian units of Fortis before the start of trading on Monday. The Netherlands effectively nationalized the Dutch operations of the bank on Friday after a joint rescue deal with Belgium and Luxembourg broke down.

In Iceland, where the government seized control of a bank last week, officials were considering more sweeping measures to stabilize finances there as well. And the board of UniCredit, which is based in Milan and also operates in Germany and much of Eastern Europe, met to consider a capital increase after being buffeted by a week of speculation about its solvency.

From Bloomberg: German Government Leads Hypo Real Estate Rescue Talks

And from the WSJ: Governments Scramble to Find Rescue Plans for Hypo, Fortis

And from The Times: Interest rates to drop to 50-year low

Interest rates in Britain will drop to a new 50-year low in the coming months, economists say, as the Bank of England tries to head off a serious recession. The Bank’s monetary policy committee (MPC) is expected to start the process by cutting rates this week.

by Calculated Risk on 10/05/2008 11:47:00 AM

These reports are in German, but I believe they are saying the German government has guaranteed all deposits (update: apparently all deposits by private individuals).

From Reuters: Staat übernimmt Garantie für Einlagen

From Focus: Bund sichert private Spareinlagen komplett

This is probably related to the collapse of the bailout for Hypo.

Executives at the bank, which is Germany’s second largest commercial property investor and has extensive holdings across Europe, are now locked in crisis talks with the German government and central bank in an attempt to deliver an alternative plan before the stock markets open on Monday.

The German Finance Ministry has urged the private sector consortium to rethink its decision.

The collapse of the €35 billion (£27.3 billion) bail-out will provide an immediate test to the pledge made on Saturday by leaders from the biggest European Union countries that they will ensure that no major European financial institution will be allowed to fail.

by Calculated Risk on 10/05/2008 09:29:00 AM

Press Release: Citi Granted Emergency Injunctive Relief Extending Exclusivity Agreement between Citi and Wachovia

Citi tonight was granted emergency injunctive relief extending the Exclusivity Agreement between Citi and Wachovia Corp. until further order of the court. This relief was granted over the objection of Wachovia. Justice Charles Ramos of the Supreme Court of the State of New York issued the order.

Citi is prepared to continue negotiations with Wachovia on the parties’ previously agreed-to transaction.

As indicated by Citi in court filings, the Exclusivity Agreement, while in effect, unconditionally bars Wachovia from negotiating or entering into a merger/acquisition agreement with any party other than Citi.

Under the Judicial Order, Citi and Wachovia must appear before Judge Ramos on Friday, October 10, 2008.

This adds a little suspense , but I think Wells Fargo is the better fit.

by Calculated Risk on 10/04/2008 11:03:00 PM

A letter from Senator Boxer (D-CA): (hat tip Michael)

Thank you for contacting me regarding the financial rescue legislation (H.R.1424). I appreciate hearing from you on this critical issue.

The fundamentals of our economy have been shaken, and Americans are deeply concerned. When Secretary Paulson and Chairman Bernanke placed an urgent phone call a few weeks ago to Congress to say we needed emergency action to prevent a major financial meltdown, I expected they would come forward with a plan that was targeted and reasonable, with appropriate oversight and taxpayer protections.

Unfortunately, what they brought us was a $700 billion blank check, which they asked us to sign with no questions asked. This plan contained no oversight, no taxpayer equity, and no control over CEO pay. I strongly opposed this proposal - and thanks to your phone calls, e-mails, and letters, Congress stopped it in its tracks.

The Senate made major improvements designed to strengthen our economy and protect our taxpayers. Instead of a blank check, the Senate plan included significant Congressional oversight, equity for taxpayers, curbs on executive compensation, an increase in FDIC insurance protection for bank depositors, middle-class tax relief, and job-creating tax incentives for renewable energy. The bill passed the Senate by an overwhelmingly bipartisan vote of 74-25 and the House by a vote of 263-171.

These were very important changes. But let me be honest: There were still aspects of this package that I didn't like. I preferred the government acquiring more equity instead of toxic assets. I wanted the package to be put forward in smaller installments and to include more checks and balances to make sure it would work.

For me, the deciding factor in my Yes vote was information I received from the State of California. I was told by the Treasurer's office that without access to credit, which is the goal of this legislation, California wouldn't be able to sell voter-approved highway, school, and water bonds that are desperately needed for our economy and the creation of good-paying new jobs. In addition, I was told by the Governor's office, that without action, our state might be forced to withhold funds for law enforcement, schools, and other needed services. This would bring our state to its knees and many middle-class families would be in deep trouble. Small businesses are beginning to tell me they cannot get lines of credit to meet payroll, as well.

Rest assured, I will continue to speak out forcefully about the failures that led us to this place and keep working with my colleagues to strengthen confidence in our markets, protect the American taxpayers, and enact regulatory reform to ensure that we don't end up in this mess again.

Again, thank you for writing to me about this very important matter. Even though you may feel frustrated with the outcome of the legislation that passed, your voice absolutely resulted in the enactment of a better bill. Feel free to contact me again about any issue of importance to you.

Barbara Boxer
United States Senator

by Calculated Risk on 10/04/2008 05:18:00 PM

The next Fed meeting is more than three weeks away (a two day meeting on October 28th and 29th) and the economic data suggests the economy is deteriorating rapidly. And the TARP will not start buying assets for several weeks, maybe not until mid-November. This suggests the possibility of an intermeeting Fed rate cut.

Fed Chairman Bernanke released a statement on Friday:

We will continue to use all of the powers at our disposal to mitigate credit market disruptions and to foster a strong, vibrant economy.

The Financial Times notes: Declining economy could force Fed to act

The last time the macro-economic data deteriorated rapidly – around the turn of the year – the Fed reacted decisively with big rate cuts, including an intermeeting move. In the eyes of many the latest data also adds up to an open-and-shut case for further Fed rate cuts.
...
If the Fed does decide to cut, the case for cutting at the meeting is that a new set of economic forecasts could win over doubters. But if the Fed wants to maximise the impact of the cut it could move intermeeting in the hope of shocking the credit markets back to life.
emphasis added

And here are the latest Fed Fund probabilities from the Cleveland Fed.

Click on graph for larger image in new window.

Until a couple of weeks ago, market participants anticipated no change in the Fed Funds rate in October.

Now, because of recent events, there is a strong consensus for a rate cut by the October meeting.

But if you are going to lower rates at the end of October, why wait?

Back in 2004, Bernanke wrote a paper (with NBER economist Kenneth Kuttner) What Explains the Stock Market’s Reaction to Federal Reserve Policy?

The most direct and immediate effects of monetary policy actions, such as changes in the federal funds rate, are on the financial markets; by affecting asset prices and returns, policymakers try to modify economic behavior in ways that will help to achieve their ultimate objectives.
...
The unexpected 50-basis-point intermeeting rate reductions on 3 January [2001] and 18 April [2001] were both greeted euphorically, with one-day returns of 5.3% and 4.0% respectively. The 50-basis-point rate cut on 20 March [2001] was received less enthusiastically, however. Even though the cut was more or less what the futures market had been anticipating, financial press reported that many equity market participants were “disappointed” the rate cut hadn’t been an even larger 75 basis point action. Consequently, the market lost more than 2%.
...
Another unusually vehement reaction to a Fed action is associated with the 25-basis-point intermeeting rate cut on 15 October 1998, which was taken in response to unsettled conditions in the financial markets — specifically, the deteriorating situations in Asia and Russia. For whatever reason, the unexpected intermeeting cut lifted equities over 4%.
...
This study has documented a relatively strong and consistent response of the stock market to unexpected monetary policy actions, using federal funds futures data to gauge policy expectations.

To surprise the market, the Fed might need to cut by at least 50 bps - maybe 75 bps - and announce the action before the market opens on Monday.

by Calculated Risk on 10/04/2008 03:29:00 PM

From Bloomberg: Hypo Real Estate Says Banks Withdrew Support for Rescue Package (hat tip Ryan)

Hypo Real Estate Holding AG, the troubled German property lender, said private banks withdrew their support for a 35 billion-euro ($49 billion) rescue package.

``The intended rescue package involved a liquidity line to be provided by a consortium of several financial institutions,'' Hypo Real Estate said in a statement on the DBF newswire today. ``The consortium has now declined to provide the line. The Group is now in the process of determining the consequences of this'' and ``alternative measures are being investigated.'

Hypo mostly lends to commercial and public projects internationally.

by Calculated Risk on 10/04/2008 08:43:00 AM

This is interesting ... from The Times: Homeowners steer clear of equity release loans

Fearful homeowners have finally called a halt to a decade-long spree of cashing-in on the value of their properties to pay for big-ticket consumer spending and paying off debt, the Bank of England revealed yesterday.

The Bank’s latest figures show that Britons have abruptly abandoned the habit of borrowing against their houses and flats through mortgage equity withdrawal, bringing to an end a decade-long era of the nation using its homes as cash machines.

Second-quarter figures for equity withdrawal showed that, rather than raising borrowed cash against their properties, homeowners injected a net £2.8 billion of new equity.
...
In practice, this means that homeowners collectively invested more capital in properties during the second quarter, either through paying down mortgages or cash payments to buy, than they raised through home loans.

The news marks a big turnaround.

The following graph shows home equity extraction in the U.S. through Q1 2008 (NSA - not seasonally adjusted) provided by Federal Reserve economist Jim Kennedy based on the mortgage system presented in "Estimates of Home Mortgage Originations, Repayments, and Debt On One-to-Four-Family Residences," Alan Greenspan and James Kennedy, Federal Reserve Board FEDS working paper no. 2005-41.

Click on graph for larger image in new window.

Just like in the UK, there was a surge of equity extraction in recent years. And just like in the UK, equity extraction has fallen off a cliff.

I've contacted Dr. Kennedy's office, but unfortunately data isn't available yet for Q2. However the US data probably looks very similar to UK data.

Here is what I wrote last year:

As homeowner equity continues to decline sharply in the coming quarters, combined with tighter lending standards, equity extraction should decline significantly and impact consumer spending.

As of Q1 homeowner equity had declined sharply, lending standards had tightened, and equity extraction had declined significantly. And now, based on the recent monthly data from the BEA on Personal Consumption Expenditures (PCE), it appears consumer spending has slowed sharply. My recent comment was: "[T]this will be the first decline in PCE since Q4 1991. This is strong evidence that the indefatigable U.S. consumer is finally throwing in the towel."

It appears that less equity extraction is finally having a significant impact on consumer spending. Of course consumer spending is also being impact by job losses and the recession.

by Calculated Risk on 10/03/2008 10:58:00 PM

From the Financial Times: Dutch government takes over Fortis units

The Dutch government on Friday re-negotiated last weekend’s bail-out of Fortis in order to buy all of Fortis’s Dutch operations for €16.8bn, including its Dutch insurance operations and the Dutch operations of ABN Amro.
...
Wouter Bos, Dutch finance minister, said the Dutch state took the decision after seeing how Fortis faced greater liquidity problems this week following the rescue.
...
The Dutch government will privatise the Fortis and ABN Amro operations after calm returns to the markets, it said.

Nationalize. Then privatize. That is a proven approach. It will be interesting to see if the Dutch approach works better or worse than the Paulson plan.