by Calculated Risk on 10/14/2008 09:27:00 AM

From IHT: Volcker warns of "considerable recession" in US

"I've seen a lot of crisis, but I've not seen anything quite like this one," Volcker said in a speech in Singapore. "I don't think we can escape damage to the real economy. I think we almost inevitably face a considerable recession."
...
"These kinds of measures — government guarantees and interventions — are really distasteful," said Volcker, who was Fed chief from 1979 to 1987. "However distasteful, I'm afraid they were necessary in this emergency to restore some sense of stability and confidence."
...
"Those banks have been nationalized, overtly or not overtly, which is something that hasn't happened before in the history of developed countries," Volcker said. "How to wean them from government support? That is the challenge of the future."

Once we see a thaw in the credit markets (right now the credit markets have improved only slightly), then I'll update my forecast on housing, the economy and unemployment.

by Calculated Risk on 10/14/2008 08:42:00 AM

Press conference any minute. Here is the CNBC feed.

From the Fed:

The following statement was made by Treasury Secretary Henry M. Paulson, Jr, Federal Reserve Chairman Ben Bernanke and FDIC Chairman Sheila C. Bair:

Today we are taking decisive actions to protect the U.S. economy, to strengthen public confidence in our financial institutions, and to foster the robust functioning of our credit markets. These steps will ensure that the U.S. financial system performs its vital role of providing credit to households and businesses and protecting savings and investments in a manner that promotes strong economic growth in the U.S. and around the world. The overwhelming majority of banks in the United States are strong and well-capitalized. These actions will bolster public confidence in our system to restore and stabilize liquidity necessary to support economic growth.

Last week, the President’s Working Group on Financial Markets announced that the U.S. government would deploy all of our tools in a strategic and collaborative manner to address the current instability in our financial markets and mitigate the risks that instability poses for broader economic growth. This past weekend, we and our G7 colleagues committed to a comprehensive global strategy to provide liquidity to markets, to strengthen financial institutions, to prevent failures that pose systemic risk, to protect savers, and to enforce investor protections.

We welcomed the steps announced by our European colleagues this weekend to implement the action plan, and ensure financial institutions in Europe can finance economic growth. Today we are implementing our strategy with three important actions.

First, Treasury is announcing a voluntary capital purchase program. A broad array of financial institutions is eligible to participate in this program by selling preferred shares to the U.S. government on attractive terms that protect the taxpayer. Second, after receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Paulson signed the systemic risk exception to the FDIC Act, enabling the FDIC to temporarily guarantee the senior debt of all FDIC-insured institutions and their holding companies, as well as deposits in non-interest bearing deposit transaction accounts. Regulators will implement an enhanced supervisory framework to assure appropriate use of this new guarantee.

We are pleased to announce that nine major financial institutions have already agreed to participate in both the capital purchase program and the FDIC guarantee program. We appreciate that these healthy institutions are taking these steps to strengthen their own positions and to enhance the overall performance of the U.S. economy. By participating in these programs, these institutions, along with thousands of others to come, will have enhanced capacity to perform their vital function of lending to U.S. consumers and businesses and promoting economic growth. They have also committed to continued aggressive actions to prevent unnecessary foreclosures and preserve homeownership.

Third, to further increase access to funding for businesses in all sectors of our economy, the Federal Reserve has announced further details of its Commercial Paper Funding Facility (CPFF) program, which provides a broad backstop for the commercial paper market. Beginning October 27, the CPFF will fund purchases of commercial paper of 3 month maturity from high-quality issuers.


Together these three steps significantly strengthen the capital position and funding ability of U.S. financial institutions, enabling them to perform their role of underpinning overall economic growth. These actions demonstrate to market participants here and around the world the strength of the U.S. government’s commitment to take all necessary steps to unlock our credit markets and minimize the impact of the current instability on the overall U.S. economy. The actions taken today are a powerful step toward restoring the health of the global financial system.

by Calculated Risk on 10/14/2008 01:42:00 AM

Update: Here is the CNBC feed.

Bloomberg:

Paulson, Federal Reserve Chairman Ben S. Bernanke and FDIC Chairman Sheila Bair scheduled a press conference at 8:30 a.m. today in Washington.

by Calculated Risk on 10/14/2008 01:02:00 AM

Edward Glaeser: Honoring Paul Krugman

EconomistsView has several Krugman pieces today. How Bubbles Happen, "Thoughts about Thinking", In Defense of Macroeconomics, "The Accidental Theorist" and more.

Krugman: A bit of autobiography

by Calculated Risk on 10/13/2008 09:39:00 PM

From the NY Times: U.S. Investing $250 Billion in Banks

Citigroup and JPMorgan Chase were told they would each get $25 billion; Bank of America and Wells Fargo, $20 billion each (plus an additional $5 billion for their recent acquisitions); Goldman Sachs and Morgan Stanley, $10 billion each, with Bank of New York Mellon and State Street each receiving $2 to 3 billion. Wells Fargo will get $5 billion for its acquisition of Wachovia, and Bank of America the same for amount for its purchase of Merrill Lynch.

... The government will purchase perpectual preferred shares in all the largest U.S. banking companies. The shares will notbe dilutive to current shareholders, a concern to banking chie executives, because perpetual preferred stock holders are paid a dividend, not a portion of earnings.

The capital injections are not voluntary...

by Calculated Risk on 10/13/2008 07:42:00 PM

From the WSJ:

[T]he government is set to buy preferred equity stakes in nine top financial institutions ... It's unclear how much would be invested in each institution. The move is designed to remove any stigma that might come with a government investment.

Banks receiving government funds include Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Bank of New York Mellon.

Not all of the banks involved are happy with the move, but agreed under pressure from the government.

I only count seven.

by Calculated Risk on 10/13/2008 05:36:00 PM

UPDATE: The WSJ article has been updated:

The U.S. government is set to buy preferred equity stakes in nine top financial institutions ... Not all of the banks involved are happy with the move but agreed under pressure from the government.

From the WSJ: Treasury to Roll Out New Approach to Credit Crisis

The Bush administration is expected Tuesday to roll out a wide-ranging effort to restore confidence to the battered banking system, following similar moves by European governments ...

The initiatives will likely supersede many of the government's previous efforts. They are being formulated jointly by the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp...

[T]he Treasury [is expected] to take approximately $250 billion in equity stakes in potentially thousands of banks ...

[T]he FDIC is expected to temporarily extend its backstop from bank deposits to new senior preferred debt issued by banks and thrifts for three years. ...

Other moves could include temporary loan guarantees aimed at helping banks borrow the money they need to do business. ...

The current planning would bring the U.S. in to line with [Europe].

The title of the post is from this piece by Professor Krugman: Moment of Truth

by Calculated Risk on 10/13/2008 04:00:00 PM

The opposite of Cliff Diving.

Dow up just under 1000 points.

S&P 500 up about 100 points, and over 1000.

We will see over the next few days if the credit markets have thawed. This will be critical for the economy going forward.

However, the economic data will continue to be negative as the recession deepens.

by Calculated Risk on 10/13/2008 02:58:00 PM

From Mathew Padilla at the O.C. Register: See where foreclosures are stacking up in O.C.

[A] growing backlog of foreclosures threatens to push home prices further down, some economists and brokers say.
...
MDA DataQuick, in a special report prepared for the Orange County Register, found that as of early September there were more than 3,300 unsold foreclosures in the county. DataQuick looked at all foreclosures for the year ended in June, and checked to see how many had resold. It found 40 percent were unsold.

Matt provides maps of the unsold inventory and time to sell by zip code. So far the foreclosures are piling up in the lower prices areas of Orange County. Some may think that this is still a subprime problem, but in Orange County even the low priced areas have many homes that sold for above the conventional loan limits set by Fannie and Freddie back in 2004 and 2005.

The photo below shows a central orange county house that sold for $600,000 in 2005. Since the conforming limit was $359,650 in 2005, this home may have been bought with an Alt-A loan.

On Alt-A, see Tanta's "Subprime and Alt-A: The End of One Crisis and the Beginning of Another" and for those wondering about Alt-A "Reflections on Alt-A"


Photo credit: Rose Palmisano, The Orange County Register

This foreclosed 3 bedroom home sold for $600,000 in August of 2005.

This home is in the central orange county city of Anaheim.

by Calculated Risk on 10/13/2008 12:50:00 PM

From Bloomberg: EU Nations Commit 1.3 Trillion Euros to Bank Bailouts

France, Germany, Spain, the Netherlands and Austria committed 1.3 trillion euros ($1.8 trillion) to guarantee bank loans and take stakes in lenders ...

In Germany, Chancellor Angela Merkel pledged to guarantee up to 400 billion euros of lending between banks and set aside 20 billion euros to cover potential losses. It will also provide as much as 80 billion euros to recapitalize banks ...

In France, President Nicolas Sarkozy said the state will guarantee 320 billion euros of bank debt and set up a fund allowed to spend up to 40 billion euros ...

Spain's cabinet today approved measures to guarantee up to 100 billion euros of bank debt this year and authorized the government to buy shares in banks in need of capital.
...
The Austrian government will set up an 85 billion-euro clearinghouse run by the Austrian Kontrollbank to provide cash by holding illiquid bank assets as collateral. Austria also pledged to buy banking shares...

The Dutch government will guarantee up to 200 billion euros of interbank loans ...

Italy will guarantee some bank debt and buy preferred stock in banks if necessary ... without providing any figures.

As Nobel Prize-winning economist Paul Krugman noted this morning:

This sort of temporary part-nationalization ... is the crisis solution advocated by many economists — and sources told The Times that it was also the solution privately favored by Ben Bernanke, the Federal Reserve chairman.
emphasis added

This was generally the approach favored by Roubini (see Roubini's post today), Krugman and many others. When the history of the credit crisis is written, it will be interesting to understand why Paulson proposed his plan - even though Bernanke and others argued for the recapitalization plan.