by Calculated Risk on 11/05/2008 04:51:00 PM

Ambac and MBIA are back in the news ...

From Bloomberg: MBIA, Ambac Losses Widen on Higher Claims Forecast

MBIA Inc. and Ambac Financial Group Inc., the bond insurers crippled by credit-rating downgrades, posted wider losses than analysts anticipated ...

MBIA ... reported a $806.5 million net loss after setting $961 million aside for guarantees on home-equity loan bonds. Ambac fell 41 percent as it recorded a $2.43 billion net loss after reserving $3.1 billion.

"The big issue for bond insurers is their ratings," said Jim Ryan, an analyst with Morningstar Inc. in Chicago. "If the rating agencies pile on, that could create more problems."

And right on cue from MarketWatch: Moody's cuts Ambac to 'Baa1'; outlook developing

Paul Jackson at HousingWire adds: Ambac Posts $2.4 Billion Q3 Loss on “False” MBS Recovery

In an investor presentation, Ambac said that second quarter RMBS trending among private-party transactions it had insured — which had initially turned upward earlier this year — has since proven to be the latest example of a “false positive” in battered mortgage securities markets.
...
Ambac expressed hope that the Treasury’s TARP program and capital purchase program would “establish a floor for housing market fundamentals,” according to its investor presentation. The insurer has asked Treasury to consider guaranteeing a portion of its structured securities portfolio, as well.

I think it is absurd to hope that the TARP will "establish a floor for housing market fundamentals". Hope is not a plan.

Note: just to be clear "Hope is not a plan" is a phrase I've used for at least 30 years ... and was not intended as a swipe at President-elect Obama.

by Calculated Risk on 11/05/2008 03:24:00 PM

Robert Shiller on forecasting and the economy ...

"This is not a run of the mill recession that we are in. This is a crisis of confidence that we haven't seen since the Great Depression.
...
Ultimately I think economic forecasting is more guess work than people realize. In times when you don't have a fundamental change, you can exrapolate curves, and people do that pretty well. But right now I don't trust extrapolation. It also - forecasting - depends on how the new government, how the new president, what he does, how he shapes confidence - and those are also unknowns at this point."

And many other interesting comments ... "no one really knows what to do", "we are getting into Ben's nightmare scenario" ... "and then we try some other heterodox monetary policies":

by Calculated Risk on 11/05/2008 12:01:00 PM

LIBOR declined again today, from Bloomberg:

The London interbank offered rate, or Libor, for three- month loans fell to 2.51 percent today, from 4.82 percent on Oct. 10.

The three-month LIBOR was at 2.71 yesterday. The rate peaked at 4.81875% on Oct. 10.

The yield on 3 month treasuries fell slightly to 0.44% from 0.47%. (unchanged)

Usually the 3 month trades below the target Fed Funds rate by around 25 bps, so this is too low with the Fed funds rate at 1.0%. However, the effective Fed Funds rate is even lower (0.23% yesterday), so maybe the 3 month yield of 0.44% is somewhat in the right range.

The TED spread: 2.07, down from 2.23 (Better) This is still high, but significantly below the peak of 4.63 on Oct 10th.

It is nice to be back near 2.0, and I'd like to see the spread move back down to 1.0 or lower.

The two year swap spread from Bloomberg: 105.12 down from 116.52 (slightly better). This spread peaked at near 165 in early October, so there has been significant progress, and I'd like to see this under 100.

Activity in the Treasury's Supplementary Financing Program (SFP). This is the Treasury program to raise cash for the Fed's liquidity initiatives. If this program slows down borrowing, I think that would be a good sign.

Here is a list of SFP sales. No announcement today from the Treasury ... no progress.

Note: Once a week I will include the Fed balance sheet assets. If this starts to decline that would be a positive sign.

The A2P2 spread is down to 4.18 from 4.45 yesterday and a record 4.72 last week. better.

The Fed is buying higher quality commercial paper (CP) and this is pushing down the yield on this paper (0.97% on Friday!) - and increasing the spread between AA and A2/P2 CP. So this indicator has been a little misleading. But it now sounds like the Fed might intervene in other companies and just the talk of possible Fed action is probably pushing down the A2/P2 rates. If the credit crisis eases, I'd expect a significant decline in this spread.

The LIBOR is down, the TED spread is off again, the A2/P2 spread declined - so there is more progress.

by Calculated Risk on 11/05/2008 10:36:00 AM

There is plenty of speculation this morning about possible nominees for Treasury Secretary. Bloomberg mentions former Clinton Treasury Secretary Lawrence Summers and NY Fed President Tim Geithner:

Summers, 53, is favored to return to the Treasury post that he held under President Bill Clinton because Obama values his experience and familiarity with markets and global leaders ... Still, people close to the president-elect stress no final decision has been reached and that Timothy Geithner, president of the New York Federal Reserve, is also a strong contender.

Another person frequently mentioned is JPMorgan Chase CEO Jamie Dimon.

Goldman Sachs conference call this morning on impact of election (my notes):

President-elect Obama will face a significantly deteriorating economy. The risks are to the downside of Goldman forecast of -2.0% GDP in Q4 and -1.0% in Q1 2009, and upside risk to Goldman unemployment forecast (peak of 8.0%).

Currently expect $200 billion in stimulus. Now, with Democratic control of government, expect to see a larger economic stimulus package of at least $300 billion, maybe as high as $500 billion. It's possible there will be a smaller stimulus package this fall, and then a 2nd bill early next year (late January or February).

Also expect to see more emphasis on mortgage modifications. Expect something similar to the FDIC proposal - also might see 90 day foreclosure moratorium.

Healthcare reform and tax policy discussions will probably be pushed out for a year or two - unless some of the tax proposals are part of the stimulus package.

Expect significantly larger budget deficits over the next two years.

Other issues will probably be pushed out (healthcare reform, energy and environmental policies).

Q&A: Hatzius says the probability of depression is 'very low' unless we see phenomenal mistakes from Fed and Government - and he doesn't expect those mistakes.

by Calculated Risk on 11/05/2008 10:07:00 AM

From the Institute for Supply Management (ISM): October 2008 Non-Manufacturing ISM Report On Business®

The report shows the service sector contracted sharply in October.

"The NMI (Non-Manufacturing Index) registered 44.4 percent in October, 5.8 percentage points lower than the 50.2 percent registered in September, indicating contraction in the non-manufacturing sector after two consecutive months of growth."
Anthony Nieves, chair of the Institute for Supply Management

There were a couple of interesting comments on discretionary spending:

"Uncertainty is having the usual effect on business. Our response is traditional — stop all discretionary spending."

"Business down significantly! Discretionary spending disappearing."

This is exactly how businesses (and consumers) react to uncertainty - halt all discretionary spending. This is usually a temporary reaction until the business can adjust to changes in economic conditions.

by Calculated Risk on 11/05/2008 08:44:00 AM

“Market conditions in the homebuilding industry deteriorated during our fourth fiscal quarter and October, characterized by rising foreclosures, high inventory levels of both new and existing homes and reduced liquidity in the mortgage markets. In addition, consumer confidence has been eroded by a weakening economy, higher unemployment and record volatility in the capital markets."
Donald R. Horton, Chairman, D.R. Horton, Nov 4, 2008

From D.R. Horton press release:

Home sales revenue for the fourth quarter of fiscal 2008 totaled $1.5 billion on 6,961 homes closed, compared to $3.0 billion in the same quarter of fiscal 2007 on 11,733 homes closed.
...
The Company’s net loss for the fourth quarter is estimated to be in the range of $800 to $900 million ...

Horton's home sales were half (in dollars), and about 40% lower in units, compared to the same quarter in 2007. Ouch.

by Calculated Risk on 11/05/2008 08:22:00 AM

From Bloomberg: GMAC Posts Quarterly Loss, ResCap Unit Faces Doubt on Survival

GMAC ... third-quarter net loss widened to a record $2.52 billion from $1.6 billion a year earlier ...

GMAC's results were crushed by slumps in the housing market, where foreclosures are running at record levels, and in auto sales, which GM labeled the worst since 1945 when it reported October results this week.

The story mentions that GMAC will only lend to car buyers with the highest credit ratings - and that contributed to the dismal sales auto sales in October.

Also GMAC is considering converting to a bank holding company to gain more access to capital. Currently GM owns 49% of GMAC, and entities (like GM) with more than 25% ownership in a bank holding company are subject to strict capital requirements and other regulations. That is why a conversion of GMAC to a bank holding company would probably be part of a GM-Chrysler merger, with Cerberus swapping Chrysler for enough of GM's stake in GMAC to lower GM's ownership below 25%.

by Calculated Risk on 11/04/2008 08:39:00 PM

Not much happening tonight (except some sort of election) ... but here are a couple of interesting articles on commercial real estate (CRE):

From Bloomberg: NYC Commercial Property Sales Plunge in Credit Freeze

New York City commercial real estate transactions plunged 61 percent in 2008 through October as the global credit crisis roiled lending and sidelined buyers.

About $17 billion of transactions have closed so far and the market is headed for its worst year since 2004 ...

From the WaPo: Financial Crisis Hits Commercial Real Estate Market

PricewaterhouseCoopers and the Urban Land Institute concluded in a recently report released that "U.S. commercial real estate faces its worst year since the wrenching 1991-1992 industry depression."

The report said that nationwide, rents are stagnant and likely to drop. Vacancy rates at offices, shopping malls and hotels are expected to rise and billions of dollars of loans are coming due next year.

by Calculated Risk on 11/04/2008 06:11:00 PM

From Bloomberg: Credit-Default Swaps Top $33 Trillion, Depository Trust Says

Credit-default swaps totaling $33.6 trillion are outstanding on companies, governments and asset- backed securities worldwide, the Depository Trust & Clearing Corp. said in a report ... released on its Web site today.

Knock yourselves out ... tons of data.

by Calculated Risk on 11/04/2008 04:46:00 PM

From Bloomberg: Fannie Mortgage-Bond Spreads Fall to Lowest in Almost Two Weeks (no link yet)

Yields on Fannie Mae, Freddie Mac and Ginnie Mae mortgage bonds tumbled to the lowest in almost two weeks relative to U.S. government notes, potentially lowering home-loan rates.

The difference between yields on Washington-based Fannie's current-coupon 30-year fixed-rate mortgage securities and 10-year Treasuries fell about 23 basis points to about 183 basis points ...

A little more progress.