by Calculated Risk on 11/11/2008 09:51:00 AM

From Reuters: Option ARM specialist Downey Financial may fail

Downey Financial Corp ... one of the largest specialists in "option" adjustable-rate mortgages, said on Monday its survival was in doubt because it may fail to raise enough capital to satisfy its regulators.

In its quarterly report filed with the U.S. Securities and Exchange Commission, Downey said there was "substantial doubt" about its ability and that of its banking unit "to continue as going concerns for a reasonable period of time."

Something to watch this friday!

by Calculated Risk on 11/11/2008 01:07:00 AM

From the WSJ: Mall Owner Is Warning of Default

Ailing mall owner General Growth Properties Inc. warned Monday in a government filing that its failure to refinance or extend $1 billion in debt due this month could trigger default on billions of dollars in debt and its ability to continue operations would be in "substantial doubt."
...
General Growth has $900 million in debt coming due Nov. 28 on two luxury malls on the Las Vegas strip. It has another $58 million in bonds due on Dec. 1.

From the GGP 10-Q on the economy:

Deteriorating economic conditions will have an adverse affect on our revenues and available cash, and may also impair our ability to sell our properties.

General and retail economic conditions continue to weaken, and we expect this weakness to continue and worsen in 2009 as the economy enters a recessionary or near recessionary period. Consumer spending recently declined for the first time in 17 years, the unemployment rate is expected to rise, consumer confidence has decreased dramatically and the stock market remains extremely volatile. Given these expected economic conditions, we believe there is a significantly increased risk that the sales of stores operating in our centers will decrease, negatively affecting their ability to make minimum rent payments and increasing the risk of tenant bankruptcies. In addition to the direct adverse effect of tenant failures to pay minimum rents and tenant bankruptcies on our operations, these events also negatively affect our ability to attract and maintain minimum rent levels for new tenants. These circumstances negatively affect our revenues and available cash, and also reduce the value of our properties, reducing the likelihood that we would be able to sell such properties, on attractive terms or at all.

by Calculated Risk on 11/10/2008 08:49:00 PM

From the Financial Times: Plunge in UK retail sales and home deals (hat tip Jonathan)

High street sales suffered their sharpest annual fall in nearly four years in October and home purchases fell to a record low ... in a further sign of the UK economy’s deepening woes.
...
The BRC report says total retail sales were 0.1 per cent below their October 2007 level ... “A fall in the value of total sales is extremely rare,” said Helen Dickinson, head of retail at the consultancy KPMG.
...
The housing picture is no better, according to the RICS. The average number of completed sales per surveyor fell to 10.9 over the past three months, the weakest sales record since the survey began in 1978.

In the U.S., the year-over-year change in nominal retail sales went negative in September. The following graph shows the year-over-year change in nominal and real U.S. retail sales since 1993.

Click on graph for larger image in new window.

The Census Bureau reported that nominal retail sales decreased 1.0% year-over-year (retail and food services decreased 1.0%) in Septebmer, and real retail sales (adjusting with PCE) declined by 4.3% on a YoY basis.

Retail sales for October will be reported on Friday, and based on retailer reports, the numbers will be ugly.

by Calculated Risk on 11/10/2008 06:56:00 PM

Fed Press Release:

The Federal Reserve Board on Monday announced its approval of the applications and notices under sections 3 and 4 of the Bank Holding Company Act by American Express Company and American Express Travel Related Services Company, Inc., both of New York, New York, to become bank holding companies on conversion of American Express Centurion Bank, Salt Lake City, Utah, to a bank, and to retain certain nonbanking subsidiaries, including American Express Bank, FSB, Salt Lake City, Utah.

American Express has approximately $127 billion in consolidated assets, and becoming a bank holding company allows access to financing from the Federal Reserve for some of these assets. More details are in the Fed Order.

by Calculated Risk on 11/10/2008 05:49:00 PM

From Bloomberg: Fannie Says $100 Billion Pledge From Treasury May Not Be Enough

Fannie Mae may need more than the $100 billion in funding pledged by the U.S. Treasury to stay afloat after reporting a record $29 billion loss and confronting more difficulty in issuing and refinancing debt.

``This commitment may not be sufficient to keep us in solvent condition or from being placed into receivership,'' if there are further ``substantial'' losses or if the company is unable to sell unsecured debt, Washington-based Fannie said in a filing today with the U.S. Securities and Exchange Commission.

Here is the Fannie 10-Q filed with the SEC. This statement is under "Risks Relating to Our Business" and is not a prediction from Fannie, just a statement of a possible risk. The huge loss reported today was mostly because of a reduction in deferred tax assets.

Here are a few excerpts from the Fannie section on Housing and Economic Conditions:

Growth in U.S. residential mortgage debt outstanding slowed to an estimated annual rate of 2.0% based on the first six months of 2008, compared with an estimated annual rate of 8.3% based on the first six months of 2007, and is expected to continue to decline to a growth rate of about 0% in 2009.

We continue to expect that home prices will decline 7% to 9% on a national basis in 2008, and that home prices nationally will decline 15% to 19% from their peak in 2006 before they stabilize. Through September 30, 2008, home prices nationally have declined 10% from their peak in 2006. (Our estimates compare to approximately 12% to 16% for 2008, and 27% to 32% peak-to-trough, using the Case-Schiller index.) We currently expect home price declines at the top end of our estimated ranges. We also expect significant regional variation in these national home price decline percentages, with steeper declines in certain areas such as Florida, California, Nevada and Arizona. The deteriorating economic conditions and related government actions that occurred in the third quarter of 2008 have increased the uncertainty of future economic conditions, including home price movements. Therefore, while our peak-to-trough home price forecast is at the top end of the 15% to 19% range, there is increasing uncertainty about the actual amount of decline that will occur.

So Fannie is expecting house price declines of around 32% using the Case-Shiller index.

by Calculated Risk on 11/10/2008 01:32:00 PM

A daily update ... day to day there has been little progress, but overall most indicators have improved since the crisis started.

As an example, the LIBOR is down sharply from 4.82% on Oct 10th to 2.24% today. And the TED spread is at 2.0% from 4.63%. The progress is slow, but there has been progress.

LIBOR declined again today, from Bloomberg:

The London interbank offered rate, or Libor, that banks say they charge each other for such loans declined 5 basis points to 2.24 percent today, the lowest level since November 2004, the British Bankers' Association said.

The three-month LIBOR was at 2.29% on Friday. The rate peaked at 4.81875% on Oct. 10. (Better)

The yield on 3 month treasuries fell to 0.20 for 0.303%. (worse)

With the effective Fed Funds rate at 0.23% (as of Friday), this is probably somewhat in the right range. At some point, I'd like to see the effective Fed funds rate close to the target rate (currently 1.0%).

The TED spread: 2.02, up slightly from 1.98 (slightly worse)

The TED spread is around 2.0, but still too high. The peak was 4.63 on Oct 10th. I'd like to see the spread move back down to 1.0 or lower. A normal spread is about 0.5.

The two year swap spread from Bloomberg: 103.75 down slightly from 107.25 (slightly better). This spread peaked at near 165 in early October, so there has been significant progress, and we are finally getting close to 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. It has been a few days without an announcement from the Treasury... (no progress).

Weekly Fed Balance Sheet. This will be update weekly.


Click on graph for larger image in new window.

The Federal Reserve assets increased $105 billion last week to $2.075 trillion. Note: the graph shows Total Factors Supplying Federal Reserve Funds and is an available series that is close to assets.

So far the Federal Reserve assets are still increasing rapidly. It will be a good sign - sometime in the future - when the Fed assets start to decline.

The A2P2 spread is up to 4.23 from 4.2 on Thursday, and down from 4.72 about ten days ago week. (unchanged).

Graph from the Fed.

This is the spread between high and low quality 30 day nonfinancial commercial paper.

The Fed is buying higher quality commercial paper (CP) and this is pushing down the yield on this paper (0.82% yesterday!) - 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 and the TED spread is flat - so there is little progress today - and any progress is coming directly from Fed intervention and increases in the Fed balance sheet, so there is still a long way to go.

by Calculated Risk on 11/10/2008 12:34:00 PM

A couple of great quotes:

"There's a new realization that holding a gift card from a troubled retailer is like having a bank account without FDIC insurance."
Jerry Hirsch writing in the LA Times

From the LA Times: Gift card holders may be out of luck in retail bankruptcies. Gift card buyers beware ...

Note that the Circuit City bankruptcy is somewhat unusual in that most retailers file for bankruptcy after the holiday season. Bloomberg had an article about this last week: `Tis the Season for Retailer Visions of Liquidations

In the last quarter century, about a fifth of large retailers that went bankrupt, including RH Macy & Co. Inc. and FAO Schwarz, did so in January, using holiday sales cash to jump-start reorganizations or finance liquidations.
...
From 1980 to 2008, of the 105 large public retailers that filed for bankruptcy with assets of more then $100 million, only seven did so in December ... That was less than half the 18 that did so in January --the most popular filing month for large retailers ...

This bankruptcy season is different. ...

And the second quote of the day:

"Confidence has deteriorated so badly that merchants and bankers don't even believe in Santa Claus any more."
Martin Zohn, a bankruptcy lawyer in New York, from Bloomberg article.

Maybe this year is a little different than normal with more bankruptcies before the holidays, but I expect to see more retailer bankruptcies in early 2009.

by Calculated Risk on 11/10/2008 09:33:00 AM

From the Fed:

The Federal Reserve Board and the U.S. Treasury on Monday announced the restructuring of the government's financial support to the American International Group (AIG) in order to keep the company strong and facilitate its ability to complete its restructuring process successfully. These new measures establish a more durable capital structure, resolve liquidity issues, facilitate AIG's execution of its plan to sell certain of its businesses in an orderly manner, promote market stability, and protect the interests of the U.S. government and taxpayers.

Equity Purchase
The U.S. Treasury on Monday announced that it will purchase $40 billion of newly issued AIG preferred shares under the Troubled Asset Relief Program. This purchase will allow the Federal Reserve to reduce from $85 billion to $60 billion the total amount available under the credit facility established by the Federal Reserve Bank of New York (New York Fed) on September 16, 2008.

Plus some new credit facilities from the Fed.

In one new facility, the New York Fed will lend up to $22.5 billion to a newly formed limited liability company (LLC) to fund the LLC’s purchase of residential mortgage-backed securities from AIG's U.S. securities lending collateral portfolio. ... As a result, the $37.8 billion securities lending facility established by the New York Fed on October 8, 2008, will be repaid and terminated.
...
In the second new facility, the New York Fed will lend up to $30 billion to a newly formed LLC to fund the LLC's purchase of multi-sector collateralized debt obligations (CDOs) on which AIG Financial Products has written credit default swap (CDS) contracts.

by Calculated Risk on 11/10/2008 09:18:00 AM

From the WSJ: Circuit City Files for Bankruptcy

Troubled electronics retailer Circuit City Stores Inc. filed for Chapter 11 bankruptcy Monday in an effort to stay ahead of lenders owed $898 million.
...
The lenders have agreed to loan Circuit City $1.1 billion to keep the retailer's doors open through the holiday season.

There is a good chance that Circuit City will be gone in January - another serious blow for mall owners.

by Calculated Risk on 11/10/2008 12:28:00 AM

From the NY Times: A.I.G. May Get More in Bailout

The Treasury Department and the Federal Reserve were near a deal to abandon the initial bailout plan and invest another $40 billion in the company ... When the restructured deal is complete, taxpayers will have invested and lent a total of $150 billion to A.I.G., the most the government has ever directed to a single private enterprise. ... The revised deal, which may be announced as early as Monday morning ...

What a mess ...