by Calculated Risk on 11/12/2008 09:37:00 PM

Check out the ABX-HE-AAA- 07-2 close today. More Cliff Diving!

Note: The ABX indices are based on credit default swaps (CDS) for various tranches of subprime mortgage-backed securities (MBS). For some background, here is a post at the Cleveland Fed back in March, 2007.

All of the CMBX indices are setting new record lows again.

Check out the CMBX-NA-BB-4 close today. To the moon, Alice!

The CMBX is a CMBS (Commercial Mortgage-Backed Securities) credit default index just like the ABX - except up is down for the CMBX indices. The CMBX is quoted as spreads, whereas ABX is quoted as bond prices. When the spreads increase - chart going up - the bond prices are going down.

by Calculated Risk on 11/12/2008 08:09:00 PM

Professor Duy writes a regular column at Economist's View called Fed Watch - it is definitely worth reading (as is Economist's View).

From Fed Watch: Misguided Policies

From the wires:

15:30 *PAULSON SAYS MARKET TURMOIL WON'T ABATE UNTIL HOUSING REBOUNDS

Such comments always leave me with a sick feeling in my stomach – if policymakers are waiting for the housing market to rebound, they had better be prepared for a long wait. ... I think the biggest potential for policy error lies in maintaining the delusion that preventing housing, and by extension, consumer spending, from adjusting is central to fixing the nation’s economy. Policy would be best focused on supporting the inevitable transition away from debt-supported consumer dependent growth dynamic.

Housing prices are falling because fundamentally the price of housing became unaffordable.
emphasis added

Dr. Duy offers some suggestions for policy makers:

Policymakers need to come clean with the American public: Future patterns of growth will simply be less dependent on consumer spending. We are entering a period of structural adjustment, and it will be painful. We spent decades pretending that the relentless focus on producing nontradable goods and relying on a ballooning current account deficit to hide our lack of productive capacity was an appropriate policy approach. But ultimately, those policies have failed us, with stagnant income growth for median income families and the deepest recession since the 1980’s (or even worse).

This admission, however, in no way, shape, or form means policy options are limited. The admission simply defines your policy. In the short term, policy can cushion the transition by expanding the social safety net. In the medium term, if consumption is falling, and private investment is unable to compensate, then the federal authority should fill the gap. There is no shortage of sectors of the economy that offer opportunities for investment. In so many ways, we are running on the fumes of the infrastructure investment made by the last generation. Roads, bridges, channels, etc. – you name it, there is an opportunity. Or human capital, via education?... Reasonable policymakers free from ideological constraints can develop a host of potential projects without relying on bridges to nowhere.

Investment in infrastructure makes sense, especially since construction (and construction employment) is one of the hardest hit sectors of the economy. And with the commercial real estate slump picking up steam (and more construction job losses to come), what better area to invest than in the infrastructure of the U.S.A.?

by Calculated Risk on 11/12/2008 05:17:00 PM

Press Release: Intel's Fourth-Quarter Business Below Expectations

The company now expects fourth-quarter revenue to be $9 billion, plus or minus $300 million, lower than the previous expectation of between $10.1 billion and $10.9 billion. Revenue is being affected by significantly weaker than expected demand in all geographies and market segments. In addition, the PC supply chain is aggressively reducing component inventories.

That is a huge cut in guidance.

by Calculated Risk on 11/12/2008 04:40:00 PM

Upping the ante on JPMorgan's CEO Dimon and Merrill's CEO Thain (see previous post), former Goldman Sachs chairman John Whitehead is quoted as saying the current slump will be worse than the Great Depression!

From Reuters: Whitehead sees slump worse than Depression (hat tip Rex Nutting)

The economy faces a slump deeper than the Great Depression and a growing deficit threatens the credit of the United States itself, former Goldman Sachs chairman John Whitehead ...

"I think it would be worse than the depression," Whitehead said. "We're talking about reducing the credit of the United States of America, which is the backbone of the economic system. ... I see nothing but large increases in the deficit, all of which are serving to decrease the credit standing of America. ... I just want to get people thinking about this, and to realize this is a road to disaster. I've always been a positive person and optimistic, but I don't see a solution here."

So far most of the Great Depression discussions have been phrased in terms of "worst since". Whitehead has taken the next step - however I think "worse than" is extremely unlikely.

by Calculated Risk on 11/12/2008 04:17:00 PM

From Bloomberg: Dimon Says Recession May Be Worse Than Credit Crisis

``We think the economy could be worse than the capital- markets crisis,'' [JPMorgan Chase & Co. Chief Executive Officer Jamie] Dimon said. ``You really need to separate them because they have completely different effects on our businesses and on most businesses.''

Not to be outdone, John Thain, chairman and chief executive of Merrill Lynch compared the current contraction to the Great Depression, from the Financial Times: Merrill chief sees severe global slowdown

“Right now, the US economy is contracting very rapidly. We are looking at a per­iod of global slowdown,” [Thain] told investors. “This is not like 1987 or 1998 or 2001. The contraction going on is bigger than that. We will in fact look back to the 1929 period to see the kind of slow­down we’re seeing now.”
...
"There is no such thing as decoupling. ... Each individual economy will be more or less affected, depending on reliance on global trade and commerce.”

by Calculated Risk on 11/12/2008 03:22:00 PM

Update: From the WSJ: GE Says Government Will Guarantee Debt

General Electric Co. said Wednesday the government will insure up to $139 billion of debt issued by its financing arm, GE Capital Corp., under a new program.

The conglomerate announced on its Web site that GE Capital has been approved to participate in the new Temporary Liquidity Guarantee Program operated by the Federal Deposit Insurance Corporation.

From Bloomberg: Frank's Plan Gives GM, Ford, Chrysler $25 Billion

General Motors Corp., Ford Motor Co. and Chrysler LLC would get $25 billion in additional aid from the Treasury's financial-rescue plan under a proposal by House Financial Services Committee Chairman Barney Frank.

Legislation is needed to authorize the Treasury to use part of its $700 billion rescue fund for the auto industry, Frank said today. He scheduled a hearing on the measure for Nov. 19.

``The consequences of a collapse of the American automobile industry would be particularly troublesome,'' Frank, a Massachusetts Democrat, told reporters in Washington.

It's hard to keep up ...

by Calculated Risk on 11/12/2008 02:20:00 PM

Here is the press conference from CNN:

by Calculated Risk on 11/12/2008 12:57:00 PM

As economic activity falls off a cliff, here is the daily look at a few credit indicitors ...

LIBOR declined again today:

The 3-month Libor rate fell to 2.13% from 2.18%, according to Dow Jones, the lowest level for the rate since Oct. 27, 2004.

The three-month LIBOR was 2.18% yesterday. The rate peaked at 4.81875% on Oct. 10. (Better)

The yield on 3 month treasuries fell to 0.145% for 0.20%. (worse)

With the effective Fed Funds rate at 0.27% (as of yesterday), 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: 1.98, down slightly from 2.02 (slightly better)

The TED spread is under 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: 100.62 down slightly from 103.75 (slightly better). This spread peaked at near 165 in early October, so there has been significant progress, and we are almost 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. It has been a few days without an announcement from the Treasury... (no progress).

Weekly Fed Balance Sheet. This will be updated tomorrow.

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 4.61 from 4.23 last week, and down from 4.72 two weeks ago . (Worse).

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 (0.65% yesterday!) - and increasing the spread between AA and A2/P2 CP. So this indicator has been a little misleading. Also the recession is creating concern for lower rated paper. Still, if the credit crisis eases, I'd expect a significant decline in this spread.

The LIBOR is down and the TED spread is slightly lower - so there is a little progress today, but there is still a long way to go.

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

From an 8-K SEC filing this morning:

"In recognition of the weak economy, we reduced our budget for 2009 capital expenditures from approximately $1 billion to a range of $550 million to $600 million, compared with approximately $950 million in 2008."
Terry J. Lundgren, Macy's, Nov 12, 2008

This significant reduction in 2009 capital expenditures appears widespread (many companies are announcing reduced CapEx for 2009) - and this will hit non-residential investment in both structures and equipment. This is another blow for commercial real estate.

by Calculated Risk on 11/12/2008 10:47:00 AM

How things have changed ...

Here are Paulson's prepared remarks on the progress of the TARP.

Priorities for Remaining TARP Funds

We have evaluated options for most effectively deploying the remaining TARP funds, and have identified three critical priorities. First, we must continue to reinforce the stability of the financial system, so that banks and other institutions critical to the provision of credit are able to support economic recovery and growth. Although the financial system has stabilized, both banks and non-banks may well need more capital given their troubled asset holdings, projections for continued high rates of foreclosures and stagnant U.S. and world economic conditions. Second, the important markets for securitizing credit outside of the banking system also need support. Approximately 40 percent of U.S. consumer credit is provided through securitization of credit card receivables, auto loans and student loans and similar products. This market, which is vital for lending and growth, has for all practical purposes ground to a halt. Addressing these two priorities will have powerful impacts on the overall financial system, the strength of our financial institutions and the availability of consumer credit. Third, we continue to explore ways to reduce the risk of foreclosure.

Over these past weeks we have continued to examine the relative benefits of purchasing illiquid mortgage-related assets. Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending.
emphasis added

There a couple of new wrinkles. First the Treasury is exploring ways to have private matching funds:

Any future program should maintain our principle of encouraging participation of healthy institutions while protecting taxpayers. We are carefully evaluating programs which would further leverage the impact of a TARP investment by attracting private capital, potentially through matching investments. In developing a potential matching program, we will also consider capital needs of non-bank financial institutions not eligible for the current capital program; broadening access in this way would bring both benefits and challenges.

And the Treasury is also looking at supporting some securitization:

Second, we are examining strategies to support consumer access to credit outside the banking system. ... With the Federal Reserve we are exploring the development of a potential liquidity facility for highly-rated AAA asset-backed securities. We are looking at ways to possibly use the TARP to encourage private investors to come back to this troubled market, by providing them access to federal financing while protecting the taxpayers' investment. ... While this securitization effort is targeted at consumer financing, the program we are evaluating may also be used to support new commercial and residential mortgage-backed securities lending.