by Calculated Risk on 11/23/2008 11:34:00 AM

From The Telegraph: Pre-Budget report: Gordon Brown defends tax cuts

[Prime Minister Gordon Brown] told BBC1's The Politics Show world leaders agreed the need for an injection of cash into the economy.

"Everybody generally agrees that the fiscal stimulus - and what we mean by fiscal stimulus is real help for businesses and families now - has got to be substantial to have an impact."

The Government is expected to pump between £15 and £20 billion into the economy ... [in addition to changing] the VAT ... from 17.5% to 15%, which would cost £12.5 billion, moves are thought to include further tax cuts targeted at the least well off.
...
There are also suggestions of a new three month grace period for mortgage holders struggling to keep up with their repayments before repossession proceedings kick in.
...
But debt is predicted to soar to more than £120 billion, fuelling concerns about the tax rises and spending cuts that may be necessary later.

Mr Brown said: "If you say at the moment that there is nothing that government can do by spending more or investing more at the moment then that is a gospel of despair in the future."

by Calculated Risk on 11/23/2008 01:15:00 AM

The WaPo has an article reviewing how the Office of Thrift Supervision (OTS) failed to properly regulate lenders: Banking Regulator Played Advocate Over Enforcer

OTS is responsible for regulating thrifts, also known as savings and loans, which focus on mortgage lending. As the banks under OTS supervision expanded high-risk lending, the agency failed to rein in their destructive excesses despite clear evidence of mounting problems, according to banking officials and a review of financial documents.

Instead, OTS adopted an aggressively deregulatory stance toward the mortgage lenders it regulated. It allowed the reserves the banks held as a buffer against losses to dwindle to a historic low.
...
The agency championed the thrift industry's growth during the housing boom and called programs that extended mortgages to previously unqualified borrowers as "innovations." In 2004, the year that risky loans called option adjustable-rate mortgages took off, then-OTS director James Gilleran lauded the banks for their role in providing home loans. "Our goal is to allow thrifts to operate with a wide breadth of freedom from regulatory intrusion," he said in a speech.

The article references the infamous chainsaw incident:

In the summer of 2003, leaders of the four federal agencies that oversee the banking industry gathered to highlight the Bush administration's commitment to reducing regulation. They posed for photographers behind a stack of papers wrapped in red tape. The others held garden shears. Gilleran ... hefted a chain saw.

This photo from 2003 shows two regulators: John Reich (then Vice Chairman of the FDIC and later at the OTS) and James Gilleran of the Office of Thrift Supervision (with the chainsaw) and representatives of three banker trade associations: James McLaughlin of the American Bankers Association, Harry Doherty of America's Community Bankers, and Ken Guenther of the Independent Community Bankers of America.

The article also discusses how the OTS dragged their feet when new lending guidelines were proposed by the Office of the Comptroller of the Currency:

In 2006, at the peak of the boom, lenders made $255 billion in option ARMs ... Most option ARMs were originated by OTS-regulated banks.

Concerns about the product were first raised in late 2005 by another federal regulator, the Office of the Comptroller of the Currency. The agency pushed other regulators to issue a joint proposal that lenders should make sure borrowers could afford their full monthly payments. "Too many consumers have been attracted to products by the seductive prospect of low minimum payments that delay the day of reckoning," Comptroller of the Currency John C. Dugan said in a speech advocating the proposal.

OTS was hesitant to sign on ... [John] Reich, the new director of OTS, warned against excessive intervention. He cautioned that the government should not interfere with lending by thrifts "who have demonstrated that they have the know-how to manage these products through all kinds of economic cycles."

Back in 2005 I posted frequently on the progress of the proposed new guidance. I spoke with a number of regulators in 2005 and 2006 who were involved in the process, and a number of them expressed frustration with the OTS and the Fed.

Here is an excerpt from the NY Times from July 2005: A Hands-Off Policy on Mortgage Loans

For two months now, federal banking regulators have signaled their discomfort about the explosive rise in risky mortgage loans.

First they issued new "guidance" to banks about home-equity loans, warning against letting homeowners borrow too much against their houses. Then they expressed worry about the surge in no-money-down mortgages, interest-only loans and "liar's loans" that require no proof of a borrower's income.

The impact so far? Almost nil.

"It's as easy to get these loans now as it was two months ago," said Michael Menatian, president of Sanborn Mortgage, a mortgage broker in West Hartford, Conn. "If anything, people are offering them even more than before."

The reason is that federal banking regulators, from the Federal Reserve to the Office of the Comptroller of the Currency, have been reluctant to back up their words with specific actions. For even as they urge caution, officials here are loath to stand in the way of new methods of extending credit.

I was outraged by the foot dragging at the time ... the regulators knew there was a lax lending problem in early 2005 (they were already late), and the continual foot dragging just made the inevitable crisis worse (as an example the peak year for Option ARM lending was in 2006).

This willful lack of oversight by certain regulators was outrageous.

by Calculated Risk on 11/23/2008 12:38:00 AM

Headlines (hat tip Justin):
*SOMALI PIRATES APPLY TO BECOME BANK TO ACCESS TARP
*PAULSON: TARP PIRATE EQUITY IS AN `INVESTMENT,' WILL PAY OFF
*KASHKARI SAYS `SOMALI PIRATES ARE 'FUNDAMENTALLY SOUND' '
*Moody's upgrade Somali Pirates to AAA
*HUD SAYS SOMALI DHOW FORECLOSURE PROGRAM HAD `VERY LOW' PARTICIPATION
*SOMALI PIRATES IN DISCUSSION TO ACQUIRE CITIBANK
*FED OFFICIALS: AGGRESSIVE EASING WOULD CUT SOMALI PIRATE RISK
*FED AGREED OCT. 29 TO TAKE `WHATEVER STEPS' NEEDED FOR SOMALI PIRATES

The Daily Show With Jon StewartM - Th 11p / 10c

The Buccaneer Stops Here

Barack Obama Interview
John McCain Interview

Sarah Palin Video
Funny Election Video

by Calculated Risk on 11/22/2008 07:00:00 PM

From the NY Times: Obama Vows Swift Action on Vast Economic Stimulus Plan

Mr. Obama said he would direct his economic team to design a two-year stimulus plan with the goal of saving or creating 2.5 million jobs, “a plan big enough to meet the challenges we face that I intend to sign soon after taking office” on Jan. 20, an indication that he would begin pushing his plan through Congress even before taking office.
...
“The news this week has only reinforced the fact that we are facing an economic crisis of historic proportions,” Mr. Obama said. “We now risk falling into a deflationary spiral that could increase our massive debt even further.”

Here is Obama's radio address today (3 min 52 secs):



On the size of the stimulus plan from a Goldman Sachs research note yesterday:

We need a fiscal stimulus package that offsets most of the retrenchment in private spending that remains after offsets from a smaller real trade deficit and lower oil prices. Our recommendation has been a $300-$500bn package, but we regard this as the minimum of what would be desirable. The 4% of GDP that we estimate for the retrenchment amounts to $600bn.

The good news is that the likelihood of a large package under President Obama is rising. Now many economists are calling for $300-$400bn, and some have proposed as much as $600bn; as recently as late October, when we first outlined the case for significant stimulus, $200bn was the highest figure on the table. The bad news is that implementation of whatever is adopted is at least two to three months away absent an extraordinary bipartisan effort. This is unfortunate, as the dynamics of the retrenchment have clearly developed a life of their own.

It sounds like we should expect a massive stimulus package to be signed by the end of January.

There is a good chance the simulus package will be along the lines proposed in September by Larry Summers:

The Composition of Stimulus

In many ways the composition of a fiscal stimulus program is a decision that goes to value rather than economic judgments. It seems to me however that particularly strong arguments can be made for the following components:

Support for low income families and for those who have been laid off is much more likely to be spent rapidly than support diffused more widely throughout the economy. Possible vehicles here include food stamps and extensions of unemployment insurance. [CR Note: President Bush signed an extension of unemployment benefits this week]

There is a compelling case for significant new commitment to infrastructure spending. While infrastructure spending is often seen as operating only with significant lags, I have become convinced that properly designed infrastructure support can make a timely difference for the economy. Evidence from the Minneapolis bridge collapse suggests that it is possible to launch infrastructure programs where the vast majority of the money is spent within a year. Moreover, the combination of declining trust fund revenues, and dramatic (more than 70 percent) increases in some categories of construction costs mean that there are a large number of projects that are currently on hold, slowed down, or contracted and awaiting funding. Properly designed infrastructure projects have the virtue of being helpful as short run stimulus, especially for the employment of the workers most hard hit by the housing decline, while at the same time augmenting the economy’s productive potential in the long run.

State and local governments are facing grave budget pressures resulting in forced cutbacks that in many cases compromise either very vulnerable populations, or necessary long term investments. While it is true that some state and local problems are consequences of imprudent tax cutting during the good times, there is a strong case that properly targeted assistance perhaps through temporary changes in Medicaid reimbursement rules could provide valuable stimulus to the economy while at the same time avoiding dangerous cutbacks.

Other areas that should receive consideration include compensating consumers in the most affected regions for the effects of higher energy prices through LIHEAP [CR note: with falling gasoline prices, this may not be needed] , beginning a process of making necessary investments in energy efficiency and renewable energy and where appropriate, responding to the adverse impacts of the ongoing financial turbulence.

by Calculated Risk on 11/22/2008 03:33:00 PM

Please indulge me ...

Back in 2005, I wrote:

Of all the areas experiencing a housing boom, the areas most at risk have had the greatest increase in real estate related jobs. These jobs include home construction, real estate agents, mortgage brokers, inspectors and more. ... I believe that areas like the Inland Empire will suffer the most when housing activity slows.

And in 2006, in response to a sanguine forecast from a local economist, I wrote: Housing: Inverted Reasoning?

[W]hat happens during a housing bust? Just look at the unemployment rate in the previous bust.

The unemployment rate in California rose from 5.2% to 10.4% in just over two years. For the Inland Empire, the unemployment rate rose from 4.8% to double digits in the same period, peaking at 12.4%. Yes, California was impacted by Defense cutbacks in the early '90s, but the areas that were most dependent on housing saw the largest increases in the unemployment rate.

As the housing bubble unwinds, housing related employment will fall; and fall dramatically in areas like the Inland Empire. The more an area is dependent on housing, the larger the negative impact on the local economy will be.

So I think some pundits have it backwards: Instead of a strong local economy keeping housing afloat, I think the bursting housing bubble will significantly impact housing dependent local economies.

And from the LA Times today: Surge in unemployment puts California's Inland Empire in tailspin

If the Inland Empire is one of the birthplaces of the current recession, it is also at the forefront of the nation's growing pain over joblessness -- with the highest unemployment rate of any large metropolitan area in the country.

State numbers released Friday show the Riverside, San Bernardino and Ontario area is now suffering from its highest unemployment rate in 13 years at 9.5% in October -- 3 percentage points higher than the national rate and 1.3 points higher than the state's rate of 8.2%.

Ignited by the collapse of the local housing market, which decimated the construction and lending industries, the wave of unemployment has trickled into almost every area, including retail, manufacturing and local government.

Hoocoodanode?

by Calculated Risk on 11/22/2008 01:22:00 PM

Click on Ad for larger image in new window.
Not sure of the exact date of this advertisement, but thanks for the memories! (hat tip Elroy).

by Calculated Risk on 11/22/2008 07:03:00 AM

Three banks were closed by the FDIC yesterday. To put these failures into perspective, here are two graphs: the first shows the number of bank failures by year since the FDIC was founded, and the second graph shows the size of the assets and deposits (in current dollars).

Click on graph for larger image in new window.

Back in the '80s, there was some minor multiple counting ... as an example, when First City of Texas failed on Oct 30, 1992 there were 18 different banks closed by the FDIC. This multiple counting was minor, and there were far more bank failures in the late '80s and early '90s than this year.

Note: there are 8,451 FDIC insured banks as of Q3 2008.

However banks are much larger today.

The second graph (hat tip Kurt) shows the bank failures by total assets and deposits per year starting in 1934 (in current dollars adjusted with CPI).

WaMu accounts for a vast majority of the assets and deposits of failed banks in 2008, and it is important to remember that WaMu was closed by the FDIC, and sold to JPMorgan Chase Bank, at no cost to the Deposit Insurance Fund (DIF) or taxpayers.

There are many more bank failures to come over the next couple of years, mostly because of losses related to Construction & Development (C&D) and Commercial Real Estate (CRE) loans, but, excluding WaMu, the total assets and deposits of failed banks will probably be lower than in the '80s and early '90s.

by Calculated Risk on 11/22/2008 12:01:00 AM

From Andrew Ross Sorkin and Louise Story at the NY Times: Citigroup, Under Siege, Holds Talks With U.S.

Citigroup ... executives on Friday entered into talks with federal officials about how to stabilize the struggling financial giant.

In a series of tense meetings and telephone calls, the executives and officials weighed several options, including whether to replace Citigroup’s chief executive, Vikram S. Pandit, or sell all or part of the company.

There is much more in the article. This weekend might be busy.

by Calculated Risk on 11/21/2008 09:21:00 PM

From the FDIC: U.S. Bank Acquires All the Deposits of Two Southern California Institutions

U.S. Bank, National Association, Minneapolis, MN, acquired the banking operations, including all the deposits, of Downey Savings and Loan Association, F.A., Newport Beach, CA, and PFF Bank & Trust, Pomona, CA, in a transaction facilitated by the Federal Deposit Insurance Corporation.
...
As of September 30, 2008, Downey Savings had total assets of $12.8 billion and total deposits of $9.7 billion. PFF Bank had total assets of $3.7 billion and total deposits of $2.4 billion. Besides assuming all the deposits from the two California banks, U.S. Bank will purchase virtually all their assets. The FDIC will retain any remaining assets for later disposition.

The FDIC and U.S. Bank entered into a loss share transaction. U.S. Bank will assume the first $1.6 billion of losses on the asset pools covered under the loss share agreement, equal to the net asset position at close. The FDIC will then share in any further losses. Under the agreement, U.S. Bank will implement a loan modification program similar to the one the FDIC announced in August stemming from the failure of IndyMac Bank, F.S.B., Pasadena, CA.

The loss-sharing arrangement is expected to maximize returns on the assets covered by keeping them in the private sector. The agreement also is expected to minimize disruptions for loan customers as they will maintain a banking relationship.
...
The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) for Downey Savings will be $1.4 billion and $700 million for PFF Bank. U.S. Bank's acquisition of all the deposits of the two institutions was the "least costly" option for the FDIC's DIF compared to alternatives.

These were the twenty first and twenty second banks to fail in the nation this year, and the fourth and fifth banks to close in California.

That makes three today!

by Calculated Risk on 11/21/2008 08:50:00 PM

FYI: A friend (in management at a public company) told me his company just obtained a new loan for expansion and a revolving line of credit. This loan is on the order of $100 million. One loan doesn't mean the credit markets are thawing - but the discussion definitely sounded like the banks are starting to lend again. Show me the money!