by Calculated Risk on 1/16/2009 12:24:00 AM

Press Release: Treasury, Federal Reserve, and the FDIC Provide Assistance to Bank of America

The U.S. government entered into an agreement today with Bank of America to provide a package of guarantees, liquidity access, and capital as part of its commitment to support financial market stability.

Treasury and the Federal Deposit Insurance Corporation will provide protection against the possibility of unusually large losses on an asset pool of approximately $118 billion of loans, securities backed by residential and commercial real estate loans, and other such assets, all of which have been marked to current market value. The large majority of these assets were assumed by Bank of America as a result of its acquisition of Merrill Lynch. The assets will remain on Bank of America's balance sheet. As a fee for this arrangement, Bank of America will issue preferred shares to the Treasury and FDIC. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan.

In addition, Treasury will invest $20 billion in Bank of America from the Troubled Assets Relief Program in exchange for preferred stock with an 8 percent dividend to the Treasury. Bank of America will comply with enhanced executive compensation restrictions and implement a mortgage loan modification program.

Treasury exercised this funding authority under the Emergency Economic Stabilization Act's Troubled Asset Relief Program (TARP). The investment was made under the Targeted Investment Program. The objective of this program is to foster financial market stability and thereby to strengthen the economy and protect American jobs, savings, and retirement security.

Separately, the FDIC board announced that it will soon propose rule changes to its Temporary Liquidity Guarantee Program to extend the maturity of the guarantee from three to up to 10 years where the debt is supported by collateral and the issuance supports new consumer lending.

With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy. As was stated in November when the first transaction under the Targeted Investment Program was announced, the U.S. government will continue to use all of our resources to preserve the strength of our banking institutions and promote the process of repair and recovery and to manage risks.

Term Sheet

by Calculated Risk on 1/15/2009 11:15:00 PM

From the NY Times: U.S. Said Close to Giving More to Bank of America

The program ... will hold Bank of America responsible for the first $10 billion in losses on a pool of $118 billion in illiquid assets. The government will take on the next $10 billion in losses and then taking on 90 percent of any additional losses with Bank of America absorbing the rest.

That puts the taxpayers on the line for close to $100 billion. What do we get for taking on this risk?

Hopefully we will have more details in the morning.

by Calculated Risk on 1/15/2009 09:05:00 PM

Both imports and exports declined sharply in November, but just wait until we see the December trade numbers. Based on LA area port traffic numbers released today, trade volumes collapsed in December.

Click on graph for larger image in new window.

This graph shows the combined loaded inbound and outbound traffic at the ports of Long Beach and Los Angeles in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container). Although containers tell us nothing about value, container traffic does give us an idea of the volume of goods being exported and imported.

Inbound traffic was 19% below last December. This slowdown in exports (inbound traffic to the U.S.) is hitting Asian countries hard.

But even more shocking and important for the U.S. economy is that export traffic has collapsed. For the LA area ports, outbound traffic continued to decline in December, and was 30% below the level of December 2007. Export traffic is now at about the same level as in late 2005. So much for the export boom!

Now it is the export bust.

by Calculated Risk on 1/15/2009 07:07:00 PM

From the WSJ: Bank of America Nears Deal for Fresh Capital

Bank of America Corp. was near an agreement with U.S. officials late Thursday that would provide it with $15 billion to $20 billion of fresh capital while backstopping $115 billion to $120 billion of Bank of America assets to help shore up the bank.
...
The Treasury rescue deal ... could be announced as early as tonight, or alongside Bank of America's fourth-quarter earnings, which have been moved up to a Friday release.

Earnings will be announced at 7 AM ET on Friday.

by Calculated Risk on 1/15/2009 06:42:00 PM

The vacancy rate for U.S. office buildings rose in the fourth quarter of 2008 to 14.5% real estate research firm Reis said today (no link).

According to the LA Times, Grubb & Ellis reported the national office vacancy rate rose to 14.8%: Realty group predicts some 30% cuts in L.A. office rents

Nationwide, the office vacancy rate increased to 14.8% in the fourth quarter from 13% a year earlier. That's the highest rate since the third quarter of 2005, when it was 15.1%, Grubb & Ellis said.

The following graphs show office vacancy rate (from REIS) vs. unemployment (hat tip Will).

Click on graph for larger image in new window.

The first graph shows the office vacancy rate vs. the quarterly unemployment rate and recessions.

Changes in the unemployment rate and the office vacancy rate are highly correlated. As the unemployment rate continues to rise over the next year or more, we'd expect the office vacancy rate to rise too. And this will discourage investment in new office structures - and put significant pressure on office rents and prices.

From the LA Times story:

Los Angeles office landlords will probably be forced to slash rents as much as 30% in the first half of the year as job cuts create more empty space, Grubb & Ellis Co. said Wednesday.

Office vacancy rates in Los Angeles County jumped to 12.2% at the end of 2008 from 9.7% a year earlier, the Santa Ana broker said.

The second graph shows the relationship between the office vacancy rate and the unemployment rate using data starting in Q1 1991. The unemployment rate is from the BLS and the office vacancy rate is from REIS.

I've added the polynomial trend line (with R^2 of 0.88). The three most recent quarters are marked in red.

This suggests that office vacancy rates are currently below the expected level, and vacancy rates might increase sharply over the next year. However, given the limited amount of data (since Q1 1991), the lower than expected vacancy rate might also indicate there was less overbuilding in recent years as compared to the early '90s.

by Calculated Risk on 1/15/2009 04:49:00 PM

From San Francisco Fed President Janet Yellen: The Outlook for 2009: Economic Turmoil and Policy Responses. A few excerpts:

Economic weakness is evident in every sector of the economy. ... With respect to wealth, the combined impact of falling equity and house prices has been staggering. Household wealth has declined by an estimated $10 trillion. ... Not surprisingly, consumer confidence is at a 30-year low and the personal saving rate is on the rise, as people try to rebuild their wealth and provide a cushion against the possibility of job loss. ...

Business spending is also feeling the crunch, as firms face weak demand for their products, a higher cost of capital, and restricted credit. ...

Nonresidential construction, surprisingly enough, has continued to show some growth up to this point, but this is not likely to last much longer. I’m hearing talk about substantial cutbacks on new projects and planned capital improvements on existing buildings for two all-too-familiar reasons—demand is falling as the economy weakens and financing is hard to get. In particular, the market for commercial mortgage-backed securities, a mainstay for financing large projects, has all but dried up. Banks and other traditional lenders have also become less willing to extend funding.

... Housing starts have plummeted, falling to nearly one-half of their year-ago level, and it is hard to see when they will bottom out, since inventories of unsold new and existing homes remain at high levels relative to sales. Indeed, the possibility of ongoing contraction in this sector is intensified by the economic downturn, the loss in jobs, and the reduced availability of mortgage credit. ...

The ongoing decline in house prices is a source of particular concern not only because of its impact on consumer spending, but also because it contributes importantly to delinquencies and foreclosures ... [S]ome of the earliest and sharpest price declines nationwide occurred in parts of California and other western states, such as Arizona and Nevada. Foreclosure rates in these states are well above their historic highs dating back at least to the late 1970s, and home prices in the largest metro areas are down by as much as 35 to 40 percent from their 2006 peak. Unfortunately, futures contracts for house prices suggest that further declines are likely this year and next.

Many state and local governments have been dragged into the financial mess. The downturns in the housing markets and the economy have bitten into tax collections at the same time that the financial market turmoil has made it harder to issue bonds. These problems are particularly acute in California. ... The latest projection is for a deficit of about $40 billion that will accumulate over the current and next fiscal year. This is a huge shortfall relative to annual revenue of $100 billion, and the actions needed to overcome it are only likely to add to the recession in the state.

... Economic growth in the rest of the world, particularly in Europe and Japan, has weakened sharply for a number of reasons, including spillovers from the U.S. recession and from the financial meltdown that now has spread globally. ... [I]t now looks likely that the data will show worldwide recession in late 2008 and early 2009, with a more severe and long-lasting contraction in many industrial countries.
emphasis added

Global recession. House prices declining "this year and next". "Substantial cutbacks" in non-residential investment. And on and on ... these Fed speeches are grim and depressing.

by Calculated Risk on 1/15/2009 03:20:00 PM

Just a headline ...

"Government Guarantees for Bank of America to Be Between $100 Billion-$200 Billion, CNBC Has Learned (story developing)"

UPDATE: BofA in talks for $15 billion capital plus guarantees

by Calculated Risk on 1/15/2009 02:00:00 PM

Here is the plan (PDF file)

See PDF for details ...

Here is an overview:

Clean, Efficient, American Energy: To put people back to work today and reduce our dependence on foreign oil tomorrow, we will strengthen efforts directed at doubling renewable energy production and renovate public buildings to make them more energy efficient.

• $32 billion to transform the nation’s energy transmission, distribution, and production systems by allowing for a smarter and better grid and focusing investment in renewable technology.

• $16 billion to repair public housing and make key energy efficiency retrofits.

• $6 billion to weatherize modest-income homes.

[CR Note: $54 Billion]

Transform our Economy with Science and Technology: We need to put scientists to work looking for the next great discovery, creating jobs in cutting-edge-technologies, and making smart investments that will help businesses in every community succeed in a global economy. For every dollar invested in broadband the economy sees a ten-fold return on that investment.

• $10 billion for science facilities, research, and instrumentation.

• $6 billion to expand broadband internet access so businesses in rural and other underserved areas can link up to the global economy.

[CR Note: $16 Billion: $70 billion total]

Modernize Roads, Bridges, Transit and Waterways: To build a 21st century economy, we must engage contractors across the nation to create jobs rebuilding our crumbling roads, and bridges, modernize public buildings, and put people to work cleaning our air, water and land.

• $30 billion for highway construction;

• $31 billion to modernize federal and other public infrastructure with investments that lead to long term energy cost savings;

• $19 billion for clean water, flood control, and environmental restoration investments;

• $10 billion for transit and rail to reduce traffic congestion and gas consumption.

[CR Note: $90 Billion: $160 billion total]

Education for the 21st Century: To enable more children to learn in 21st century classrooms, labs, and libraries to help our kids compete with any worker in the world, this package provides:

• $41 billion to local school districts through Title I ($13 billion), IDEA ($13 billion), a new School Modernization and Repair Program ($14 billion), and the Education Technology program ($1 billion).

• $79 billion in state fiscal relief to prevent cutbacks to key services, including $39 billion to local school districts and public colleges and universities distributed through existing state and federal formulas, $15 billion to states as bonus grants as a reward for meeting key performance measures, and $25 billion to states for other high priority needs such as public safety and other critical services, which may include education.

• $15.6 billion to increase the Pell grant by $500.

• $6 billion for higher education modernization.

[CR Note: $141.6 Billion: $301.6 billion total]

Tax Cuts to Make Work Pay and Create Jobs: We will provide direct tax relief to 95 percent of American workers, and spur investment and job growth for American Businesses. [marked up by the Ways and Means Committee]

[CR Note: Unknown amount - probably $300 billion]

Lower Healthcare Costs: To save not only jobs, but money and lives, we will update and computerize our healthcare system to cut red tape, prevent medical mistakes, and help reduce healthcare costs by billions of dollars each year.

• $20 billion for health information technology to prevent medical mistakes, provide better care to patients and introduce cost-saving efficiencies.

• $4.1 billion to provide for preventative care and to evaluate the most effective
healthcare treatments.

[CR Note: $24.1 Billion: $325.7 billion total]

Help Workers Hurt by the Economy: High unemployment and rising costs have outpaced Americans’ paychecks. We will help workers train and find jobs, and help struggling families make ends meet.

• $43 billion for increased unemployment benefits and job training.

• $39 billion to support those who lose their jobs by helping them to pay the cost of keeping their employer provided healthcare under COBRA and providing short-term options to be covered by Medicaid.

• $20 billion to increase the food stamp benefit by over 13% in order to help defray
rising food costs.

[CR Note: $102 Billion: $427.7 billion total]

Save Public Sector Jobs and Protect Vital Services: We will provide relief to states, so they can continue to employ teachers, firefighters and police officers and provide vital services without having to unnecessarily raise middle class taxes.

• $87 billion for a temporary increase in the Medicaid matching rate.

• $4 billion for state and local law enforcement funding.

[CR Note: $91 Billion: $518.7 billion total]

Plus add in about $300 billion for various tax cuts, and that give $818.7 billion (by my count).

by Calculated Risk on 1/15/2009 01:28:00 PM

UPDATE: from the WSJ: Facing Budget Gap, Schwarzenegger Urges Lawmakers to Bridge Divide

"This disruption has stopped work on levees, schools, roads, everything," Mr. Schwarzenegger plans to say. "It has thrown thousands and thousands of people out of work at a time when our unemployment rate is rising. How could we let something like that happen? I know that everyone in this room wants to hear again the sound of construction. No one wants unemployment checks replacing paychecks."

Headlines (hat tip Brian). Click on headlines for larger image ...

by Calculated Risk on 1/15/2009 12:22:00 PM

From Reuters: Marshall & Ilsley has big loss (hat tip Justin)

In a bad sign for other regional banks, Marshall & Ilsley Corp said it was slashing its dividend and cutting its workforce and posted a surprising fourth-quarter loss as bad loans surged.
...
In the fourth quarter, Marshall & Ilsley increased the amount set aside for bad loans to $850.4 million from $235.1 million, as commercial and construction loan losses surged, especially among residential developers and in the states of Arizona and Florida. Net charge-offs more than tripled to $679.8 million.

"The nation's current recessionary climate is unlike any we have experienced," Chief Executive Mark Furlong said in a letter to shareholders.
emphasis added

This may seem like a small story compared to Citi, BofA and JPMorgan, but the regional banks are going to be hit especially hard in 2009 as the commercial real estate bust unfolds.