by Calculated Risk on 1/19/2009 12:09:00 PM

Bloomberg has an article on the Inland Empire: California Finds Public-Works Spending No Unemployment Cure-All. The focus of the article is on public works projects, but the more important point is that areas with the highest levels of construction employment during the housing boom are now suffering the most from unemployment (no surprise!).

Only four years ago, Riverside and nearby San Bernardino, often called the Inland Empire, were California’s economic powerhouse, accounting for more than a fifth of the state’s new jobs. Today, unemployment reigns in the sprawling region east of Los Angeles. The 9.5 percent jobless rate in the two counties matches Detroit’s as the highest of any major metropolitan area in the U.S.

Click on graph for larger image in new window.

This graph (using Not Seasonally Adjusted data) shows construction as a percent of total employment for the Inland Empire, California and the U.S.

Although there was a surge in construction employment in the U.S., and about a 50% increase in California (as a percent of total employment), construction employment doubled (as a percent of total employment) in the Inland Empire.

The second graph shows the percent of construction employment and the unemployment rate for the Inland Empire.

With the housing bust, the percent construction employment has declined sharply and the unemployment rate has risen to almost 10%. Is it any surprise that jobless rate in the Inland Empire matches Detroit’s as the highest of any major metropolitan area in the U.S.?

by Calculated Risk on 1/19/2009 09:10:00 AM

From The Times: RBS losses set to reach record £28 billion

Royal Bank of Scotland (RBS) confirmed today that losses for the full-year could reach as much as £28 billion ...

The bank said this morning that it will make an annual loss of between £7 billion and £8 billion, when it announces its results on February 26.

However, it also expects to announce a charge of between £15 billion and £20 billion related to last year's acquisition of ABN Amro, the Dutch bank, which it acquired with Spain's Santander and Fortis, the Belgium bank.

The potential £28 billion loss is nearly twice the size of Vodafone's £15 billion deficit in 2006, currently the biggest-ever corporate loss in UK history.

From the WSJ: RBS Expects Huge 2008 Loss

Royal Bank of Scotland Group PLC said Monday that tough market conditions in the fourth quarter and mounting impairment charges could push it to a 2008 full-year loss of as much as £28 billion ($41.29 billion), the U.K.'s biggest ever corporate loss.

Ouch!

by Calculated Risk on 1/19/2009 01:44:00 AM

Paul Krugman explains (once again) why "bad banks" won't work: Wall Street Voodoo

Also see Krugman's blog today: More on the bad bank

by Calculated Risk on 1/18/2009 05:36:00 PM

The Times is reporting that Gordon Brown will announce on Monday: Banks bail-out: Taxpayers may take shares in Barclays and HSBC

* The Government's £250 billion Credit Guarantee Scheme to support lending between banks will be extended until the end this year.

* An expansion of the Bank of England's £200 billion Special Liquidity Scheme. The Bank will now accept consumers' car loans in exchange for high-grade Government bonds ...

* A plan for the Government to guarantee £100 billion of mortgage-backed securities...

* Northern Rock, the state-owned bank will be told to offer more mortgages ...

Talks are also underway for the state to increase its holdings in RBS and the newly-formed Lloyds Banking Group ...

Still scheming ...

by Calculated Risk on 1/18/2009 03:42:00 PM

OK, this is amusing. Although there is no formal definition of an economic depression, the most common definition is a sustained recessionary period with at least a 10% decline in real GDP from peak to trough.

And that brings us to the odds of a depression from Intrade Prediction Markets. (hat tip Asymmetric). This graph shows that traders believe the odds of a depression in 2009 are about 55%.

And how does Intrade define a depression? Here are the rules:

This contract will settle (expire) at 100 ($10.00) if quarterly GDP figures show the US economy has gone into a depression in 2009.

The contract will settle (expire) at 0 ($0.00) if quarterly GDP figures DO NOT show the US economy has gone into a depression in 2009.

For expiry purposes a depression is defined as a cumulative decline in GDP of more than 10.0% over four consecutive quarters. This is calculated by adding together the published (annualized) Real GDP figures (as detailed below). If these annualised figures add up to more than -10.0% over four consecutive quarters then the contract will expire at 100.

Example 1:

In Q1 the Final Real GDP figure is -3.5%
In Q2 the Final Real GDP figure is -2.5%
In Q3 the Final Real GDP figure is -2.0%
In Q4 the Final Real GDP figure is -2.3%

The sum of these figures is -10.3% so the contract will be expired at 100.
...
Negative quarters in the preceding year will count towards the total GDP decline for expiration purposes. For example, if the total decline in GDP from Q3 2008 to Q2 2009 exceeds 10.0% then the contract will expire at 100.

Quiz: If the annualized real GDP declines 2.5% in each quarter of 2009, how much does real GDP decline in 2009?

A: -10% (as calculated by Intrade adding the four quarters together)

B: -2.5%

I'm not making this up. The answer is B. If GDP declines at an annualized rate of 2.5% each quarter, then the total decline in real GDP over four quarters is 2.5%.

So which is correct for Intrade? A a cumulative decline in GDP of more than 10.0% or "adding together the published (annualized) Real GDP figures"? ROFLOL. I think they might have a dispute coming!

I suspect this might actually come up if reported GDP declines 5% in Q4 2008 and another 5% in Q1 2009; some observers might claim GDP has declined 10% (adding the two together). Readers of this blog will know that real GDP would have only declined about 2.5%! That is bad enough. (5% annual rate for half a year)

by Calculated Risk on 1/18/2009 12:57:00 PM

From the Chris Serres at the StarTribune: Loans threaten Minnesota community banks (hat tip dryfly)

Dozens of Minnesota banks have entered the new year on shaky footing, hobbled with millions of dollars of commercial real estate loans going sour at an alarming pace. ... "Any bank that has a sizable book of commercial real estate loans could have serious problems in 2009," predicted Jamie Peters, a bank analyst at Morningstar in Chicago.
...
As of the third quarter of last year, 5.7 percent of commercial real estate loans in Minnesota were more than 30 days past due, up from 3.1 percent a year ago.
...
Officials with the Minnesota Department of Commerce, which regulates 429 state-chartered banks and credit unions in Minnesota, acknowledged the problem and said they are concerned. The department's watch list of banks it considers in "less than satisfactory" condition has nearly doubled over the past 18 months to 50, from 26 in June 2007.

As I've noted several times, most regional banks avoided the residential real estate market (because they couldn't compete) and instead focused on CRE and C&D (construction & development) lending. This exposed many regional banks to excessive CRE loan concentrations, and now that CRE will implode in 2009, many of these banks will be in serious jeopardy.

Along these lines, here are some comments from Fed Vice Chairman Donald L. Kohn from April, 2008:

Setting aside the 100 largest banks, the share of commercial real estate loans in bank loan portfolios nearly doubled over the past 10 years and is approaching 50 percent. The portfolio share at these banks of residential mortgage and other consumer loans, which are more readily securitized, fell by 20 percentage points over the same period.
...
Concentration risk is another familiar risk that is appearing in a new form. Banks have always had to worry about lending too much to one borrower, one industry, or one geographic region. But as smaller banks hold more of their balance sheet in types of loans that are difficult to securitize, concentration risks can develop. Concentrations of commercial real estate exposures are currently quite high at some smaller banks. This has the potential to make the banking sector much more sensitive to a downturn in the commercial real estate market.

Here come the regional bank failures ...

by Calculated Risk on 1/17/2009 08:14:00 PM

From The Times: Treasury’s £100bn lifeline

THE Treasury will tomorrow drastically revise the terms of last October’s bank bailout and say it will guarantee at least £100 billion of new lending.
...
Three key proposals are being finalised. The government will offer guarantees on new consumer loans, outline plans to ringfence “toxic” assets on bank balance sheets and propose to refinance the preference shares that were used to rescue Royal Bank of Scotland and HBOS.

The taxpayer’s stake in Royal Bank of Scotland could jump from 57.9% to about 70% as part of the deal.
...
Tomorrow’s announcements will centre on measures to get the banks through the crisis and to boost lending. The existing Bank of England Special Liquidity Scheme (SLS), which has provided the banks with £200 billion of liquidity over the past nine months, will expire on January 30. But officials say there will be a “son of SLS”, to replace it and ensure liquidity does not dry up.
...
There has been intense speculation that the government plans to set up a “bad bank” to take so-called toxic assets off the banks’ books and put them in a new taxpayer-owned entity, to be sold on when economic conditions improve.

Officials, however, played this down. “There will be no announcement of a bad bank next week,” one well-placed Whitehall official said.

It sounds like the details will be released on Monday, and will include more capital for banks and a Government guarantee for new lending ... but no "bad bank".

by Calculated Risk on 1/17/2009 04:34:00 PM

Atrios notes:

... suddenly our great newspapers are discovering the "stereotypes" they helped to perpetuate weren't, you know, true. Subprime loans were never the problem, just an early warning signal ...

Oh well, better late than never.

* Note: "We're all subprime now!" was Tanta's response to the false subprime meme.

From the WaPo: The Growing Foreclosure Crisis

One oft-repeated assertion no longer holds true. Those in trouble are not, primarily, lower-income borrowers. The foreclosure crisis has become a wave, afflicting neighborhoods of every stripe -- but particularly communities created by the boom itself.

... interviews and a Washington Post analysis of available data show that the foreclosure crisis knows no class or income boundaries. Many borrowers ensnared in the evolving mortgage mess do not fit neatly into the stereotypes that surfaced by early 2007 when delinquency rates shot up. They don't have subprime loans, the lending industry's jargon for the higher-rate mortgages made to borrowers with shaky credit or without enough cash for a down payment.

The wave of subprime delinquencies appears to have crested. But in October, for the first time, the number of prime mortgages in delinquency exceeded the subprime loans in danger of default, according to The Post's analysis.

And please excuse me, but I found this paragraph amusing:

In 2005 and 2006, more than half the homes sold in Southern California were in Riverside and neighboring San Bernardino County, pumping thousands of new jobs into the regional economy, said John Husing, an independent economist. "Real estate became what gold was to the gold mining towns," he said. "Everyone's job was tied to the mine, whether they realized it or not."

And here is what I wrote in 2006, in response to an optimistic forecast for the Inland Empire from Mr. Husing: Housing: Inverted Reasoning?

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.

Hoocoodanode? This cartoon is worth repeating ...

Click on cartoon for larger image in new window. Cartoon from Eric G. Lewis www.EricGLewis.com (site coming soon)

by Calculated Risk on 1/17/2009 01:16:00 PM

From the WSJ: U.S. Plots New Phase in Banking Bailout

Officials at the Treasury, Federal Reserve and Federal Deposit Insurance Corp., in consultation with the incoming Obama administration, are discussing a plan to create a government bank that would buy up the bad investments and loans that are behind the huge losses that U.S. banks continue to report, say government officials. Also under consideration is an additional and giant government guarantee of banks' assets against further losses.

The discussions, which are intensifying, show how the rapid deterioration of bank assets is outpacing the government's rescue efforts. Banks are now struggling not only with the real-estate investments that sparked the crisis, but also with the car loans, credit-card debt and other consumer debt that have taken a hit with the faltering economy.

The Times is reporting an announcement could come this week:

An announcement could be made within days of Barack Obama taking office as President on Tuesday.

Also the WSJ article has a table of credit losses based on estimates from Goldman Sachs: $1.1 trillion from residential mortgages, $390 billion from corporate loans and bonds, $234 billion from commercial real estate, $226 billion from credit cards, and $133 billion from auto loans.

The $1.1 trillion for residential is in line with my estimates from Dec 2007, and the additional estimate also seem reasonable (close to $2.1 trillion total in U.S. credit losses). These losses will be shared among banks and investors worldwide, so probably less than half of the losses will be for U.S. banks. However U.S. banks will also suffer losses on overseas loans.

by Calculated Risk on 1/17/2009 01:28:00 AM

From the Telegraph: £200bn to save banks from bad debt

In an attempt to restore confidence within the financial sector, the Treasury will tell the banks of its plan on Saturday. It aims to announce details of the rescue package publicly early next week.

The bad bank plan has climbed the political agenda in the past couple of weeks as the Government has become aware of the extent of the lenders' bad debts.

Sources said that a bad bank would have to take on about £200 billion of toxic assets. That would take the Government's total commitment to solving the banking crisis to almost £1 trillion in taxpayers' money that has either been spent or pledged.

That equates to about £33,000 per taxpayer. The total sum is equivalent to more than two-thirds of Britain's annual GDP of £1.4 trillion.

That is equivalent to a total U.S. bailout of almost $10 trillion (about 2/3 of GDP).