by Calculated Risk on 1/23/2009 11:17:00 AM

From The Times: It's official - Britain is in recession

Britain is in the grip of its sharpest recession for three decades, grim official figures confirmed today ... The economy suffered a brutal 1.5 per cent drop in Gross Domestic Product (GDP) during the past three months, shrinking at its fastest quarterly pace since 1980.

Coming on the heels of an already steep 0.6 per cent plunge in GDP in the third quarter of last year, the news means that the widely accepted definition of recession as two consecutive quarters of falling output has finally been met.

This brings up a couple of interesting points:

For an "official" recession in Britain they use the "two consecutive quarters of declining GDP" rule. In the U.S., a recession is declared by NBER based on a number of factors:

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators.

GDP is reported very differently in different countries. In the U.S. the headline number is the real (inflation adjusted) quarterly change, seasonally adjusted at an annual rate (SAAR). In Britain and the EU, the headline GDP number is the real quarterly change, but it is not the annual rate. So a 1.5% decline in the U.K. is about the same as a 6% decline (SAAR) in the U.S.

China reports the year-over-year change in real GDP for the quarter, so the 6.8% GDP for Q4 recently reported includes the changes in Q1 through Q3 too. As Roubini noted:

The Chinese came out today with their 6.8% estimate of Q4 2008 growth. China publishes its quarterly GDP figure on a year over year basis, differently from the U.S. and most other countries that publish their GDP growth figure on a quarter on quarter annualized seasonally adjusted (SAAR) basis.

When growth is slowing down sharply the Chinese way to measure GDP is highly misleading as quarter on quarter growth may be negative while the year over year figure is positive and high because of the momentum of the previous quarters’ positive growth.

Indeed if one were to convert the 6.8% y-o-y figure in the more standard quarter over quarter annualized figure Chinese growth in Q4 would be close to zero if not negative.

Here is the Britain report: UK output decreased by 1.5% in Q4 2008

Gross Domestic Product (GDP) contracted by 1.5 per cent in the fourth quarter of 2008, compared with a decrease of 0.6 per cent in the third quarter. The increased rate of decline in output was due to weaker services and production industries output.

Construction output decreased by 1.1 per cent, compared with a decrease of 0.2 per cent in the previous quarter.

by Calculated Risk on 1/23/2009 10:36:00 AM

From the WSJ: General Electric's Net Slides 44%.

Here are a couple of slides from their investor presentation:

Click on table for larger image in new window.

The credit loss estimate is $2 trillion - just a little lower than my estimate of $2 to $2.5 trillion (Roubini's estimate is $3.6 trillion now!)

The good news is a "broad deflationary cycle" begins!


Look at mortgage delinquencies: 10.74%!

And commercial delinquencies are rising faster too.

by Calculated Risk on 1/23/2009 02:44:00 AM

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 and C&D loan concentrations, and now that CRE will implode in 2009, many of these banks will be in serious jeopardy.

Eric Dash at the NY Times has some details: Smaller Banks’ Losses Expected to Bring Mergers

Most of these banks were never big players in credit cards, subprime mortgages or credit-default swaps. But they were major lenders to commercial real estate developers, home builders and small corporations. As the recession tightens, losses have started to surge.

“There will not be the shock and awe factor” of the big bank losses, said Nancy A. Bush, a longtime banking analyst. But “small and midsize banks are up to their eyeballs in commercial real estate related to residential development and business loans. We are going to see a reckoning with how bad that got” in 2009.
...
Gerard Cassidy, a veteran banking analyst, projected that 200 to 300 small banks might fail or be forced into mergers over the next year or so. While that is still a fraction of the industry’s 8,400 banks, it is up sharply from the 25 bank failures in 2008.

Sounds like Bank Failure Fridays will be busy this year.

by Calculated Risk on 1/22/2009 10:44:00 PM

From the Financial Times: Great Portland says demand for offices falls

Great Portland Estates, the London office developer, has reported a rise in vacancies and fall in rents as demand dries up for office space in its core West End property portfolio.
...
The company reported a clear deterioration in its occupier market. Rental value declined by 9.4 per cent overall, with a fall of 13.8 per cent in West End offices and 2.1 per cent in West End retail.
...
The void rate across its portfolio more than doubled to 7.5 per cent, from 3.2 in September, although the increase mainly reflects forward development planning rather than tenant failures.

As the economy weakens (the British economy will probably be officially in recession tomorrow), the vacancy rate will probably also be impacted by tenant failures (negative absorption).

by Calculated Risk on 1/22/2009 08:27:00 PM

From the Capital One conference call, on Closed End Unsecured Loans (hat tip Brian):

Analyst: When you look at the closed in loans that are clearly under performing at this stage, what is it about either the underwriting or the characteristics of that group of loans which makes that different than say a normal revolving credit card or what would you suppose is maybe leading to the worse than expected performance at this point?

COF CEO: There are several factors involving the closed in loans. From a credit point of view, closed end loans tend to attract, just sort of by the nature of who the customer base that pursues an installment loan, tends to attract a customer base that is a little more credit intense if you will relative to the broad swath of our credit card base because a credit card of course is also a transactional product as well as a borrowing product. These closed in loans in fact were to pretty darn strikingly high FICO customers, basically super prime customers by profile, but they certainly have a degraded a lot more quickly than the overall super prime sort of equivalent super prime credit card customer. You know, they tend to be -- a couple of things about the boom and bust market that we have seen both they tend to perform -- they are performing worse in the boom and bust market we can see that than the credit cards, and they have a higher concentration in boom and bust markets as well. ...
emphasis added

Those darn strikingly high FICO super prime borrowers!

by Calculated Risk on 1/22/2009 05:10:00 PM

Two different markets: Capital One is being hit by higher credit card charge-offs and Synovus is being hit by residential construction and development losses. The result is the same ... a visit to the confessional.

Press Release from Capital One:

Economic deterioration intensified during the fourth quarter, driving increasing delinquency and charge-off rates across all of our lending businesses. The fourth quarter charge-off rate in the U.S. Card business was 7.08%, in line with the expectations conveyed last quarter. The company now expects that the U.S. Card charge-off rate for the first quarter of 2009 will be around 8.1%, rather than the mid 7% range previously communicated. The change in outlook is primarily the result of declining balances and adverse credit performance of closed-end, unsecured loans that are included in the U.S. Card subsegment. Auto Finance delinquencies and charge-off rates increased in the quarter as a result of seasonality, economic worsening, declining loan balances, and the impact of sharply falling used car auction prices.

"Economic worsening"?

And from Synovus:

“As the economy continued to deteriorate in the fourth quarter, credit quality in the residential construction and development portfolios, especially in Atlanta, continued to weaken,” said Richard Anthony, Chairman and CEO.
...
The ratio of nonperforming assets to loans, impaired loans held for sale, and other real estate was 4.16%, as of December 31, 2008, compared to 3.58% last quarter.
...
The net charge-off ratio for the quarter was 3.25% compared to 1.53% last quarter.

Doubled in one quarter!

by Calculated Risk on 1/22/2009 04:13:00 PM

From the Association of American Railroads (AAR): Rail Freight Traffic Slides During 2nd Week of 2009 (hat tip Bob_in_MA)

The economic slowdown continued to affect U.S. railroads as freight volume declined during the second week of 2009 in comparison with same week last year, the Association of American Railroads (AAR) reported today.

Carload freight totaled 267,063 cars, down 17.9 percent from 2008, with loadings down 13.2 percent in the West and 24.4 percent in the East. Intermodal volume of 199,117 trailers or containers was off 13.7 percent from last year, with container volume falling 10.2 percent and trailer volume dipping 27.0 percent. Total volume was estimated at 28.3 billion ton-miles, off 16.8 percent from 2008.

Ouch.

by Calculated Risk on 1/22/2009 03:49:00 PM

From the Fed: The A2P2 spread as at 1.29. This spread has seen a huge decline in 2009. This is far lower than the record (for this cycle) of 5.86 after Thanksgiving, but still too high.

This is the spread between high and low quality 30 day nonfinancial commercial paper. Right now quality 30 day nonfinancial paper is yielding 0.25% and A2/P2 paper is yielding 1.54%. As the credit crisis eases, I'd expect a further decline in this spread, although this is progress.

There may be plenty of bad news, but this is definitely good news for companies that issue lower quality commercial paper.

As a reminder - see those three little bumps on the graph in 2007 and early 2008? Each of those bumps indicated a crisis in the credit markets - and now they barely show up on the graph!

by Calculated Risk on 1/22/2009 02:01:00 PM

Here is a partial transcript from Susie Gharib’s interview with Warren Buffett airing tonight on Nightly Business Report. You can check your local listings here

SUSIE GHARIB, ANCHOR, NIGHTLY BUSINESS REPORT: Are we overly optimistic about what President Obama can do?

WARREN BUFFETT, CHAIRMAN, BERKSHIRE HATHAWAY: Well I think if you think that he can turn things around in a month or three months or six months and there’s going to be some magical transformation since he took office on the 20th that can’t happen and wouldn’t happen. So you don’t want to get into Superman-type expectations. On the other hand, I don’t think there’s anybody better than you could have had; have in the presidency than Barack Obama at this time. He understands economics. He’s a very smart guy. He’s a cool rational-type thinker. He will work with the right kind of people. So you’ve got the right person in the operating room, but it doesn’t mean the patient is going to leave the hospital tomorrow.
...
SG: But I know that during the election that you were one of his economic advisors, what were you telling him?

WB: I was telling him business was going to be awful during the election period and that we were coming up in November to a terrible economic scene which would be even worse probably when he got inaugurated. So far I’ve been either lucky or right on that. But he’s got the right ideas. He believes in the same things I believe in. America ’s best days are ahead and that we’ve got a great economic machine, its sputtering now. And he believes there could be a more equitable job done in distributing the rewards of this great machine. But he doesn’t need my advice on anything.
...
SG: What’s the most important thing you think he needs to fix?

WB: Well the most important thing to fix right now is the economy. We have a business slowdown particularly after October 1st it was sort of on a glide path downward up til roughly October 1st and then it went into a real nosedive. In fact in September I said we were in an economic Pearl Harbor and I’ve never used that phrase before. So he really has a tough economic situation and that’s his number one job. Now his number one job always is to keep America safe that goes without saying.

SG: But when you look at the economy, what do you think is the most important thing he needs to fix in the economy?

WB: Well we’ve had to get the credit system partially fixed in order for the economy to have a chance of starting to turn around. But there’s no magic bullet on this. They’re going to throw everything from the government they can in. As I said, the Treasury is going all in, the Fed and they have to and that isn’t necessarily going to produce anything dramatic in the short term at all. Over time the American economy is going to work fine.

SG: There is considerable debate as you know about whether President Obama is taking the right steps so we don’t get in this kind of economic mess again, where do you stand on that debate?

WB: Well I don’t think the worry right now should be about the next one, the worry should be about the present one. Let’s get this fire out and then we’ll figure out fire prevention for the future. But really the important thing to do now is to figure out how we get the American economy restarted and that’s not going to be easy and its not going to be soon, but its going to get done.

SG: But there is debate about whether there should be fiscal stimulus, whether tax cuts work or not. There is all of this academic debate among economists. What do you think? Is that the right way to go with stimulus and tax cuts?

WB: The answer is nobody knows. The economists don’t know. All you know is you throw everything at it and whether it’s more effective if you’re fighting a fire to be concentrating the water flow on this part or that part. You’re going to use every weapon you have in fighting it. And people, they do not know exactly what the effects are. Economists like to talk about it, but in the end they’ve been very, very wrong and most of them in recent years on this. We don’t know the perfect answers on it. What we do know is to stand by and do nothing is a terrible mistake or to follow Hoover-like policies would be a mistake and we don’t know how effective in the short run we don’t know how effective this will be and how quickly things will right themselves. We do know over time the American machine works wonderfully and it will work wonderfully again.

SG: But are we creating new problems?

WB: Always

There is much more including a discussion of Madoff.

Saturday UPDATE: Full transcript is now online: Warren Buffett One on One, Extended Transcript

by Calculated Risk on 1/22/2009 12:16:00 PM

From CNBC: Former Merrill CEO Thain Leaving Bank of America

Former Merrill Lynch CEO John Thain agreed to resign from Bank of America ... less than a week after Bank of America was forced to seek $20 billion in government bailout money to absorb Merrill.
...
Merrill, meanwhile, decided to move up its year-end bonuses, doling out cash just days before it was officially acquired by Bank of America, it was reported earlier Thursday.

Take the money and run ...