by Calculated Risk on 2/10/2009 05:34:00 PM

Terry Moran at ABC News interviewed President Obama today (airs tonight). Here are some excerpts: (hat tip Paul Kedrosky)

TERRY MORAN: There are a lot of economists who look at these banks and they say all that garbage that's in them renders them essentially insolvent. Why not just nationalize the banks?

PRESIDENT OBAMA: Well, you know, it's interesting. There are two countries who have gone through some big financial crises over the last decade or two. One was Japan, which never really acknowledged the scale and magnitude of the problems in their banking system and that resulted in what's called "The Lost Decade." They kept on trying to paper over the problems. The markets sort of stayed up because the Japanese government kept on pumping money in. But, eventually, nothing happened and they didn't see any growth whatsoever.

Sweden, on the other hand, had a problem like this. They took over the banks, nationalized them, got rid of the bad assets, resold the banks and, a couple years later, they were going again. So you'd think looking at it, Sweden looks like a good model. Here's the problem; Sweden had like five banks. [LAUGHS] We've got thousands of banks. You know, the scale of the U.S. economy and the capital markets are so vast and the problems in terms of managing and overseeing anything of that scale, I think, would -- our assessment was that it wouldn't make sense. And we also have different traditions in this country.

Obviously, Sweden has a different set of cultures in terms of how the government relates to markets and America's different. And we want to retain a strong sense of that private capital fulfilling the core -- core investment needs of this country.

And so, what we've tried to do is to apply some of the tough love that's going to be necessary, but do it in a way that's also recognizing we've got big private capital markets and ultimately that's going to be the key to getting credit flowing again.

Kedrosky comments:

[S]aying that Sweden had five banks and the U.S. has thousands, so nationalization can’t happen here, is misleading. It ignores the relative GDPs of the two countries. ...[and] the problem is chiefly in the six largest U.S. banks ...

On the issue of "cultural differences" between the U.S. and Sweden, I've joked that we should call taking over the banks "preprivatization" to avoid the stigma of "nationalization".

But stop and think about what Obama is saying. We know the correct answer, but we are afraid to do it - because of our "culture" - so we are going to follow the Japanese plan.

We should definitely stress test the banks. My suggestion: announce when this will be complete (within 30 days), make the results public, and preprivatize the insolvent ones.

Update: Roubini: It Is Time to Nationalize Insolvent Banking Systems. Excerpt:

[W]hy is the US government temporizing and avoiding doing the right thing, i.e. take over the insolvent banks? There are two reasons. First, there is still some small hope and a small probability that the economy will recover sooner than expected, that expected credit losses will be smaller than expected and that the current approach of recapping the banks and somehow working out the bad assets will work in due time. Second, taking over the banks – call is nationalization or, in a more politically correct way, “receivership” – is a radical action that requires most banks be clearly beyond pale and insolvent to be undertaken. Today Citi and Bank of America clearly look like near-insolvent and ready to be taken over but JPMorgan and Wells Fargo do not yet. But with the sharp rise in delinquencies and charge-off rates that we are experiencing now on mortgages, commercial real estate and consumer credit in a matter of six to twelve months even JPMorgan and Wells will likely look as near-insolvent (as suggested by Chris Whalen, one of the leading independent analysts of the banking system).

Thus, if the government were to take over only Citi and Bank of America today (and wipe out common and preferred shareholders and also force unsecured creditors to take a haircut) a panic may ensue ... Instead if, as likely, the current fudging strategy - of temporizing and hoping that things will improve for the economy and the banks - does not work and in 6-12 months most banks (the major four and the a good part of the remaining regional banks) all look like clearly insolvent you can then take them all over, wipe out common shareholders and preferred shareholders and even force unsecured creditors to accept losses ( in the form of a conversion of debt into equity and/or haircut on the face value of their bond claims) as the losses will be so large that not treating such unsecured creditors would be fiscally too expensive.

So, the current strategy – Plan A - may not work and the Plan B (or better Plan N for nationalization) may end up the way to go later this year. Wasting another 6-12 months to do the right thing may be a mistake but the political constrains facing the new administration – and the remaining small probability that the current strategy may by some miracle or luck work – suggest that Plan A should be first exhausted before there is a move to Plan N. Wasting another 6-12 months may risk turning a U-shaped recession into an L-shaped near depression but currently Plan N is not yet politically feasible.

by Calculated Risk on 2/10/2009 03:56:00 PM

Update: This graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears". There is much more at the site.

Click on graph for updated image in new window.

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

Investors didn't think much of Secretary Geithner's outline of a bailout (we can't really call it a plan).

DOW off 386 points or so ...

S&P 500 off 43 points (almost 5%)

NASDAQ off 67 points (about 4%)

Another day of Cliff Diving.

by Calculated Risk on 2/10/2009 01:53:00 PM

One of the key elements of the Financial Stability Plan is to build "Financial Stability Trust" by conducting "A Comprehensive Stress Test for Major Banks" and providing investors and the public "Increased Balance Sheet Transparency and Disclosure".

Although lacking in details, this is a very good idea. A few suggestions:

Provide a timeline for conducting the stress tests of all institutions with more than $100 billion in assets (like 30 days).

Disclose the results with multiple scenarios on the Financial Stability website by bank (yes, name each bank and the future projected losses under each scenario).

A template for this disclosure could be the JPM presentation when they acquired WaMu.

Here is the table JPM provided:

Click on chart for larger image in new window.

JPM presented the WaMu losses from three scenarios: a base case (with national prices falling 25% peak to trough), a deeper recession (28% decline), and a severe recession (37% decline).

Although unemployment will probably exceed the JPM severe recession scenario of 8% - the point is investors now know that! We can see that in the severe recession, JPM expected national house prices to decline 37% and 54% in California. This would lead to an estimate $54 billion in additional losses.

Note: the toxic assets are frequently described as difficult to value, but the real problem is forecasting future defaults. This is why providing different scenarios for the stress test makes sense. No one has a crystal ball. For mortgage related assets, defaults correlate well with house price declines - so the JPM method is very useful. For other assets (like automobiles), unemployment is a better measure.

A table like this would allow investors and the public to understand which institutions are insolvent under different scenarios, and then provide a guide for the Capital Assistance Program (aka more capital injections). If a bank is massively insolvent, then the next step would be preprivatization. At least we would all know.

If JPM could put this data together in fairly short order, the other institutions - under the supervision of the government - could provide this data within 30 days. One of the key roles for the government would be to make sure the analysis is consistent between institutions: same scenarios, same defaults per house price declines, same results for similar securities.

by Calculated Risk on 2/10/2009 12:41:00 PM

The Senate has approved their version of the stimulus package. The vote was 61 to 37.

There are significant differences between the House and Senate bills, and this might cause some problems in gaining final approval.

For a chuckle, from Krugman on the bailout:

I was going to dub the new financial plan TANF 2 — temporary assistance to needy financial institutions ... But Jamie Galbraith (private communication) has trumped me; he says it’s the Bad Assets Relief Fund.

by Calculated Risk on 2/10/2009 11:25:00 AM

From the Federal Reserve:

The Federal Reserve Board on Tuesday announced that it is prepared to undertake a substantial expansion of the Term Asset-Backed Securities Loan Facility (TALF). The expansion could increase the size of the TALF to as much as $1 trillion and could broaden the eligible collateral to encompass other types of newly issued AAA-rated asset-backed securities, such as commercial mortgage-backed securities, private-label residential mortgage-backed securities, and other asset-backed securities. An expansion of the TALF would be supported by the provision by the Treasury of additional funds from the Troubled Asset Relief Program.
emphasis added

Here is the new Treasury website. Geithner says this site will help provide much better transparency.

Here is a Financial Stability Plan Fact Sheet on the new plan (update: now available).

This was just a broad outline of a plan - not a specific plan.

by Calculated Risk on 2/10/2009 10:34:00 AM

The Geithner news conference is scheduled for 11 AM ET.

Here is the CNBC feed.

And a live feed from C-SPAN.

Here is a summary from CNBC: Financial Plan to Focus on Consumer, Business Aid

by Calculated Risk on 2/10/2009 08:51:00 AM

From the Boston Globe: Boston's tallest building faces foreclosure

Click on photo for larger image in new window.

Photo Credit: Tomtheman5

The article notes that the 60-story John Hancock tower is facing foreclosure and is scheduled to be auctioned off next month.

The owners, Broadway Partners, paid $1.3 billion for the building in 2006 and the current value is estimated at between $700 and $900 million. Quite a haircut!

Broadway Partners was an aggressive buyer at the height of the commercial real estate market. From Bloomberg in January: Broadway Partners Talks With Lenders After Loan Deadline Passes

Broadway Partners, the New York real estate investment firm that used short-term debt to buy more than $8 billion of office towers from December 2006 to May 2007, is negotiating with its banks after missing a repayment deadline last week.
...
Broadway ... borrowed $1.5 billion through mezzanine loans to help finance the purchases of two groups of buildings from Beacon Capital Partners LLC, including Boston’s John Hancock Tower. Broadway borrowed the money from Lehman Brothers Holdings Inc. and RBS Greenwich Capital Markets Inc.

More losses for the lenders too.

by Calculated Risk on 2/10/2009 01:19:00 AM

Press Release: UBS Reports a Fourth Quarter Loss of CHF 8.1 Billion

Update: From the WSJ: UBS Posts Loss, Plans Job Cuts

UBS AG Tuesday reported a narrower fourth-quarter net loss and said it will cut 15,000 jobs by the end of this year in its loss-making investment bank.

The confessional is still very busy.

And oldie (Source: Jan-Martin Feddersen, Immobilienblasen)



Here is the actually UBS logo.

by Calculated Risk on 2/09/2009 11:18:00 PM

From the NY Times: Geithner Said to Have Prevailed on the Bailout. According to the NY Times, the plan includes:

[T]he creation of a joint Treasury and Federal Reserve program, at an initial cost of $250 billion to $500 billion, to encourage investors to acquire soured mortgage-related assets from banks.

The Fed will use its balance sheet to provide the financing, and the Federal Deposit Insurance Corporation might provide guarantees to investors who participate in the program, which some people might call a “bad bank.”

A second component of the plan would broadly expand, to $500 billion to $1 trillion, an existing $200 billion program run by the Federal Reserve to try to unfreeze the market for commercial, student, auto and credit card loans.
...
A third component would involve a review of the capital levels of all banks, including projections of future losses, to determine how much additional capital each bank should receive.

The capital injections would come out of the remaining $350 billion in the Troubled Asset Relief Program, or TARP.

Mortgage relief for homeowners will be a separate plan announced next week.

The first and third components are related. The first component sounds like a plan to encourage investors to buy toxic mortgage securities from banks with non-recourse financing from the Fed and possibly some guarantees from the FDIC. One of the keys will be the percent the investors have to put down (skin in the game), but their downside will probably be limited.

This will almost certainly lead to more losses for many banks, and that will require additional capital injections. Apparently Geithner believes the remaining $350 billion in the TARP is sufficient for the capital injections.

Treasury Secretary Timothy Geithner will announce the plan at 11 am EST.

by Calculated Risk on 2/09/2009 09:46:00 PM

From the WSJ: Bond Market in Winter Thaw

A growing number of big companies are taking advantage of the thawing credit markets to raise large sums of money at low interest rates, with Cisco Systems Inc. Monday selling $4 billion in bonds ...

The big Cisco offering follows a string of successful efforts just in the past five weeks to tap the market for corporate debt. The size of the offering -- and the relatively low risk premiums attached to the bonds -- indicate that investors are hungry for debt from highly rated companies that issue infrequently.
...
Cisco's 10-year notes were sold Monday at two percentage points above Treasurys for a yield of 4.979%, while a 30-year portion of Cisco's offering sold for a yield of 5.916%.
...
Cablevision Systems Corp. had to pay interest of 9.375% to borrow $500 million on Monday. [10 year notes]
...
Other companies are still shut out of the market completely.

The following graph shows the spread between 30 year Moody's Aaa and Baa rated bonds and the 30 year treasury.

The Moody's data is from the St. Louis Fed:

Moody's tries to include bonds with remaining maturities as close as possible to 30 years. Moody's drops bonds if the remaining life falls below 20 years, if the bond is susceptible to redemption, or if the rating changes.

Click on table for larger image in new window.

There has been some improvement (decline in spread) in recent weeks, but the spreads are still very high - even for higher rated paper - but especially for lower rated paper like Cablevision.