by Calculated Risk on 2/24/2009 08:45:00 AM

From the WSJ: Home Depot Posts Loss, Expects Earnings Below Views

Home Depot's sales fell by more than 17% in the fourth quarter and by nearly 8% on the year. The company expects them to fall another 9% in its 2009 fiscal year ...

"We expect the home improvement market in 2009 will remain just as challenging as 2008," Chief Executive Frank Blake said in a release.

Hoocoodanode?

by Calculated Risk on 2/24/2009 12:11:00 AM

From the WSJ: AIG Seeks to Ease Its Bailout Terms

American International Group Inc. is seeking an overhaul of its $150 billion government bailout package ... Under the plan, the government loan of up to $60 billion at the heart of the bailout would be repaid with a combination of debt, equity, cash and operating businesses, such as stakes in AIG's lucrative Asian life-insurance arms. AIG and the government have been discussing the changes since December and plan to announce them by Monday when the insurer is expected to report fourth-quarter results, the people said.

The earnings report is expected to underscore AIG's worsening condition with its total loss for the quarter likely to top $60 billion...

It looks another Sunday announcement coming up. No new info on Citi yet.

Here are the Bloomberg Futures. Futures are basically flat so far.

Barchart.com (active contract has a time, not a date)

CBOT mini-sized Dow

And the Asian markets. Not bad so far.

by Calculated Risk on 2/23/2009 10:10:00 PM

Press Release: General Growth Properties, Inc. Releases Fourth Quarter and Full-Year 2008 Operating Results

We are considering all strategic alternatives and are continuing our discussions with our lenders. In addition, we have suspended our cash dividend, halted or slowed nearly all of our development and redevelopment projects, systematically engaged in certain cost reduction or efficiency programs, reduced our workforce by over 20% and sold certain non-mall assets. We currently have approximately $1.179 billion of past due debt and approximately $4.09 billion of debt that could be accelerated. However, our lenders have not yet exercised any of their remedy rights with respect to such debt. In addition, we have an additional $1.44 billion of consolidated mortgage debt and approximately $595 million of unsecured bonds scheduled to mature in the balance of 2009 that remains to be refinanced, repaid or extended. In the event that we are unable to extend or refinance our near and intermediate term loan maturities, we may be required to seek legal protection from our creditors.

No BK yet for the 2nd largest mall owner.

by Calculated Risk on 2/23/2009 08:50:00 PM

Waiting for some news ...

General Growth Properties, the 2nd largest mall owner in the U.S., is scheduled to report earnings this evening. In an SEC filing on Friday, GGP reported that they are currently in default on certain loans.

And today was the light news day of the week! The rest of the week will be busy with Case-Shiller house prices, existing home sales, new home sales, and revised GDP all being released. Plus President Obama will address Congress tomorrow evening, Bernanke testifies to Congress on Tuesday and Wednesday, and Geithner will provide more details on the capital program and stress tests on Wednesday.

May we all live in interesting times.

by Calculated Risk on 2/23/2009 05:55:00 PM

From Rudolph Bell at GreenvilleOnline: Ex-Fed governor feels 'accountable' in economic crisis (ht Scott)

[Former Fed Governor from 2001-2007] Susan Schmidt Bies is having second thoughts about some of the votes she cast as a member of the Federal Reserve Board of Governors in the years leading up to the present crisis.
...
"I never, never would have guessed it was going to be like this, never," she said.

In an interview with The Greenville News, Bies reflected on her time at the Fed -- and expressed regret at not acting to raise interest rates faster or doing more to strengthen mortgage underwriting.
...
Bies said the bigger problem was lenders granting mortgages to people without the means to repay the loans. That concern fell to Bies, since she was the Fed's point person for bank oversight.

"As regulators, we didn't see the whole picture of how poorly the loans were being underwritten, because there's so many regulators in this country. None of us saw the whole picture, and we didn't tighten down enough, fast enough on it," Bies said.
...
"I think everybody just really lost touch with how much the underwriting of loans had deteriorated," Bies said.
...
Before the collapse, she said, "every bank risk model, every securitizer, broker dealer, all the rating agencies, were all basically where I was."

"I just didn't realize it was as bad as it was," she said.

It's tempting to say: Hoocoodanode?

But actually Bies did realize there was a problem, but she just didn't act aggressively to understand the depth of the problem ... here are some excerpts from a speech she gave in June, 2005:

Current Regulatory Issues

[W]e see indications that underwriting standards are beginning to weaken. For example, "affordability products"--such as interest-only loans, negative amortizations, and second mortgages with high loan-to-value ratios--are becoming more popular; subprime lending is growing faster than prime lending; adjustable-rate mortgages, or ARMs, have grown substantially and now account for more than a third of all mortgage originations, the highest level since 1994. Industry experts are increasingly concerned about the quality of collateral valuations relied upon in home equity lending and residential refinancing activities. More homes are being purchased not as primary dwellings, but as vacation homes or pure investments, in which case anticipated price appreciation may be a large factor influencing purchase decisions.

... [T]he agencies have observed some easing of underwriting standards, with lenders competing to attract home equity lending business. Lenders are sometimes offering interest-only loans and are sometimes requiring very small down payments and limited documentation of a borrower's assets and income. They are also relying more on automated-valuation models and entering into more transactions with loan brokers and other third parties. Given this easing of standards, there is concern that portions of banks' home equity loan portfolios may be vulnerable to a rise in interest rates and a decline in home values. In other words, there is concern that not all banks fully recognize the embedded risks in some of their portfolios.

Bank supervisors today have similar concerns about commercial real estate lending, defined as those real estate loans in which the primary source of repayment is derived from the rental income or sale proceeds of commercial property. This has historically been a highly volatile asset class, and it played a central role in the banking problems of the late 1980s and early 1990s.

Yes, Bies was late realizing there was a problem. And she didn't seem to recognize the extent of the underwriting issues - even though this speech outlined many of the key issues and was given almost two years before New Century went down. Think of all those poorly underwritten loans made after Bies gave this speech. Why didn't the Fed move more aggressively to understand the underwriting issues, and why did they drag their feet for the next two years? I think those are key questions that still need to be answered.

by Calculated Risk on 2/23/2009 04:01:00 PM

Well, almost 1996. The S&P 500 low in 1997 was 737.01.

Click on graph for larger image in new window.

DOW off 250 points (3.4%)

S&P 500 off 27 points (3.5%)

NASDAQ off 53 points (about 3.7%)

Another day of Cliff Diving.



This graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears". (if smaller graph isn't updated, click for larger graph - Doug should update soon)

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

by Calculated Risk on 2/23/2009 02:42:00 PM

CNBC Headline: AIG Is In Talks With Government To Secure Additional Funds to Keep Operating, CNBC Has Learned Click on cartoon for larger image in new window. Cartoon from Eric G. Lewis

Update from David Faber: AIG Seeks More US Funds As Record Loss Looms

Sources close to the company said the loss will be near $60 billion due to writedowns on a variety of assets including commercial real estate.

That massive loss is likely to spur downgrades in its insurance and credit ratings that will force AIG to raise collateral that it doesn't have.

by Calculated Risk on 2/23/2009 01:07:00 PM

CNBC Headline: Deal to Increase Government Stake In Citigroup May Be Reached As Early As Today, Sources Tell CNBC.

UPDATE: From CNBC: Citigroup: Government Could Get Higher Stake Today

A deal for the government to hike its stake in Citigroup could be announced today or tomorrow, sources close to the company have told CNBC.

This is a followup to the WSJ story last night: U.S. Eyes Large Stake in Citi

by Calculated Risk on 2/23/2009 11:32:00 AM

Last weekend I spoke with a few builders and land developers. Talk about a depressing group. In many areas of California the builders can't compete with lender REOs, since the lenders are selling REOs below replacement costs (including construction and all entitlements).

As one developer said: "We can't compete even if the land is free!"

And on the stock market, it was just last Thursday that I wrote:

The DOW closed at 7,465.95; a six year low. The low in 2002 was 7286.27, if the market breaks that level, the DOW will be back to 1997 levels. That would mean more than a lost decade for DOW investors (not counting dividends).

As an aside, Greenspan made the "irrational exuberance" comment in a speech on December 5, 1996 with the DOW at 6,437. Not a prediction, but we are getting close to that level over 12 years later!

Also note that the closing low last November for the S&P 500 was 752.44. That could be broken today. Best to all.

by Calculated Risk on 2/23/2009 09:58:00 AM

From the Chicago Fed: Index shows economic activity remained low in January (ht Misha)

The Chicago Fed National Activity Index was –3.45 in January, up slightly from –3.65 in December. All four broad categories of indicators made negative contributions to the index in January.

The three-month moving average, CFNAI-MA3, decreased to –3.41 in January from –2.70 in the previous month, reaching its lowest level since 1975. ... The production and income category of indicators made a large negative contribution of –1.35 to the index in January after contributing –1.53 in December. Total industrial production decreased 1.8 percent in January after declining 2.4 percent in the previous month. In particular, manufacturing production of durable goods declined 4.8 percent in January, marking its largest one-month decline since December 1974.

Click on table for larger image in new window.

This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967. According to the Chicago Fed: "When the CFNAI-MA3 value moves below –0.70 following a period of economic expansion, there is an increasing likelihood that a recession has begun."

This is the lowest level since 1975. Just more cliff diving ...