by Calculated Risk on 3/30/2009 09:23:00 AM

From the WSJ: Mortgage Defaults, Delinquencies Rise

... A spokesman for the FHA said 7.5% of FHA loans were "seriously delinquent" at the end of February, up from 6.2% a year earlier. Seriously delinquent includes loans that are 90 days or more overdue, in the foreclosure process or in bankruptcy.
...
The FHA's share of the U.S. mortgage market soared to nearly a third of loans originated in last year's fourth quarter from about 2% in 2006 as a whole, according to Inside Mortgage Finance, a trade publication. That is increasing the risk to taxpayers if the FHA's reserves prove inadequate to cover default losses.

by Calculated Risk on 3/30/2009 01:11:00 AM

From the WSJ: Government Forces Out Wagoner at GM

The administration's auto team announced the departure of [General Motors Corp. Chief Executive Rick Wagoner] on Sunday. In a summary of its findings, the task force added that it doesn't believe Chrysler is viable as a stand-alone company, and suggested that the best chance for success for both GM and Chrysler "may well require utilizing the bankruptcy code in a quick and surgical way."

On Chrysler:

The government said it would provide Chrysler with capital for 30 days to cut a workable arrangement with Fiat SpA, the Italian auto maker that has a tentative alliance with Chrysler.
...
If the two reach a definitive alliance agreement, the government would consider investing up to $6 billion more in Chrysler. If the talks fail, the company would be allowed to collapse.

From the NY Times: U.S. Moves to Overhaul Ailing Carmakers

President Obama is scheduled to announce details of the auto package at the White House on Monday, but two senior officials, offering a preview on condition of anonymity, made clear that some form of bankruptcy — a quick, court-supervised restructuring, as they described it — could still be an option for one or both companies.

On GM:

G.M., on the other hand, has made considerable progress in developing new energy-efficient cars and could survive if it can cut costs sharply, the task force reported. The administration is giving G.M. 60 days to present a cost-cutting plan and will provide taxpayer assistance to keep it afloat during that time.

As expected, it sounds especially grim for Chrysler.

by Calculated Risk on 3/29/2009 11:59:00 PM

Here is an open thread for discussion. I'm out for a few hours (if there is breaking news) ...

Bloomberg Futures.

CBOT mini-sized Dow

CME Globex Flash Quotes

Futures from barchart.com

And the Asian markets.

And a graph of the Asian markets.

Best to all.

by Calculated Risk on 3/29/2009 08:25:00 PM

From Bloomberg: Spain Rescues Caja Castilla With EU9 Billion in Funds (ht Carlomagno, Bob_in_MA)

The Spanish government said it will provide as much as 9 billion euros ($12 billion) to Caja Castilla-La Mancha to shore up the regional lender’s finances and protect depositors in the first bank rescue since 1993.
...
Loan defaults in Spain have tripled since the global financial crisis began in 2007, ending the country’s real estate boom and boosting unemployment to a European-Union high of 14 percent. The economy is in the grip of its worst recession in half a century with the government forecasting a contraction of 1.6 percent this year.

To understand a "Caja", here is a Financial Times article on the Spanish banking system from last October: Cajas in the balance

... Half of Spain's financial system consists of 45 unlisted mutuals owned by local governments, called cajas. They are entirely domestically focused, therefore highly exposed to property, and also - because they cannot raise equity - potentially short of capital.

An estimated 70 per cent of cajas' combined €900bn loan portfolio is in real estate. Bad debts doubled last year and Credit Suisse expects them to double again to 5 per cent, twice the current European average. Add in the odd bankruptcy - such as property developer Martinsa Fedesa's recent collapse - and this could eliminate the cajas' provisioning cushions. That presents a problem. ...

... Rescue deals for some of the smaller, more opaque banks look inevitable. The financial fuse on Spain's property bomb is burning slowly. But the bang could still be big.

The Pain in Spain happens mainly in the - uh - Cajas.

by Calculated Risk on 3/29/2009 06:08:00 PM

From Bloomberg: General Motors Chief Rick Wagoner Said to Step Down

General Motors Corp. Chief Executive Officer Rick Wagoner will step down after more than eight years running the largest U.S. automaker ...

The departure of Wagoner comes as President Barack Obama prepares an address tomorrow morning on his plans for the future of the U.S. auto industry. GM is surviving on $13.4 billion in U.S. loans and is asking for as much as $16.6 billion in additional aid to survive.

It sounds like the next round of the auto bailout will be announced Monday.

by Calculated Risk on 3/29/2009 03:42:00 PM

Much has been made about the personal saving rate falling to zero during the housing bubble, and rising sharply in recent months. This decline in the saving rate was probably related to homeowner's borrowing against their homes.

During the housing bubble there was a huge surge in home equity borrowing or cash-out refinancing - commonly called mortgage equity withdrawal (MEW) - that led many people to spend more than their usually defined disposable personal income (DPI). (ht Professor Martha Olney)

However this didn't capture MEW. The following two graphs show the impact of MEW. Note: I used 50% of MEW, because that appears to be the amount consumed.

Click on graph for larger image in new window.

The first graph shows disposal personal income (blue), disposal personal income plus MEW (green) and personal outlays (red). Note: Graph doesn't start at zero to better show the change.

The BEA defines personal saving as the difference between the blue and red lines:

Personal Savings = Disposable Personal Income - Personal Outlays

However many people acted as if MEW was income, and that would mean personal saving was the difference between the green and red lines.

The second graph shows the same data except as a saving rate.

As Professor Olney mentioned to me, the aggregate saving rate captures the behavior of both savers (who probably didn't change their behavior) and "dissavers" (who borrowed heavily). The saving rate declined to zero, probably because the dissavers were using MEW as income.

Now that the Home ATM is closed, the saving rate is rising because of less borrowing - as dissavers are forced to live within their incomes.

by Calculated Risk on 3/29/2009 01:16:00 PM

Evan Thomas writes in Newsweek: Obama’s Nobel Headache. An excerpt:

If you are of the establishment persuasion (and I am), reading Krugman makes you uneasy. You hope he's wrong, and you sense he's being a little harsh (especially about Geithner), but you have a creeping feeling that he knows something that others cannot, or will not, see. By definition, establishments believe in propping up the existing order. Members of the ruling class have a vested interest in keeping things pretty much the way they are. Safeguarding the status quo, protecting traditional institutions, can be healthy and useful, stabilizing and reassuring. But sometimes, beneath the pleasant murmur and tinkle of cocktails, the old guard cannot hear the sound of ice cracking. The in crowd of any age can be deceived by self-confidence, as Liaquat Ahamed has shown in "Lords of Finance," his new book about the folly of central bankers before the Great Depression, and David Halberstam revealed in his Vietnam War classic, "The Best and the Brightest." Krugman may be exaggerating the decay of the financial system or the devotion of Obama's team to preserving it. But what if he's right, or part right? What if President Obama is squandering his only chance to step in and nationalize—well, maybe not nationalize, that loaded word—but restructure the banks before they collapse altogether?
emphasis added

Krugman is making the establishment nervous! Probably because they all missed the housing bubble - and Krugman called it correctly.

Krugman foreshadowed the Newsweek article yesterday: The magazine cover effect

I’ve long been a believer in the magazine cover indicator: when you see a corporate chieftain on the cover of a glossy magazine, short the stock. Or as I once put it (I’d actually forgotten I’d said that), “Whom the Gods would destroy, they first put on the cover of Business Week.”

There’s even empirical evidence supporting the proposition that celebrity ruins the performance of previously good chief executives.

Presumably the same effect applies to, say, economists.

You have been warned.

by Calculated Risk on 3/29/2009 10:37:00 AM

From the Seattle Times: Washington's banks under stress (ht Lyle)

Ailing financial giants such as Citigroup, Bank of America and AIG have drawn most of the attention as the worst banking crisis since the Great Depression grinds on.

But several of Washington's community banks also are clearly straining under the weight of the crisis, a Seattle Times analysis shows.

At least a dozen of the 52 Washington-based banks examined are carrying heavy loads of past-due loans, defaults and foreclosed properties relative to their financial resources. ...

While banks big and small have been kneecapped by the collapse of the housing bubble, the crisis has played out differently for the big "money center" banks and the thousands of regional and community banks sprinkled across the country.

The main problem for the big banks and investment firms has been exotic instruments such as collateralized mortgage obligations, structured investment vehicles and credit-default swaps — all tied, one way or another, to pools of residential mortgages that were bought, sold, sliced up and repackaged like so much salami.
...
But at most community banks, residential mortgages were a relatively small part of their business. Instead, their troubles are tied directly to their heavy dependence on real-estate loans — mainly loans to local builders and developers.

"Many community banks found that (construction and development loans) was an area in which they could compete effectively against the big banks," Frontier's Fahey said.

At Frontier Bank, for example, construction and development loans made up 44.5 percent of all assets at year's end. City Bank had 53.3 percent of its assets in such loans, and at Seattle Bank (until recently Seattle Savings Bank), they constituted a full 54.2 percent of total assets.
...
Regulators can act to bring wobbly banks back into balance, short of seizing them outright. Four Washington banks — Horizon, Frontier, Westsound and Bank Reale of Pasco — are operating under FDIC "corrective action plans" that place tight restrictions on their lending practices, management and overall operations.

But sometimes, such plans just delay the inevitable. Last year, for instance, the FDIC imposed corrective action plans on Pinnacle Bank and Silver Falls Bank, both of Oregon; in February, both were seized.

This article makes a couple of key points that we've been discussing: many community and regional banks sidestepped the residential mortgage debacle, and focused on local commercial real estate (CRE) and construction & development (C&D) lending. Now, with rapidly increasing defaults on C&D and CRE loans, the high concentrations of CRE and C&D loans at these banks will lead to many bank failures. And unlike the "too big to fail" banks, these community banks will just be seized by the FDIC.

by Calculated Risk on 3/28/2009 10:32:00 PM

From the WSJ: US Treasury: $134.5 Billion Left in TARP

The U.S. Treasury Department estimates that it has about $134.5 billion left in its financial-rescue fund, which would mean that about 81% of the $700 billion program has been committed.

In its estimate, the Treasury projects that it will receive about $25 billion from banks that have participated in the department's Troubled Asset Relief Program, or TARP.

If you need a bailout, you'd better get in line soon!

by Calculated Risk on 3/28/2009 06:31:00 PM

From the WaPo: Obama Signals Flexibility Ahead of G-20 Summit

The Obama administration on Saturday appeared to back away from calls for other nations to mirror the United States in combating the financial crisis with ramped up government spending ...

U.S. officials yesterday dismissed any notion of a rift, saying they would not press nations to adopt specific spending targets. "Nobody is asking any country to come to London to commit to do more right now," said Deputy National Security Advisor for International Economic Affairs, Michael Froman. ...

Experts say the U.S. stance may reflect a recognition that the White House may simply not be able to convince their European counterparts to spend more. Some said it may herald a modest outcome for the summit.

Those expecting anything of substance from the G-20 meeting will probably be disappointed ...