by Calculated Risk on 4/06/2009 09:04:00 AM

From The Obersver: US watchdog calls for bank executives to be sacked (ht several!)

Elizabeth Warren, chief watchdog of America's $700bn (£472bn) bank bailout plan, will this week call for the removal of top executives from Citigroup, AIG and other institutions ...

"The very notion that anyone would infuse money into a financially troubled entity without demanding changes in management is preposterous."

The report will also look at how earlier crises were overcome - the Swedish and Japanese problems of the 1990s, the US savings and loan crisis of the 1980s and the 30s Depression. "Three things had to happen," Warren said. "Firstly, the banks must have confidence that the valuation of the troubled assets in question is accurate; then the management of the institutions receiving subsidies from the government must be replaced; and thirdly, the equity investors are always wiped out."

by Calculated Risk on 4/06/2009 01:53:00 AM

Here is an open thread for discussion. The futures are slightly positive ...

Bloomberg Futures.

CBOT mini-sized Dow

CME Globex Flash Quotes

Futures from barchart.com

And the Asian markets. The Asian markets are up 1% to 2%.

And a graph of the Asian markets.

Best to all.

by Calculated Risk on 4/05/2009 07:48:00 PM

I've switched the comments over to Ken's Hoocoodanode system. This should work well with an iPhone, Blackberry and other handheld devices. Also "comments" provides a link for those who want to open the comments in a new tab.

Currently the "comments" indicator on the blog doesn't indicate the number of comments. This should be added soon.

Also Ken will be adding the number of visitors online and an indicator that new comments are pending - plus much much more!

There is a nice preview, and you can also edit your comments. Please try it out. If you see any glitches, please post a comment. Enjoy. CR

by Calculated Risk on 4/05/2009 05:02:00 PM

UPDATE: A reader notes:

One more point worth making - Results of the stress tests, especially if they show potential capital shortage, surely constitute a reportable material event and therefore must be publicly disclosed to the SEC to protect the shareholders, who are likely to be diluted.

It is not just the matter of public trust and fairness, it is the SEC law.

The WSJ has an update: Bank Stress Test Meeting Planned. A few points:

Top federal bank regulators plan to meet early this week to discuss how to analyze the results of stress tests being conducted on the country's 19 largest banks ... The Federal Reserve is overseeing the stress-test analysis process. People familiar with the matter said the final analysis isn't likely to be completed until at least the end of the month.

The end of April was the original schedule, FAQ:

Q10: When will the process be completed?

A: The Federal supervisory agencies will conclude their work as soon as possible, but no later than the end of April.

A suggestion for regulators: Ignore the "baseline case" - it is inoperative.

On the differences between assets with the same characteristics:

"[All loan portfolios, even with the same surface characteristics, don't perform the same at all." [said Eugene Ludwig, chief executive of Promontory Financial Group, which advises financial firms]

This is an understatement. Last April, Ambac discussed a Bear Stearns deal:

"Ambac originally projected that losses on the underlying collateral of the Bear Stearns transaction would be between 10% and 12%, but now expects losses at 81.8% of underlying collateral ..."

This is part of the problem in valuing assets - assets with identical characteristics may have significantly different losses. If it was securitized by Bear Stearns, or the loans were originated by New Century (and others), I'd be especially careful.

And on transparency:

"I think serious efforts will be made to respect the confidential nature of the test and its results," [Ludwig] said, but added that "there is a real danger that the results of the stress test are uncovered and this roils the markets."

The results of the stress test should be made public - at least for any bank taking TARP money. This would build confidence in the process, otherwise serious doubts will remain.

by Calculated Risk on 4/05/2009 12:15:00 PM

Here is a CQ Transcript: Treasury Secretary Geithner on CBS’s ‘Face the Nation’. Here is a brief excerpt:

SCHIEFFER: Let me ask you about this plan you have put together to create these public-private partnerships to buy these toxic assets that these banks owned to get them off these bank books so they -- the idea is that, if they can do that, then they can start lending again.

But last week the government did change the accounting rules. So the banks can, in essence, put a different value on those assets. Some people are now saying that, with this in place, the banks may no longer want to sell those toxic assets.

So I guess the question is, can you get the banks to participate in this program?

And do you feel you have the power to force them to sell those toxic assets?

GEITHNER: Bob, banks have a large incentive, now, to clean up their balance sheets, to make it easier for them to go raise equity from the markets, from private investors. So they’re going to have significant incentives to clean up their balance sheets. This gives them a way to do that that did not exist before that.

Just as an example, you know, if you had to sell your home tomorrow, in a world where nobody could get a mortgage to buy your home, you’d have to sell at an enormously low price.

You’d reluctant to sell. You might end up keeping your home longer than you want, not moving to some -- to take a new job, where you can earn more money, going forward.

That’s part of what’s happening to our financial system today.

GEITHNER: So what we try to do is lay out a proposal for how to create a market for these loans, bring in private investors to help protect the government from not overpaying for these assets.

This is just part, though, of a broad set of programs to help address the housing crisis, make sure banks have enough capital to lend even in a deeper recession, make sure we’re providing direct lending to help get small business lending going again. It’s an important part of this -- part of this (inaudible) program.

Three comments (addressing text in bold):

The government did not change (Mark-to-market) Update: Mort_fin notes: FASB did change the rules on Other Than Temporary Impairments (OTTI) which is a big part of the story. FASB provided some clarifications to mark-to-market.

Geithner seems to be arguing that the toxic asset legacy asset issue is primarily a liquidity problem, and not a solvency problem. I think this is backwards - it is primary a solvency problem with some liquidity issues.

Geithner says one goal is to "make sure banks have enough capital to lend even in a deeper recession". The problem is the "more adverse" scenario is really not a "deeper recession" - it is the new baseline.

by Calculated Risk on 4/05/2009 10:26:00 AM

From the LA Times: Bill would fundamentally reform home mortgage industry.

The Mortgage Reform and Anti-Predatory Lending Act of 2009 (H.R. 1728) was introduced March 26 by coauthors Rep. Brad Miller (D-N.C.), Rep. Melvin Watt (D-N.C.) and Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee ...

Here's what the legislation would do:

* Ban all fees paid to loan officers that are tied to the interest rate of the mortgage or the type of the loan. ...

* Create mandatory minimum national quality standards for all mortgages. The rules would encourage lenders to make fully documented 30-year, fixed-rate loans with prevailing market rates, as opposed to loans with higher-risk features such as adjustable payments and negative amortization. The bill would also impose a federal "duty of care" standard requiring loan officers to offer applicants terms and rates that are "appropriate" to their income and ability to repay. ...

* Allow borrowers who are put into mortgages that violate the new law to seek legal redress through cancellation of the loan contract, refund of all payments and fees and compensation for legal costs.

Borrowers who lied or committed fraud on their loan applications would have no such recourse. The bill would also extend liability for rule violations to third-party securitizers who buy loans for repackaging into mortgage bonds. Originators of all but fully documented 30-year, fixed-rate loans would be required to retain at least a 5% stake in the loan until it's finally paid off. If the loan goes into default, they would retain some economic stake in the losses.

We need to see the details. If lenders are required to take a 5% stake in all but 30-year fixed-rate loans, many of the non-traditional loans will go away (especially from smaller lenders).

I also hope Mr. Frank will not try to bring back DAPs again. The data is conclusive - DAPs are bad for housing, the economy and America.

Update: Here is the text of the bill.

by Calculated Risk on 4/04/2009 09:59:00 PM

From The Times: Bankrupt Britain: 340 people go bust every day

Begbies Traynor, the insolvency and restructuring group, reckons more than 35,000 firms could go under this year – equivalent to more than 95 a day. The figure would be 18% higher than during the previous peak in the 1990s crash. Nick Hood at Begbies said he would not be surprised if the number rose to 40,000 by the end of the year.

Begbies forecasts that as many as 125,000 people will go bust this year – well above the 107,000 peak in 2006 – equivalent to 342 people a day.
...
In America an average 5,945 bankruptcies were filed each day last month by troubled consumers – the highest level since October 2005.

The Q1 bankruptcy stats for the U.S. will be very ugly. There was a spike in bankruptcy filings in the U.S. in 2005 prior to the new bankruptcy law taking effect - the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Over 2 million bankruptcies were filed in 2005 - and that is a tough record to beat, but I wouldn't be surprised if 2009 is the 2nd worst year ever in the U.S.

Click on cartoon for larger image in new window. Repeat of a great cartoon from Eric G. Lewis, a freelance cartoonist living in Orange County, CA.

by Calculated Risk on 4/04/2009 07:36:00 PM

“I never imagined that these days I'd get to the epicenter, the place, the heart of the problem, by a commuter train on New Jersey Transit. But here it is. It's the crisis of our lifetime.”
Paul Krugman, April 3, 2009

From the Desert Sun: Nobel Prize winner Krugman shares harsh view on economic woes (ht Jonathan)

... "This is terrifying,” [Paul Krugman] said. “I did not imagine in my worst expectations that this would be this hard. I thought that we could sit down and sketch out the kinds of things, in principle, you could do to offset this type of global slump. But I never thought it would be this hard, in practice, to implement.”
...
Krugman said, the lesson from Japan is that countries facing a similar fate should be “very aggressive and cut interest rates early.”

And though the United States did - “unfortunately, it didn't turn out to be enough,” he said.

“Once you're in a world where there's just not enough demand out there and you're cutting interest rates down to zero, then you're in a world where the rules of economics go into reverse - much like ‘Alice in Wonderland,'” he said.

Jon Lansner at the O.C. Register has more: Krugman: ‘Maybe we need a new bubble to invest in!’ (excerpts from a Twitter transcript)

How did this happen? We forgot the Great Depression! We exposed ourselves 2 a repeat. May not be a repeat BUT close.

Debt levels before this crash approached pre-Depression levels. And we had “the mother of all housing bubbles.”

By one professor’s math interest rates should be at minus-8% based on the economy’s plight

Big banks are in trouble. Some insolvent. “Socialist” bank seizures in US every week. But giant holding companies?

Are we doing enough? If you think this ends soon, then “Yes!” But if this runs on then “No!” This looks inadequate.

Stock rally on good news? Not good news just things not getting much worse!

We are not clueless. We have not done enough. I am terrified. Hope we find the audacity to fix it.

by Calculated Risk on 4/04/2009 04:47:00 PM

Note: Working on comments today - sorry for any inconvenience.

For years I've complained about FHA related seller-funded Down payment Assistance Programs (DAPs). These programs circumvented the FHA down payment requirements by having the seller funnel the "down payment" to the buyer through a "charity" (for a small fee of course). In 2008, low end buyers with no money for a down payment, flocked to these programs with predictable results ...

From Zach Fox at the NC Times: Delinquencies for FHA surpassed those of subprime loans last year

Once considered among the safest loans available, government-insured mortgages issued last year have performed worse than the subprime loans that kicked off the collapse of the nation's housing market, according to data from a research firm.
...
huge level of defaults on loans insured by the Federal Housing Administration, which analysts called "stunning," raise the specter of further market turmoil and more taxpayer funds sent toward fixing the mortgage crisis.

"Frankly, I wouldn't be surprised if you called me up in a year from now and asked, 'What do you think about the FHA bailout?' " said Norm Miller, a professor at University of San Diego's Burnham-Moores Center for Real Estate.

First American CoreLogic ... reported this week that 20.7 percent of all FHA loans issued in 2008 were at least 60 days late by 10 months after the origination date. By the same metric, 14.1 percent of subprime loans issued in 2007 were 60 days delinquent.

The main problem with the delinquent FHA loans was low down-payment requirements, said Sam Khater, senior economist for First American CoreLogic.
...
By definition, FHA loans carry little equity. But the risk of failure was increased by the implementation of "down payment assistance" programs implemented by home builders, said Ramsey Su, a San Diego housing analyst.
...
The government has since discontinued the programs.

For more on DAPs, see Tanta's DAP for UberNerds

Journalists: A story that follows the history of DAPs, profiles the "charities" involved, shows the rising defaults associated with DAPs, examines the efforts of the FHA, HUD and the IRS to eliminate DAPs, and investigates the rent seeking activities of the "charities" (contribution to politicians, etc.) would be very interesting. Follow the money - as they say.

by Calculated Risk on 4/04/2009 01:52:00 PM

Something I should have mentioned earlier this week ...

From the Washington Independent: Fannie, Freddie Quietly Lift Moratorium on Foreclosures (ht many!)

A ban on foreclosure sales and evictions from houses owned by mortgage giants Fannie Mae and Freddie Mac ... is over.

Spokesmen for Fannie Mae and Freddie Mac confirmed the ban ended March 31 ...

This was just the scheduled end of the moratorium - and this will probably lead to an increase in foreclosures for April.