by Calculated Risk on 4/06/2009 04:02:00 PM

Press Release: Richards Barry Joyce & Partners Releases Quarterly Report On Greater Boston’s Commercial Real Estate Office Market

[O]verall vacancy rates in Greater Boston’s office market rose during the first quarter of 2009, moving up a percentage point from 13.4% to 14.4%. During the period, the market experienced negative absorption of 1.1 million square feet.

Class A office space was hit particularly hard. In the last two quarters since Q3’08, tenants have vacated 1.7 million square feet of Class A office space, increasing the vacancy rate from 10.5% to 13.1%. Additionally, Class A asking lease rates dropped $0.59 to $38.75 across the market.

Negative absorption: words that strike terror in the hearts of CRE owners. Negative absorption means more offices are vacated than leased in a given period. Add any new supply, and the vacancy rate spikes and rents fall.

On Friday, REIS Inc. reported that the nationwide office vacancy rate increased to 15.2% from 14.5% in Q4 2008.

Click on graph for larger image in new window.

This graph shows the national office vacancy rate from REIS starting in 1991.

A little over one month ago, REIS was forecasting office vacancy rates would reach 17.6% in 2010. Now they are forecasting 19.3%!

by Calculated Risk on 4/06/2009 03:07:00 PM

Some excerpts are now available from Professor Krugman's talk in Spain (March 17th). Note Krugman's comments on innovation ...

Here are the slides from Krugman's talk: How will it end?

Note: This was before Bernanke talked about "credit easing" as opposed to "quantitative easing" again. Bernanke's approach appears to run counter to Krugman's argument:

"The only way to make monetary policy effective once you’re in such a trap, at least in this framework, is to credibly commit to raising future as well as current money supplies."

by Calculated Risk on 4/06/2009 01:42:00 PM

Since about 100 people sent me this interview, I suspect there might be some discussion in the comments ...

The video is here.

Here is the transcript.

BILL MOYERS: In your book, you make it clear that calculated dishonesty by people in charge is at the heart of most large corporate failures and scandals, including, of course, the S&L, but is that true? Is that what you're saying here, that it was in the boardrooms and the CEO offices where this fraud began?

WILLIAM K. BLACK: Absolutely.

BILL MOYERS: How did they do it? What do you mean?

WILLIAM K. BLACK: Well, the way that you do it is to make really bad loans, because they pay better. Then you grow extremely rapidly, in other words, you're a Ponzi-like scheme. And the third thing you do is we call it leverage. That just means borrowing a lot of money, and the combination creates a situation where you have guaranteed record profits in the early years. That makes you rich, through the bonuses that modern executive compensation has produced. It also makes it inevitable that there's going to be a disaster down the road.

BILL MOYERS: So you're suggesting, saying that CEOs of some of these banks and mortgage firms in order to increase their own personal income, deliberately set out to make bad loans?

WILLIAM K. BLACK: Yes.

And here is a photo I've posted before ...

This photo from 2003 shows two regulators: John Reich (then Vice Chairman of the FDIC and later at the OTS) and James Gilleran of the Office of Thrift Supervision (with the chainsaw) and representatives of three banker trade associations: James McLaughlin of the American Bankers Association, Harry Doherty of America's Community Bankers, and Ken Guenther of the Independent Community Bankers of America.

WILLIAM K. BLACK: [T]hey didn't even begin to investigate the major lenders until the market had actually collapsed, which is completely contrary to what we did successfully in the Savings and Loan crisis, right? Even while the institutions were reporting they were the most profitable savings and loan in America, we knew they were frauds. And we were moving to close them down. Here, the Justice Department, even though it very appropriately warned, in 2004, that there was an epidemic...

BILL MOYERS: Who did?

WILLIAM K. BLACK: The FBI publicly warned, in September 2004 that there was an epidemic of mortgage fraud, that if it was allowed to continue it would produce a crisis at least as large as the Savings and Loan debacle. And that they were going to make sure that they didn't let that happen. So what goes wrong? After 9/11, the attacks, the Justice Department transfers 500 white-collar specialists in the FBI to national terrorism. Well, we can all understand that. But then, the Bush administration refused to replace the missing 500 agents. So even today, again, as you say, this crisis is 1000 times worse, perhaps, certainly 100 times worse, than the Savings and Loan crisis. There are one-fifth as many FBI agents as worked the Savings and Loan crisis.

BILL MOYERS: You talk about the Bush administration. Of course, there's that famous photograph of some of the regulators in 2003, who come to a press conference with a chainsaw suggesting that they're going to slash, cut business loose from regulation, right?

WILLIAM K. BLACK: Well, they succeeded. And in that picture, by the way, the other — three of the other guys with pruning shears are the...

BILL MOYERS: That's right.

WILLIAM K. BLACK: They're the trade representatives. They're the lobbyists for the bankers. And everybody's grinning. The government's working together with the industry to destroy regulation. Well, we now know what happens when you destroy regulation. You get the biggest financial calamity of anybody under the age of 80.

by Calculated Risk on 4/06/2009 11:55:00 AM

Roger Altman, former deputy Treasury secretary, writes in the Financial Times: Why this will not be a normal cyclical recovery (ht Jonathan)

The rare nature of this recession precludes a cyclically normal US recovery. Instead, we are consigned to a slow, painful climb-out ...

What is unusual is that this is a balance-sheet driven recession, centred on the damaged financial condition of both households and banks. These weaknesses mandate sub-normal levels of consumer spending and overall lending for about three years.

... To see why recovery will be slow, we can look at the balance sheet damage. For households, net worth peaked in mid-2007 at $64,400bn (€47,750, £43,449bn) but fell to $51,500bn at the end of 2008, a swift 20 per cent fall. ... household debt reached 130 per cent of income in 2008.

This debt derived from Americans spending more than their income, reflecting the positive wealth effect. Households felt wealthier ... Now that wealth effect has reversed with a vengeance. ... household balance sheets will not be rebuilt soon. Home values will keep falling through mid-2010 and there is no precedent for equity markets, still down 45 per cent from their peak, to make those losses up in just two years. It is illogical, therefore, to expect a full snap-back in the consumer sector in 2010 or 2011. This alone mandates a drawn-out, weak recovery.

The second key sector is the financial one. ... losses are eating into banks’ capital and shrinking their capacity to add assets. Funds from the Troubled Asset Relief Program are only replacing lost capital, not increasing it. When might they end? With key categories of toxic assets still losing value, the answer is: not soon. The scale of lending needed to support a normal cyclical recovery will not materialise.

A third constraint on recovery may involve the federal balance sheet. The fiscal and monetary engines are currently on full throttle. But, within two years, concerns over budget deficits and inflation may revive, compelling the Federal Reserve to raise interest rates and Congress to adopt deficit reduction steps. These actions, contractionary by definition, could occur before a full recovery has asserted itself. On that basis, the federal balance sheet would also limit a full recovery.

Also, in a typical cycle, residential investment (mostly new home construction and home improvement) leads the economy out of a recession. This time there is still too much excess inventory - especially distressed inventory - for any meaningful recovery in residential investment.

So even if the economy bottoms later this year, the recovery will probably be very sluggish for some time.

by Calculated Risk on 4/06/2009 10:29:00 AM

From Bloomberg: Mayo Says Loan Losses Will Exceed Depression Levels

Mike Mayo ... assigned an “underweight” rating to banks on expectations that loan losses will exceed levels from the Great Depression.

“While certain mortgage problems are farther along, other areas are likely to accelerate, reflecting a rolling recession by asset class,” Mayo wrote in a report today. “New government actions might not help as much as expected, especially given that loans have been marked down to only 98 cents on the dollar, on average.”

Note: Mayo will hold a conference call at 11 AM ET. There will also be a discussion of mark-to-market accounting. See the comments for details ...

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.