by Calculated Risk on 4/17/2009 04:00:00 PM

While we wait for the FDIC ...

Here is a link to Jim the Realtor on Nightline last night.

Click on graph for larger image in new window.

The first graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".

This is still the 2nd worst S&P 500 / DOW bear market in the U.S. in 100 years.

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

The second graph shows the S&P 500 since 1990.

The dashed line is the closing price today.

The half off sale is over (for now), and the market is only off 44.4% from the peak.

by Calculated Risk on 4/17/2009 03:30:00 PM

From MarketWatch: Pessimistic scenario gains stress-test influence

Banks ... are under pressure to disclose the results of their stress tests to shareholders. Banks are expected to sign capital-assistance documents upon the completion of the stress tests, explaining whether they are seeking out immediate government capital infusions or they plan to spend six months raising capital before re-evaluating.

The signing of those documents could be a material agreement, which means banks must file an 8-K with the Securities and Exchange Commission, explaining what they've agreed to.

"It's a material event," said Gary Roth, partner at Alston & Bird LLP in New York. "When banks are given their results, they would be under a lot of pressure to disclose. When one discloses, it puts pressure on the other banks to disclose."

SEC officials are in discussions with bank regulators about disclosure responsibilities.

If the stress test shows a bank needs additional capital, (update for clarification) and the bank signs the agreement, there is no question that is a material event and must be disclosed to shareholders. Also, it appears everyone now understands the "more adverse" scenario is the baseline:

Alston & Bird's [Jeffrey] Hare said he believes that bank regulators are now using the pessimistic scenario as their baseline forecast.

by Calculated Risk on 4/17/2009 12:38:00 PM

From Fed Chairman Ben Bernanke: Financial Innovation and Consumer Protection (ht Rex)

The concept of financial innovation, it seems, has fallen on hard times. Subprime mortgage loans, credit default swaps, structured investment vehicles, and other more-recently developed financial products have become emblematic of our present financial crisis. Indeed, innovation, once held up as the solution, is now more often than not perceived as the problem. I think that perception goes too far, and innovation, at its best, has been and will continue to be a tool for making our financial system more efficient and more inclusive. But, as we have seen only too clearly during the past two years, innovation that is inappropriately implemented can be positively harmful. In short, it would be unwise to try to stop financial innovation, but we must be more alert to its risks and the need to manage those risks properly.
...
[W]ith hindsight, we can see that something went wrong in recent years, as evidenced by the currently high rates of mortgage delinquency and foreclosure ... And the damage from this turn in the credit cycle--in terms of lost wealth, lost homes, and blemished credit histories--is likely to be long-lasting. One would be forgiven for concluding that the assumed benefits of financial innovation are not all they were cracked up to be.
...
Where does all this leave us? It seems clear that the difficulty of managing financial innovation in the period leading up to the crisis was underestimated ...

With hindsight? Hoocoodanode?

by Calculated Risk on 4/17/2009 11:26:00 AM

From the BLS: Regional and State Employment and Unemployment: March 2009

Regional and state unemployment rates were nearly all higher in March. Forty-six states recorded over-the-month unemployment rate increases, North Dakota and the District of Columbia registered rate decreases, and 3 states had no change in their rate ...

In March, Michigan again reported the highest jobless rate, 12.6 percent. The states with the next highest rates were Oregon, 12.1 percent; South Carolina, 11.4 percent; California, 11.2 percent; North Carolina, 10.8 percent; Rhode Island, 10.5 percent; Nevada, 10.4 percent; and Indiana, 10.0 percent. Nine additional states and the District of Columbia recorded unemployment rates of at least 9.0 percent. The California and North Carolina rates were the highest on record for those states.
emphasis added, records started in 1976.

Probably more records coming ...

by Calculated Risk on 4/17/2009 09:47:00 AM

First, Citi has committed to "tell the market exactly" the results of the stress tests:

[I]t made sense to delay the launch of the exchange offer until we could tell the market exactly what the results of the stress test are.
Citigroup, April 17, 2009

And from the investor presentation:

Click on graph for larger image in new window.

Note the rapid rise in card NCLs. NCLs jumped from 8.04% in Q4 to 10.18% in Q1 2009.

Mortgage NCLs are rising sharply too.

The second graph shows the 90+ Days Past Due (DPD) trend for 1st and 2nd mortgages, and the Net Credit Losses.

The 90+ DPD is increasing rapidly for 1st mortgages - jumping from 5.71% in Q4, to 7.15% in Q1 2009.

Credit losses are still rising rapidly at Citi.

by Calculated Risk on 4/17/2009 08:32:00 AM

From Bloomberg: Citigroup Profit Exceeds Estimates on Trading, Accounting Rule

Citigroup Inc. [reported] a $1.6 billion profit on trading gains and an accounting benefit for companies in distress.
...
While the bank cut compensation costs and took fewer writedowns, it couldn’t halt rising delinquencies on home and credit-card loans. Citigroup benefited from higher fixed-income trading revenue ...

Citigroup posted a $2.5 billion gain because of an accounting change adopted in 2007. Under the rule, companies are allowed to record any declines in the market value of their own debt as an unrealized gain.

So when do they pay back the TARP money?

by Calculated Risk on 4/17/2009 12:31:00 AM

From CNN: Experts: Some foreclosed homes too damaged to sell

"About a third of all of the foreclosed properties nationwide have been so damaged, either by the previous owners or by criminal gangs coming in after the foreclosure, that they no longer qualify for standard mortgage financing," [researcher] Thomas Popik told CNN. "So there is going to be all kinds of government programs to help, but if they don't qualify for standard mortgage financing, there's no one to buy these properties."

Popik says responses from thousands of real estate agents nationwide to the questionnaires he sends out quarterly indicate that badly damaged foreclosed homes ... are a much bigger element of the national housing picture than officials in Washington have acknowledged.

"In many cases, it costs so much to rehabilitate these houses, it's just not cost-effective," he told CNN. "And the properties are eventually going to be bulldozed."

This probably explains some of the "shadow" inventory.

by Calculated Risk on 4/16/2009 10:25:00 PM

From Bloomberg: U.S. Aims to Release Bank Stress-Test Results May 4 (ht jb)

The Federal Reserve and other regulators aim to release the results of stress tests on 19 of the biggest U.S. banks on May 4, a central bank official said.

Regulators also plan to publish a paper on their methods on April 24, according to the official. The May 4 results will include any plans for boosting capital to weather a deeper economic downturn, the person said.

Procedures for releasing information on specific firms, including whether the banks themselves or the supervisors will release the results, are still under discussion. The Securities and Exchange Commission, which sets rules for what publicly traded companies must disclose to investors about their financial condition, is involved in the talks, the person said.

The goal of publishing the stress-test methods is to bolster credibility of the assessments, which will expose weaker banks and may boost confidence in stronger ones.

A potential capital shortage is a reportable material event and therefore all results must be released for banks requiring additional investment.

May 4th is a Monday ... I wonder if the results will be released pre-market (or even leaked Sunday night).

by Calculated Risk on 4/16/2009 08:06:00 PM

From San Francisco Fed President Janet Yellen: A Minsky Meltdown: Lessons for Central Bankers

... with the financial world in turmoil, Minsky’s work has become required reading. It is getting the recognition it richly deserves. The dramatic events of the past year and a half are a classic case of the kind of systemic breakdown that he—and relatively few others—envisioned.

Central to Minsky’s view of how financial meltdowns occur, of course, are “asset price bubbles.” This evening I will revisit the ongoing debate over whether central banks should act to counter such bubbles and discuss “lessons learned.” This issue seems especially compelling now that it’s evident that episodes of exuberance, like the ones that led to our bond and house price bubbles, can be time bombs that cause catastrophic damage to the economy when they explode.

Much of the speech is about Minsky, but here are some excerpts on bubbles and monetary policy:

[T]his evening I want to address another question that has been the subject of much debate for many years: Should central banks attempt to deflate asset price bubbles before they get big enough to cause big problems? Until recently, most central bankers would have said no. They would have argued that policy should focus solely on inflation, employment, and output goals—even in the midst of an apparent asset-price bubble. That was the view that prevailed during the tech stock bubble and I myself have supported this approach in the past. However, now that we face the tangible and tragic consequences of the bursting of the house price bubble, I think it is time to take another look.

Let me briefly review the arguments for and against policies aimed at counteracting bubbles. The conventional wisdom generally followed by the Fed and central banks in most inflation-targeting countries is that monetary policy should respond to an asset price only to the extent that it will affect the future path of output and inflation, which are the proper concerns of monetary policy. ... policy would not respond to the stock market boom itself, but only to the consequences of the boom on the macroeconomy.

However, other observers argue that monetary authorities must consider responding directly to an asset price bubble when one is detected. This is because—as we are witnessing—bursting bubbles can seriously harm economic performance, and monetary policy is hard-pressed to respond effectively after the fact. ...

What are the issues that separate the anti-bubble monetary policy activists from the skeptics? First, some of those who oppose such policy question whether bubbles even exist. ...

Second, even if bubbles do occur, it’s an open question whether policymakers can identify them in time to act effectively. Bubbles are not easy to detect because estimates of the underlying fundamentals are imprecise. ...

Now, even if we accept that we can identify bubbles as they happen, another question arises: Is the threat so serious that a monetary response is imperative? It would make sense for monetary policy makers to intervene only if the fallout were likely to be quite severe and difficult to deal with after the fact. ...

Still, just like infections, some bursting asset price bubbles are more virulent than others. The current recession is a case in point. As house prices have plunged, the turmoil has been transmitted to the economy much more quickly and violently than interest rate policy has been able to offset.

You’ll recognize right away that the assets at risk in the tech stock bubble were equities, while the volatile assets in the current crisis involve debt instruments held widely by global financial institutions. It may be that credit booms, such as the one that spurred house price and bond price increases, hold more dangerous systemic risks than other asset bubbles. By their nature, credit booms are especially prone to generating powerful adverse feedback loops between financial markets and real economic activity. It follows then, that if all asset bubbles are not created equal, policymakers could decide to intervene only in those cases that seem especially dangerous.

That brings up a fourth point: even if a dangerous asset price bubble is detected and action to rein it in is warranted, conventional monetary policy may not be the best approach. It’s true that moderate increases in the policy interest rate might constrain the bubble and reduce the risk of severe macroeconomic dislocation. In the current episode, higher short-term interest rates probably would have restrained the demand for housing by raising mortgage interest rates, and this might have slowed the pace of house price increases. In addition, as Hyun Song Shin and his coauthors have noted in important work related to Minsky’s, tighter monetary policy may be associated with reduced leverage and slower credit growth, especially in securitized markets. Thus, monetary policy that leans against bubble expansion may also enhance financial stability by slowing credit booms and lowering overall leverage.

Nonetheless, these linkages remain controversial and bubbles may not be predictably susceptible to interest rate policy actions. And there’s a question of collateral damage. Even if higher interest rates take some air out of a bubble, such a strategy may have an unacceptably depressing effect on the economy as a whole. There is also the harm that can result from “type 2 errors,” when policymakers respond to asset price developments that, with the benefit of hindsight, turn out not to have been bubbles at all. For both of these reasons, central bankers may be better off avoiding monetary strategies and instead relying on more targeted and lower-cost alternative approaches to manage bubbles, such as financial regulatory and supervisory tools. I will turn to that topic in just a minute.

In summary, when it comes to using monetary policy to deflate asset bubbles, we must acknowledge the difficulty of identifying bubbles, and uncertainties in the relationship between monetary policy and financial stability. At the same time though, policymakers often must act on the basis of incomplete knowledge. What has become patently obvious is that not dealing with certain kinds of bubbles before they get big can have grave consequences. This lends more weight to arguments in favor of attempting to mitigate bubbles, especially when a credit boom is the driving factor. I would not advocate making it a regular practice to use monetary policy to lean against asset price bubbles. However recent experience has made me more open to action. I can now imagine circumstances that would justify leaning against a bubble with tighter monetary policy. Clearly further research may help clarify these issues.

Another important tool for financial stability

Regardless of one’s views on using monetary policy to reduce bubbles, it seems plain that supervisory and regulatory policies could help prevent the kinds of problems we now face. Indeed, this was one of Minsky’s major prescriptions for mitigating financial instability. I am heartened that there is now widespread agreement among policymakers and in Congress on the need to overhaul our supervisory and regulatory system, and broad agreement on the basic elements of reform.
emphasis added

This is an interesting topic. I agree with Yellen's emphasis on regulation and oversight. I think it was easy to identify the surge in credit (especially home borrowing) and that lending standards had become very lax. That should have set off the alarm bells for regulators.

by Calculated Risk on 4/16/2009 06:03:00 PM

Jim will be on Nightline tonight. Here is the story: Truth in Advertising: One Realtor's Strategy to Sell Foreclosed Homes

And here some highlights from various Jim videos. Check out Jim comparing a photo in the MLS, taken with a wide angle lens. with the actual yard (at about 2:50). Good stuff ...