by Calculated Risk on 5/07/2009 11:00:00 PM

Earlier I pointed out that some of the numbers seemed puzzling.

Peter Eavis at the WSJ has a similar reaction, but uses a different example: U.S. Banks' Not-So-Stressful Test

The government's 13.8% worst-case loss-rate for second-lien mortgages seems fair. But it is a stretch to think Wells Fargo, with its large home-equity book focused on stressed housing markets, will have a lower-than-sector loss rate of 13.2%.

That doesn't make sense.

And on commercial real estate:

The government may have been too optimistic in positing an 8.5% commercial-real-estate loss rate. This sector is just starting to fall apart, and defaults may move sharply higher as borrowers struggle to refinance loans.

Unfortunately the Fed grouped Construction & Development loans (C&D) in with other CRE loans. The losses on C&D at loans are rising sharply, and it would have been easier to analyze if the Fed had released the data by each separate CRE category.

by Calculated Risk on 5/07/2009 09:29:00 PM

With the recent increase in treasury yields, reader shortcourage asked for a graph comparing the 30 year fixed mortgage rate and the ten year treasury yield. Sometimes we do requests ...

Click on graph for larger image in new window.

This graph compares the weekly 30 year fixed rate conforming rate from Freddie Mac, and the 10 year treasury yield. The black line is the spread between the two rates.

The spread is back down near the lower end of the range - and this suggests any further increase in the ten year yield will push up morgage rates.

Freddie Mac reported today:

Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®) in which the 30-year fixed-rate mortgage (FRM) averaged 4.84 percent with an average 0.7 point for the week ending May 7, 2009, up from last week when it averaged 4.78 percent. Last year at this time, the 30-year FRM averaged 6.05 percent.

by Calculated Risk on 5/07/2009 07:04:00 PM

The Fed released the stress test results earlier today.

The projected $600 billion in losses over the next two years under the "more adverse" scenario are in addition to the estimated $400 billion in losses and write downs are already taken by these 19 banks. Because of existing resources, future earnings, and planned transactions, the Fed estimates the banks need to raise $75 billion in capital. This is a huge question mark: Is this enough?

Note: Shuffling preferred to common doesn't really help with solvency (except with some ratios). See Paul Kasriel's Preferred Equity into Common Equity – Accounting Alchemy?

Some of the numbers don't make much sense. Using BofA as an example, the indicative two year loss rates for first lien mortgages are 7% to 8.5%, and I believe BofA is in worse shape (because of their acquisition of Countrywide) than most banks. So I would expect losses substantially higher than the indicative rates. Instead they were lower (only 6.8% of first lien mortgages).

And I was expecting more details. Under Commercial Real Estate (CRE), the Fed grouped Construction & Development (C&D), Multi-family, and other non-residential in the same category. However the indicative loss rates suggest these assets perform very differently (C&D the worst), and it would help to break out each category. Especially since it appears the banks have under reserved for CRE losses.

How can BofA only have 9.1% in CRE losses over two years under the "more adverse" scenario? I'd like to see their exposure to C&D, and other categories.

Also, I was expecting to see the losses and loss rates for both the baseline and more adverse scenarios. Although the "more adverse" is the new baseline, I was hoping to construct a new scenario based on differences in these losses. Without the baseline data, this is impossible.

On the Obama dinner with several economists, Michael Hirsh writes: No-Stress Tests

It’s not that Barack Obama isn’t aware of what’s at stake. That’s very likely why on April 27, the president gathered in some of his chief outside economic critics —including two of the most vociferous, Nobelists Joseph Stiglitz and Paul Krugman—for a secretive dinner in the old family dining room of the White House. Also in attendance: Paul Volcker, who has one foot in and one foot out of the administration as the head of Obama’s largely cosmetic economic recovery board; Princeton economist and former Fed vice chairman Alan Blinder; Columbia’s Jeff Sachs; and Harvard’s Ken Rogoff. Representing the home team, as it were: Obama’s chief economic adviser Larry Summers, Treasury Secretary Tim Geithner and Chief of Staff Rahm Emanuel. Why did Obama hold the meeting? “I think he wanted to hear the [opposing] arguments right in front of him,” says Blinder. “All I can say is if the president of the United States devotes that much personal time, and it was about two-hour dinner, he must want to hear what people outside the administration are saying and hear what his own people say in rebuttal to that. Why would you do that if you aren’t at least turning over your mind what to do next?”

What to do next? If this fails, nationalize.

by Calculated Risk on 5/07/2009 05:00:00 PM

From the Fed:

The results of a comprehensive, forward-looking assessment of the financial conditions of the nation's 19 largest bank holding companies (BHCs) by the federal bank supervisory agencies were released on Thursday.

The exercise--conducted by the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation--was conducted so that supervisors could determine the capital buffers sufficient for the 19 BHCs to withstand losses and sustain lending--even if the economic downturn is more severe than is currently anticipated. In a detailed summary of the results of the Supervisory Capital Assessment Program (SCAP), the supervisors identified the potential losses, resources available to absorb losses, and resulting capital buffer needed for the 19 participating BHCs.

The SCAP is a complement to the Treasury's Capital Assistance Program (CAP), which makes capital available to financial institutions as a bridge to private capital in the future. Together, these programs play a critical role in ensuring that the U.S. banking sector will be in a position of strength.

Overview of Results (333 KB PDF)

The results of the SCAP suggest that if the economy were to track the more adverse scenario, losses at the 19 firms during 2009 and 2010 could be $600 billion. The bulk of the estimated losses –approximately $455 billion – come from losses on the BHCs’ accrual loan portfolios, particularly from residential mortgages and other consumer‐related loans. The estimated two‐year cumulative losses on total loans under the more adverse scenario is 9.1 percent at the 19 participating BHCs; for comparison, this two‐year rate is higher than during the historical peak loss years of the 1930s. Estimated possible losses from trading‐related exposures and securities held in investment portfolios totaled $135 billion.

Ten banks need $185 billion in additional capital:

After taking account of losses, revenues and reserve build requirements, in the aggregate, these firms need to add $185 billion to capital buffers to reach the target SCAP capital buffer at the end of 2010 under the more adverse scenario. But a number of these firms have either completed or contracted for asset sales or restructured existing capital instruments since the end of 2008 in ways that increased their Tier 1 Common capital. These actions substantially reduced the final SCAP buffer. In addition, the preprovision net revenues of many of the firms exceeded what was assumed in the more adverse scenario by almost $20B, allowing them to build their capital bases. The effects of these transactions and revenues rendered the additional capital needed to establish the SCAP buffer equal to $75 billion.

Note: It's important to note these are future losses in addition to write-downs already taken.

by Calculated Risk on 5/07/2009 03:32:00 PM

Initial leaks suggested State Street would need to raise capital.

Now, from the WSJ: State Street Doesn't Need to Boost Capital

State Street Corp. does not need to boost its capital levels as a result of the government's recently concluded stress tests ...

The stress test results will be released at 5 PM ET.

UPDATE: Morgan Stanley to raise $5 billion through stock, debt offerings

Wells to sell $6 billion in new common stock

by Calculated Risk on 5/07/2009 02:10:00 PM

From Bloomberg: Commercial Mortgage Delinquencies in U.S. Rise to 11-Year High

The percentage of loans 30 days or more behind in payments rose to 2.45 percent, Trepp LLC said in a report. The delinquency rate was more than five times the year-ago number, Trepp said. The New York-based researcher’s records go back to 1998.
...
Commercial property values fell 21.5 percent through February from their October 2007 peak, according to Moody’s Investors Service.

Properties bought in 2006 are now worth on average 11 percent less than their original price, and those bought in 2007 are worth almost 20 percent less, Moody’s said.
...
Mortgages on rental apartment buildings posted the highest delinquency rate of securitized commercial property loans in April, rising to 5.24 percent from 3.86 percent in March, Trepp said.

These are delinquencies - not losses - but it will be interesting to see the expected losses (and loss rates) for multifamily and non-residential real estate reported this afternoon.

The Fed provides charge-off and delinquency rate for commercial real estate back to 1991. However, the Fed data includes C&D (construction and development) in CRE, so isn't directly comparable to the Trepp data.

by Calculated Risk on 5/07/2009 11:06:00 AM

"OK, so now it’s official. The first quarter of 2009 experienced the worst year-over-year revenue per available room drop in the U.S. lodging industry’s organized history."
Jeff Higley: Catching up on hotel topics

Note: RevPAR is Revenue per available room - a key measure in the hotel industry.

From HotelNewsNow.com: STR reports U.S. data for week ending 2 May

In year-over-year measurements, the industry’s occupancy fell 11.6 percent to end the week at 55.7 percent. Average daily rate dropped 8.6 percent to finish the week at US$99.42. Revenue per available room for the week decreased 19.1 percent to finish at US$55.33.

Click on graph for larger image in new window.

This graph shows the YoY change in the occupancy rate (3 week trailing average).

The three week average is off 11.1% from the same period in 2008.

The average daily rate is down 8.6%, so RevPAR is off 19.1% from the same week last year.

Data Source: Smith Travel Research, Courtesy of HotelNewsNow.com

by Calculated Risk on 5/07/2009 09:36:00 AM

There is no question that the Fed failed to adequately perform their regulatory responsibilities during the housing and credit bubble. However part of the problem was supervisory responsibility were split between various state and Federal regulators. As Fed Chairman Ben Bernanke notes in this speech, under the Gramm-Leach-Bliley Act of 1999, the Fed "serves as consolidated supervisor of all bank holding companies, including financial holding companies." Although the Fed missed significant problems at these holding companies, many of the problems were at mortgage brokers, and commercial banks that were not regulated by the Fed.

The regulators that I spoke with in 2005, at various agencies, were all concerned about the impact of the housing bubble and lax lending standards. But it was difficult to get the various regulators to coordinate. And several people told me confidentially that the Fed and the OTS were blocking efforts to tighten lending standards. So more consolidated supervision is required - but part of the problem during the bubble was that a few key individuals were able to block the efforts of other regulators.

So I think a framework to identify systemic problems would be an important addition.

Fed Chairman Ben Bernanke offers some suggestions: Lessons of the Financial Crisis for Banking Supervision

Looking forward, I believe a more macroprudential approach to supervision--one that supplements the supervision of individual institutions to address risks to the financial system as a whole--could help to enhance overall financial stability. Our regulatory system must include the capacity to monitor, assess, and, if necessary, address potential systemic risks within the financial system. Elements of a macroprudential agenda include

monitoring large or rapidly increasing exposures--such as to subprime mortgages--across firms and markets, rather than only at the level of individual firms or sectors;

assessing the potential systemic risks implied by evolving risk-management practices, broad-based increases in financial leverage, or changes in financial markets or products;

analyzing possible spillovers between financial firms or between firms and markets, such as the mutual exposures of highly interconnected firms;

ensuring that each systemically important firm receives oversight commensurate with the risks that its failure would pose to the financial system;

providing a resolution mechanism to safely wind down failing, systemically important institutions;

ensuring that the critical financial infrastructure, including the institutions that support trading, payments, clearing, and settlement, is robust;

working to mitigate procyclical features of capital regulation and other rules and standards; and

identifying possible regulatory gaps, including gaps in the protection of consumers and investors, that pose risks for the system as a whole.

Precisely how best to implement a macroprudential agenda remains open to debate. Some of these critical functions could be incorporated into the practices of existing regulators, or a subset of them might be assigned to a macroprudential supervisory authority. However we proceed, a principal lesson of the crisis is that an approach to supervision that focuses narrowly on individual institutions can miss broader problems that are building up in the system.

by Calculated Risk on 5/07/2009 08:37:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending May 2, the advance figure for seasonally adjusted initial claims was 601,000, a decrease of 34,000 from the previous week's revised figure of 635,000. The 4-week moving average was 623,500, a decrease of 14,750 from the previous week's revised average of 638,250.
...
The advance number for seasonally adjusted insured unemployment during the week ending April 25 was 6,351,000, an increase of 56,000 from the preceding week's revised level of 6,295,000. The 4-week moving average was 6,207,250, an increase of 125,250 from the preceding week's revised average of 6,082,000.

Click on graph for larger image in new window.

The first graph shows weekly claims and continued claims since 1971.

The four-week moving average is at 623,500, off 35,250 from the peak 4 weeks ago.

Continued claims are now at 6.35 million - an all time record.

The second shows the four-week average of initial unemployment claims and recessions.

Typically the four-week average peaks near the end of a recession.

Also important - in the last two recessions, initial unemployment claims peaked just before the end of the recession, but then stayed elevated for a long period following the recession - a "jobless recovery". There is a good chance this recovery will be very sluggish too, and we will see claims elevated for some time (although below the peak).

The 35,250 decline in the four-week average from the peak appears significant, and there is a good chance that we've seen the peak for weekly unemployment insurance claims. If this is the peak, continued claims should peak soon.

The level of initial claims (over 600 thousand) is still very high, indicating significant weakness in the job market.

by Calculated Risk on 5/07/2009 12:36:00 AM

Joint statement from Treasury, Fed, FDIC and Comptroller: The Treasury Capital Assistance Program and the Supervisory Capital Assessment Program

During this period of extraordinary economic uncertainty, the U.S. federal banking supervisors believe it to be important for the largest U.S. bank holding companies (BHCs) to have a capital buffer sufficient to withstand losses and sustain lending even in a significantly more adverse economic environment than is currently anticipated. In keeping with this aim, the Federal Reserve and other federal bank supervisors have been engaged in a comprehensive capital assessment exercise--known as the Supervisory Capital Assessment Program (SCAP)--with each of the 19 largest U.S. BHCs.

The SCAP will be completed this week and the results released publicly by the Federal Reserve Board on Thursday May 7th, 2009 at 5pm EDT. In this release, supervisors will report--under the SCAP "more adverse" scenario, for each of the 19 institutions individually and in the aggregate--their estimates of: losses and loss rates across select categories of loans; resources available to absorb those losses; and the resulting necessary additions to capital buffers. The estimates reported by the Federal Reserve represent values for a hypothetical 'what-if' scenario and are not forecasts of expected losses or revenues for the firms. Any BHC needing to augment its capital buffer at the conclusion of the SCAP will have until June 8th, 2009 to develop a detailed capital plan, and until November 9th, 2009 to implement that capital plan.
emphasis added

So the Fed will release the losses and loss rates for each of the 12 categories in outlined in the Fed White Paper. And these are the losses for the "more adverse" scenario.

There is much more ...