by Calculated Risk on 5/22/2009 04:14:00 PM

The post title needs context ...

We all have moments we will never forget. One of mine occurred when I entered Harvard Yard for the first time, a 17-year-old freshman. It was late on Saturday night, I had had a grueling trip, and as I entered the Yard, I put down my two suitcases with a thump. I looked around at the historic old brick buildings, covered with ivy. Parties were going on, students were calling to each other across the Yard, stereos were blasting out of dorm windows. I took in the scene, so foreign to my experience, and I said to myself, "What have I done?"
Ben Bernanke, May 22, 2009

Excerpts from Fed Chaiman Bernanke's commencement address at Boston College School of Law, Newton, Massachusetts on dealing with the reality of unpredictability:

I'd like to offer a few thoughts today about the inherent unpredictability of our individual lives and how one might go about dealing with that reality. As an economist and policymaker, I have plenty of experience in trying to foretell the future, because policy decisions inevitably involve projections of how alternative policy choices will influence the future course of the economy. The Federal Reserve, therefore, devotes substantial resources to economic forecasting. Likewise, individual investors and businesses have strong financial incentives to try to anticipate how the economy will evolve. With so much at stake, you will not be surprised to know that, over the years, many very smart people have applied the most sophisticated statistical and modeling tools available to try to better divine the economic future. But the results, unfortunately, have more often than not been underwhelming. Like weather forecasters, economic forecasters must deal with a system that is extraordinarily complex, that is subject to random shocks, and about which our data and understanding will always be imperfect. In some ways, predicting the economy is even more difficult than forecasting the weather, because an economy is not made up of molecules whose behavior is subject to the laws of physics, but rather of human beings who are themselves thinking about the future and whose behavior may be influenced by the forecasts that they or others make. To be sure, historical relationships and regularities can help economists, as well as weather forecasters, gain some insight into the future, but these must be used with considerable caution and healthy skepticism.

And on how he ended up becoming an economist:

After I arrived at college, unpredictable factors continued to shape my future. In college I chose to major in economics as a compromise between math and English, and because a senior economics professor liked a paper I wrote and offered me a summer job. In graduate school at MIT, I became interested in monetary and financial history when a professor gave me several books to read on the subject. I found historical accounts of financial crises particularly fascinating. I determined that I would learn more about the causes of financial crises, their effects on economic performance, and methods of addressing them. Little did I realize then how relevant that subject would become one day. Later I met my wife Anna, to whom I have been married now for 31 years, on a blind date.

I'm sure someone has a good blind date joke that would fit here.

by Calculated Risk on 5/22/2009 03:09:00 PM

Last year I wrote a post about how falling oil prices would provide some cushion for the U.S. economy: The Oil Cushion. Here is another update ...

The following graph shows the monthly personal consumption expenditures (PCE) at a seasonally adjusted annual rate (SAAR) for gasoline, oil and other energy goods compared to the U.S. spot price for oil (monthly).

Click on graph for larger image in new window.

Last quarter I noted:

"The good news is at current oil prices (U.S. spot prices averaged about $39 per barrel in February), oil related PCE will be in the $250 billion seasonally adjusted annual rate (SAAR) range in Q1 - well below the $440 billion SAAR of the first 8 months of 2008.

This is a savings of about $16 billion per month compared to the first 8 months of 2008. That savings will definitely provide a cushion for consumers."

As expected, the BEA reported "PCE, Gasoline, fuel oil, and other energy goods" at $265 billion (SAAR) in Q1.

Now, with spot prices pushing $60 per barrel, oil related PCE will probably come in close to $300 billion (SAAR) in Q2.

That is still provides a sizable cushion compared to the first eight months of 2008 (about $11 billion per month), but this is a drag compared to Q1.

Data sources:
PCE from BEA underlying detail tables: Table 2.4.5U. Personal Consumption Expenditures by Type of Product line 117.

Oil prices from EIA U.S. Spot Prices.

by Calculated Risk on 5/22/2009 01:16:00 PM

A great Memorial Day gift for the UberNerd in your family! And the proceeds go to fight cancer ...

But first ... Cathy shared this email from Tanta:

‘She took her MTM in hand,
Long time the CFO she sought,
And rested she from her own QC
And stood a while in thought.

And as in uffish thought she froze
The S&P with eyes aflame
Came woofling through her CMOs
And burbled as it came.

One two! One two! And through and through!
The rater’s blade went snicker-snack
She started B but with a C
She came galumphing back.

“And hast thou slain the MBS?
My whole loans too? My hedges all?
O frabjous day! Alas! Allay!
My margin got a call!”

‘Twas brillig, and the slivey toves . . .
Doris Tanta Dungey, July 18, 2007
(based on "Jabberwocky" by Lewis Carroll)

Tanta's Mortgage Pig
Notes from Cathy (Tanta' sister):

These items are produced as they are ordered and we do apologize about the size and color confusion. The best method is to enter this information in the PayPal message box when completing the order.

We will accept check orders outside of Ebay but that will slow things down. Please EMAIL: rwstick AT yahoo DOT com (Dick) with the item, size and color and we will return the cost with shipping. Once the check is received with shipping instructions we will process the order.

So far the Mortgage Pig Wear raised over $3,500 for charity! From more on other donations, see: Tanta's Bench and Charity Update

Back in October, after Tanta came home from the hospital and agreed to come to Ohio with me, we had an idea to create Mortgage Pig Wear and donate the proceeds from the sales to the UMMS Greenebaum Cancer Center.

We have friends in Springboro, OH who own a small, local embroidery company called Image Mark-it that is owned and staffed by the type of caring folks who would want to be involved in a project like this. Jumped at the chance, is more like it.

We enlisted her 16 year-old nephew (my son) to handle the shipping and for that he would receive $1.00 per item in his college fund. Tanta would provide the "quality control" or lovingly ride herd on him. She couldn't wait.

Over the past 4 weeks we have "digitized" the pig for the embroidery on sweatshirts and polos and created high quality photo transfers for T-shirts and sweatshirts. Tanta lived long enough to see the samples but not to see the items go into production and be offered for sale. I still can't believe it.

I worried about what to do with this on Saturday so I simply asked Tanta. She wanted us to proceed. My son and my husband both asked her as well - and both got the same answer "Please go ahead with The Mortgage Pig Wear".

In the last day or so as I read the various tributes to her, I saw references to cure vs care. So we've made a small change - we're offering the embroidered pig items with proceeds donated to the Ovarian Cancer Research Fund (www.ocrf.org) and the photo-transfer items split between UMMS Greenebaum and OSUMC James Cancer Centers.

I hope you enjoy wearing these as much as the folks at Image Mark-it and I have enjoyed creating them. We are planning to work very hard to keep up with demand - and for all of us it's a labor of love.

Tanta's Mortgage Pig

Holiday

Click on the Mortgage Pig™ for a larger image in new window.

Slap it

Convexity

by Calculated Risk on 5/22/2009 09:50:00 AM

From the British Bankers' Association reported that the three-month dollar Libor rates were fixed at 0.66%. The LIBOR peaked at 4.81875% on Oct 10, 2008.

Click on graph for larger image in new window.

There has been improvement in the A2P2 spread. This has declined to 0.48. This is far below the record (for this cycle) of 5.86 after Thanksgiving, but still above the normal spread of around 20 bps.

This is the spread between high and low quality 30 day nonfinancial commercial paper.

Meanwhile the TED spread has decreased further and is now at 48.45. This is the difference between the interbank rate for three month loans and the three month Treasury. The peak was 463 on Oct 10th and a normal spread is around 50 bps.

The third graph shows the spread between 30 year Moody's Aaa and Baa rated bonds and the 30 year treasury.

The spread has decreased sharply over the last few months. The spreads are still high, especially for lower rated paper.

The Moody's data is from the St. Louis Fed:

Moody's tries to include bonds with remaining maturities as close as possible to 30 years. Moody's drops bonds if the remaining life falls below 20 years, if the bond is susceptible to redemption, or if the rating changes.

This graph shows the at the Merrill Lynch Corporate Master Index OAS (Option adjusted spread) for the last 2 years.

This is a broad index of investment grade corporate debt:

The Merrill Lynch US Corporate Index tracks the performance of US dollar denominated investment grade corporate debt publicly issued in the US domestic market.

Back in early March, Warren Buffett mentioned that credit conditions were tightening again - and this was probably one of the indexes he was looking at. Since March, the index has declined - but is still above normal levels.

Overall it appears the credit crisis has eased significantly.

by Calculated Risk on 5/22/2009 09:07:00 AM

Not a new topic, but still interesting ...

From the WSJ: Recession Turns Malls Into Ghost Towns

One industry rule of thumb holds that any large, enclosed mall generating sales per square foot of $250 or less -- the U.S. average is $381 -- is in danger of failure. By that measure, Eastland is one of 84 dead malls in a 1,032-mall database compiled by Green Street. (The database focuses heavily on malls owned by publicly traded landlords and doesn't account for several dozen failing malls in private hands.) If retail sales continue to decline at current rates, the dead-mall roster could exceed 100 properties by the end of this year, according to Green Street. That's up from an estimated 40 failing malls in 2006, before the recession began.

"This time around, because of the dramatic changes in consumer spending practices, we're very likely to see more malls in the death spiral than we've ever seen before," says Green Street analyst Jim Sullivan.
...
For towns and cities that are home to dying malls, the fallout can be devastating. Malls hire hundreds of workers and are significant contributors to the local tax base. In suburbs and small towns, malls often are the only major public spaces and the safest venues for teenagers to shop, hang out and seek part-time work.

by Calculated Risk on 5/21/2009 10:28:00 PM

From the WaPo: U.S. to Steer GM Toward Bankruptcy

The Obama administration is preparing to send General Motors into bankruptcy next week under a plan that would give the automaker tens of billions of dollars more in public financing ...

The move comes as the administration prepares to lift the nation's other faltering car company, Chrysler, from bankruptcy as soon as next week ...

That is fast!

by Calculated Risk on 5/21/2009 08:52:00 PM

From Bloomberg: British Land Has $6.1 Billion Loss on Property Slump (ht Adam)

British Land’s real estate was valued at 5.8 billion pounds on March 31, about 28 percent less than a year earlier, [British Land said in a statement today]. More than half of the properties are retail warehouses and malls, and the rest are office buildings.
...
Most of British Land’s office buildings are in the City of London, where rents are expected to fall back to 1991 levels by the end of this year ... as job losses and a mistimed building boom depress prices.
...
The City of London now has enough empty space to hold two- thirds of Canary Wharf, its rival financial district 1 1/2 miles to the east. About 9 million square feet (855,000 square meters) are available in the City and that may climb to 12 million by the end of 2009, according to CB Richard Ellis Group Inc. Rents that reached a high of 65 pounds per square foot in mid-2007 are forecast to fall to 40 pounds by the end of this year ...

Rents back to 1991. Property values off 28%. Ouch.

by Calculated Risk on 5/21/2009 07:35:00 PM

From Zach Fox at the NC Times: REAL ESTATE: Foreclosures, booming sales make predictions difficult

The case for a bottoming or recovering housing market is strongest along Highway 78 (Escondido, San Marcos, Vista, Oceanside) and Southwest Riverside County, where housing inventory ---- the length of time to sell all active listings ---- has dipped below three months. Six months is considered healthy; three months is screaming hot.
...
However, the numbers flip-flop in high-end areas such as Del Mar and Rancho Santa Fe. Inventory has breached a new stratosphere at anywhere from 25 to 50 months to sell all listings.

Click on graph for larger image in new window.

This graphic from Zach shows both the Notice of Default rate (NOD) and months of inventory by zip code (posted with permission).

In general the lower priced areas are seeing more foreclosure activity than the high prices areas, but the months of inventory is lower.

In a dynamic that is reflected in the divergent inventory numbers, buyers are avoiding the higher end and finding the purchase process on the lower end surprisingly frustrating; real estate agents have reported up to 25 offers on a single house.
...
[S]ome analysts think those red-hot inventory numbers in Escondido, Oceanside and pretty much all of Southwest Riverside County aren't that telling, because it's hard to determine how many foreclosures are actually up for sale.

Lenders and government agencies have embraced foreclosure moratoriums, delaying the process of actually seizing the property and putting it back on the market. Once those foreclosures are put on the market, the inventory number could shoot up in a hurry.

Just some more data showing the divergent markets.

by Calculated Risk on 5/21/2009 05:56:00 PM

Federal ninjas
Swarm the shoguns failed bank
Almost seppuku
by Soylent Green is People
From the FDIC: BankUnited Acquires the Banking Operations of BankUnited, FSB, Coral Gables, Florida

BankUnited, a newly chartered federal savings bank, acquired the banking operations, including all of the nonbrokered deposits, of BankUnited, FSB, Coral Gables, Florida, in a transaction facilitated by the Federal Deposit Insurance Corporation (FDIC). As a result of this transaction, BankUnited, FSB, offices and branches will be operated as BankUnited offices and branches.
...
Bank United, FSB had assets of $12.80 billion and deposits of $8.6 billion as of May 2, 2009. The new BankUnited will assume $12.7 billion in assets and $8.3 billion in nonbrokered deposits. ...

The FDIC facilitated the transaction with John Kanas and a consortium of investors after BankUnited, FSB, was closed today by the Office of Thrift Supervision, which appointed the FDIC as receiver. The FDIC estimates that the cost to its Deposit Insurance Fund will be $4.9 billion. BankUnited's acquisition of all the deposits and assets of BankUnited, FSB was the "least costly" resolution for the DIF compared to alternatives.
...
BankUnited, FSB is the 34th FDIC-insured institution to fail in the nation this year, and the third in Florida. The last bank to be closed in the state was Riverside Bank of the Gulf Coast, Cape Coral on February 13, 2009.

by Calculated Risk on 5/21/2009 04:00:00 PM

Here are a couple of market graphs from Doug (the 2nd one is new - the mega bear quartet in real prices), and an excerpt from CFO Magazine How Healthy Is Your Bank?

There was a significant bond sell-off today - probably because of concerns about the UK (and US) credit ratings.

Click on graph for larger image in new window. The first graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears". Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

The second graph compares four significant bear markets: the Dow during the Great Depression, the NASDAQ, the Nikkei, and the current S&P 500. This is inflation adjusted. See Doug's: "The Mega-Bear Quartet 2000" for a dicussion.

Excerpt from CFO Magazine How Healthy Is Your Bank? (ht jb)

Evaluating a bank's health falls into two parts, says Mark J. Flannery, a finance professor at the University of Florida's Warrington College of Business Administration. One, how well capitalized is the bank — how much loss can it stand without failing? Two, what is the quality of its assets — how much loss risk is the bank exposed to?

In the FDIC's eyes, a well-capitalized bank has a ratio of Tier 1 capital to total risk-weighted assets of at least 6% (analysts prefer to see 8%); a ratio of total capital to total risk-weighted assets of at least 10%; and a Tier 1 leverage ratio of at least 5%. ...

The trouble is, the risk-based capital ratios "don't work very well," says Frederick Cannon, chief equity strategist at Keefe Bruyette Woods, specialists in financial services. That's because the risk weightings that the government uses are out of date. For example, a mortgage-backed security is weighted at 20%, meaning that it requires one-fifth the capital of whole loans. "But some of those securities have declined in value a lot more than the values of whole loans," says Cannon. The option ARM, which "proved to be an absolutely horrible product in terms of performance," is weighted at 50%; "in hindsight it probably should have been weighted at 200%," he says. As for the leverage ratio, "it doesn't pay any attention to the composition of assets and their risk," says Flannery.

Many investors no longer trust the regulatory ratios. ... An officially well-capitalized bank may have a dangerously thin TCE ratio. Take Citigroup. At the end of December, the $1.9 trillion (in assets) bank holding company had a Tier 1 ratio of 11.9%, a total capital ratio of 15.7%, and a leverage ratio of 6.1%. ... But its TCE ratio was just 1.5%. ...

But the TCE ratio is not infallible. Right before Washington Mutual failed, its TCE ratio was 7.8%. For regulators and analysts, TCE is one more metric in the tool kit. That tool kit is typically based on CAMELS, the supervisory rating system that looks at a bank's capital, asset quality, management, earnings, liquidity, and sensitivity to market risk (hence the acronym). Earnings are always important, but "these days it's more about the 'C' and the 'A,'" says Valentin.

The "A" is a growing source of discomfort as the recession drags on. With growth slowing and unemployment rising, a broad swath of consumer and business loans is beginning to sour. "Most of the banks that have failed to date have had significant early credit-cycle exposure — subprime, option-ARM, residential construction loans," says Cannon. "We're starting to see significant deterioration in midcycle credit: prime mortgages, home-equity loans, some nonresidential construction. And there's increasing concern about late-cycle credit instruments such as commercial real-estate mortgages and commercial loans."

It is all about asset quality right now.