by Calculated Risk on 12/18/2009 03:08:00 PM

"The 1980s trained macroeconomics -- like Greg Mankiw and Ben Bernanke and so forth -- became a very complacent group, very ill adapted to meet with a completely unpredictable and new situation, such as we've had. I looked up ... Mankiw's bestseller, both the macro book and his introductory textbook, I went through the index to look for liquidity trap. It wasn't there!"
Paul Samuelson, June 2009

Here is an interview with Paul Samuelson from June (Dr. Samuelson passed away last weekend at the age of 94):

An Interview With Paul Samuelson, Part One (ht Jonathan)

An Interview With Paul Samuelson, Part Two

On Greenspan and the stock bubble:

"I can remember when some of us -- and I remember there were a lot of us in the late 90s -- said you should do something about the stock bubble. And he kind of said, 'look, reasonable men are putting their money into these things -- who are we to second guess them?' Well, reasonable men are not reasonable when you're in the bubbles which have characterized capitalism since the beginning of time."

by Calculated Risk on 12/18/2009 12:45:00 PM

Update comment: I feel torn about digging into Chairman Bernanke's private affairs, but this seems to be in the public interest based on Bernanke's comments, his position, and the current crisis.

Effective Demand has some more details: So I pulled Bernanke's mortgage...

Bernanke bought in May 2004 for $839,000. He had a 5/1 ARM for $671,200 at 4.125% that adjusted to 12 month Libor in June of each year after his fixed period ended. To calculate his rate you take 12 month Libor on that date and add 2.250%, it can't adjust more than 2% in any one year due to restrictions on the note. He also had a purchase money second $83,900 but for some reason I can't find the interest rate on that one, nor do I see an ARM rider for it so it could very well be fixed. Both notes indicate they are amortizing loans.

So what does this all mean? Well according to the terms I see for Bernanke's first and the little information on historic LIBOR I can find (here)... his rate actually went down.

How did it "explode" if his rate went down?

I was assuming this was an Option ARM and Chairman Bernanke was paying the negatively amortizing payment. Then, when the loan recast to amortize over the remaining term (25 years), the payment would have increased significantly.

But Effective Demand's information raises several questions: Why did Bernanke refi? What did he mean by "explode", and was his home underwater when he refinanced since he bought in 2004 and apparently borrowed 90% LTV with only 10% down.

by Calculated Risk on 12/18/2009 10:54:00 AM

In general the unemployment rates declined in November along with the national rate, however the unemployment rate hit new record highs in Florida and South Carolina.

From the BLS: Regional and State Employment and Unemployment Summary

Regional and state unemployment rates were generally lower in November. Thirty-six states and the District of Columbia recorded over-the-month unemployment rate decreases, 8 states registered rate increases, and 6 states had no rate change, the U.S. Bureau of Labor Statistics reported today. Over the year, jobless rates increased in all 50 states and the District of Columbia.
...
Michigan again recorded the highest unemployment rate among the states, 14.7 percent in November. The states with the next highest rates were Rhode Island, 12.7 percent, and California, Nevada, and South Carolina, 12.3 percent each. North Dakota continued to register the lowest jobless rate, 4.1 percent in November, followed by
Nebraska, 4.5 percent, and South Dakota, 5.0 percent. The rate in South Carolina set a new series high, as did the rate in Florida (11.5 percent).
emphasis added

Click on graph for larger image in new window.

This graph shows the high and low unemployment rates for each state (and D.C.) since 1976. The red bar is the current unemployment rate (sorted by the current unemployment rate).

Fourteen states and D.C. now have double digit unemployment rates. New Jersey, Indiana, and Mississippi are all close.

Two states are at record unemployment rates: Florida and South Carolina, and several other states are close.

by Calculated Risk on 12/18/2009 09:18:00 AM

Note: this is not seasonally adjusted. There is a very distinct seasonal pattern for imports, but not for exports. LA area ports handle about 40% of nation's container port traffic.

Sometimes port traffic gives us an early hint of changes in the trade deficit. The following graph shows the loaded inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container). Although containers tell us nothing about value, container traffic does give us an idea of the volume of goods being exported and imported.

Click on graph for larger image in new window.

Loaded inbound traffic was 13.1% below November 2008. (-15.1% over last three months)

Loaded outbound traffic was 11.4% above November 2008. (+0.8% three months average)

U.S. exports fell off a cliff in November 2008, but it took a little longer for imports to decline sharply (because the ships were already underway).

There was a clear recovery in U.S. exports earlier this year; however exports have been mostly flat since May. Still this year will be the 3rd best year for export traffic at LA area ports, behind 2007 and 2008.

For imports, traffic is below the November 2003 level, and 2009 will be the weakest year for import traffic since 2002.

Note: Imports usually peak in the August through October period (as retailers import goods for the holidays) and then decline in November.

The lack of further export growth to Asia is definitely discouraging.

by Calculated Risk on 12/18/2009 08:29:00 AM

From the WaPo: Kucinich panel to investigate Citigroup tax ruling

House subcommittee said Thursday that it will investigate the Treasury Department's decision to change a long-standing law so that Citigroup could keep billions of dollars in tax breaks.
...
The Internal Revenue Service ... ruled last Friday that Citigroup could keep $38 billion in tax breaks that otherwise would decline in value as the government sells its stake in the company. Federal law lets companies shelter profits from taxes in good years based on the amount of losses in previous bad years. But the law restricts the use of past losses if a company changes hands, to discourage profitable companies from buying unprofitable firms to avoid paying taxes.

Treasury's plan to sell its $25 billion stake in Citigroup would have qualified as a change of ownership under the law. ... Treasury officials said the government needed to grant the tax break in order to sell its shares in Citigroup because the company could not afford the loss. Officials also said that preserving the tax break would help the government sell its shares at a higher price.

The key question is who benefits from the law change? The value of the shares the U.S. owns should increase, but only 34% of the share price increase accrues to U.S. taxpayers The other current shareholders receive the rest.

Of course the U.S. delayed selling shares because of the weak Citi share price (Treasury would have had to sell at a loss), but this is still an issue when Treasury eventually sells.

by Calculated Risk on 12/17/2009 09:26:00 PM

Just a Bank Failure Friday warm up post ... first, the CEO of Barnes Bank is expecting a PCA:

From Paul Beebe at the Salt Lake Tribune: Beleaguered Barnes Bank to brief shareholders

Barnes Bank, under orders to shore up its capital and fix other financial problems, will tell shareholders in a special meeting Friday how much headway it's making.
...
Asked if Barnes is healthy, [Curtis Harris, president and CEO] said, "I probably wouldn't make a comment on that right now."
...
"We understand that a PCA (prompt corrective action order) may be coming. We are looking for that to be coming," Harris said.

I'm not sure I've ever heard a bank CEO say he expects a PCA. Basically PCAs are Hail Mary passes with a low probability of success. Note: It is common for banks to be seized without a PCA ever being issued.

Barnes had $827 million in assets at the end of Q3. They have been operating under a written agreement since May 13th with a 60 day period for compliance (sounds like they didn't meet that deadline!).

Also - earlier this week - the FDIC announced plans to hire over 1,600 temporary employees in 2010 to assist with bank closings: FDIC Board Approves 2010 Operating Budget

The 2010 operating budget will increase more than $1.4 billion (55%) from 2009, primarily due to the cyclical nature of bank failures. The receivership funding component of the 2010 budget, the vast majority of which is funded by receiverships, will be $2.5 billion, up from $1.3 billion in 2009. This includes funding for the continuing work associated with bank failures that have occurred over the past two years. The budget also contains contingency funding for the possible continuation of an elevated number of bank failures in 2010. The 2010 budget increase also is partially attributable to increased supervisory activity related to the rising number of troubled banks which the FDIC oversees.

In conjunction with its approval of the 2010 operating budget, the Board also approved an authorized 2010 staffing level of 8,653 employees, up from 7,010 in 2009. Almost all the additional staff will be hired on a temporary basis. They will be hired primarily to assist with bank closings; to perform follow-on work related to the management and sale of failed bank assets; and to conduct bank examinations and perform other bank supervisory activities.

Friday afternoons will be busy in 2010.

by Calculated Risk on 12/17/2009 06:48:00 PM

From Bloomberg: ‘Shadow Inventory’ of U.S. Homes Climbs, Report Says

The number of homes that may be in the pipeline for a sale because of foreclosure and delinquency climbed about 55 percent to 1.7 million at the end of September, according to estimates by First American CoreLogic.
...
“While the visible month’s supply has decreased and is beginning to approach more normal levels, adding in the pending supply reveals there is still quite a bit of inventory that will impact the housing market for the next few years,” First American said.

A few points:

First American CoreLogic is counting the number of homes seriously delinquent or in the foreclosure process.

The 55% increase is from last year (1.1 million to 1.7 million in this category)

The comment at the end about "beginning to approach more normal levels" is about months-of-supply, not total inventory. Obviously months-of-supply is impacted by the surge in sales due to the expected expiration of the homebuyer tax credit.

The term "shadow inventory" is used in different ways. I consider all of the following to be "shadow inventory":

REOs. There are bank owned properties that have not been put on the market yet.

Foreclosures in process and seriously delinquent loans (although some of these may be in the modification process).

New high rise condos. These properties are not included in the new home inventory report from the Census Bureau, and do not show up anywhere unless they are listed.

Homeowners waiting for a better market. These are homeowners waiting for better market conditions to sell.

On high rise, condos from the WSJ (ht William):

In the downtown Miami and neighboring Brickell areas, more than 22,000 condos have been built in the past four years, or more than twice the number added over the previous four decades, says Holliday Fenoglio Fowler LP, which advises real-estate developers and investors.

by Calculated Risk on 12/17/2009 03:44:00 PM

From Bloomberg: Harvard’s Feldstein Says U.S. Economy Still Mired in Recession

Restrained consumer spending suggests “2010 is going to be a very weak year,” said [Harvard University economics professor and former NBER president Martin Feldstein ] “Thrift in the long run is a very good thing, but increasing thrift as you come out of a recession is going to be a drag."
...
Regarding the residential property market ... Feldstein said the Obama administration’s effort to revive the housing market is a failure and home prices will continue to decline.

“It was just not well enough designed,” Feldstein said. “They ended up failing.” That suggests the housing slump will “continue to push down house prices,” he said.

“We saw a little pause in home-price declines in the summer but I think that was because of the first-time home buyers program,” Feldstein said. “We’re not going to get that boost.”

On the recession comments - "The recession isn’t over" - I think he was just referring to the dating of the recession, although he clearly thinks there is a chance of a double dip recession and he expressed concern about is the "danger is we will run out of steam".

by Calculated Risk on 12/17/2009 01:21:00 PM

From HotelNewsNow.com: New Orleans tops increases in STR weekly numbers

Overall, in year-over-year measurements, the industry’s occupancy fell 2.9 percent to 48.1 percent, Average daily rate dropped 5.9 percent to US$96.04, and Revenue per available room decreased 8.6 percent to US$46.22.

Click on graph for larger image in new window.

This graph shows the occupancy rate by week for each of the last four years (2006 through 2009 labeled by start of month).

Notes: Some of the holidays don't line up - especially at the end of the year.

Data Source: Smith Travel Research, Courtesy of HotelNewsNow.com (Note: They have a free daily email too for hotel news)

The above graph shows two key points:

This is a two year slump for the hotel industry. Although occupancy is off 2.9% compared to 2008, occupancy is off about 9% compared to 2006 and 2007.

There is a distinct seasonal pattern for the occupancy rate. The occupancy rate is higher in the summer (because of leisure travel), and lower on certain holidays.

The HotelNewsNow press release also has this graph on occupancy variance compared to 2008.

For most of the year business travel (mid-week) has been off significantly more than leisure travel (weekends).

It now appears both categories are off about the same compared to last year.

This seems to be more evidence that the hotel industry has stabilized at this low level as far as occupancy rates, although room rates will still be under pressure because this is the lowest occupancy rate (annual) since the Great Depression.

by Calculated Risk on 12/17/2009 10:59:00 AM

From Bloomberg: Morgan Stanley to Give Up 5 San Francisco Towers Bought at Peak (ht MikeinLongIsland, Brian)

Morgan Stanley ... plans to relinquish five San Francisco office buildings to its lender two years after purchasing them from Blackstone Group LP near the top of the market.

“This isn’t a default or foreclosure situation,” [Alyson Barnes, a Morgan Stanley spokeswoman] said. “We are going to give them the properties to get out of the loan obligation.”
...
The Morgan Stanley buildings may have lost as much as 50 percent since the purchase ...

Note that Morgan Stanley is current on the loan and is not in foreclosure. They are simply "walking away" because the buildings are worth less than the amount owed.

On residential, the WSJ has an article: Debtor's Dilemma: Pay the Mortgage or Walk Away? (ht Sabine). The article contains a graph of "strategic defaults" by state - however I'm not sure how this is estimated. In very few cases does the borrower admit they can afford the payments and are just walking away (like Morgan Stanley above). In most cases the borrower either doesn't respond or says they are having a financial crisis.

From a research paper earlier this year on homeowners with negative equity walking away: Moral and Social Constraints to Strategic Default on Mortgages by Guiso, Sapienza and Zingales.

It is difficult to study the strategic default decision, because it is de facto an unobservable event. While we do observe defaults, we cannot observe whether a default is strategic. Strategic defaulters have all the incentives to disguise themselves as people who cannot afford to pay and so they will appear as non strategic defaulters in all the data.

The researchers argued that the pace of strategic defaults is increasing - and that is terrifying for lenders.

This is what I wrote in 2007:

One of the greatest fears for lenders (and investors in mortgage backed securities) is that it will become socially acceptable for upside down middle class Americans to walk away from their homes.

And that remains the greatest fear - and it probably doesn't help that companies like Morgan Stanley are walking away from commercial buildings. As the researchers noted, the more people hear about strategic defaults, the more willing they are to walk away. Zingales was quoted in the WSJ earlier this year:

“Our research showed there is a multiplication effect, where the social pressure not to default is weakened when homeowners live in areas of high frequency of foreclosures or know others who defaulted strategically”

I wonder if hearing about "rich" banks that are paying "large" bonuses walking away from commercial buildings also weakens the social pressure?