by Calculated Risk on 2/13/2010 07:18:00 PM

From Louise Story, Landon Thomas Jr. and Nelson D. Schwartz at the NY Times: Wall Street Helped to Mask Debts Shaking Europe. A brief excerpt:

In 2001, just after Greece was admitted to Europe’s monetary union, [Goldman Sachs] helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means.
...
Critics say that such deals, because they are not recorded as loans, mislead investors and regulators about the depth of a country’s liabilities.
...
“Politicians want to pass the ball forward, and if a banker can show them a way to pass a problem to the future, they will fall for it,” said Gikas A. Hardouvelis, an economist and former government official who helped write a recent report on Greece’s accounting policies.

Wall Street did not create Europe’s debt problem. But bankers enabled Greece and others to borrow beyond their means, in deals that were perfectly legal.

The quote from Hardouvelis is on target. Many on Wall Street just care about short term fees and large bonuses, and politicians just want to push the problems into the future. A perfect match ... except for all the people who are eventually hurt by their actions.

by Calculated Risk on 2/13/2010 02:59:00 PM

Another view ...

Simon Johnson writes at Baseline Scenario: Greece Derails – Is Europe Far Behind?

Already facing serious difficulties – both internal and with regard to its EU partners (see our longer essay in Saturday’s WSJ) – Greece’s predicament just became substantially worse.

Speaking on national television this evening, the Greek Prime Minister – George Papandreou – lashed out at the European Union (presumably meaning mostly Germany) for creating a “psychology of looming collapse which could be self-fulfilling.” He also implied that Greece was being treated, in some senses, like a “lab animal.”
...
Greece is well down the path to becoming regarded more like Argentina – a country that struggles over many decades (and whose leaders frequently rail against the world) and for which episodes of reasonable prosperity and new economic models are punctuated by gut-wrenching crises, most of which do not shake the world.

Will the EU save Greece? Much will depend on how bad the situation could become in other “related” (in the eyes of the financial markets) places.

But destabilizing actions or inflammatory statements by Greece make an orderly rescue less likely and put another major international economic crisis firmly on the table.

Here is the piece in the WSJ from Simon Johnson and Peter Boone: The Greek Tragedy That Changed Europe Update: When I linked to it, the title was "How Much Does a Grecian Urn?"

Greece is just one of several global financial concerns right now ...

by Calculated Risk on 2/13/2010 11:30:00 AM

From CNNMoney: States to Senate: Send more federal aid

States are looking to the federal government for more help balancing their budgets, but the Senate is not heeding their call. ...

States are looking at a total budget gap of $180 billion for fiscal 2011, which for most of them begins July 1. These cuts could lead to a loss of 900,000 jobs, according to Mark Zandi, chief economist of Moody's Economy.com.

To close this gap, governors and lawmakers will be forced to lay off state employees, cut services and postpone capital projects ...
Already, states laid off 44,000 workers in the 12 months ending in January, according to federal labor statistics.

If Zandi is correct the vast majority of state layoffs are still to come.

by Calculated Risk on 2/13/2010 08:34:00 AM

This is an unofficial list of Problem Banks compiled only from public sources. Changes and comments from surferdude808:

The Unofficial Problem Bank List saw minor changes during the week and the total number of institutions remained unchanged at 605 but aggregate assets increased slightly to $329.4 billion from $328.7 billion last week.

There was one addition – Broadway Bank, Chicago, IL ($1.2 billion), and one removal -- Mt. Washington Co-operative Bank, South Boston, MA ($501 million), which was acquired via an unassisted merger with East Boston Savings Bank, Boston, MA during January 2010.

The only other change is a Prompt Corrective Action order issued by the Federal Reserve against Marco Community Bank, Marco Island, FL ($138 million) on February 2, 2010.

The list is compiled from regulator press releases or from public news sources (see Enforcement Action Type link for source). The FDIC data is released monthly with a delay, and the Fed and OTC data is more timely. The OCC data is a little lagged. Credit: surferdude808.

See description below table for Class and Cert (and a link to FDIC ID system).

For a full screen version of the table click here.

The table is wide - use scroll bars to see all information!

NOTE: Columns are sortable - click on column header (Assets, State, Bank Name, Date, etc.)



Class: from FDIC

The FDIC assigns classification codes indicating an institution's charter type (commercial bank, savings bank, or savings association), its chartering agent (state or federal government), its Federal Reserve membership status (member or nonmember), and its primary federal regulator (state-chartered institutions are subject to both federal and state supervision). These codes are:

N National chartered commercial bank supervised by the Office of the Comptroller of the Currency

SM State charter Fed member commercial bank supervised by the Federal Reserve

NM State charter Fed nonmember commercial bank supervised by the FDIC

SA State or federal charter savings association supervised by the Office of Thrift Supervision

SB State charter savings bank supervised by the FDIC

Cert: This is the certificate number assigned by the FDIC used to identify institutions and for the issuance of insurance certificates. Click on the number and the Institution Directory (ID) system "will provide the last demographic and financial data filed by the selected institution".

by Calculated Risk on 2/12/2010 09:31:00 PM

It looks like no bank failures this week, but there were renewed global concerns today:

Dubai: From the WSJ: Cost of Insuring Dubai's Debt Jumps

The cost of insuring Dubai's sovereign debt against default rose to its highest level since November as concerns resurfaced over the emirate's large debt. ... On Wednesday, the Al-Ittihad newspaper reported that Dubai World would this month ask creditors to freeze payments on 80 million dirhams ($21.8 million) of debt for six months, until its restructuring is complete.

China: From Bloomberg: China Raises Bank Reserve Requirement to Cool Economy

China ordered banks to set aside more deposits as reserves for the second time in a month to cool the fastest-growing economy after loan growth accelerated and property prices surged.

The reserve requirement will increase 50 basis points, or 0.5 percentage point, effective Feb. 25, the People’s Bank of China said on its Web site today. The current level is 16 percent for big banks and 14 percent for smaller ones.

Europe: From the NY Times: Growth in Europe Slows to a Crawl

The total gross domestic product increased by one-tenth of 1 percent in the 16-nation euro area during the fourth quarter, compared with a year earlier, according to an initial estimate from Eurostat, the European Union’s statistics agency. The same tepid rate was also recorded for the 27 members of the European Union as a whole.

Greece: See: Greece Still Slippery.

Also:

Retail Sales increased 0.5% in January

Inventory Cycle and GDP If you've been wondering about the inventory cycle and GDP, I tried to explain how it works (with a tie in to the Census Bureau's Manufacturing and Trade Inventories and Sales report released today for December)

Best to all

by Calculated Risk on 2/12/2010 07:23:00 PM

From the Financial Times: Greek austerity ‘comes before any bail-out’

[A] senior [German] government official insisted European Union leaders had not given Greece any firm promises of financial assistance, he said they had signalled the possibility of help once the government of George Papandreou had implemented a tough and sustainable austerity programme.
excerpted with permission

Originally investors expected a detailed plan early next week when the eurozone finance ministers meet, but now it appears there will be no plan released.

These "mixed messages" have upset Greek Prime Minister Papandreou, from the Financial Times: Greece turns on EU critics

In a televised address to his cabinet, [George Papandreou] criticised EU members for sending “mixed messages about our country . . . that have created a psychology of looming collapse which could be self-fulfilling”.

Sorry for the bad pun in the post title.

by Calculated Risk on 2/12/2010 06:34:00 PM

A number of readers have sent me a video that is obviously inaccurate. I usually don't do "take downs", so I'm happy to see the FDIC has responded ...

From the FDIC: FDIC Provides Additional Information on its Loss Share Agreement With OneWest Bank

FDIC Director of Public Affairs Andrew Gray said, "It is unfortunate but necessary to respond to blatantly false claims in a web video that is being circulated about the loss-sharing agreement between the FDIC and OneWest Bank. Here are the facts: OneWest has not been paid one penny by the FDIC in loss-share claims. The loss-share agreement is limited to 7% of the total assets that OneWest services, and OneWest must first take more than $2.5 billion in losses before it can make a loss-share claim on owned assets. In order to be paid through loss share, OneWest must have adhered to the Home Affordable Modification Program (HAMP).

The producers of this video perpetuate other falsehoods. The FDIC has not requested to borrow money from the Treasury Department. Indeed, we continue to be funded by the banking industry through assessments, not by taxpayers as claimed in the video.

This video has no credibility. Regardless of the personal or professional motivations behind its production, there is always a responsibility to be factually correct and transparent. The FDIC made available a fact sheet on the day that the sale of IndyMac was announced that details the terms of the contract. It's too bad that the creators of this video opted to premise it on falsehoods."

Supplemental Facts about the Sale of Indymac F.S.B. to OneWest Bank

The FDIC is absolutely correct.

by Calculated Risk on 2/12/2010 04:03:00 PM

From Moody's:

The delinquency rate on CMBS conduit and fusion loans increased by more than 50 basis points in January, bringing the total rate to 5.42%. The total delinquent balance is now more than $36 billion, a $3 billion increase over the month before. By dollar and basis points, this is the largest increase in the delinquency rate thus far in the downturn, as measured by the Moody’s Delinquency Tracker (DQT).
emphasis added

On sectors:

The retail delinquency rate rose 72 basis points and currently stands at 5.24%. The 72 basis point increase was more than 1.5 times higher than any increase in the history of the retail DQT ...

The office delinquency rate rose 34 basis points, and although that represents the second largest increase to the office DQT to date ... the office DQT, which currently stands at 3.53%, is the lowest of the five major sectors ...

The multifamily delinquency rate now stands at 8.77%, a 63 basis point increase over the month before. ...

The hotel DQT increased 75 basis points and currently stands at 9.82%.

Hotels and multi-family are the worst, but delinquencies are increasing in every category - especially for retail.

Here is WSJ article

by Calculated Risk on 2/12/2010 02:37:00 PM

The rapid expansion of high speed rail in China is pretty astounding ...

From the NY Times: China’s Project to Build Fast Trains Is Spurring Growth

The Chinese bullet train, which has the world’s fastest average speed, connects Guangzhou, the southern coastal manufacturing center, to Wuhan, deep in the interior. In a little more than three hours, it travels 664 miles ... Even more impressive, the Guangzhou to Wuhan train is just one of 42 high-speed lines recently opened or set to open by 2012 in China.

This is part of the stimulus package:

Faced with mass layoffs at export factories [due to the global financial crisis], China ordered that the new rail system be completed by 2012 instead of 2020, throwing more than $100 billion in stimulus at the projects.

Administrators mobilized armies of laborers — 110,000 just for the 820-mile route from Beijing to Shanghai, which will cut travel time there to 5 hours from 12 when it opens next year.

It sounds like they are building the pyramids!

by Calculated Risk on 2/12/2010 11:51:00 AM

In Q4 2009 a majority of the increase in GDP was due to changes in private inventories. That can be a little confusing ...

First, GDP is Gross Domestic Production. What is being estimated is "domestic production", but what is being measured is mostly domestic consumption.

Right away we can see that if something is produced domestically and then exported, it will not show up in domestic sales. So exports are added to the equation, and imports subtracted. Investment and Government spending are also added to measures of consumption, and we frequently see an equation like this for GDP:

Y = C + I + G + NX
Y: GDP
C: Consumption
I: Investment
G: Government spending
NX: Exports - imports.

But what about changes in inventories? The same ideas apply. What is measured are sales and changes in inventory, and then production is calculated:

Production = Sales + Changes in Inventory
The following simple table shows how this works, and how it impacts GDP.

	Sales	Production	Inventory	I/S	GDP
Q1	100	100	100	1.00	--
Q2	101	101	100	0.99	4.1%
Q3	102	102	100	0.98	4.0%
Q4	103	103	100	0.97	4.0%
Q5	100	104	104	1.04	3.9%
Q6	97	100	107	1.10	-14.5%
Q7	97	96	106	1.09	-15.1%
Q8	98	93	101	1.03	-11.9%
Q9	99	98	100	1.01	23.3%
Q10	100	100	100	1.00	8.4%

The first four quarters just show normal growth. Sales increase by one unit each quarter, and since inventory is steady, production increases with sales. This gives annualized GDP growth of 4%, and a slightly declining inventory-to-sales ratio (assuming inventory stay at the same level).

Now look at Q5. Sales suddenly drop, but production still increases since the decline in sales was a surprise. This pushes up inventories. Production is measured from sales (100) plus increase in inventory (+4) and GDP still increases.

Now in Q6 sales fall further to 97. The company reacts to the decline in sales and only produces 100 widgets. Inventory still increases (+3), but the combination of sales and inventory changes in Q6 is less than in Q5, so GDP declines sharply (marked in red).

In Q7 sales have bottomed, but the company is still cutting back on producton because they have too much inventory. For Q7, Production = Sales (97) plus changes in inventory (-1) giving production of 96 widgets. That is sharply below the 100 widget production of the prior quarter, so even though sales have bottomed, GDP declines sharply.

In Q8 sales increase slightly, but the company still has too much inventory, and they cut production further - resulting in a decline in GDP.

Finally in Q9, sales increase again by one unit, and the company can now increase production almost to the level of sales. Inventory is still declining (production is less than sales), but production has increased sharply compared to Q8. This shows up as a surge in GDP of 23% in this example.

Remember production in Q9 was calculated from sales and changes in inventory. Production of 98 widgets = Sales of 99 widgets, minus 1 unit for decline in inventory. The increase in production from 93 units in Q8 to 98 unites in Q9 is what shows up in the GDP report.

By Q10 sales and production are pretty much back in equilibrium, but at a lower level than the peak. Now further increases in production depend on increases in sales.

And that brings us to the Manufacturing and Trade Inventories and Sales report from the Census Bureau today that showed inventories declined slightly in December (seasonally adjusted).

Click on graph for larger image in new window.

The Census Bureau reported:

Inventories. Manufacturers’ and trade inventories, adjusted for seasonal variations but not for price changes, were estimated at an end-of-month level of $1,310.7 billion, down 0.2 percent (±0.1%) from November 2009 and down 9.7 percent (±0.4%) from December 2008.

Inventories/Sales Ratio. The total business inventories/sales ratio based on seasonally adjusted data at the end of December was 1.26. The December 2008 ratio was 1.46.

This report suggests that inventories are back in line with sales, and the inventory cycle is mostly over (there will probably still be a positive contribution in Q1 2010 from changes in private inventories). Further increases in production will now depend on increases in consumption (or exports).