by Calculated Risk on 7/10/2010 08:30:00 AM

CR Note: This is part 2 in a series on sovereign debt issues by reader "some investor guy". Here is Part 1: How Large is the Outstanding Value of Sovereign Bonds?

Sovereign bonds have been defaulting for almost as long as there have been sovereign bonds. The problems go back many centuries. A good overview created for the IMF is “The Costs of Sovereign Default” by Eduardo Borensztein and Ugo Panizza. Some countries are “serial defaulters”, with a long history of sovereign defaults. Many have defaulted on sovereign debt five times or more.

Click on graph for larger image in new window.

Here is a chart showing the number of countries defaulting each year from 1824 to 2003. The raw data comes from S&P. Charts were created by the Some Investor Guy.

As you can see, there are some years with no defaults at all, and other years with many. Defaults tend to come in clusters, and the behavior of lenders often changes substantially after defaults. In the Volatility Machine, Michael Pettis asserts that sovereign default contagion follows predictable patterns, and that contagion is primarily due to investors in the first defaulting country also having investments in other countries which are vulnerable. This is especially the case with leveraged investors.

In the seemingly “quiet period” from 1945 to 1959, there was just one sovereign default. Interestingly, this was also a time with a number of very angry foreign investors. This time period was the peak of expropriation of foreign assets. There were at least 25 nationalizations and expropriations of foreign assets. Many were by new members of the Soviet Bloc, and by newly independent colonies (Source: Michael Tomz, Stanford, working paper).

For you ubernerds who want to see which countries defaulted each year, here they are. I’ve broken them down into three periods to make the charts more readable.

1820 to 1920(click on chart for larger image)

1920 to 1980

1981 to 2003

The underlying causes of default (such as rises in interest rates, wars, commodity price collapses, and simply borrowing too much money) have been diagnosed for many episodes. Proximate to the default, any of the following six financial changes might occur:

1. Government revenues fall far below history or forecast;
2. Expenses aside from debt service rise far above history or forecast;
3. Interest rates rise substantially; due to inflation, credit spreads, illiquidity, or other causes
4. Demand for bonds suddenly drops or disappears (a sudden stop);
5. Exchange rates move, making payments on foreign denominated bonds much more expensive (currency risk), and,
6. A government simply decides not to pay, even though it has the capacity to pay (repudiation).

Paolo Manasse and Nouriel Roubini studied sovereign default risk and concluded that many guidelines used for estimating when default was likely did not perform well, primarily because those guidelines looked at separate risks. For example, total government debt exceeding 200% of GDP is often used to indicate stress. However, some other circumstances may make the problems much less severe (like having a growing economy and no foreign denominated debt). Other factors might make it much worse (like high inflation).

CR Note: This is from "Some investor guy". Over the next week or so, some investor guy will address several questions: What are market estimates of the probabilities of default? What are total estimated losses on sovereign bonds due to default? What happens if things go really badly and what are the indirect effects of default?

Next in the series, Part 3. What are the Market Estimates of the Probabilities of Default?

Series:
• Part 1: How Large is the Outstanding Value of Sovereign Bonds?

• Part 2. How Often Have Sovereign Countries Defaulted in the Past?

• Part 2B: More on Historic Sovereign Default Research

• Part 3. What are the Market Estimates of the Probabilities of Default?

• Part 4. What are Total Estimated Losses on Sovereign Bonds Due to Default?

• Part 5A. What Happens If Things Go Really Badly? $15 Trillion of Sovereign Debt in Default

• Part 5B. Part 5B. What Happens If Things Go Really Badly? More Things Can Go Badly: Credit Default Swaps, Interest Swaps and Options, Foreign Exchange

• Part 5C. Some Policy Options, Good and Bad

• Part 5D. European Banks, What if Things Go Really Badly?

by Calculated Risk on 7/09/2010 10:18:00 PM

Note: this is an unofficial list of Problem Banks compiled only from public sources.

Here is the unofficial problem bank list for July 9, 2010.

Changes and comments from surferdude808:

Relatively quiet week for the Unofficial Problem Bank List.

The four failures -- Home National Bank ($644. million), Bay National Bank ($282 million), USA Bank ($193 million), and Ideal Federal Savings Bank ($6.3 million) were removed.

There are two additions including Great Northern Bank, Saint Michael, MN ($70.8 million); and American Eagle Savings Bank, Boothwyn, PA ($21.9 million).

These changes leave the Unofficial Problem Bank List with 796 institutions with aggregate assets of $411.6 billion. Next week, we anticipate the OCC will release its actions for June 2010.

CR Note: The list will probably be over 800 next week, and is still on pace to hit 1,000 by the end of the year.

by Calculated Risk on 7/09/2010 07:11:00 PM

New Century Bank?
Customer First / U.S.A.?
Who's in control here?

Home, Bank on the range
Where Bair, and the banksters play....
Cloudy sky ahead.
by Soylent Green is People
From the FDIC: New Century Bank, Phoenixville, Pennsylvania, Assumes All of the Deposits of USA Bank, Port Chester, New York

As of March 31, 2010, USA Bank had approximately $193.3 million in total assets and $189.9 million in total deposits.
...
The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $61.7 million. Compared to other alternatives, ... USA Bank is the 89th FDIC-insured institution to fail in the nation this year, and the third in New York. The last FDIC-insured institution closed in the state was The Park Avenue Bank, New York, on March 12, 2010.

From the FDIC: RCB Bank, Claremore, Oklahoma, Assumes All of the Deposits of Home National Bank, Blackwell, Oklahoma

As of March 31, 2010, Home National Bank had approximately $644.5 million in total assets and $560.7 million in total deposits.
...
The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $78.7 million. ... Home National Bank is the 90th FDIC-insured institution to fail in the nation this year, and the first in Oklahoma. The last FDIC-insured institution closed in the state was First State Bank of Altus, Altus, on July 31, 2009.

by Calculated Risk on 7/09/2010 05:10:00 PM

Bay National... zip
Ideal Federal... whoosh
A trifecta miss : - (
by Soylent Green is People
From the FDIC: FDIC Approves the Payout of the Insured Deposits of Ideal Federal Savings Bank, Baltimore, Maryland

As of March 31, 2010, Ideal Federal Savings Bank had approximately $6.3 million in total assets and $5.8 million in total deposits.
...
he cost to the FDIC's Deposit Insurance Fund is estimated to be $2.1 million. Ideal Federal Savings Bank is the 88th FDIC-insured institution to fail in the nation this year, and the third in Maryland. The last FDIC-insured institution closed in the state was Bay National Bank, Baltimore, earlier today.

Pretty small. Not ideal.

by Calculated Risk on 7/09/2010 04:36:00 PM

From the FDIC: Bay Bank, FSB, Lutherville, Maryland, Assumes all of the Deposits of Bay National Bank, Baltimore, Maryland

As of March 31, 2010, Bay National Bank had approximately $282.2 million in total assets and $276.1 million in total deposits.
...
The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $17.4 million. .. Bay National Bank is the 87th FDIC-insured institution to fail in the nation this year, and the second in Maryland. The last FDIC-insured institution closed in the state was Waterfield Bank, Germantown, on March 5, 2010.

A quick start ...

by Calculated Risk on 7/09/2010 04:00:00 PM

This has been a light week for economic news, but the pace will pick up again next week ... I guess no news is good news for the stock market:

Here is a graph from Doug Short of dshort.com (financial planner).

Click on graph for interactive version in new window.

The graph has tabs to look at the different bear markets - "now" shows the current market - and there is also a tab for the "four bears".

by Calculated Risk on 7/09/2010 01:38:00 PM

The following article confuses "liar loans" with underwriting based on the "Three C's": creditworthiness, capacity, and collateral.

From Forbes: 'Liar Loans' Make a Comeback

Did you think the housing collapse killed off "liar loans"--those infamous bubble-era mortgages for which people were allowed to get creative in portraying their ability to make the payments? Well, they're back, and that may be a good thing.

First, this article doesn't provide evidence that liar loans have made a comeback, although low-doc loans based on collateral are being offered. And, second, if "liar loans" were coming back that would be a BAD BAD thing.

From the article:

Case in point: One of [Dave] Dessner's people is toiling now on a loan application from a hedge fund manager wishing to borrow $800,000 against a $4 million home purchase. The hedge's fund did poorly last year, so as a sign of good faith for his investors he's drawing no salary. Good for his business, perhaps, but rotten for a conventional mortgage application.

This guy made $5 million in 2007 and 2008. He's liquid for $10 million, and he's borrowing 20% LTV (loan-to-value)," says Dessner. A no-doc loan to that kind of borrower shouldn't be political dynamite ...

This is not stated income (liar loan) or even no-doc. The lender has apparently verified the borrower's collateral (a 20% LTV), and has verified the borrower's capacity ("liquid for $10 million"), and I assume the borrower's credit is solid.

The above example sounds like solid underwriting.

Tanta explained why there is no need for stated income better than I can (see below), but low-doc based on collateral are not "liar loans". The article even quotes Dessner on this distinction:

Dessner insists it would be a mistake to associate the loans GuardHill and its bank network are originating with the doomed liar loans ... "I'd be on my soapbox railing against those loans," says Dessner. "The people in government who are now screaming about liar loans aren't looking at the quality of the loans we're making."

He isn't making stated income loans, so I'm not sure why the headline and lead paragraph are so misleading.

From Tanta:

Just Say No To Stated Income

Reflections on Alt-A

by Calculated Risk on 7/09/2010 11:22:00 AM

From HotelNewsNow.com: STR: US results for week ending 3 July 2010

In year-over-year measurements, the industry’s occupancy increased 10.0 percent to 63.4 percent. Average daily rate rose 1.3 percent to US$96.65. Revenue per available room jumped 11.5 percent to US$61.32.

The following graph shows the four week moving average for the occupancy rate by week for 2008, 2009 and 2010 (and a median for 2000 through 2007).

Click on graph for larger image in new window.

Notes: the scale doesn't start at zero to better show the change.

On a 4-week basis, occupancy is up 7.5% compared to last year (the worst year since the Great Depression) and 4.1% below the median for 2000 through 2007.

This as close to "normal" as the occupancy rate has been all year.

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

by Calculated Risk on 7/09/2010 09:02:00 AM

From Sharon Bernstein at the LA Times: Jobs outlook for small businesses may be getting bleaker

Intuit Inc., which provides payroll services for small employers, says the nation's tiniest companies had fewer new hires last month than any time since October.
...
To calculate its estimate of national hiring, Intuit uses payroll information from its 56,000 small-business customers. The company defines small businesses as those with fewer than 20 employees.

Intuit's data show that small businesses hired just 18,000 additional workers last month. That's still positive territory, but it's less than a third of the 60,000 that were added in February, when it seemed that an employment recovery was imminent. Additional hiring dropped steadily during the spring, to 40,000 in April and 32,000 in May. Another payroll company, Automatic Data Processing Inc., painted an even gloomier picture, saying that small businesses lost 1,000 jobs nationwide in June.

According to surveys by the National Federation of Independent Business (NFIB), the problem isn't lack of financing or government regulation - the problem is a "shortage of customers".

NFIB chief economist Bill Dunkelberg recently said: “What small businesses need are customers, giving them a reason to hire and make capital expenditures and borrow to support those activities.”

by Calculated Risk on 7/08/2010 11:54:00 PM

From David Streitfeld at the NY Times: Biggest Defaulters on Mortgages Are the Rich

More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.

By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.
...
The CoreLogic data measures serious delinquencies, which means the borrower has missed at least three payments in a row.

Were these borrowers really "rich"? Or did they just buy more home than they could really afford?

The "movin' on up" theme for distressed properties is something we've been discussing for some time. We're all subprime now!

Obviously more distressed sales will put downward pressure on prices in these areas.