by Calculated Risk on 9/25/2008 10:05:00 AM

From the Census Bureau: New Residential Sales in August 2008

Sales of new one-family houses in August 2008 were at a seasonally adjusted annual rate of 460,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 11.5 percent below the revised July rate of 520,000 and is 34.5 percent below the August 2007 estimate of 702,000.

This is a very weak report. Analysis and graphs coming ...

by Calculated Risk on 9/25/2008 09:18:00 AM

From the WSJ: Bailout Pact Gains Momentum Amid Push for Tough Controls

A likely bill would include limits on executive pay in situations where the government puts a large amount of money into a failing institution. In certain cases, the government could receive warrants that would give it the right to acquire shares in the company. Also included is beefed-up oversight through the Government Accountability Office, an investigative arm of Congress.

Likely not included is a controversial idea to let judges alter the terms of mortgages during bankruptcy proceedings.

The real question is the price mechanism for buying securities.

Vikas Bajaj writes in the NY Times: Plan’s Mystery: What’s All This Stuff Worth?. See the story about the Bear Stearns Alt-A Trust 2006-7.

Bear Stearns bundled the loans into 37 different kinds of bonds, ranked by varying levels of risk, for sale to investment banks, hedge funds and insurance companies.

If any of the mortgages went bad — and, it turned out, many did — the bonds at the bottom of the pecking order would suffer losses first, followed by the next lowest, and so on up the chain. By one measure, the Bear Stearns Alt-A Trust 2006-7 has performed well: It has suffered losses of about 1.6 percent. Of those loans, 778 have been paid off or moved through the foreclosure process.

But by many other measures, it’s a toxic portfolio.

This is the problem when you hear about the losses associated with a Trust. In this case the overall losses are only 1.6% so far (but this is Alt-A so it will get much worse), but many of lower tranches have been wiped out.

We don't know if Paulson will overpay for assets - losing money for the taxpayers - and that is why warrants are necessary.

by Calculated Risk on 9/25/2008 08:44:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending Sept. 20, the advance figure for seasonally adjusted initial claims was 493,000, an increase of 32,000 from the previous week's revised figure of 461,000. It is estimated that the effects of Hurricane Gustav in Louisiana and the effects of Hurricane Ike in Texas added approximately 50,000 claims to the total. The 4-week moving average was 462,500, an increase of 16,000 from the previous week's revised average of 446,500.

Click on graph for larger image in new window.

This graph shows weekly claims. The four moving average is at 462,500.

Some of the jump in unemployment claims is a result of the hurricanes - and should be temporary - but away from the financial crisis this shows there are significant weaknesses in the labor market and real economy.

by Calculated Risk on 9/25/2008 08:29:00 AM

The WSJ reports: GE Cuts Earnings Forecast, Suspends Stock Buyback that GE lowered its earning guidance, suspended its stock buyback, and will probably not increase its dividend.

[GE cited] "unprecedented weakness and volatility in the financial-services markets," and ... issued a harrowing projection for the economy, as predicting "that difficult conditions in the financial-services markets are not likely to improve in the near future."

by Calculated Risk on 9/24/2008 09:32:00 PM

From the WSJ: Bush Addresses Bailout Plan

President George W. Bush on Wednesday warned Americans and legislators reluctant to pass a historic financial rescue plan that failing to act fast risks wiping out retirement savings, rising foreclosures, lost jobs, closed business and "a long and painful recession."

From the NY Times: President Issues Warning to Americans

From the WaPo: Bush: 'Our Entire Economy Is in Danger'

Bush painted a grim picture view of the future if Congress doesn't act, but he really didn't address how the plan would work. Bush did comment that the plan was to buy assets "at the current low price", seemingly contradicting the comments from Bernanke and Paulson earlier today that they would buy at above the current "fire sale" prices.

I'm not sure if this speech will motivate people to call their representatives, but it might motivate people that haven't been paying attention to say: "Wow, this is bad. Let's make sure our money is safe, and watch our expenditures." And that could lead to a deeper recession.

by Calculated Risk on 9/24/2008 08:36:00 PM

President Bush will speak on the financial crisis and Paulson bailout plan at 9 PM ET. The speech is expected to run 12 to 14 minutes according to the WSJ.

The speech will be on (C-SPAN2) for those that want to watch online. Here is the C-SPAN live video.

And on CNBC. Here is the live video from CNBC.

Discussion in the comments.

by Calculated Risk on 9/24/2008 07:01:00 PM

From MarketWatch: Fitch cuts WaMu long-term issuer default rating to junk

Is it Friday yet?

by Calculated Risk on 9/24/2008 05:27:00 PM

[I]sn’t it bizarre to have officials who miscalled so much ... confidently declaring that they know better than the market what a broad class of securities is worth?
Professor Krugman, Sept 24, 2008

Here are clips of Paulson, Bernanke, Bush and presidential economic advisor Edward Lazear from 2007:

by Calculated Risk on 9/24/2008 03:56:00 PM

From Professor Krugman: A $700 billion slap in the face

[L]et’s talk about how governments normally respond to financial crisis: namely, they rescue the failing financial institutions, taking temporary ownership while keeping them running. If they don’t want to keep the institutions public, they eventually dispose of bad assets and pay off enough debt to make the institutions viable again, then sell them back to the private sector. But the first step is rescue with ownership.

That’s what we did in the S&L crisis; that’s what Sweden did in the early 90s; that’s what was just done with Fannie and Freddie; it’s even what was done just last week with AIG. It’s more or less what would happen with the Dodd plan, which would buy bad debt but get equity warrants that depend on the later losses on that debt.

But now Paulson and Bernanke are proposing, very nearly, to do the opposite: they want to buy bad paper from everyone, not just institutions in trouble, while taking no ownership. In fact, they’ve said that they don’t want equity warrants precisely because they would lead financial institutions that aren’t in trouble to stay away. So we’re talking about a bailout specifically designed to funnel money to those who don’t need it.

It took four days before P&B offered any explanation whatsoever of their logic. But as of now, it seems that the argument runs like this: mortgage-related assets are currently being sold at “fire-sale” prices, which don’t reflect their true, “hold to maturity” value; we’re going to pay true value — and that will make everyone’s balance sheet look better and restore confidence to the markets.

As I said, this is really a giant version of the slap-in-the-face theory: markets are getting hysterical, and the feds can calm them down by buying when everyone else is selling.

There is much more, but this point can't be emphasized enough:

And isn’t it bizarre to have officials who miscalled so much — “All the signs I look at,” declared Paulson in April 2007, show “the housing market is at or near a bottom” — confidently declaring that they know better than the market what a broad class of securities is worth?
emphasis added

If these are "fire sale" prices because of impending distress, then shouldn't the government be stepping in and taking temporary ownership? Or at the least a percentage of ownership while making an investment to increase capital, like with the Reconstruction Finance Corporation (RFC) during the Depression?

Note: the RFC is considered by most economists to have been very successful.

by Calculated Risk on 9/24/2008 02:24:00 PM

For those that want to watch online, here is the C-Span live video.

And here is a live video from CNBC.

Discussion in the comments.