by Calculated Risk on 7/11/2008 10:00:00 AM

I'll be out of communication range today. Please send all stories to Tanta.

Thanks, Best to all, CR

by Calculated Risk on 7/11/2008 08:45:00 AM

Oil nearly $146.

Import Prices up 2.6%

From the WSJ: U.S. May Trade Gap Unexpectedly Shrinks

I'll be out today. Please send stories to Tanta. Best to all.

by Anonymous on 7/11/2008 08:44:00 AM

The whole essay is worth reading, if only as a refreshing change from the overheated rhetoric of the last few days. Note that Pearlstein will be having an online chat today at 11:00 Eastern to discuss Fannie and Freddie.

A financial crisis like this one calls for policymakers and regulators who can keep a cool head and remain flexible and practical rather than insisting on strict adherence to economic orthodoxies. Not every instance of regulatory forbearance need be viewed as a step down a slippery slope toward Japanlike stagnation. Nor is it particularly constructive to characterize every instance of government involvement in the private sector -- whether it be refinancing a troubled home mortgage, opening the Fed lending window to cash-strapped investment banks or orchestrating a private-sector rescue of a failing hedge fund -- as a massive government bailout.

As for Fannie and Freddie, nobody would be particularly happy if it became necessary for the Treasury to inject some fresh capital into the mortgage giants, in exchange, say, for newly issued preferred stock that could be sold back at a profit when the mortgage market recovers. But even the editorialists at the Wall Street Journal acknowledged yesterday that this wee bit of socialism might be the most effective and least costly way to keep the mortgage market functioning and prevent a meltdown in global credit markets.

A financial crisis is not a morality play. What matters most isn't the precedents that are set, the amount of taxpayer money that's implicated or whether people are made to suffer fully for their financial misjudgments. In the end, what matters most is that we get through it as quickly as possible with an economy and a financial system intact.

If this blog's comment threads are any kind of representation of a slice of reality--I am often agnostic on that question, but still--there are more than a few people who are more interested in getting a front-row ticket to a morality play than working through a financial crisis with the least (further) damage to the banking system. Lord knows that a lot of bad policy can be floated along under the guise of "pragmatism," but I for one would rather try debating with a pragmatist than a purist or a moralist.

by Calculated Risk on 7/11/2008 12:54:00 AM

Two articles ...

From the WSJ: Mortgage Giants Face Pressure Over Capital

Even as federal officials sought to reassure investors about the financial health of Fannie Mae and Freddie Mac, pressure mounted on the giant mortgage companies to raise fresh capital to offset the tumbling values of home loans they hold.
...
One possible scenario if Fannie and Freddie's financial position worsens: Under existing law, if either company were severely low on capital, it could fall under the control of their government regulator, which would then be responsible for the firm. That step -- known as placing it in a conservatorship -- would allow the mortgage company to continue operating, but the extent of its abilities in such a distressed situation remains unclear.

From the NY Times: U.S. Weighs Takeover of Two Mortgage Giants

Alarmed by the growing financial stress at the nation’s two largest mortgage finance companies, senior Bush administration officials are considering a plan to have the government take over one or both of the companies and place them in a conservatorship if their problems worsen, people briefed about the plan said on Thursday.
...
Under a conservatorship, the shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee — which could be staggering — would be paid by taxpayers.

The government officials said that the administration had also considered calling for legislation that would offer an explicit government guarantee on the $5 trillion of debt owned or guaranteed by the companies. But that is a far less attractive option, they said, because it would effectively double the size of the public debt.

Guaranteeing the debt of Fannie and Freddie would not double the public debt because they have somewhat offsetting assets. This would lower the borrowing costs for Fannie and Freddie and is probably the most effective solution (if one is needed). Its not clear to me how a conservatorship helps. Pretty scary discussion ...

by Calculated Risk on 7/10/2008 09:38:00 PM

From Michael Rosenwald at the WaPo: Slide by Marriott Signals Distress for Hotel Industry (hat tip John)

Let there be no mistaking it now: The hotel boom is kaput.

Marriott International, one of the world's largest hotel operators, released a stream of unsettling news for the industry yesterday: Its second quarter profit fell 24 percent, to $157 million; it lowered yearly profit estimates again; and most importantly, it said revenue per available room, a key measure of hotel strength, could decrease this year in the United States by 1 percent.

"There's no doubt we are in a very turbulent period," said Thomas Baltimore, the president of Bethesda's RLJ Development, one of the largest owners of Marriott hotels. "Clearly we are seeing softening demand -- there's no doubt about that."
...
Chief executive Bill Marriott said in a statement that "while our hotels outside the U.S. continue to benefit from solid global demand, business conditions have deteriorated in the U.S. . . . We expect weak economic growth and soft U.S. lodging demand to persist into 2009."

This fits with my post yesterday: Hotel Vacancies Rising

by Calculated Risk on 7/10/2008 06:23:00 PM

Check out the ABX-HE-AAA- 07-2 close today. More Cliff Diving!

Note: The ABX indices are based on credit default swaps (CDS) for various tranches of subprime mortgage-backed securities (MBS). For some background, here is a post at the Cleveland Fed back in March, 2007.
Most of the CMBX indices are setting new record lows again.

Note: Up is down for the CMBX indices. The CMBX is quoted as spreads, whereas ABX is quoted as bond prices. When the spreads increase - chart going up - the bond prices are going down.

Check out the CMBX-NA-BB-4 close today.

The CMBX is a CMBS (Commercial Mortgage-Backed Securities) credit default index just like the ABX - except up is down.

by Calculated Risk on 7/10/2008 04:23:00 PM

From the LA Times: Countrywide takeover will pay off, BofA's CEO says

[Lewis] said Bank of America paid so little for the lender that once the books on the deal were closed, the Countrywide operation would immediately show a profit -- with the potential for huge growth in income when the mortgage industry recovers.
...
Lewis initially said he wanted to study whether to keep the Countrywide brand, which was extremely well recognized even if it was tarnished.

"I went in thinking that there would be some way to use the Countrywide name," he said Wednesday. But as the mortgage meltdown worsened, with Countrywide at its center, that possibility disappeared.
...
As for the housing market, Lewis said Bank of America's latest forecast called for a further 15% decline in home prices nationwide, with the decline going into at least the first quarter of next year.

In the case of California, Florida and other markets that had the biggest booms, a further 20% decline is more realistic, he said.

Isn't Lewis saying "Don't buy yet!"?

by Calculated Risk on 7/10/2008 03:00:00 PM

Peter Viles at LA Times brings us another of his series on foreclosed properties in the LA area.

Peter features one on his blog L.A. Land: In Fontana, foreclosure discounts hit 50%. Check it out.

Here is another example - this one is in Lake Elsinore, an exurb of Los Angeles. This is one of the areas getting hit hard by the housing bust and high gas prices (because of the commute).

3313 Banyon Circle, Lake Elsinore 92530

Agent's description: "This 5 Bdrm, 4 BA gem is located in the Alberhill Ranch community. Boasts granite countertops, upgraded cabinets & stainless steel appliances. Travertine tile throughout downstairs, bathrooms & laundry room."

• Sales history from Redfin.com: Sold for $570,000 in August 2006

• Current listing price: $349,500

• Discount from sales price: 38.6%

by Calculated Risk on 7/10/2008 01:38:00 PM

From the WSJ: Senate Housing Rescue Bill Edges Closer to Passage

The Senate voted resoundingly Thursday to push closer to passage a massive mortgage rescue to help hundreds of thousands of stressed homeowners, even as the bill faced new obstacles in the House.

By a vote of 84-12, the Senate cleared away the last procedural hurdle hindering the measure, putting the election-year aid package on track for approval as early as Thursday afternoon.

by Calculated Risk on 7/10/2008 12:04:00 PM

From Nemo, CNBC's David Faber reacts to the decline in the Freddie Mac share price (37 seconds):

by Calculated Risk on 7/10/2008 10:38:00 AM

From MarketWatch: Lehman shares dive on fresh credit, mortgage fears

Click on graph for larger image in new window.

Cliff diving from Yahoo Charts.

This isn't a stock blog, but these are three critical companies right now in the credit and mortgage crisis.

by Calculated Risk on 7/10/2008 10:06:00 AM

From the WSJ: Bernanke, Paulson Push For New Regulatory Powers

Treasury Secretary Henry Paulson ... made a point to address the issue of Fannie Mae and Freddie Mac.
...
They play an important role in our housing markets today and need to continue to play an important role in the future," Mr. Paulson said. He noted that the firms' regulator, the Office of Federal Housing Enterprise Oversight, stressed earlier this week that "they are adequately capitalized."

Mr. Paulson also said the collapse of Bear Stearns and the ongoing market turmoil have "convinced me that we must move much more quickly to update our regulatory structure and improve both market oversight and market discipline."
...
"For market discipline to be effective, market participants must not expect that lending from the Fed, or any other government support, is readily available," Paulson said. Added Mr. Paulson, "For market discipline to effectively constrain risk, financial institutions must be allowed to fail."

Here is Bernanke's testimony (just a repeat of earlier comments)

Note: the collapse in Fannie (off 15%) and Freddie (off 23%) stock prices continues this morning.

by Calculated Risk on 7/10/2008 09:10:00 AM

From Bloomberg: U.S. Foreclosures Rose 53% in June, Bank Seizures Almost Triple

U.S. foreclosure filings rose 53 percent in June from a year earlier and bank repossessions almost tripled ... More than 252,000 properties, or one in every 501 U.S. households, were in some stage of foreclosure, [said] RealtyTrac Inc. ... Filings fell 3 percent from May.
...
``The foreclosure problem is getting worse and will stay with us well into the next decade,'' Mark Zandi, chief economist for Moody's Economy.com in ... said in an interview.

by Calculated Risk on 7/10/2008 12:23:00 AM

From Bloomberg: Fannie Mae, Freddie Losses Make Them `Insolvent,' Poole Says (hat tip Dwight)

Chances are increasing that the U.S. may need to bail out Fannie Mae and the smaller Freddie Mac, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules, he said. The fair value of Fannie Mae's assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, Poole said.

``Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,'' Poole, 71, who left the Fed in March, said in an interview.

And Fannie and Freddie are on page 1 of the WSJ: U.S. Mulls Future of Fannie, Freddie

The Bush administration has held talks about what to do in the event mortgage giants Fannie Mae and Freddie Mac falter ... The government doesn't expect the entities to fail and no rescue plan is imminent ... Treasury officials are nonetheless talking about what the government could -- or should -- do if Fannie and Freddie become so pressed that they are unable to borrow money and continue operating.

It seems like everyone is piling on ...

by Calculated Risk on 7/09/2008 09:20:00 PM

A conversation with Jamie Dimon (Part I): (hat tip Dave)

Note: this is long but worth the time.



A continued conversation with Jamie Dimon (Part II) NOTE: Dimon starts at 43+ minutes into the 2nd video:

by Calculated Risk on 7/09/2008 06:42:00 PM

Yesterday we focused on strip malls, and the probable impact on malls of the imminent Steve & Barry's BK (now official). For more on the impacts on malls, see this story from MarketWatch: Steve & Barry bankruptcy further pressures malls

Lets look at lodging today. A Goldman Sachs research note out this afternoon mentioned that the average US hotel occupancy rate over the last four weeks was 65.9%, down three percentage points from the same period one year ago. Goldman further noted that YoY comparisons of vacancy rates have been deteriorating all year.

This is more bad news for commercial real estate construction. Based on the recent building boom, lodging was even more of a bubble than multimerchandise shopping!

Click on graph for larger image in new window.

This graph shows the investment in office buildings, multimerchandise shopping, and lodging over the last ten years (as a percent of GDP). Note: data from the BEA. The BEA started breaking out office and multimerchandise shopping in 1997.

Lodging and multimerchandise shopping saw the largest percentage booms, while office space was less than the office boom in the late '90s. These are the three categories of commercial construction that are probably the most overbuilt - and will probably see the biggest declines in investment.

This data fits with the forecast from American Institute of Architects chief economist Kermit Baker:

"On the commercial side, best I can tell the problems are in all of it - offices, retail, hotels. I think we will see a prolonged decline."
Kermit Baker, CNNMoney May 17, 2008

"[W]e’ve seen a dramatic contraction in design activity in recent months. ... This weakness in design activity can be expected to produce a contraction in [commercial and multifamily] construction sectors later this year and into 2009.”Kermit Baker, June 18, 2008

by Calculated Risk on 7/09/2008 04:52:00 PM

From Fortune: The Fannie and Freddie doomsday scenario

Here's a scary, and relevant, question to ponder as the housing market continues to slide: What would it take for the government to step in and help Fannie Mae and Freddie Mac, and how would a rescue affect you, the taxpayer?

Although S&P argues it is unlikely that either Fannie or Freddie will fail, one thing is pretty certain - there is no way politically that Fannie and Freddie would be allowed to fail.

So what might it look like if the government had to lend a hand? Outright nationalization is an unlikely option given that neither the current administration nor the presidential candidates could afford to support such a move in an election year.

More likely, the Treasury Department or the Federal Reserve would come in and provide a liquidity backstop, in the form of a loan or guarantee to bondholders that they will be paid.

Some investors apparently don't think the government will guarantee Fannie and Freddie debt since the (link fixed) spreads to treasuries on Fannie two year notes are at record levels. An explicit loan guarantee would reduce the borrowing costs for Fannie and Freddie, and reduce mortgage rates. Of course this would probably mean the end of the dividend (both companies pay hefty dividends) until the loan guarantees are lifted, possibly a change in management, and would still require raising more dilutive capital. No wonder Fannie and Freddie equity investors are scared.

Mish argues that the Nationalization of Fannie and Freddie is unavoidable.

by Calculated Risk on 7/09/2008 03:56:00 PM

I think she is still too optimistic on pricing, but her comments are interesting. Here is the story: Why This Housing Bust Is Worst Ever: The American Dream Ends

by Calculated Risk on 7/09/2008 02:59:00 PM

From the LA Times: For opportunists, IndyMac CD yields are a bonanza

[T]he troubled Pasadena-based thrift isn’t just edging competitors on yield -- it’s trouncing them.
...
For a six-month CD with a $5,000 minimum deposit, IndyMac’s website on Tuesday was offering an annualized yield of 4.10% as an online "special."

The next-highest-paying bank in the nation for six-month CDs was Corus Bank of Chicago, with a 3.7% annualized yield, according to bankrate.com.

Most 6 month CDs are paying in the 3.0 to 3.2% range (annualized). According to Indymac, the FDIC has banned them from accepting brokered deposits, but they can still accept individual deposits:

A consequence of falling below well-capitalized is that we are no longer permitted to accept new brokered deposits or renew or roll over existing ones, unless we get a waiver from the FDIC.

This is a classic hazard of insurance - Indymac needs deposits to stay in business (there is somewhat of a run on the bank right now), and to attract deposits they have to pay a higher than industry interest rate. The FDIC is well aware of this problem:

Concerns about Moral Hazard. In the insurance context, the term "moral hazard" refers to the tendency of insured parties to take on more risk than they would if they had not been indemnified against losses. The argument is that deposit insurance reassures depositors that their money is safe and removes the incentive for depositors to critically evaluate the condition of their bank. With deposit insurance, unsound banks typically have little difficulty obtaining funds, and riskier banks can obtain funds at costs that are not commensurate with their levels of risk. Unless deposit insurance is properly priced to reflect risk, banks gain if they take on more risk because they need not pay creditors a fair risk–adjusted return. A truly risk–based assessment discourages such risky behavior. The moral hazard problem is particularly acute for insured depository institutions that are at or near insolvency but are allowed to operate freely because any losses are passed on to the insurer, whereas profits accrue to the owners. Thus problem institutions have an incentive to take excessive risks with insured deposits in the hope of returning to profitability.
emphasis added

by Calculated Risk on 7/09/2008 11:32:00 AM

Video: Roubini on CNBC

From Roubini: Interview on CNBC and Rising Estimates of Credit Losses from the Financial Crisis Now Up to $1.6 Trillion

[B]race yourself for a severe recession in the US and other advanced economies, a serious global growth slowdown and a systemic financial crisis. The worst is ahead of us rather than behind us ...

[T]he temporary drug of a $160 billion fiscal package including $100 billion of tax rebates will boost Q2 growth into positive territory (1% to 1.5% growth in Q2). But that boost is deceptive as it is entirely driven by such temporary tax rebates. The effects of those rebates on consumption are temporary while a half a dozen more persistent shock will lead to a consumption reduction – by late summer –once the effect of the rebates fizzle out. Persistent headwinds hitting consumers on a more protracted basis are: falling home prices, falling home equity withdrawal, falling stock prices, rising oil and food prices, rising debt servicing ratios, falling consumer confidence, falling employment and income generation.

BTW, Goldman Sachs had a research note out this week on "The Sorry State of US Consumer Fundamentals".

[W]e [focus] on five key indicators of consumers’ financial well-being: job creation, changes in real wages, changes in home prices, changes in equity prices, and access to credit. Together, these indicators cover major movements in the income statement and balance sheet of the US household sector.

Goldman analysts then present evidence that all five factors are negative for consumer spending.

The bottom line: none does very well; the [household] balance sheet looks especially fragile.