by Calculated Risk on 9/19/2008 12:58:00 PM

Secretary Paulson said: "We're talking hundreds of billions."

The NY Times DealBook has other estimates: Putting a Price Tag on a Government Bailout

“It’s probably $500 [billion] to a trillion dollars, and that’s going to visit the taxpayers sooner or later,” [Sen. Richard Shelby] said. “It’s either going to be a debt charged to all of us or to all our children.”
...
Bloomberg News ... reported that the government is considering establishing an $800 billion fund to purchase so-called failed assets and a separate $400 billion pool at the Federal Deposit Insurance Corporation to insure investors in money-market funds.

However buying the assets isn't enough. These asset sales will lead to substantial write-downs, and that will reduce the regulatory capital at the banks.

So how do the banks recapitalize?

The hope is that by making the assets transparent, and selling off the toxic waste, that will rebuild confidence with investors. Maybe. But the U.S. Government might also have to help recapitalize the banks to keep them lending (like the Reconstruction Finance Corporation (RFC) did during the Depression). Either way, it appears the current shareholders face massive dilution.

Also - as an aside - when the banks make their assets transparent (should be a requirement for participation), we will discover if any executives misrepresented their assets and filed false reports with the SEC. That could be prosecuted under Sarbanes-Oxley, and perhaps a few executives spending time in jail might help with the moral hazard issues.

by Calculated Risk on 9/19/2008 10:50:00 AM

Paulson statement on TARP (Troubled Asset Relief Program): (note: the name isn't official, but as I mentioned in the previous thread, the TARP is intended to cover all of Wall Street's sins!)

Last night, Federal Reserve Chairman Ben Bernanke, SEC Chairman Chris Cox and I had a lengthy and productive working session with Congressional leaders. We began a substantive discussion on the need for a comprehensive approach to relieving the stresses on our financial institutions and markets.

We have acted on a case-by-case basis in recent weeks, addressing problems at Fannie Mae and Freddie Mac, working with market participants to prepare for the failure of Lehman Brothers, and lending to AIG so it can sell some of its assets in an orderly manner. And this morning we've taken a number of powerful tactical steps to increase confidence in the system, including the establishment of a temporary guaranty program for the U.S. money market mutual fund industry.

Despite these steps, more is needed. We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system's stresses.

The underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded. These illiquid assets are choking off the flow of credit that is so vitally important to our economy. When the financial system works as it should, money and capital flow to and from households and businesses to pay for home loans, school loans and investments that create jobs. As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to have significant effects on our financial system and our economy.

As we all know, lax lending practices earlier this decade led to irresponsible lending and irresponsible borrowing. This simply put too many families into mortgages they could not afford. We are seeing the impact on homeowners and neighborhoods, with 5 million homeowners now delinquent or in foreclosure. What began as a sub-prime lending problem has spread to other, less- risky mortgages, and contributed to excess home inventories that have pushed down home prices for responsible homeowners.

A similar scenario is playing out among the lenders who made those mortgages, the securitizers who bought, repackaged and resold them, and the investors who bought them. These troubled loans are now parked, or frozen, on the balance sheets of banks and other financial institutions, preventing them from financing productive loans. The inability to determine their worth has fostered uncertainty about mortgage assets, and even about the financial condition of the institutions that own them. The normal buying and selling of nearly all types of mortgage assets has become challenged.

These illiquid assets are clogging up our financial system, and undermining the strength of our otherwise sound financial institutions. As a result, Americans' personal savings are threatened, and the ability of consumers and businesses to borrow and finance spending, investment, and job creation has been disrupted.

To restore confidence in our markets and our financial institutions, so they can fuel continued growth and prosperity, we must address the underlying problem.

The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy. This troubled asset relief program must be properly designed and sufficiently large to have maximum impact, while including features that protect the taxpayer to the maximum extent possible. The ultimate taxpayer protection will be the stability this troubled asset relief program provides to our financial system, even as it will involve a significant investment of taxpayer dollars. I am convinced that this bold approach will cost American families far less than the alternative - a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion.

I believe many Members of Congress share my conviction. I will spend the weekend working with members of Congress of both parties to examine approaches to alleviate the pressure of these bad loans on our system, so credit can flow once again to American consumers and companies. Our economic health requires that we work together for prompt, bipartisan action.

As we work with the Congress to pass this legislation over the next week, other immediate actions will provide relief.

First, to provide critical additional funding to our mortgage markets, the GSEs Fannie Mae and Freddie Mac will increase their purchases of mortgage-backed securities (MBS). These two enterprises must carry out their mission to support the mortgage market.

Second, to increase the availability of capital for new home loans, Treasury will expand the MBS purchase program we announced earlier this month. This will complement the capital provided by the GSEs and will help facilitate mortgage availability and affordability.

These two steps will provide some initial support to mortgage assets, but they are not enough. Many of the illiquid assets clogging our system today do not meet the regulatory requirements to be eligible for purchase by the GSEs or by the Treasury program.

I look forward to working with Congress to pass necessary legislation to remove these troubled assets from our financial system. When we get through this difficult period, which we will, our next task must be to improve the financial regulatory structure so that these past excesses do not recur. This crisis demonstrates in vivid terms that our financial regulatory structure is sub-optimal, duplicative and outdated. I have put forward my ideas for a modernized financial oversight structure that matches our modern economy, and more closely links the regulatory structure to the reasons why we regulate. That is a critical debate for another day.

Right now, our focus is restoring the strength of our financial system so it can again finance economic growth. The financial security of all Americans - their retirement savings, their home values, their ability to borrow for college, and the opportunities for more and higher-paying jobs - depends on our ability to restore our financial institutions to a sound footing.''

In the Q&A, Paulson said "We're talking hundreds of billions."

by Calculated Risk on 9/19/2008 10:14:00 AM

Secretary Paulson just spoke and said the plan would be "hundreds of billions".

Update: A few excerpts:

"We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system's stresses.

The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy.

This troubled asset relief program must be properly designed and sufficiently large to have maximum impact, while including features that protect the taxpayer to the maximum extent possible."

I guess we know the name: Troubled Asset Relief Program (TARP). The tarp hides all sins.

by Calculated Risk on 9/19/2008 08:58:00 AM

From Bloomberg: U.S. Treasury to Insure Money-Market Fund Holdings

The U.S. Treasury plans to use as much as $50 billion from the country's Exchange Stabilization Fund to temporarily protect investors from losses on money- market mutual funds.

The Treasury will insure for a year holdings of publicly offered money-market funds that pay a fee to participate in the program. Retail and institutional funds are eligible, the department said today in a statement.

Update: The Fed is also extending non-recourse loans to certain institutions to buy commercial paper:

The Federal Reserve Board on Friday announced two enhancements to its programs to provide liquidity to markets. One initiative will extend non-recourse loans at the primary credit rate to U.S. depository institutions and bank holding companies to finance their purchases of high-quality asset-backed commercial paper (ABCP) from money market mutual funds. This should assist money funds that hold such paper in meeting demands for redemptions by investors and foster liquidity in the ABCP markets and broader money markets.

To further support market functioning, the Federal Reserve also plans to purchase from primary dealers federal agency discount notes, which are short-term debt obligations issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.

by Calculated Risk on 9/19/2008 01:58:00 AM

Here is the press release: SEC Halts Short Selling of Financial Stocks to Protect Investors and Markets

Here is the order from the SEC:

IT IS ORDERED that, pursuant to our Section 12(k)(2) powers, all persons are prohibited from short selling3 any publicly traded securities of any Included Financial Firm.
...
This Order shall be effective immediately and shall terminate at 11:59 p.m. EDT on October 2, 2008, unless further extended by the Commission.

The list is long - 799 financial companies - here is the first page:

AAME ATLANTIC AMERICAN CORP
AANB ABIGAIL ADAMS NATL BANCORP INC
ABBC ABINGTON BANCORP INC PA
ABCB AMERIS BANCORP
ABCW ANCHOR BANCORP WISCONSIN INC
ABK AMBAC FINANCIAL GROUP INC
ABNJ AMERICAN BANCORP OF NJ INC
ABVA ALLIANCE BANKSHARES CORP
ACAP AMERICAN PHYSICIANS CAPITAL INC
ACBA AMERICAN COMMUNITY BNCSHRS INC
ACE ACE LTD
ACFC ATLANTIC COAST FED CORP
ACGL ARCH CAPITAL GROUP LTD NEW
ADVNA ADVANTA CORP
ADVNB ADVANTA CORP
AEG AEGON N V
AEL AMERICAN EQUITY INVT LIFE HLDG C
AET AETNA INC NEW
AF ASTORIA FINANCIAL CORP
AFFM AFFIRMATIVE INSURANCE HLDGS INC
AFG AMERICAN FINANCIAL GROUP INC NEW
AFL A F L A C INC
AGII ARGO GROUP INTL HLDGS LTD
AGO ASSURED GUARANTY LTD
AGP AMERIGROUP CORP
AGX ARGAN INC
AHD ATLAS PIPELINE HOLDINGS L P
AHL ASPEN INSURANCE HOLDINGS LTD
AIB ALLIED IRISH BANKS PLC
AIG AMERICAN INTERNATIONAL GROUP

by Calculated Risk on 9/19/2008 01:14:00 AM

“When you are ready to participate in the loss, feel free to call me."
Citi loss mitigation specialist to homeowner requesting short sale.

From David Streitfeld at the NY Times: The Pain of Selling a Home for Less Than the Loan

Reluctantly, banks are agreeing to let some short sales go through. But instead of writing off the unpaid portion of the debt, they want homeowners to sign a note promising to pay some or all of the balance due.

This was the situation confronting Mike and Linda Kelly, who needed to sell their house in the foreclosure-plagued Central Valley of California when Mr. Kelly got a new job 75 miles away.

The Kellys owe $300,000 on their house ... But the best offer they could get gave the bank $220,000.

CitiMortgage said it would approve a sale at that price, but at the last minute told the Kellys they needed to pay $166 a month for the next 20 years, a total of $40,000.

“When you are ready to participate in the loss, feel free to call me,” a Citi loss mitigation specialist ... wrote to them in an e-mail message.

The payments might total $40,000 over 20 years, but the present value of the payments is probably close to $20,000. Is avoiding foreclosure worth $20,000?

by Calculated Risk on 9/18/2008 09:24:00 PM

It appears Paulson and Bernanke are promising to work through the weekend on a comprehensive crisis plan. And the NY Times reports that lawmakers hope to complete the legislation by the end of next week.

But what will the plan look like?

First, the goal of the plan is to help recapitalize the banks and keep them lending. Once again the credit markets are frozen, and all indicators of stress are at or near record levels (like the TED spread). It appears even credit worthy borrowers are having difficulties obtaining loans.

A number of observers have been comparing the new entity to the Resolution Trust Corporation (RTC). As an example, from the CNBC story that broke the news:

Such a facility would be similar to the Resolution Trust Corporation, which was set up in 1989 to take on all the failed thrift assets during the savings and loan crisis, sources told CNBC.

And Volcker, et. al, titled their opinion piece yesterday in the WSJ: Resurrect the Resolution Trust Corp.

However this new entity would be very different from the RTC in a number of ways. The RTC was created to dispose of assets accumulated from failed Savings & Loans.

The new entity, according to the WSJ, would purchase illiquid assets "at a steep discount from solvent financial institutions and then eventually sell them back into the market".

With the RTC, the government already had direct responsibility for the assets since they acquired them from insured S&Ls that had failed. The role of the RTC was to liquidate certain of these assets.

In the current situation, the government has no financial responsibility for the assets, except for a few exceptions like the assets of Fannie and Freddie, and the NY Fed's assets acquired in the JPMorgan / Bear Stearns deal. The new entity will both buy assets "at a steep discount" and eventually sell the assets. So unlike the RTC, this new entity puts the taxpayers at risk.

Details of how this will work aren't available yet. But one of the key problems - in addition to the risk to the taxpayer - is that this program will actually reduce regulatory capital as losses are realized. The opposite of the goal!

Another previous entity mentioned today was the Reconstruction Finance Corporation (RFC) that was created in 1932 by Hoover. A key purpose of the RFC was to purchase preferred stock in banks to increase their capital positions and expand their landing capacity. This might also be part of Paulson and Bernanke's "comprehensive plan".

A new RFC might help certain FDIC insured banks, especially banks with significant losses associated with Freddie and Fannie preferred shares.

But since the first part of the plan - buying impaired assets at a steep discount - appears to reduce regulatory capital, a RFC preferred investment might be included to help boost regulatory capital. We will know more soon.

by Calculated Risk on 9/18/2008 08:05:00 PM

Form the WSJ: SEC Plans to Temporarily Ban Short-Selling

The Securities and Exchange Commission took its most aggressive assault against bearish stock bets by stating its intention to issue a temporary ban on short-selling.

SEC Chairman Christopher Cox briefed Congress late Thursday ... It's unclear if the SEC's intention has been approved by the commissioners ... which stocks are covered or for how long it will be in effect.

This follows the FSA in the UK banning short selling of financial stocks: FSA halts short-selling of financial stocks

Traders will be banned from betting against financial companies on the London Stock Exchange by selling shares short, the country’s financial regulator said today.
...
The FSA said the new rule would take effect at midnight and remain in force until January 16, 2009. It added the ban would be reviewed after 30 days and could be extended to other sectors “if (the FSA) judges it to be necessary.”

This focus on short sellers is misguided and counterproductive.

by Calculated Risk on 9/18/2008 06:57:00 PM

The Financial Times has updated their story: Five banks exploring WaMu records

Five banks have come forward to evaluate Washington Mutual’s financial records as part of an auction process run by WaMu’s adviser ... The five banks ... include JPMorgan Chase, Wells Fargo, Citigroup, HSBC and Banco Santander

by Calculated Risk on 9/18/2008 06:19:00 PM

Update: added potential to title.

From Bloomberg: WaMu Said to Attract Multiple Potential Bidders.

Washington Mutual Inc., the savings and loan that put itself up for sale this week after the stock tumbled, has attracted several potential bidders for all or part of the bank, a person familiar with the matter said.

The Finanical Times reported earlier there were no bidders.

by Calculated Risk on 9/18/2008 05:12:00 PM

Here is the story that apparently sparked the stock market rally today.

From CNBC: US Weighing Plan to Set Up Facility to Hold Bad Debts

Treasury Secretary Henry Paulson is working on a plan that would set up a government facility to take on bad debts from financial institutions, preventing a worsening of the global credit crisis, Wall Street sources have told CNBC.

The facility would be similar to the Resolution Trust Corporation, which was set up in 1989 to take on all the failed thrift assets during the savings and loan crisis, these sources said.

Paulson is consulting with Congress on the proposal and will brief House Speaker Nancy Pelosi this afternoon, CNBC has learned.

A number of people have been pushing this plan, including Paul Volcker and others in a WSJ opinion piece yesterday: Resurrect the Resolution Trust Corp.

We should move decisively to create a new, temporary resolution mechanism. There are precedents -- such as the Resolution Trust Corporation of the late 1980s and early 1990s, as well as the Home Owners Loan Corporation of the 1930s. This new governmental body would be able to buy up the troubled paper at fair market values, where possible keeping people in their homes and businesses operating. Like the RTC, this mechanism should have a limited life and be run by nonpartisan professional management.

This seemed like something that would be considered after the electon in November, but the Wall Street crisis - and WaMu attracting no bids - might push the Government to act sooner.

UPDATE: Here is a Bloomberg story: Paulson, Bernanke Weighing New Plan, Schumer Says. Schumer is calling for someting different than RTC II.

Note: the joke in Washington is that the most dangerous place to stand is between Schumer and a microphone.

by Calculated Risk on 9/18/2008 05:01:00 PM

From the Financial Times: No bidders come for Washington Mutual

Hopes of finding a buyer for Washington Mutual dimmed on Thursday as an auction for the beleaguered US bank had yet to attract any bids. ... Goldman Sachs is conducting the auction for Seattle-based WaMu ... The lack of interest means that Goldman may soon have to evaluate other options for the bank.

What if you held an auction and no one came? Maybe they can put WaMu on eBay.

by Calculated Risk on 9/18/2008 04:42:00 PM

From ABC: Top Broker: NYC Real Estate Already in Steep Decline

Manhattan's finest co-op apartments may have already lost a fourth of their value as a result of the financial crisis, and the worst is yet to come, says leading New York estate broker Kathy Sloane, of Brown Harris Stevens.

Remember when New York city was considered immune?

Kudos to NY agent Noah Rosenblatt of UrbanDigs. When I spoke with Noah at the Inman conference in late July, he told me there were clear signs of a slowdown in New York city, and he thought the RE market would get much worse.

by Calculated Risk on 9/18/2008 03:59:00 PM

From Bloomberg: Moody's Raises Loss Forecast on Subprime, Jumbo Loans (no link yet). Moody's increased their loss forecasts for certain securitized subprime and Jumbo-prime mortgages, and cautioned about related downgrades of securities and financial firms.

Losses will reach an average of 22 percent on subprime loans underlying bonds created in 2006 ... That's up from an estimate of 14 percent to 18 percent made in January.

Losses on jumbo loans in 2006 bonds will rise to 1.6 percent to 2.1 percent, versus initial estimates of 0.35 percent and 0.60 percent.

Notice the sharp increase in losses for prime jumbo loans in 2006 bonds.

by Calculated Risk on 9/18/2008 03:03:00 PM

The Fed released the Q1 2008 Flow of Funds report today: Flow of Funds.

Household percent equity was at an all time low of 45.2%.

Click on graph for larger image in new window.

This graph shows homeowner percent equity since 1952.

When prices were increasing dramatically in recent years, the percent homeowner equity was declining because homeowners were extracting equity from their homes. Now, with prices falling, the percent homeowner equity is declining even faster.

Note: approximately 31% of households do not have a mortgage. So the 50+ million households with mortgages have far less equity than 45.2%.

The second graph shows household real estate assets and mortgage debt as a percent of GDP. Household assets as a percent of GDP is now declining. Mortgage debt as a percent of GDP has declined for the last two quarters.

More later ...

by Calculated Risk on 9/18/2008 02:40:00 PM

From DataQuick: Bay Area home sales near bottom again, median price plunges

The pace of Bay Area home sales reversed its July uptick and dropped again last month ... A total of 7,232 new and resale houses and condos were sold in the nine-county Bay Area in August. That was down 4.7 percent from 7,586 in July, and down 0.9 percent from 7,299 in August 2007, according to San Diego-based MDA DataQuick.

Last month's sales total was the second-lowest for an August, behind 6,688 sales in August 1992, in MDA DataQuick's statistics, which go back to 1988.

The median prices declined sharply, but we have to be careful with median prices because of the mix of homes can change (many low priced homes are being sold through foreclosure):

The median price paid for all new and resale houses and condos sold in the Bay Area last month was $447,000, down 4.9 percent from $470,000 in July and down a record 31.8 percent from $655,000 in August 2007, according to MDA DataQuick.

Last month's median stood at the lowest point since January 2004, when it was $440,000. The median peaked at $665,000 in June, July and August of 2007.

Foreclosure resales are a significant portion of sales:

Across the Bay Area, foreclosure resales made up 36.1 percent of all resales last month, up from 33.3 percent in July and 4.4 percent a year ago. The figure represents the percentage of homes resold in August that had been foreclosed on at some point in the prior 12 months.

At the county level, foreclosure resales ranged from 8.6 percent of resales in San Francisco to 61.3 percent in Solano County. In the Bay Area's other seven counties, August foreclosure resales were as follows: Contra Costa, 54.4 percent; Marin, 13.5 percent; Napa, 39 percent; Santa Clara, 24.7 percent; San Mateo, 16.6 percent; Sonoma, 41.6 percent.

by Calculated Risk on 9/18/2008 01:24:00 PM

From Bloomberg: BNY Mellon Institutional Cash Fund Hit by Lehman Debt Losses (hat tip Kevin Jesse)

An institutional fund run by Bank of New York Mellon Corp. designed to work like a money-market account fell to less than $1 a share after losses on debt issued by bankrupt Lehman Brothers Holdings Inc.

The $22 billion BNY Institutional Cash Reserves fell to $0.991 a share on Sept. 16, according to an e-mail sent by a bank representative to one client. BNY Mellon has ``isolated the Lehman assets in the fund into a separate structure,'' Ivan Royle, a spokesman for the New York-based company, said today ...

From Reuters: Putnam shuts $15 billion money market fund

Asset manager Putnam Investments said on Thursday that it had closed its $15 billion Prime Money Market Fund due to redemption pressures.

by Calculated Risk on 9/18/2008 12:08:00 PM

From the NY Times: (hat tip Barry Ritholtz)

Editors’ Note
An earlier version of this article cited two sources who were said to have been briefed on a conversation in which John J. Mack, chief executive of Morgan Stanley, had told Vikrim S. Pandit, Citigroup’s chief executive, that “we need a merger partner or we’re not going to make it.” On Thursday, Morgan Stanley vigorously denied that Mr. Mack had made the comment, as did Citigroup, which had declined to comment on Wednesday.

The Times’s two sources have since clarified their comments, saying that because they were not present during the discussions, they could not confirm that Mr. Mack had in fact made the statement. The Times should have asked Morgan Stanley for comment and should not have used the quotation without doing more to verify the sources’ version of events.

by Calculated Risk on 9/18/2008 11:55:00 AM

Here is the A2/P2 spread from the Fed's commercial paper report. The A2/P2 Spread hit 280bp yesterday. This is literally off the chart compared to any previous period.

Click on graph for larger image in new window.

This is the spread between high and low quality 30 day nonfinancial commercial paper.

What is commercial paper (CP)? This is short term paper - less than 9 months, but usually much shorter duration like 30 days - that is issued by companies to finance short term needs. Many companies issue CP, and for most of these companies the risk of default is close to zero (think companies like GE (update: well maybe not GE anymore) or Coke). This is the high quality CP. Here is a good description.

Lower rated companies also issue CP and this is the A2/P2 rating. This doesn't include the Asset Backed CP - that is another category. (see commercial paper table).

Usually the spread between the A2/P2 and AA paper shows the concern of default for the A2/P2 paper. But right now this also shows the lack of liquidity in the system.

by Calculated Risk on 9/18/2008 10:16:00 AM

This is quite a decline in mortgage rates over the last few weeks.

From MarketWatch: Freddie Mac: 30-year fixed-rate mortgage average drops

Freddie Mac said Thursday the 30-year fixed-rate mortgage average ... was 5.78% with an average 0.6 point for the week ending Sept. 18, compared with 5.93% last week. Last year at this time, the average rate was 6.34%.