by Calculated Risk on 9/26/2008 12:47:00 PM

Update from MarketWatch: Counterparty credit risk jumps on Wachovia concern

The CDR Counterparty Risk Index, which tracks credit-default swaps on leading banks and brokerage firms, surged more than 100 basis points to 430.2, close to a record. A basis point is one one-hundredth of a percentage point.
...
Credit-default swap spreads on Wachovia widened by 827.2 basis points and now trade between 28% and 33% "upfront," according to CDR.
...
"Wachovia is now trading at distressed levels, raising the specter of another major U.S. bank failure in the near future," CDR said in a statement.

National City stock is now off 50%.

Wachovia is off 30%.

Reader BR notes that investors are reacting to JPM's marks on WaMu's loan portfolio. These published marks will force the regionals to write down the value of their paper too.

As I mentioned earler, investors appear to be asking "Who is next?"

I don't think either of these banks will be seized today, but based on the pace of failures, I'd guess a bank failure is likely.

by Calculated Risk on 9/26/2008 10:44:00 AM

First, here is the investor presentation material from the JPMorgan conference call last night.

Click on chart for larger image in new window.

Here are the House Price Appreciation (HPA) numbers JPM is working with.

JPMorgan presented three scenarios: a base case (with national prices falling 25% peak to trough), a deeper recession (28% decline), and a severe recession (37% decline).

Currently the Case-Shiller futures are predicting a 33% decline peak-to-trough, Goldman is forecasting 27%, and Lehman was forecasting 32%.

Also note the unemployment numbers for each scenario (7%, 7.5%, and 8% for a severe recession), and price forecasts for California and Florida.

Earlier this month, I presented three ways to look at prices: real prices, price-to-rent, and price-to-income. I've taken the JPMorgan national prices forecasts and added them to the price-to-household income chart.

This graph shows the price-to-household income ratio and is based off the Case-Shiller index, and the Census Bureau's median income Historical Income Tables - Households.

Using national median incomes and house prices provides a gross overview of price-to-income (it would be better to do this analysis on a local area).

For this graph, I assumed that prices would fall over four more quarters for JPMorgan's base house price projection, over five more quarters for the "Deeper recession" projections, and over eight more quarters for the "Severe recession" projections.

Also, after reaching the price trough, I held house prices steady while incomes continue to rise mostly with inflation.

I'd expect this ratio to decline below 1.0 (like in the mid-90s), so I think the JPMorgan base case is too optimistic. My guess is that national house prices will decline somewhere between JPMorgan's "deeper recession" (28% peak to trough) and their "severe recession" (37% peak to trough) projections.

by Calculated Risk on 9/26/2008 09:54:00 AM

Wachovia's (WB) stock price is off 22%.

National City (NCC) is off 19%.

With WaMu seized, investors are now asking who is next ...

by Calculated Risk on 9/26/2008 09:31:00 AM

UPDATE: Bush "It's hard work"

Basically Bush said:

There is no disagreement that something must be done. We are going to get a package passed. Republicans and Democrats will come together and pass a substantial rescue plan.

That was it. Sorry for posting the link ...

President Bush will speak on the financial crisis and status of the Paulson Plan at 9:35AM ET

Here is the live feed from CNBC.

by Calculated Risk on 9/26/2008 08:31:00 AM

From the Washington Post: Away from Wall Street, Economists Question Basis of Paulson's Plan. A couple of quotes:

"There is a kind of suggestion in the Paulson proposal that if only we provide enough money to financial markets, this problem will disappear," said Joseph Stiglitz, a Nobel Prize-winning economist. "But that does nothing to address the fundamental problem of bleeding foreclosures and the holes in the balance sheets of banks."
...
"The root of the issue is recapitalizing banks," said Glenn Hubbard, dean of Columbia Business School and a former chairman of President Bush's Council of Economic Advisers. "That could be done more efficiently through the government injection of preferred equity. Then the market could figure out the prices of the assets."

Initially many of us expected a Depression era Reconstruction Finance Corporation (RFC) type preferred stock investment to recapitalize the banks. Instead, the Paulson Plan intended to recapitalize the banks by paying a premium for troubled assets. The compromise bill discussed yesterday was a step in the right direction because of the equity sharing provision (although there was no details).

Apparently there will be meetings again today starting at 11:30AM ET. (scroll down to see posts on JPM / WaMu)

by Calculated Risk on 9/26/2008 01:27:00 AM

Senator Shelby on bailout:



And a little less serious: Debt to America!

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

Paulson Plan Update: No Deal Yet.

“If money isn’t loosened up, this sucker could go down.”
President Bush, Sept 25, 2008

NY Times: Bailout Plan Stalls After Day of Talks; Paulson Heads Back to Capitol Hill

The day began with an agreement that Washington hoped would end the financial crisis that has gripped the nation. It dissolved into a verbal brawl in the Cabinet Room of the White House, warnings from an angry president and pleas from a Treasury secretary who knelt before the House speaker and appealed for her support.
...
It was an implosion that spilled out from behind closed doors into public view in a way rarely seen in Washington. Left uncertain was the fate of the bailout, which the White House says is urgently needed to fix broken financial and credit markets ...

[The] House Republican leader, John A. Boehner of Ohio, surprised many in the room by declaring that his caucus could not support the plan to allow the government to buy distressed mortgage assets from ailing financial companies.

Mr. Boehner pressed an alternative that involved a smaller role for the government, and Mr. McCain, whose support of the deal is critical if fellow Republicans are to sign on, declined to take a stand.

The talks broke up in angry recriminations, according to accounts provided by a participant and others who were briefed on the session, and were followed by dueling press conferences and interviews rife with partisan finger-pointing.

From the WSJ: Leaders Wrangle Over Bailout

It was unclear if an agreement would still come together Thursday night: The emergence of a competing plan was threatening to derail a carefully crafted compromise previously taking shape.

Earlier Thursday, congressional leaders had hammered together the outline of a compromise that involved allotting the bailout money in installments. However, after a meeting at the White House -- attended by President George W. Bush, congressional leaders and the two presidential candidates -- the gathering broke without announcing a deal, despite widespread expectations that one was imminent.

One cause of the delay: opposition from House Republicans who have tried to fashion an alternative "free market" plan that, instead of relying heavily on taxpayer money, could let banks buy insurance for the troubled assets weighing down their books.

On JPM Wamu (scroll down for earlier posts), here is the investor presentation. Basically JPMorgan - in an asset only acquisition - acquired the toxic WaMu loan portfolio and deposit base (all branches). JPMorgan paid the FDIC $1.9 billion, and they expect to take write-downs of $30 billion to $54 billion on the WaMu toxic loans. That is the primary cost of the acquisition - the write-downs.

The holding company is responsible for all lawsuits (good luck). The shareholders are wiped out, and so are most of the bondholders. See the previous post for a couple of interesting charts. I will post on their house price assumptions tomorrow.

by Calculated Risk on 9/25/2008 09:09:00 PM

JPMorgan announces investor conference call:

JPMorgan Chase & Co. (NYSE: JPM) will host a conference call at 9:15 p.m. (Eastern Time) tonight, September 25, 2008. You may access the conference call by dialing 1-877-238-4671 (U.S. and Canada) / 1-719-785-5594 (International) - access code: 814030 or via live audio webcast at www.jpmorganchase.com under Investor Relations/Investor Presentations. Materials and further communication will be available on this website at the time of the call.

Presentation material should be here.

Click on graph for larger image in new window.

Here are the bad asset details. Also see page 16 for assumptions.

Wow. They expect 44% peak-to-trough price declines in California (58% if severe recession).

Here are the House Price Appreciation numbers JPM is working with.

by Calculated Risk on 9/25/2008 09:00:00 PM

JPMorgan Chase Acquires Banking Operations of Washington Mutual

FDIC Facilitates Transaction that Protects All Depositors and Comes at No Cost to the Deposit Insurance Fund

JPMorgan Chase acquired the banking operations of Washington Mutual Bank in a transaction facilitated by the Federal Deposit Insurance Corporation. All depositors are fully protected and there will be no cost to the Deposit Insurance Fund.

"For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks," said FDIC Chairman Sheila C. Bair. "For bank customers, it will be a seamless transition. There will be no interruption in services and bank customers should expect business as usual come Friday morning."

JPMorgan Chase acquired the assets, assumed the qualified financial contracts and made a payment of $1.9 billion. Claims by equity, subordinated and senior debt holders were not acquired.

"WaMu's balance sheet and the payment paid by JPMorgan Chase allowed a transaction in which neither the uninsured depositors nor the insurance fund absorbed any losses," Bair said.

Washington Mutual Bank also has a subsidiary, Washington Mutual FSB, Park City, Utah. They have combined assets of $307 billion and total deposits of $188 billion.

Thursday evening, Washington Mutual was closed by the Office of Thrift Supervision and the FDIC named receiver.

by Calculated Risk on 9/25/2008 08:41:00 PM

No word from FDIC.

JPMorgan announces investor conference call:

JPMorgan Chase & Co. (NYSE: JPM) will host a conference call at 9:15 p.m. (Eastern Time) tonight, September 25, 2008. You may access the conference call by dialing 1-877-238-4671 (U.S. and Canada) / 1-719-785-5594 (International) - access code: 814030 or via live audio webcast at www.jpmorganchase.com under Investor Relations/Investor Presentations. Materials and further communication will be available on this website at the time of the call.

by Calculated Risk on 9/25/2008 07:55:00 PM

Note: Live bloggin' the confence call at 9:15 ET.

CNBC reports: FDIC to Seize WaMu and Sell Deposits to JPMorgan

The Federal Deposit Insurance Corp will seize Washington Mutual and sell its deposits to JPMorgan Chase for an undisclosed sum, CNBC has learned. The deal is expected to be announced during a Thursday night conference call at 9:15 p.m. ET.

JPMorgan announces investor conference call:

JPMorgan Chase & Co. (NYSE: JPM) will host a conference call at 9:15 p.m. (Eastern Time) tonight, September 25, 2008. You may access the conference call by dialing 1-877-238-4671 (U.S. and Canada) / 1-719-785-5594 (International) - access code: 814030 or via live audio webcast at www.jpmorganchase.com under Investor Relations/Investor Presentations. Materials and further communication will be available on this website at the time of the call.

A replay of the conference call will be available beginning at approximately 1:00 a.m. on September 26 through midnight, Thursday, October 9 by telephone at (888) 348-4629 (U.S. and Canada); access code: 942856 or (719) 884-8882 (International). The replay will also be available via webcast on www.jpmorganchase.com under Investor Relations, Investor Presentations.

From the WSJ: J.P. Morgan to Rescue Faltering WaMu

J.P. Morgan Chase & Co. was expected to announce as early as Thursday night a deal to acquire the bulk of Washington Mutual Inc.'s operations in a deal that would mark the end of independence for what once was the largest U.S. thrift.

Looking for details ...

From the NY Times: Regulators Broker Deal on Washington Mutual (hat tip Walt)

Washington Mutual, the nation’s largest savings and loan, agreed Thursday to sell assets and some branches to JPMorgan Chase in a government-brokered deal to rescue the troubled bank, according to people briefed on the deal.

The deal is expected to be discussed at 9:15 p.m. on a conference call for investors held by JPMorgan.

by Calculated Risk on 9/25/2008 06:04:00 PM

From MarketWatch: No deal reached at White House, officials say

President Bush was unable to seal a deal between Republicans and Democrats on his $700 billion mortgage rescue plan, officials said.

From the WSJ: White House Meeting Ends With Bailout Still in Flux

[O]ne opponent of the tentative agreement, Sen. Richard Shelby (R., Ala.) told reporters after the meeting with President Bush that lawmakers still haven't reached an agreement on financial bailout legislation. "I don't believe we have an agreement," said Sen. Shelby, the ranking Republican on the Senate Banking Committee. "There are still a lot of different opinions."
...
Sen. Bob Corker (R., Tenn.) said: "I believe that we will pass this legislation before the markets open on Monday."

Who knows. I think there will be some sort of deal this weekend before Congress goes into recess (September 26 is the Target for Adjournment).

by Calculated Risk on 9/25/2008 04:58:00 PM

Via the WSJ:

Agreement on Principles

1. Taxpayer Protection

a. Requires Treasury Secretary to set standards to prevent excessive or inappropriate executive compensation for participating companies

b. To minimize risk to the American taxpayer, requires that any transaction include equity sharing

c. Requires most profits to be used to reduce the national debt

2. Oversight and Transparency

a. Treasury Secretary is prohibited from acting in an arbitrary or capricious manner or in any way that is inconsistent with existing law

b. Establishes strong oversight board with cease and desist authority

c. Requires program transparency and public accountability through regular, detailed reports to Congress disclosing exercise of the Treasury Secretary’s authority

d. Establishes an independent Inspector General to monitor the use of the Treasury Secretary’s authority

e. Requires GAO audits to ensure proper use of funds, appropriate internal controls, and to prevent waste, fraud, and abuse

3. Homeownership Preservation

a. Maximize and coordinate efforts to modify mortgages for homeowners at risk of foreclosure

b. Requires loan modifications for mortgages owned or controlled by the Federal Government

c. Directs a percentage of future profits to the Affordable Housing Fund and the Capital Magnet Fund to meet America’s housing needs

4. Funding Authority

a. Treasury Secretary’s request for $700 billion is authorized, with $250 billion available immediately and an additional $100 billion released upon his or her certification that funds are needed

b. final $350 billion is subject to a Congressional joint resolution of disapproval

Not much here. We need details on the equity sharing and other provisions.

by Calculated Risk on 9/25/2008 03:53:00 PM

When I read the intial proposal (admittedly very vague), it appeared the Treasury could churn the $700 billion, and therefore could possibly end up losing all of it (like a gambler at a slot machine "reinvesting" all their winnings).

Although we still haven't seen the proposal, Bernanke noted yesterday (if I heard him correctly) that the plan didn't intend to reinvest any proceeds after a sale. So if Treasury bought MBS for $70 million and sold it for $50 million, the loss would be $20 million - but they wouldn't reinvest the $50 million and lose even more. Those proceeds would be returned to the Treasury.

As far as total losses, here are the some comments from PIMCO's Bill Gross in an interview with Mathew Padilla at Mortgage Insider: Taxpayers can gain from $700 billion rescue

Gross said the government must find the right price between the market value of the assets they are buying and the value they have on paper at the banks holding them.
...
“It’s certainly possible if done right for the Treasury to make money for the tax payer,” Gross said.
emphasis added

And on CNBC, Warren Buffett said (hat tip Bernie):

[T]hey shouldn't buy these debt instruments at what the institutions paid. They shouldn't buy them at what they're carrying, what the carrying value is, necessarily. They should buy them at the kind of prices that are available in the market. People who are buying these instruments in the market are expecting to make 15 to 20 percent on those instruments. If the government makes anything over its cost of borrowing, this deal will come out with a profit. And I would bet it will come out with a profit, actually.

Unfortunately the plan is to buy the assets at a premium to market prices and probably at prices close to, or even above, the carrying value.

The WSJ Real Time Economics blog has more: Running Numbers on Treasury Bailout Plan

In a research note Thursday, Goldman Sachs estimated that there are probably about $1.15 trillion in distressed assets in the market.
...
That number is higher than the figure proposed by the Treasury, but it represents the face value of the mortgages. Since the discussion focuses on delinquent or foreclosed loans, the government should be getting a discount. Paying as high as 70 cents on the dollar would translate into $1 trillion in buying power for $700 billion.

The Goldman research note included calculations for losses also (ranging from none to $200 billion), although these were more examples than projections.

Price is still the key. Since Treasury doesn't plan on churning the $700 billion, the losses will be a portion of the amount invested - and the losses depend on how much Treasury pays (or overpays!) for the assets. The losses are unknowable at this point, but probably in the zero to $300 billion range. My guess - until we know more on pricing - would be towards the high side of that range.

by Calculated Risk on 9/25/2008 03:12:00 PM

From the FDIC: Open Letter to Bloomberg News about FDIC Deposit Insurance Fund

Bloomberg reporter David Evans' piece ("FDIC May Need $150 Billion Bailout as Local Bank Failures Mount," Sept. 25) does a serious disservice to your organization and your readers by painting a skewed picture of the FDIC insurance fund. Let me be clear: The insurance fund is in a strong financial position to weather a significant upsurge in bank failures. The FDIC has all the tools and resources necessary to meet our commitment to insured depositors, which we view as sacred. I do not foresee – as Mr. Evans suggests – that taxpayers may have to foot the bill for a "bailout."

Let's look at the real facts about the FDIC insurance fund. The fund's current balance is $45 billion – but that figure is not static. The fund will continue to incur the cost of protecting insured depositors as more banks may fail, but we continually bring in more premium income. We will propose raising bank premiums in the coming weeks to ensure that the fund remains strong. And, at the same time, we will propose higher premiums on higher risk activity to create economic incentives for poorly managed banks to change their risk profiles. The fund is 100 percent industry-backed. Our ability to raise premiums essentially means that the capital of the entire banking industry – that's $1.3 trillion – is available for support.

Moreover, if needed, the FDIC has longstanding lines of credit with the Treasury Department. Congress, understanding the need to ensure that working capital is available to the FDIC to provide bridge funding between the time a bank fails and when its assets are sold, provided broad authority for us to borrow from Treasury's Federal Financing Bank. If necessary, we can potentially raise very large sums of working capital, which would be paid back as the FDIC liquidates assets of failed banks. As per our authorizing statute, any money we might borrow from the Treasury must be paid back from industry assessments. Only once in the FDIC's history have we had to borrow from the Treasury – in the early 1990s – and that money was paid back with interest in less than two years.

Finally, Mr. Evans' suggestion that the "government" could ever be "on the hook for uninsured deposits" demonstrates a misunderstanding of FDIC insurance. To protect taxpayers, we are required to follow the "least cost" resolution, which means that uninsured depositors are paid in full only if this is the least costly option for the FDIC. This usually occurs when a bidder for the failed bank is willing to pay a higher price for the entire deposit franchise. We are authorized to deviate from the "least cost" resolution only where a so-called "systemic risk" exception is made. This is an extraordinary procedure which we have never invoked. And again, any money we borrow from the Treasury Department must be repaid through industry assessments.

I am confident in the strength of the FDIC's resources to make good on our sacred pledge to insured depositors. And, remember, no depositor has ever lost a penny of insured deposits, and never will.

by Calculated Risk on 9/25/2008 02:40:00 PM

From the WSJ: Agreement Reached on Bailout Ahead of High-Level Meeting

... lawmakers agreed to legislative principles that would approve Treasury's request for the funds, but would break it into installments ... Treasury would have access to $250 billion immediately, with another $100 billion to follow if needed. Congress would be able to block the last installment through a vote if it was unhappy with the program.

This was one of the good suggestions that came from Congress (and probably all of you).

by Calculated Risk on 9/25/2008 01:29:00 PM

WaMu's stock price now off 31%.

Fitch and S&P both cut their ratings earlier this week. And any hope for a deal is apparently fading ...

Bank Failure Friday might be interesting tomorrow. With $310 billion in assets (hat tip Nemo), WaMu would be the biggest bank failure in history - in fact it would be larger than the previous top ten added together (although maybe not in inflation adjusted terms).

UPDATE: Analyst Richard Bove put an estimage on a WaMu failure, from Bloomberg: FDIC May Need $150 Billion Bailout as Local Bank Failures Mount (hat tip Michael Brian)

A federal takeover of Washington Mutual, which has assets of $310 billion, could cost taxpayers $24 billion ... according to Richard Bove, an analyst at Miami-based Ladenburg Thalmann & Co.

by Calculated Risk on 9/25/2008 01:10:00 PM

Update: From CNBC: Lawmakers Say Financial Bailout Agreement Reached

CNBC Headline:

Sen. Dodd: "Fundamental" Agreement Reached on Bailout.

WSJ Headline:

Rep. Frank says Congress 'on track' to pass rescue plan.

Still no details.

by Calculated Risk on 9/25/2008 11:13:00 AM

From MarketWatch: House Speaker Pelosi reassures market on rescue plan

Pelosi said the exact timing of the House vote would depend on the outcome of closed-door meetings currently underway on Capitol Hill.

No details yet ...

by Calculated Risk on 9/25/2008 10:47:00 AM

We've been tracking the TED spread as a measure of distress in the credit markets (the difference between the LIBOR interest rate and the three month T-bill). Usually the TED spread is less than 0.5%. The higher the spread, the greater the perceived credit risks (compared to "risk free" treasuries).

The TED spread has increased to 3.27% this morning. Completely off the charts! Here is the TED Spread from Bloomberg.

And the following graph is the A2/P2 spread from the Fed's commercial paper report. The A2/P2 Spread hit 409bp yesterday. This is literally off the chart compared to any previous period.

When the A2/P2 spread spiked to 160 last year that was considered shocking; now that spike looks minor.

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 many of these companies the risk of default is close to zero. This is the high quality CP. Lower rated companies also issue CP and this is the A2/P2 rating.

Usually the spread between the A2/P2 and AA paper shows the concern of default for the A2/P2 paper. But right now this shows the credit markets are essentially locked up waiting for The Mother of All Bailouts.