by Calculated Risk on 10/05/2008 03:54:00 PM

From L'Echo: La reprise de Fortis Banque par BNP est bouclée (hat tip Alain)

Alain translates: The "Belgian government keeps a 25% minority (blocking) stake in Fortis Banque Belgium and obtains 10% of BNP Paribas in an all share deal. Luxembourg keeps 33% stake in local subsidiary and gets 1.4% of BNP".

by Calculated Risk on 10/05/2008 03:36:00 PM

Once again Sunday is the new Monday. This week the action is in Europe ...

"Hypo Real Estate has to be stabilized otherwise the damage would be unpredictable."
German Finance Minister Peer Steinbrueck on television, Oct 5, 2008

From the NY Times: Germany Moves to Shore Up Confidence in Economy

Germany’s guarantee of its private savings — worth about 500 billion euros, or more than $700 billion— followed the news that a group of banks had pulled out of a deal to provide 35 billion euros, or $48.2 billion, to rescue the large German mortgage lender, Hypo Real Estate.

The Belgian government, meanwhile, scrambled Sunday to engineer a sale of the Belgian units of Fortis before the start of trading on Monday. The Netherlands effectively nationalized the Dutch operations of the bank on Friday after a joint rescue deal with Belgium and Luxembourg broke down.

In Iceland, where the government seized control of a bank last week, officials were considering more sweeping measures to stabilize finances there as well. And the board of UniCredit, which is based in Milan and also operates in Germany and much of Eastern Europe, met to consider a capital increase after being buffeted by a week of speculation about its solvency.

From Bloomberg: German Government Leads Hypo Real Estate Rescue Talks

And from the WSJ: Governments Scramble to Find Rescue Plans for Hypo, Fortis

And from The Times: Interest rates to drop to 50-year low

Interest rates in Britain will drop to a new 50-year low in the coming months, economists say, as the Bank of England tries to head off a serious recession. The Bank’s monetary policy committee (MPC) is expected to start the process by cutting rates this week.

by Calculated Risk on 10/05/2008 11:47:00 AM

These reports are in German, but I believe they are saying the German government has guaranteed all deposits (update: apparently all deposits by private individuals).

From Reuters: Staat übernimmt Garantie für Einlagen

From Focus: Bund sichert private Spareinlagen komplett

This is probably related to the collapse of the bailout for Hypo.

Executives at the bank, which is Germany’s second largest commercial property investor and has extensive holdings across Europe, are now locked in crisis talks with the German government and central bank in an attempt to deliver an alternative plan before the stock markets open on Monday.

The German Finance Ministry has urged the private sector consortium to rethink its decision.

The collapse of the €35 billion (£27.3 billion) bail-out will provide an immediate test to the pledge made on Saturday by leaders from the biggest European Union countries that they will ensure that no major European financial institution will be allowed to fail.

by Calculated Risk on 10/05/2008 09:29:00 AM

Press Release: Citi Granted Emergency Injunctive Relief Extending Exclusivity Agreement between Citi and Wachovia

Citi tonight was granted emergency injunctive relief extending the Exclusivity Agreement between Citi and Wachovia Corp. until further order of the court. This relief was granted over the objection of Wachovia. Justice Charles Ramos of the Supreme Court of the State of New York issued the order.

Citi is prepared to continue negotiations with Wachovia on the parties’ previously agreed-to transaction.

As indicated by Citi in court filings, the Exclusivity Agreement, while in effect, unconditionally bars Wachovia from negotiating or entering into a merger/acquisition agreement with any party other than Citi.

Under the Judicial Order, Citi and Wachovia must appear before Judge Ramos on Friday, October 10, 2008.

This adds a little suspense , but I think Wells Fargo is the better fit.

by Calculated Risk on 10/04/2008 11:03:00 PM

A letter from Senator Boxer (D-CA): (hat tip Michael)

Thank you for contacting me regarding the financial rescue legislation (H.R.1424). I appreciate hearing from you on this critical issue.

The fundamentals of our economy have been shaken, and Americans are deeply concerned. When Secretary Paulson and Chairman Bernanke placed an urgent phone call a few weeks ago to Congress to say we needed emergency action to prevent a major financial meltdown, I expected they would come forward with a plan that was targeted and reasonable, with appropriate oversight and taxpayer protections.

Unfortunately, what they brought us was a $700 billion blank check, which they asked us to sign with no questions asked. This plan contained no oversight, no taxpayer equity, and no control over CEO pay. I strongly opposed this proposal - and thanks to your phone calls, e-mails, and letters, Congress stopped it in its tracks.

The Senate made major improvements designed to strengthen our economy and protect our taxpayers. Instead of a blank check, the Senate plan included significant Congressional oversight, equity for taxpayers, curbs on executive compensation, an increase in FDIC insurance protection for bank depositors, middle-class tax relief, and job-creating tax incentives for renewable energy. The bill passed the Senate by an overwhelmingly bipartisan vote of 74-25 and the House by a vote of 263-171.

These were very important changes. But let me be honest: There were still aspects of this package that I didn't like. I preferred the government acquiring more equity instead of toxic assets. I wanted the package to be put forward in smaller installments and to include more checks and balances to make sure it would work.

For me, the deciding factor in my Yes vote was information I received from the State of California. I was told by the Treasurer's office that without access to credit, which is the goal of this legislation, California wouldn't be able to sell voter-approved highway, school, and water bonds that are desperately needed for our economy and the creation of good-paying new jobs. In addition, I was told by the Governor's office, that without action, our state might be forced to withhold funds for law enforcement, schools, and other needed services. This would bring our state to its knees and many middle-class families would be in deep trouble. Small businesses are beginning to tell me they cannot get lines of credit to meet payroll, as well.

Rest assured, I will continue to speak out forcefully about the failures that led us to this place and keep working with my colleagues to strengthen confidence in our markets, protect the American taxpayers, and enact regulatory reform to ensure that we don't end up in this mess again.

Again, thank you for writing to me about this very important matter. Even though you may feel frustrated with the outcome of the legislation that passed, your voice absolutely resulted in the enactment of a better bill. Feel free to contact me again about any issue of importance to you.

Barbara Boxer
United States Senator

by Calculated Risk on 10/04/2008 05:18:00 PM

The next Fed meeting is more than three weeks away (a two day meeting on October 28th and 29th) and the economic data suggests the economy is deteriorating rapidly. And the TARP will not start buying assets for several weeks, maybe not until mid-November. This suggests the possibility of an intermeeting Fed rate cut.

Fed Chairman Bernanke released a statement on Friday:

We will continue to use all of the powers at our disposal to mitigate credit market disruptions and to foster a strong, vibrant economy.

The Financial Times notes: Declining economy could force Fed to act

The last time the macro-economic data deteriorated rapidly – around the turn of the year – the Fed reacted decisively with big rate cuts, including an intermeeting move. In the eyes of many the latest data also adds up to an open-and-shut case for further Fed rate cuts.
...
If the Fed does decide to cut, the case for cutting at the meeting is that a new set of economic forecasts could win over doubters. But if the Fed wants to maximise the impact of the cut it could move intermeeting in the hope of shocking the credit markets back to life.
emphasis added

And here are the latest Fed Fund probabilities from the Cleveland Fed.

Click on graph for larger image in new window.

Until a couple of weeks ago, market participants anticipated no change in the Fed Funds rate in October.

Now, because of recent events, there is a strong consensus for a rate cut by the October meeting.

But if you are going to lower rates at the end of October, why wait?

Back in 2004, Bernanke wrote a paper (with NBER economist Kenneth Kuttner) What Explains the Stock Market’s Reaction to Federal Reserve Policy?

The most direct and immediate effects of monetary policy actions, such as changes in the federal funds rate, are on the financial markets; by affecting asset prices and returns, policymakers try to modify economic behavior in ways that will help to achieve their ultimate objectives.
...
The unexpected 50-basis-point intermeeting rate reductions on 3 January [2001] and 18 April [2001] were both greeted euphorically, with one-day returns of 5.3% and 4.0% respectively. The 50-basis-point rate cut on 20 March [2001] was received less enthusiastically, however. Even though the cut was more or less what the futures market had been anticipating, financial press reported that many equity market participants were “disappointed” the rate cut hadn’t been an even larger 75 basis point action. Consequently, the market lost more than 2%.
...
Another unusually vehement reaction to a Fed action is associated with the 25-basis-point intermeeting rate cut on 15 October 1998, which was taken in response to unsettled conditions in the financial markets — specifically, the deteriorating situations in Asia and Russia. For whatever reason, the unexpected intermeeting cut lifted equities over 4%.
...
This study has documented a relatively strong and consistent response of the stock market to unexpected monetary policy actions, using federal funds futures data to gauge policy expectations.

To surprise the market, the Fed might need to cut by at least 50 bps - maybe 75 bps - and announce the action before the market opens on Monday.

by Calculated Risk on 10/04/2008 03:29:00 PM

From Bloomberg: Hypo Real Estate Says Banks Withdrew Support for Rescue Package (hat tip Ryan)

Hypo Real Estate Holding AG, the troubled German property lender, said private banks withdrew their support for a 35 billion-euro ($49 billion) rescue package.

``The intended rescue package involved a liquidity line to be provided by a consortium of several financial institutions,'' Hypo Real Estate said in a statement on the DBF newswire today. ``The consortium has now declined to provide the line. The Group is now in the process of determining the consequences of this'' and ``alternative measures are being investigated.'

Hypo mostly lends to commercial and public projects internationally.

by Calculated Risk on 10/04/2008 08:43:00 AM

This is interesting ... from The Times: Homeowners steer clear of equity release loans

Fearful homeowners have finally called a halt to a decade-long spree of cashing-in on the value of their properties to pay for big-ticket consumer spending and paying off debt, the Bank of England revealed yesterday.

The Bank’s latest figures show that Britons have abruptly abandoned the habit of borrowing against their houses and flats through mortgage equity withdrawal, bringing to an end a decade-long era of the nation using its homes as cash machines.

Second-quarter figures for equity withdrawal showed that, rather than raising borrowed cash against their properties, homeowners injected a net £2.8 billion of new equity.
...
In practice, this means that homeowners collectively invested more capital in properties during the second quarter, either through paying down mortgages or cash payments to buy, than they raised through home loans.

The news marks a big turnaround.

The following graph shows home equity extraction in the U.S. through Q1 2008 (NSA - not seasonally adjusted) provided by Federal Reserve economist Jim Kennedy based on the mortgage system presented in "Estimates of Home Mortgage Originations, Repayments, and Debt On One-to-Four-Family Residences," Alan Greenspan and James Kennedy, Federal Reserve Board FEDS working paper no. 2005-41.

Click on graph for larger image in new window.

Just like in the UK, there was a surge of equity extraction in recent years. And just like in the UK, equity extraction has fallen off a cliff.

I've contacted Dr. Kennedy's office, but unfortunately data isn't available yet for Q2. However the US data probably looks very similar to UK data.

Here is what I wrote last year:

As homeowner equity continues to decline sharply in the coming quarters, combined with tighter lending standards, equity extraction should decline significantly and impact consumer spending.

As of Q1 homeowner equity had declined sharply, lending standards had tightened, and equity extraction had declined significantly. And now, based on the recent monthly data from the BEA on Personal Consumption Expenditures (PCE), it appears consumer spending has slowed sharply. My recent comment was: "[T]this will be the first decline in PCE since Q4 1991. This is strong evidence that the indefatigable U.S. consumer is finally throwing in the towel."

It appears that less equity extraction is finally having a significant impact on consumer spending. Of course consumer spending is also being impact by job losses and the recession.

by Calculated Risk on 10/03/2008 10:58:00 PM

From the Financial Times: Dutch government takes over Fortis units

The Dutch government on Friday re-negotiated last weekend’s bail-out of Fortis in order to buy all of Fortis’s Dutch operations for €16.8bn, including its Dutch insurance operations and the Dutch operations of ABN Amro.
...
Wouter Bos, Dutch finance minister, said the Dutch state took the decision after seeing how Fortis faced greater liquidity problems this week following the rescue.
...
The Dutch government will privatise the Fortis and ABN Amro operations after calm returns to the markets, it said.

Nationalize. Then privatize. That is a proven approach. It will be interesting to see if the Dutch approach works better or worse than the Paulson plan.

by Calculated Risk on 10/03/2008 07:40:00 PM

From Rex Nutting at MarketWatch: More severe recession now forecast by Goldman Sachs

The U.S. recession will be "significantly deeper" than they previously thought, Goldman Sachs economists predicted Friday in a research note. ... The unemployment rate will likely rise to 8% by the end of next year from 6.1% currently.

Goldman is now forecasting Q3 2008 real GDP growth at 0.0%, with PCE at minus 2.5% (annualized as reported by BEA). This is similar to my two month estimate for PCE, see Estimating PCE Growth for Q3 2008. Both PCE and investment will be negative in Q3, but net exports, private inventories and government spending will probably all show positive growth in Q3. So GDP may be close to zero.

A major change in the Goldman outlook is the increase in the unemployment rate to 8% in 2009 (their previous forecast was for unemployment reaching 7% in 2009).

One of the features of recent recessions is that the unemployment rate kept rising for 18 months to two years after the recession officially ended. This suggests that the peak unemployment rate (for this cycle) might not happen until 2011, even if the recession ends in late 2009 - scary. I'll have some more thoughts on unemployment soon.

Note that this is the headline unemployment number. Other measures of unemployment are much higher: See Krugman: The track record

by Calculated Risk on 10/03/2008 04:12:00 PM

IRS Notice:

For purposes of Code Sec. 382(h), any deduction properly allowed after an ownership change of a corporation that is a bank with respect to losses on loans or bad debts, including any deduction for a reasonable addition to a reserve for bad debts, shall not be treated as a built-in loss or a deduction attributable to periods before the change date. This guidance does not affect the application of any provision of the IRC except Code Sec. 382. Banks may rely on this guidance until further guidance is issued.

This new rule apparently allows Wells Fargo to accelerate the use of Wachovia's huge write-downs as an offset to their own income, saving Wells Fargo a substantial amount in taxes over the next several years.

In an email memo sent yesteryday, the law firm Wachtell, Lipton, Rosen & Katz noted:

As part of the federal government’s ongoing comprehensive response to the current credit crisis, the Treasury Department and the Internal Revenue Service have acted decisively to ameliorate the impact of Section 382 of the Internal Revenue Code in the context of bank mergers and acquisitions and capital raising by banks and others. In an environment where asset quality concerns are giving potential bank acquirors and investors pause about engaging in acquisitions or supplying badly needed equity capital, these steps are likely to significantly enhance the risk/reward calculus by facilitating the deductibility of losses.

This IRS change probably motivated Wells Fargo to acquire Wachovia. This is another way to help recapitalize the banking system.

Note: according to the WSJ Law blog, Wells Fargo was advised by Wachtell, Lipton, Rosen & Katz in the Wachovia deal.

by Calculated Risk on 10/03/2008 02:24:00 PM

Paulson Statement on Emergency Economic Stabilization Act:

By acting this week, Congress has proven that our Nation’s leaders are capable of coming together at a time of crisis, even at a critical stage of the political calendar, to do what is necessary to stabilize our financial system and protect the economic security of all Americans.

The American people will appreciate the leadership of their elected representatives and senators who took bold action to help stem a severe credit crunch that threatens to cost many jobs and undermine access to credit for working Americans.

This bill contains a broad set of tools that can be deployed to strengthen financial institutions, large and small, that serve businesses and families. Our financial institutions are varied – from large banks headquartered in New York, to regional banks that serve multi-state areas, to community banks and credit unions that are vital to the lives of our citizens and their towns and communities. Each institution has its own unique benefits, and their collective strength makes our financial system more resilient, and more innovative. The challenges our institutions face are just as varied – from holding illiquid mortgage backed securities, to illiquid whole loans, to raising needed capital, to simply facing a crisis of confidence. This diversity of institutions and challenges requires that we deploy the tools in this rescue package, in combination with the tools the Fed, the Treasury, the FDIC and other bank regulators already have, in a variety of ways that addresses each of these needs and restores the ability of our financial system to fuel our broader economy.

There is no one-size-fits-all solution to alleviating the stress in our financial system. Each situation will be different and we must implement these new programs with a strategy that allows us to adapt to changing circumstances and conditions, and attract private capital. The broad authorities in this legislation, when combined with existing regulatory authorities and resources, gives us the ability to protect and recapitalize our financial system as we work through the stresses in our credit markets.

We will move rapidly to implement the new authorities, but we will also move methodically. In the coming days we will work with the Federal Reserve and the FDIC to develop strategies that deploy these tools in an expedited and methodical way to maximize effectiveness in strengthening the financial system, so it can continue to play its necessary and vital role supporting the U.S. economy and American jobs. Transparency throughout this process will be important, and I look forward to providing regular updates as we move ahead to implement this strategy.
Emphasis added

Other than helping attract private capital by cleaning up the institutions' balance sheets, I'm not sure how this plan helps the financial system recapitalize. Hopefully Mr. Paulson doesn't intend to pay a premium, not just to the current market value, but to current book value, for the toxic assets. But how else could the plan help the financial system recapitalize?

by Calculated Risk on 10/03/2008 01:22:00 PM

Vote: 263 Yes to 171 No

Fed Chairman Bernanke statement:

I applaud the action taken by the Congress. It demonstrates the government's commitment to do what it takes to support and strengthen our economy. The legislation is a critical step toward stabilizing our financial markets and ensuring an uninterrupted flow of credit to households and businesses.

The Federal Reserve will continue to work closely with the Treasury as it undertakes these new initiatives. We will continue to use all of the powers at our disposal to mitigate credit market disruptions and to foster a strong, vibrant economy.

The TED spread (from Bloomberg) is at 3.83.

by Calculated Risk on 10/03/2008 11:43:00 AM

Here is the live feed from C-SPAN.

Here is the CNBC feed.

by Calculated Risk on 10/03/2008 11:02:00 AM

From Bloomberg: Citigroup Demands Wachovia, Wells Fargo Terminate Merger Deal

Citigroup Inc. demanded that Wells Fargo & Co. and Wachovia Corp. terminate a $15.1 billion takeover agreement announced today, saying it breached an exclusive deal the New York-based company reached earlier this week.
...
``Citi has substantial legal rights regarding Wachovia and this transaction,'' the New York-based company said in a statement. ``Wachovia's agreement to a transaction with Wells Fargo is in clear breach of an exclusivity agreement between Citi and Wachovia.''

From the FDIC: FDIC Chairman Sheila Bair Comments on Agreement to Merge by Wells Fargo and Wachovia

"Since the close of our bidding process, Wells has apparently re-assessed its position and come forth with this new offer that does not require FDIC assistance. ...

"The FDIC stands behind its previously announced agreement with Citigroup. The FDIC will be reviewing all proposals and working with the primary regulators of all three institutions to pursue a resolution that serves the public interest."

The Wells Fargo deal seems to make more sense, and appears better for Wachovia stakeholders and U.S. taxpayers. Maybe there will be some sort of breakup fee for Citi.

by Calculated Risk on 10/03/2008 10:05:00 AM

From Bloomberg: Financial-Rescue Bill Gains Support Before House Vote

At least eight lawmakers, including Republican Zach Wamp of Tennessee and Democrat Emanuel Cleaver of Missouri, now say they would support the measure. Four others say they may switch their ballots before the House votes again, at about 12:30 p.m. today on the bill, which failed by a dozen votes on Sept. 29.

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

And here is a live video from CNBC.

by Calculated Risk on 10/03/2008 08:30:00 AM

From the BLS:

Nonfarm payroll employment declined by 159,000 in September, and the unemployment rate held at 6.1 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Employment continued to fall in construction, manufacturing, and retail trade, while mining and health care continued to add jobs.

Click on graph for larger image.

This graph shows the unemployment rate and the year over year change in employment vs. recessions.

Nonfarm payrolls decreased by 159,000 in September.

The unemployment rate was steady at 6.1 percent.

Year over year employment is now negative (there are over half million fewer Americans employed in Sept 2008 than in Sept 2007). This is another very weak employment report.

by Calculated Risk on 10/03/2008 08:14:00 AM

From MSNBC: Wells Fargo will buy rival bank Wachovia (hat tip Stephen)

In an abrupt change of course, Wachovia Corp. said Friday it will be acquired by Wells Fargo & Co. in a $15.1 billion all-stock deal, wiping out Wachovia’s previous plan to sell its banking operations to rival suitor Citigroup Inc.

A key difference is that the Wachovia deal will be done without government assistance, while the Citigroup deal would have been done with the help of the Federal Deposit Insurance Corp.

From the WSJ: Wells Fargo to Buy Wachovia

The Wells Fargo offer is for $7 a share in stock, based on Thursday's closing price, 79% above where Wachovia shares finished. Wells Fargo also will assume Wachovia's preferred stock and debt.

This is a huge surprise, but this deal makes much more sense than the deal with Citigroup. This also takes the FDIC off the hook.

by Calculated Risk on 10/03/2008 12:16:00 AM

From the Guardian: Greece's deposit guarantee deepens EU financial rift (hat tip Yal)

Greece joined Ireland in offering to guarantee savings in domestic banks.

George Alogoskoufis, the Greek finance minister, said deposits "in all banks that operate in Greece" would be "absolutely guaranteed", amid signs that savers were becoming restless.

The move by a second eurozone country presented a big challenge to European leaders meeting at an emergency summit tomorrow in Paris to hammer out a coordinated response to the threat of meltdown among European banks.

Apparently there was some discussion of a Euro-TARP, but it doesn't appear to be going anywhere.

by Calculated Risk on 10/02/2008 11:08:00 PM

From the WSJ: Developer Sells Land Dirt Cheap To Reap Tax Benefits

Horton two weeks ago sold about 2,000 house lots in Desert Hot Springs ... for $7.8 million, according to county records. William Shopoff, a land investor ... estimates Horton paid about $110 million for the land before [spending on improvements].

Horton also recently sold a four-acre parcel in Escondido, near San Diego, for $4.4 million, about 25% of what it paid for the property in 2005, according to the county assessor.

The reason Horton is selling now - for pennies on the dollar - is to obtain a tax refund by applying the losses to prior profits. Earlier this year I reported on a deal at 15 cents on the dollar for the same reason.

This is the common patten in a housing bust - typically land prices decline much more than house prices (on a percentage basis) - because houses can be rented, whereas land has to be held for years before realizing a return.