by Calculated Risk on 10/14/2008 08:42:00 AM

Press conference any minute. Here is the CNBC feed.

From the Fed:

The following statement was made by Treasury Secretary Henry M. Paulson, Jr, Federal Reserve Chairman Ben Bernanke and FDIC Chairman Sheila C. Bair:

Today we are taking decisive actions to protect the U.S. economy, to strengthen public confidence in our financial institutions, and to foster the robust functioning of our credit markets. These steps will ensure that the U.S. financial system performs its vital role of providing credit to households and businesses and protecting savings and investments in a manner that promotes strong economic growth in the U.S. and around the world. The overwhelming majority of banks in the United States are strong and well-capitalized. These actions will bolster public confidence in our system to restore and stabilize liquidity necessary to support economic growth.

Last week, the President’s Working Group on Financial Markets announced that the U.S. government would deploy all of our tools in a strategic and collaborative manner to address the current instability in our financial markets and mitigate the risks that instability poses for broader economic growth. This past weekend, we and our G7 colleagues committed to a comprehensive global strategy to provide liquidity to markets, to strengthen financial institutions, to prevent failures that pose systemic risk, to protect savers, and to enforce investor protections.

We welcomed the steps announced by our European colleagues this weekend to implement the action plan, and ensure financial institutions in Europe can finance economic growth. Today we are implementing our strategy with three important actions.

First, Treasury is announcing a voluntary capital purchase program. A broad array of financial institutions is eligible to participate in this program by selling preferred shares to the U.S. government on attractive terms that protect the taxpayer. Second, after receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Paulson signed the systemic risk exception to the FDIC Act, enabling the FDIC to temporarily guarantee the senior debt of all FDIC-insured institutions and their holding companies, as well as deposits in non-interest bearing deposit transaction accounts. Regulators will implement an enhanced supervisory framework to assure appropriate use of this new guarantee.

We are pleased to announce that nine major financial institutions have already agreed to participate in both the capital purchase program and the FDIC guarantee program. We appreciate that these healthy institutions are taking these steps to strengthen their own positions and to enhance the overall performance of the U.S. economy. By participating in these programs, these institutions, along with thousands of others to come, will have enhanced capacity to perform their vital function of lending to U.S. consumers and businesses and promoting economic growth. They have also committed to continued aggressive actions to prevent unnecessary foreclosures and preserve homeownership.

Third, to further increase access to funding for businesses in all sectors of our economy, the Federal Reserve has announced further details of its Commercial Paper Funding Facility (CPFF) program, which provides a broad backstop for the commercial paper market. Beginning October 27, the CPFF will fund purchases of commercial paper of 3 month maturity from high-quality issuers.


Together these three steps significantly strengthen the capital position and funding ability of U.S. financial institutions, enabling them to perform their role of underpinning overall economic growth. These actions demonstrate to market participants here and around the world the strength of the U.S. government’s commitment to take all necessary steps to unlock our credit markets and minimize the impact of the current instability on the overall U.S. economy. The actions taken today are a powerful step toward restoring the health of the global financial system.

by Calculated Risk on 10/14/2008 01:42:00 AM

Update: Here is the CNBC feed.

Bloomberg:

Paulson, Federal Reserve Chairman Ben S. Bernanke and FDIC Chairman Sheila Bair scheduled a press conference at 8:30 a.m. today in Washington.

by Calculated Risk on 10/14/2008 01:02:00 AM

Edward Glaeser: Honoring Paul Krugman

EconomistsView has several Krugman pieces today. How Bubbles Happen, "Thoughts about Thinking", In Defense of Macroeconomics, "The Accidental Theorist" and more.

Krugman: A bit of autobiography

by Calculated Risk on 10/13/2008 09:39:00 PM

From the NY Times: U.S. Investing $250 Billion in Banks

Citigroup and JPMorgan Chase were told they would each get $25 billion; Bank of America and Wells Fargo, $20 billion each (plus an additional $5 billion for their recent acquisitions); Goldman Sachs and Morgan Stanley, $10 billion each, with Bank of New York Mellon and State Street each receiving $2 to 3 billion. Wells Fargo will get $5 billion for its acquisition of Wachovia, and Bank of America the same for amount for its purchase of Merrill Lynch.

... The government will purchase perpectual preferred shares in all the largest U.S. banking companies. The shares will notbe dilutive to current shareholders, a concern to banking chie executives, because perpetual preferred stock holders are paid a dividend, not a portion of earnings.

The capital injections are not voluntary...

by Calculated Risk on 10/13/2008 07:42:00 PM

From the WSJ:

[T]he government is set to buy preferred equity stakes in nine top financial institutions ... It's unclear how much would be invested in each institution. The move is designed to remove any stigma that might come with a government investment.

Banks receiving government funds include Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Bank of New York Mellon.

Not all of the banks involved are happy with the move, but agreed under pressure from the government.

I only count seven.

by Calculated Risk on 10/13/2008 05:36:00 PM

UPDATE: The WSJ article has been updated:

The U.S. government is set to buy preferred equity stakes in nine top financial institutions ... Not all of the banks involved are happy with the move but agreed under pressure from the government.

From the WSJ: Treasury to Roll Out New Approach to Credit Crisis

The Bush administration is expected Tuesday to roll out a wide-ranging effort to restore confidence to the battered banking system, following similar moves by European governments ...

The initiatives will likely supersede many of the government's previous efforts. They are being formulated jointly by the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp...

[T]he Treasury [is expected] to take approximately $250 billion in equity stakes in potentially thousands of banks ...

[T]he FDIC is expected to temporarily extend its backstop from bank deposits to new senior preferred debt issued by banks and thrifts for three years. ...

Other moves could include temporary loan guarantees aimed at helping banks borrow the money they need to do business. ...

The current planning would bring the U.S. in to line with [Europe].

The title of the post is from this piece by Professor Krugman: Moment of Truth

by Calculated Risk on 10/13/2008 04:00:00 PM

The opposite of Cliff Diving.

Dow up just under 1000 points.

S&P 500 up about 100 points, and over 1000.

We will see over the next few days if the credit markets have thawed. This will be critical for the economy going forward.

However, the economic data will continue to be negative as the recession deepens.

by Calculated Risk on 10/13/2008 02:58:00 PM

From Mathew Padilla at the O.C. Register: See where foreclosures are stacking up in O.C.

[A] growing backlog of foreclosures threatens to push home prices further down, some economists and brokers say.
...
MDA DataQuick, in a special report prepared for the Orange County Register, found that as of early September there were more than 3,300 unsold foreclosures in the county. DataQuick looked at all foreclosures for the year ended in June, and checked to see how many had resold. It found 40 percent were unsold.

Matt provides maps of the unsold inventory and time to sell by zip code. So far the foreclosures are piling up in the lower prices areas of Orange County. Some may think that this is still a subprime problem, but in Orange County even the low priced areas have many homes that sold for above the conventional loan limits set by Fannie and Freddie back in 2004 and 2005.

The photo below shows a central orange county house that sold for $600,000 in 2005. Since the conforming limit was $359,650 in 2005, this home may have been bought with an Alt-A loan.

On Alt-A, see Tanta's "Subprime and Alt-A: The End of One Crisis and the Beginning of Another" and for those wondering about Alt-A "Reflections on Alt-A"


Photo credit: Rose Palmisano, The Orange County Register

This foreclosed 3 bedroom home sold for $600,000 in August of 2005.

This home is in the central orange county city of Anaheim.

by Calculated Risk on 10/13/2008 12:50:00 PM

From Bloomberg: EU Nations Commit 1.3 Trillion Euros to Bank Bailouts

France, Germany, Spain, the Netherlands and Austria committed 1.3 trillion euros ($1.8 trillion) to guarantee bank loans and take stakes in lenders ...

In Germany, Chancellor Angela Merkel pledged to guarantee up to 400 billion euros of lending between banks and set aside 20 billion euros to cover potential losses. It will also provide as much as 80 billion euros to recapitalize banks ...

In France, President Nicolas Sarkozy said the state will guarantee 320 billion euros of bank debt and set up a fund allowed to spend up to 40 billion euros ...

Spain's cabinet today approved measures to guarantee up to 100 billion euros of bank debt this year and authorized the government to buy shares in banks in need of capital.
...
The Austrian government will set up an 85 billion-euro clearinghouse run by the Austrian Kontrollbank to provide cash by holding illiquid bank assets as collateral. Austria also pledged to buy banking shares...

The Dutch government will guarantee up to 200 billion euros of interbank loans ...

Italy will guarantee some bank debt and buy preferred stock in banks if necessary ... without providing any figures.

As Nobel Prize-winning economist Paul Krugman noted this morning:

This sort of temporary part-nationalization ... is the crisis solution advocated by many economists — and sources told The Times that it was also the solution privately favored by Ben Bernanke, the Federal Reserve chairman.
emphasis added

This was generally the approach favored by Roubini (see Roubini's post today), Krugman and many others. When the history of the credit crisis is written, it will be interesting to understand why Paulson proposed his plan - even though Bernanke and others argued for the recapitalization plan.

by Calculated Risk on 10/13/2008 11:30:00 AM

From the WSJ: Paulson Calls Meeting of Bank Chiefs

The 3 p.m. meeting is being called while most of the banking chiefs are in Washington for meetings of the World Bank and the International Monetary Fund. Invited to attend were banking executives including Ken Lewis, CEO of Bank of America, Jamie Dimon, CEO of J.P. Morgan Chase, Lloyd Blankfein, CEO of Goldman Sachs Group; John Mack, CEO of Morgan Stanley; and Vikram Pandit, CEO of Citigroup.

... one person familiar with the matter said Secretary Paulson is expected to discuss details of his new plan to take equity stakes in financial firms ...

Apparently Paulson is considering making equity investments in strong banks to keep them lending. This would be voluntary. From Interim Assistant Secretary for Financial Stability Neel Kashkari this morning:

Equity purchase program: We are designing a standardized program to purchase equity in a broad array of financial institutions. As with the other programs, the equity purchase program will be voluntary and designed with attractive terms to encourage participation from healthy institutions. It will also encourage firms to raise new private capital to complement public capital.

by Calculated Risk on 10/13/2008 09:30:00 AM

Here are a few indicators I'm watching for progress on the credit crisis.

The yield on 3 month treasuries. (note: bond markets are closed for Columbus Day).


Click on graph for larger image in new window.

This graph shows the high, low, and the close for the three month treasury bill since the beginning of the year.

A good sign would be if the daily volatility subsides, and the yield moves up closer to the Fed funds rate, or about 1.25%.

The TED spread. The TED spread hit a recent high of 4.64 on Friday. This is far above the highs reached during the previous waves of the credit crisis.

Any significant decline would suggest progress, and a decline below 1.0 would indicate this wave of the crisis is over.

Edit: From Econbrowser:

One measure that is being used to summarize the strain in financial markets is the TED spread. This is calculated as the gap between 3-month LIBOR (an average of interest rates offered in the London interbank market for 3-month dollar-denominated loans) and the 3-month Treasury bill rate.

Usually the TED spread is less than 0.5%. The higher the spread, the greater the perceived credit risks (compared to "risk free" treasuries).

Activity in the Treasury's Supplementary Financing Program (SFP). This is the Treasury program to raise cash for the Fed's liquidity initiatives. If this program slows down borrowing, I think that would be a good sign.

Here is a list of SFP sales.

The A2P2 spread.

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

During a recession, this spread usually increases because the risk of default for lower quality paper increases. However the recent values (over 400 bps) are far in excess of normal. If the credit crisis eases, I'd expect a significant decline in this spread.

Industry contacts. I'm tracking some financing deals there are being held up right now. If these deals complete that would be a good sign (I'll post something when this happens).

Added:

The spread between the 2-year interest rate swap and the 2-year Treasury (recommended by bond guy)


In the comments, bond guy writes:

The T-Bill rates will probably take time to settle down. This means that the TED spread will probably be volatile for awhile.

I'd argue that a better indicator will be the 2-year swap spread (spread between 2-year swap rate and 2-year Treasury). If that can come down to 50 bps or so (from over 150), that would mean that the markets would be discounting spread normalization over the coming years.

by Calculated Risk on 10/13/2008 09:09:00 AM

From Bloomberg: Princeton's Paul Krugman Wins Nobel Economics Prize

Congratulations!

by Calculated Risk on 10/13/2008 09:06:00 AM

From MarketWatch: Mitsubishi UFJ invests $9 billion in Morgan Stanley

Mitsubishi UFJ Financial closed on a $9 billion equity investment in New York-based Morgan Stanley, giving the Japanese bank a 21% ownership stake. The buyer acquired $7.8 billion of perpetual non-cumulative convertible preferred stock with a 10% dividend and a conversion price pegged at $25.25 a share.

by Calculated Risk on 10/13/2008 02:42:00 AM

UPDATE: From the NY Times: Britain Props Up Banks as Fed Leads Funding Effort

The Royal Bank of Scotland — once viewed as among the most solid of Britain’s Main Street institutions — announced it would seek around $34 billion to boost its capital as part of a bail-out devised by Prime Minister Brown and Mr. Darling and offered as a global template to resolve the crisis. The bank said the British government would buy preference shares worth around $8.5 billion and underwrite the rest. The deal could mean that the British government will own almost 60 percent of Royal Bank of Scotland along with more than 40 percent of HBOS and Lloyds TSB, which are negotiating a merger.

From MarketWatch: U.K. agrees cash injections for RBS, HBOS, Lloyds TSB

The U.K. Treasury said Monday that it's agreed to make capital investments in Royal Bank of Scotland (RBS) and, upon a sucessful merger, HBOS and Lloyds TSB totalling 37 billion pounds ($63 billion).... It's also requiring banks to maintain the availability of competitively-priced lending to homeowners and has the right to appoint new independent non-executive directors.

£20 is being invested in RBS. £17 in HBOS and Lloyds (the merger is essentially being forced at this point). It sounds like the U.K. will own 43% of Lloyds-HBOS. I haven't heard the percentage in RBS. 

by Calculated Risk on 10/13/2008 02:16:00 AM

From the Fed: Federal Reserve and other central banks announce further measures to provide broad access to liquidity and funding to financial institutions

In order to provide broad access to liquidity and funding to financial institutions, the Bank of England (BoE), the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank (SNB) are jointly announcing further measures to improve liquidity in short-term U.S. dollar funding markets.

The BoE, ECB, and SNB will conduct tenders of U.S. dollar funding at 7-day, 28-day, and 84-day maturities at fixed interest rates for full allotment. Funds will be provided at a fixed interest rate, set in advance of each operation. Counterparties in these operations will be able to borrow any amount they wish against the appropriate collateral in each jurisdiction. Accordingly, sizes of the reciprocal currency arrangements (swap lines) between the Federal Reserve and the BoE, the ECB, and the SNB will be increased to accommodate whatever quantity of U.S. dollar funding is demanded. The Bank of Japan will be considering the introduction of similar measures.

Central banks will continue to work together and are prepared to take whatever measures are necessary to provide sufficient liquidity in short-term funding markets.

Federal Reserve Actions
To assist in the expansion of these operations, the Federal Open Market Committee has authorized increases in the sizes of its temporary swap facilities with the BoE, the ECB, and the SNB, so that these central banks can provide U.S. dollar funding in quantities sufficient to meet demand.

These arrangements have been authorized through April 30, 2009.

The Fed never sleeps ...

by Calculated Risk on 10/13/2008 12:12:00 AM

Paul Krugman writes in the NY Times: Gordon Does Good. A few excerpts:

The natural thing to do ... is to deal with the problem of inadequate financial capital by having governments provide financial institutions with more capital in return for a share of ownership.

This sort of temporary part-nationalization ... is the crisis solution advocated by many economists — and sources told The Times that it was also the solution privately favored by Ben Bernanke, the Federal Reserve chairman.

But when Henry Paulson, the U.S. Treasury secretary, announced his plan for a $700 billion financial bailout, he rejected this obvious path ...

Meanwhile, the British government went straight to the heart of the problem — and moved to address it with stunning speed. On Wednesday, Mr. Brown’s officials announced a plan for major equity injections into British banks, backed up by guarantees on bank debt that should get lending among banks, a crucial part of the financial mechanism, running again. And the first major commitment of funds will come on Monday — five days after the plan’s announcement.

At a special European summit meeting on Sunday, the major economies of continental Europe in effect declared themselves ready to follow Britain’s lead ... And whaddya know, Mr. Paulson — after arguably wasting several precious weeks — has also reversed course, and now plans to buy equity stakes rather than bad mortgage securities (although he still seems to be moving with painful slowness).

As Krugman notes, many economists - like Krugman, Roubini, DeLong, and many others - were urging something similar to the Gordon Brown approach.

BTW, the UK announcement is expected very soon - around 7 AM London Time (2 AM ET, 11 PM PT).

by Calculated Risk on 10/12/2008 07:58:00 PM

From the WSJ: RBS CEO's Exit Is Likely As Part of U.K. Purchase.

On Sunday night, bankers and officials expected to work through the night again to put in place details of the plan they hoped to announce before the market opens Monday.
...
On Sunday night, a spokesman for the London Stock Exchange said the market would be open for trading as usual.

The UK announcement is expected around 7 AM London Time (2 AM ET, 11 PM PT). We are still waiting for Morgan Stanley too.

Here is the current London Time:


Bloomberg Futures.

Index Futures from Barchart.com (active futures have a time not a date)

CBOT mini-sized Dow

by Calculated Risk on 10/12/2008 05:44:00 PM

Andrew Sorkin reports in the NY Times: Mitsubishi and Morgan Stanley Renegotiating

Under the proposed new terms being discussed on Sunday, Mitsubishi would still buy roughly 21 percent of Morgan Stanley ... But all of the investment would be through preferred shares, with a 10 percent annual dividend. Many of those shares would be convertible into common stock, but the Japanese bank was trying to set a conversion price far lower than originally proposed.

Treasury, however, is not planning to have the United States government take a direct stake in Morgan Stanley ... Mitsubishi and the Japanese government have sought assurances from the Treasury Department that if the United States were to decide to inject money into Morgan Stanley at a later time ... that such a move would not wipe out preferred shareholders.

Sorkin writes that an announcement is expected before the market opens on Monday.

Note: The final details of the UK bank recapitalization plan is expected at 7 AM London time.

by Calculated Risk on 10/12/2008 03:56:00 PM

UPDATE: From Reuters: Final statement from euro zone summit in Paris

From Bloomberg: European Leaders Vow Bank Guarantees, Bid to Stop Financial Rot

European leaders agreed to guarantee bank borrowing and use government money to prevent big lenders from going under ...

The key measures announced today are: a pledge to guarantee new bank debt issuance until the end of 2009; permission for governments to shore up banks by buying preferred shares; and a commitment to recapitalize any ``systemically'' critical banks in distress.

France, Germany, Italy and other countries will announce national measures tomorrow, Sarkozy said.

This apparently applies to all countries using the euro. Update: A reader adds:

Just to avoid any misunderstandings: tonight's meeting of the Eurogroup has no rule-making powers. In essence, it is just a political coordination forum. It is up to each Eurozone country to act. The fact that they all agreed the statement does not necssarily mean they will all do this.

by Calculated Risk on 10/12/2008 12:27:00 PM

From Bloomberg: European Leaders Seek `One Voice' to Counter Crisis

The 15 euro countries may agree to guarantee interbank loans of as long as five years to break the credit-market freeze, according to a draft statement cited by Agence France- Presse.

From the NY Times: European Leaders Meet as More Measures Extended

Financial and political leaders were holding meetings across the globe Sunday, urgently seeking agreement on measures to restore confidence to the teetering financial system before markets open Monday in Asia.
...
Nicolas Sarkozy, the French president, said after a meeting at the Élysée Palace with Prime Minister Gordon Brown of Britain that he expected European countries to present an “ambitious and coordinated plan” that goes beyond measures announced by the Group of 7 industrialized countries in Washington on Friday.

The UK will announce the details of the capitalization plan at 7 AM Monday London time. But it sounds like there will be an EU announcement even earlier - before the Asian markets open.