by Calculated Risk on 10/19/2008 09:33:00 AM

From the WaPo: U.S. Bank Plan Hits Snag in Rules (hat tip Mark)

The Treasury Department is pressing federal banking regulators to change longstanding rules that are in the way of its plan to invest $250 billion in American banks, raising questions about the independence of the regulatory agencies.

Treasury's plan, announced Tuesday, rests on the ability of banks to use the government's money to buttress their core capital, the financial foundation that supports a bank's operations. Those foundations have been eroded by recent losses, limiting lending to customers and damaging the broader economy.

But under federal banking regulations at the time of the announcement, investments with the conditions attached by Treasury cannot be counted as core capital because that category is reserved for only the most stable kinds of funding.

Now, federal regulators are rushing to clear the road for the rescue plan. The Federal Reserve issued new rules Thursday evening creating a special exception for Treasury's investment. Other agencies are considering following suit.

It is the latest in a string of ad hoc measures to address the financial crisis, highlighting the haste of Treasury's massive and historic interventions and, critics say, a breakdown of the traditional separation between policymakers and banking regulators.
...
In what amounted to a partial nationalization of the banking system, Treasury announced that it would invest $125 billion in nine of the nation's largest banks and an additional $125 billion in the rest of the industry. In exchange, the banks would give the government an unusual kind of stock called senior preferred shares. Holders of these shares are excluded from shareholder votes on company business, but they receive annual interest payments and their shares have priority in the event of a bankruptcy.

"The senior preferred shares will qualify as Tier 1 [core] capital," Treasury said in a release announcing the program.

Treasury officials said yesterday that they knew that the rules on core capital needed to be changed to make that true.

Just another interesting twist.

Note: I'll be back home sometime tomorrow - sorry I haven't responded to all the emails.

by Calculated Risk on 10/19/2008 12:33:00 AM

From The Times: Negative equity ‘to reach 2 million’

Collapsing house prices are plunging 60,000 homeowners a month into negative equity, which means the country is on course for a worse crisis than the 1990s crash.

At current trends, 2m households will enter negative equity by 2010, outstripping the 1.8m affected at the bottom of the last housing slump.
...
Economists believe house prices will fall by up to 35% from their peak by 2010. This compares with a drop of only 20% in the early 1990s.
...
Capital Economics, the City consultancy, expects up to 2m properties will be in negative equity by 2010 — more than in the recession of the early 1990s.

The population of the UK is about 20% of the U.S., so using a ratio of population, this would compare to about 10 million homeowners in the U.S. with negative equity. Moody's estimates there are already 12 million homeowners in the U.S. with negative equity in the U.S. - so the problem appears to be worse in the U.S. than in the U.K.

by Calculated Risk on 10/18/2008 11:30:00 AM

From Gail Collins at the NY Times: Is Anybody Happy?

George W. Bush showed up on TV Friday morning to reassure the nation. What could possibly be worse?

Everybody knows that anything our president says is very likely wrong, and certainly won’t happen. If he announced: “I’m sending government agents to Spokane to arrest the looters,” we would expect that the officials would get lost, nobody would be arrested, and the looters probably never existed in the first place.

So hearts sunk throughout the nation when Bush appeared at a Chamber of Commerce gathering to say that the economy would recover.

“America is the most attractive destination for investors around the globe. America is the home of the most talented and enterprising and creative workers in the world,” said the president, who also insisted that “democratic capitalism remains the greatest system ever devised.”

Which translates into: all the money is going to Asia, nobody will ever get a job again and Karl Marx was right after all.

Bummer.

Yes - many Americans feel they have been living in Bizarro world.

by Calculated Risk on 10/18/2008 09:22:00 AM

Form the WSJ: Amid Pressing Problems, Threat of Deflation Looms

[T]he financial shock and a faltering economy can set the stage for a deflationary environment.

Federal Reserve officials view broad-based deflation as unlikely but possible. Federal Reserve Bank of San Francisco President Janet Yellen said in a speech this week that the plunge in oil prices along with slackening demand for labor and goods should "push inflation down to, and possibly even below, rates that I consider consistent with price stability."
,,,
With the unemployment rate rising rapidly and capital markets in turmoil, "pretty much everything points toward deflation," said Paul Ashworth, chief U.S. economist at Capital Economics. "The only thing you can hope is that the prompt action of policy makers can maybe head this off first."
...
Federal Reserve Chairman Ben Bernanke, in a speech as a Fed governor in 2002, said deflation in the U.S. is "highly unlikely" but added, "I would be imprudent to rule out the possibility altogether." The reason, he said at the time, was the Fed "has sufficient policy instruments to ensure that any deflation that might occur would be both mild and brief."
...
Deflation concerns in 2002 and 2003 led Fed officials to consider alternative measures to stimulate the economy. Their initial option came from the Fed's 1940s playbook: buying Treasuries to force down long-term yields, leading consumers and businesses to spend instead of save. In normal circumstances, effectively pumping money into the economy would support growth and spur inflation over time. Today's credit crisis has pushed Treasury yields lower already as investors seek less-risky assets.

The debate returns. Some people are concerned about hyperinflation. Others about deflation. The article suggests policy makers think deflation is unlikely.

by Calculated Risk on 10/17/2008 09:00:00 PM

I saw Lahde's updates for the last couple of years, but I could never get him to allow me to excerpt from them. Bloomberg has excerpts from his farewell email.

From Bloomberg: Lahde Quits Hedge Funds, Thanks `Idiots' for Success

Andrew Lahde, the hedge-fund manager who quit after posting an 870 percent gain last year, said farewell to clients in a letter that thanks stupid traders for making him rich and ends with a plea to legalize marijuana.

Lahde, head of Santa Monica, California-based Lahde Capital Management LLC, told investors last month he was returning their cash because the risk of using credit derivatives -- his means of betting on the falling value of bonds and loans, including subprime mortgages -- was too risky given the weakness of the banks he was trading with.

``I was in this game for money,'' Lahde, 37, wrote in a two-page letter today in which he said he had come to hate the hedge-fund business. ``The low-hanging fruit, i.e. idiots whose parents paid for prep school, Yale and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government.

``All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other sides of my trades. God Bless America.''

Pretty amusing stuff. Best to all.

by Calculated Risk on 10/17/2008 01:03:00 PM

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

The yield on 3 month treasuries: 0.79% up from up from 0.40% (BETTER)

The TED spread: 3.59 down from 4.11 yesterday (BETTER)

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. No announcement today have to wait for progress.

The A2P2 spread is 4.49 for Thrusday up from 4.4 for Wenesday. slightly worse.

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). No improvement yet.

The two year swap spread from Bloomberg: 122.2 down from 138.38 BETTER

I'll add a couple more indicators, but this is progress.

Note: posting will be light today - I'm hiking in Zion. I hiked Angel's Landing this morning - awesome.

by Calculated Risk on 10/17/2008 10:30:00 AM

I'm hiking in Zion this morning, and I'll be back by lunch.

Make sure to check the three month treasury yield (above 0.435% would be an improvement) and the TED spread (below 4.08% would be an improvement). I'll have more on credit indicators later.

Meanwhile, here are a few more jokes:

From Peter:
Q: What the difference between today's investment bankers and pigeons?
A: Pigeons can still make a deposit on a BMW.

From Sidd:
I went to an ATM today, and it asked to borrow a twenty till next week.

From monta's ankle:
I went to fill up my gas tank and I couldn't decide between leveraged and unleveraged.

From Rob Dawg:
Went to Best Buy to get a toaster and they gave me a free bank with purchase

by Calculated Risk on 10/17/2008 09:30:00 AM

Nobel prize winning economist Paul Krugman writes: Let’s Get Fiscal

Just this week, we learned that retail sales have fallen off a cliff, and so has industrial production. Unemployment claims are at steep-recession levels, and the Philadelphia Fed’s manufacturing index is falling at the fastest pace in almost 20 years. All signs point to an economic slump that will be nasty, brutish — and long.

How nasty? The unemployment rate is already above 6 percent (and broader measures of underemployment are in double digits). It’s now virtually certain that the unemployment rate will go above 7 percent, and quite possibly above 8 percent, making this the worst recession in a quarter-century.

And how long? It could be very long indeed.

And Krugman argues for more government spending:

[T]here’s a lot the federal government can do for the economy. It can provide extended benefits to the unemployed, which will both help distressed families cope and put money in the hands of people likely to spend it. It can provide emergency aid to state and local governments, so that they aren’t forced into steep spending cuts that both degrade public services and destroy jobs. It can buy up mortgages (but not at face value, as John McCain has proposed) and restructure the terms to help families stay in their homes.

And this is also a good time to engage in some serious infrastructure spending, which the country badly needs in any case.

At the start of the Depression, President Hoover kept trying to balance the budget - by cutting spending and raising the top marginal taxes from 25% to 63% - while the economy kept getting worse. It's unlikely that balancing the budget will be a priority in 2009.

by Calculated Risk on 10/17/2008 08:30:00 AM

Single-family starts were at 544 thousand in September; the lowest level since February 1982. Single-family permits were at 532 thousand in September, suggesting single family starts will fall even further next month. (Graph when I return home)

Here is the Census Bureau reports on housing Permits, Starts and Completions.

Building permits decreased:

Privately-owned housing units authorized by building permits in September were at a seasonally adjusted annual rate of 786,000. This is 8.3 percent (±1.6%) below the revised August rate of 857,000 and is 38.4 percent (±1.6%) below the revised September 2007 estimate of 1,277,000.

Single-family authorizations in September were at a rate of 532,000; this is 3.8 percent (±1.6%) below the August figure of 553,000. Authorizations of units in buildings with five units or more were at a rate of 225,000 in September.

The declines in single family permits suggest further declines in starts next month.

On housing starts:

Privately-owned housing starts in September were at a seasonally adjusted annual rate of 817,000. This is 6.3 percent (±12.0%)* below the revised August estimate of 872,000 and is 31.1 percent (±8.3%) below the revised September 2007 rate of 1,185,000.

Single-family housing starts in September were at a rate of 544,000; this is 12.0 percent (±8.3%) below the August figure of 618,000. The September rate for units in buildings with five units or more was 254,000.

And on completions:

Privately-owned housing completions in September were at a seasonally adjusted annual rate of 1,097,000. This is 11.7 percent
(±14.0%)* above the revised August estimate of 982,000, but is 20.4 percent (±9.6%) below the revised September 2007 rate of
1,378,000.
Single-family housing completions in September were at a rate of 806,000; this is 17.0 percent (±11.5%) above the August figure of
689,000. The September rate for units in buildings with five units or more was 260,000.

Notice that single-family completions are significantly higher than single-family starts. This is important because residential construction employment tends to follow completions, and completions will decline sharply soon.

by Calculated Risk on 10/16/2008 10:38:00 PM

From Hannah Wood at Mirror.co.uk: Top 10 credit crunch jokes to have you laughing all the way to the bank

1) I went to the ATM this morning and it said "insufficient funds"..

I'm wondering is it them or me?

2) Petrol is way too expensive these days. I actually can't afford to drive.

Last time I went dogging, I had to ask my mum to give me a lift.

3) With the current market turmoil, what's the easiest way to make a small fortune?

Start off with a large one.

My favorite:

How do you define optimism?

A banker who irons five shirts on a Sunday

by Calculated Risk on 10/16/2008 06:35:00 PM

From the WSJ:Lenders Eager for GM-Chrysler Deal

General Motors Corp. and Chrysler LLC are picking up the pace on merger discussions as the two sides are seeing strong support from banks and other potential lenders that are eager to see a deal done...

GM ... is aiming to get a deal done as soon as the end of October.

It sounds like the banks that still own Chrysler pier loans are pushing this deal. (Pier loans are bridge loans that couldn't be sold).

by Calculated Risk on 10/16/2008 06:26:00 PM

Comments about credit cards

We have tightened underwriting standards across the boar. In our US card business we have gotten more conservative. We have begun to reduce credit lines. We have continued to tweak our underwriting models and to the recalibrate models this may be unstable. We have adapted our models and approaches as the economic environment has changed and we are intervening judgmentally even more than our models would indicate.

Auto Loan Business

We repositioned our auto business at the beginning of the year. We pulled back on origination and we are shrinking the book of loans and originations. We have leveraged pricing and shrinking competitive supply and we [continue] to aggressively manage operating costs. Originations for the second quarter were $1.4 billion, down 56% from the third quarter of 2007. We are on track for auto loan originations for the full year of 2008 to be at least 45% lower than 2007 origination. The total auto loan portfolio shrink by $2.8 billion year-to-date. Dealer customers, the credit characteristics of new originations continue to improve as evidence by rising average FICO scores, and improving and encouraging early delinquency performance of our 2008 origination vintages. We have been able to maintain pricing power while improving the credit characteristics of new originations. Expected seasonal increases in charge offs will put significant pressure on profitability for the remainder of 2008. The continuing pressure from the seasoning of 2006 and 2007 vintages and broader cyclical economic challenges are likely to be a drag on results throughout 2009 and the continuing decline in loan balances will impact the optics, for example declining loan balances would reduce the denominator like charge offs, and operating expenses as a percentage of loans [the 30 day DQ rate increased to 9.3% from 7.6% from last quarter]

Q&A:

Analyst
[Are you inclined to get more aggressive here in pursuing new business?]


Capital One
It is very clear in all of our markets competition is easing in some places, there's more pricing power. We can be more selective et cetera… what holds us back has nothing to do with frankly either capital or liquidity at the moment with respect to originations. It really is - the elephant in the living room is about the economy. From our experience over 20 years of doing this, our [conclusion] is that the assets originated as economy is getting worse tend to have more adverse characteristics than assets at other times. The one thing I would say, though, is everything I said relates to our origination strategy. I think with respect to acquisitions, acquisitions of seasoned businesses and portfolios, distressed sales of those in this environment can in fact be exceptionally profitable. So our capital raise and our kind of looking out on the horizon at the moment is related to acquisition benefits.

Analyst
My follow up question just on the incremental trends in consumer spending, the spending on your cards were flat year-over-year and I just wondered if you could giver a little color into what you have seen September, October trends year-over-year spending patterns of consumer, how much have they worsened?

Capital One
…the right way to look at it on our portfolio is purchases per account. I think it is 4 something percent, but it is just a little bit below the overall growth in purchases that has happened in the industry. We have, everything that we have seen recently has been a mirror of what you see out there in the economy. But, the window we see into the consumer is almost exactly what you see on the outside and all of the public metrics.

Analyst
it just seems like we are just starting to feel the impact of the weakening employment environment. Where do you see charge offs peaking in '09 if you had to guess today?

NEW SPEAKER
First of all, the way we create this outlook is that we base it on a couple of models. One model is a model built on the last downturn, unemployment is the key driver there, and then another model we built in this downturn which not surprisingly, the big driver of a credit worsening is changes in home prices. So, so what we do in our process we go out and we look at kind of consensus estimates for the macro economic variables... The economic outlook assume in the outlook that Gary talked about is unemployment around 7% by mid 2009, and a nationwide peak to trough home price decline of 25%. Although I don't want to get too literal with that… there are so many new things associated with each downturn….. what we share with you is an outlook that we are managing the company to - an underlying assumption [the downturn] is going to be extended and long.

by Calculated Risk on 10/16/2008 04:08:00 PM

From the WSJ: Switzerland to Inject Capital Into UBS

Switzerland's government and central bank Thursday offered emergency help to the country's two largest banks, following rescue plans in other countries to support the banking system.

The Swiss National Bank will assume up to $60 billion of risky securities from UBS, leaving it nearly free of toxic assets, a move meant to restore trust in UBS, the central bank said.

On the road today ... I see the bailouts continue, and the same with market volatility. Best to all.

by Calculated Risk on 10/16/2008 01:45:00 PM

This will be a daily post. Here are a few indicators I'm watching for progress on the credit crisis.

The yield on 3 month treasuries: 0.40% up from 0.14% (a little better)

The TED spread: 4.11 down from 4.38 yesterday (a little better)

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. Two more $30 billion auctions announced today. NO PROGRESS.

The A2P2 spread is 4.4 for Wednesday up from 4.32 for Tuesday. slightly worse.

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). No improvement yet.

The two year swap spread from Bloomberg: 138.38 slight improvement

by Calculated Risk on 10/16/2008 01:00:00 PM

From MarketWatch:Home builders' confidence tanks in October

The National Association of Home Builders/Wells Fargo index fell three points to 14 in October, two points below the previous low, NAHB said. The survey has been conducted monthly for 23 years. "Not surprisingly, builder confidence has taken a heavy hit from the recent financial market crisis," said Sandy Dunn, president of the NAHB and a builder from Point Pleasant, West Va

I'm traveling and I'll post a graph later.

From the NAHB: BUILDER SENTIMENT RETREATS IN OCTOBER

Reflecting profound uncertainties tied to the financial market shocks of recent weeks, builder confidence in the market for new single-family homes receded to a new record low this month. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) declined three points to 14 in October after having edged up slightly in the previous month.

“Not surprisingly, builder confidence has taken a heavy hit from the recent financial market crisis,” noted NAHB Chairman Sandy Dunn, a home builder from Point Pleasant, W. Va. “We applaud the coordinated government efforts that have been undertaken to try to stem the panic on Wall Street and ease the impacts on Main Street, and we stand ready to support additional efforts to help stabilize housing and the national economy going forward.”

“Undoubtedly, today’s HMI reflects builder assessments of the recent events on Wall Street, the rapid deterioration in job markets and the corresponding weakness in consumer confidence,” noted NAHB Chief Economist David Seiders. “This report provides clear evidence that an additional economic stimulus package is needed, including a substantial incentive to spur home buying. The impacts of the record-breaking housing contraction have spilled over to other key sectors of the economy and weighed heavily on financial markets, and stabilizing housing is now the best chance we have to limit the severity of recession.”

Derived from a monthly survey that NAHB has been conducting for more than 20 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view sales conditions as good than poor.

All three component indexes fell this month. The indexes gauging current sales conditions and sales expectations for the next six months each hit new lows, falling three points to 14 and nine points to 19, respectively. The index gauging traffic of prospective buyers declined two points, returning to July’s record low of 12.

Every region posted declines in builder confidence in October, with four-point declines recorded in the Northeast and South, to 17 and 16, respectively, a three-point decline to 10 registered for the West, and a one-point decline to 14 posted in the Midwest.

by Calculated Risk on 10/16/2008 11:15:00 AM

From AFP: Oil price hits 15-month low under $68

Oil prices slumped further on Thursday, with Brent crude briefly sliding close to 67 dollars a barrel and the lowest level for more than 15 months, as slowing energy demand took its toll, traders said.

Crude oil futures were down more than 50 percent from record highs of above 147 dollars reached in July ...

The free fall continues. At least this will help with inflation and take some pressure off consumer spending.

by Calculated Risk on 10/16/2008 09:17:00 AM

From MarketWatch: U.S. Sept industrial output down 2.8%, biggest since Dec '74

The output of the nation's factories, mines and utilities plunged 2.8% in September, the Federal Reserve said Thursday. This is the biggest decline in output since December 1974. ... A strike at Boeing Co had a negative impact on production, as did Hurricane Gustav and Hurricane Ike. ... Capacity utilization fell to 76.4% from 78.7%.

More evidence of a sharp slowdown in the U.S. economy in September.

by Calculated Risk on 10/16/2008 08:50:00 AM

From the WSJ: Citigroup Posts Fourth Straight Loss

Citigroup Inc. swung to a third-quarter loss -- its fourth straight quarter in the red -- as it wrote down another $4.4 billion in securities and banking and blamed weak revenues across all businesses on "the impact of a difficult economic environment and weak capital markets."

And on Merrill: Merrill's Net Loss Widens on $9.5 Billion in Write-Downs

Merrill Lynch & Co., which is set to be acquired by Bank of America Corp. in February, posted a wider third-quarter loss amid another $9.5 billion in write-downs of troubled assets.

The company, which already posted some $40 billion in subprime-related write-downs, said it has made "significant progress in balance sheet and risk reduction," having cut 98% of its exposures to U.S. Alt-A mortgages.

The confessional is still busy!

by Calculated Risk on 10/16/2008 08:37:00 AM

From the DOL: Unemployment Insurance Weekly Claims Report

In the week ending Oct. 11, the advance figure for seasonally adjusted initial claims was 461,000, a decrease of 16,000 from the previous week's revised figure of 477,000. It is estimated that the effects of Hurricane Ike in Texas added approximately 12,000 claims to the total. The 4-week moving average was 483,250, an increase of 750 from the previous week's unrevised average of 482,500.

Click on graph for larger image in new window.

This graph shows weekly claims. The four week moving average is at 483,250.

Some of the recent increase in unemployment claims is a result of Hurricane Ike and should be temporary, but the four week moving average of weekly unemployment claims is at a recession level and continues to indicate significant weakness in the labor market.

by Calculated Risk on 10/16/2008 12:30:00 AM

From Vikas Bajaj at the NY Times provides an overview: Home Prices Seem Far From Bottom

Home prices across much of the country are likely to fall through late 2009, economists say, and in some markets the trend could last even longer depending on the severity of the anticipated recession.

In hard-hit areas like California, Florida and Arizona, the grim calculus is the same: More and more homes are going up for sale, but fewer and fewer people are willing or able to buy them.

Yes, house prices are still too high.