by Calculated Risk on 11/16/2008 04:12:00 PM

From the WSJ: Iceland Overcomes IMF Obstacle

Iceland has agreed that European regulations require it to guarantee accounts of hundreds of thousands of Britons and other foreigners frozen in the online arm of one of the nation's collapsed banks, the government said Sunday.

Recognition of the legal principle ... is a significant step toward freeing up a $2.1 billion bailout package from the International Monetary Fund. ...

It isn't clear how the depositors would actually be paid. The European rules ... require Iceland to guarantee the first €20,000 ($26,000) of account holders' deposits. That sum could well run into the billions of euros, cash that Iceland's guarantee fund doesn't have.

The bailouts continue ...

by Calculated Risk on 11/16/2008 02:46:00 PM

From Dr. Setser: Ut-oh …. exports are starting to fall fast.

[T]he non-petrol goods deficit is now moving in the wrong direction. It increased from $29.3b in June to $35.6b in August. Non-petrol exports fell by $9.9b over the last two months, while non-petrol imports fell by “only” $3.7 billion.
...
And remember this is the September data. Since then the global outlook has deteriorated — and the dollar has strengthened substantially. That isn’t going to help US exports.

Although Brad Setser is concerned about the global impact of slowing U.S. exports, I think there is another interesting relationship: net exports vs. residential investment. Let me add a couple of graphs ...

Click on graph for larger image in new window.

The first graph shows real residential investment (from the BEA) and real net exports. These are historically countercyclical; as residential investment increases the trade deficit tends to increase, and as residential investment falls, the trade deficit declines.

The second graph shows this as a contribution to GDP (rolling 4 quarters to smooth the data).

This shows that residential investment and net exports are countercyclical and tend to offset each other somewhat as far the impact on GDP. This is important because slowing exports could mean that there is nothing to offset a further decline in residential investment.

The good news is the trade deficit will decline sharply over the next few months (because of the decline in oil prices), and residential investment might bottom sometime in the next few quarters.

The bad news is the trade deficit might start increasing again - after the oil price adjustment - because of the stronger dollar and weak global economies. And residential investment might bottom, but any recovery will probably be anemic because of the huge overhang of surplus inventory. So it is unlikely that residential investment will offset any possible rise in the trade deficit.

Just something to add to Setser's post ...

by Calculated Risk on 11/16/2008 10:56:00 AM

From the Independent: Rock makes Damascene conversion on repossessions

Northern Rock ... has been roundly criticised for keeping its mortgage rates punishingly high and repossessing a disproportionately large number of homes, is overhauling the way it approaches bad debts.
...
"We are looking to work through problems with our customers on a case-by-case basis. Where appropriate, we will offer payment holidays, reduced monthly repayments and conversion to interest-only mortgages," said Jemma Rundle, a spokeswoman for Northern Rock.

In addition, Rock debt advisers will call people who are in arrears to see what extra help can be offered, rather than simply writing letters to them. ....

The Rock and four of its biggest mortgage rivals have admitted that they have seen a dramatic rise in the numbers of people voluntarily giving up their properties because they are unable to meet their mortgage repayments.

Ahhh ... more jingle mail. However in the U.K. mortgages are recourse and the lenders can pursue the borrowers for six years in the event of a short fall.

But entering voluntary repossession is no solution, said [Beccy Boden Wilks from the debt charity National Debtline]: "It can take months to sell the property and it could be at a knockdown price, so there could be a shortfall to pay. The lender can come back years later and ask for its cash."

Of course some mortgages in the U.S. are recourse too, but historically U.S. lenders have rarely pursued homeowners for any losses.

by Calculated Risk on 11/15/2008 09:59:00 PM

From CNN: Pakistan borrows $7.6B from IMF

Pakistan's government has agreed to a $7.6 billion aid deal with the International Monetary Fund (IMF), Pakistan's top finance official said.
...
Pakistan expects to receive the first installment before the end of the month with further payments spread over a two-year period, according to The Associated Press.

The loan will be used to bolster Pakistan's dwindling foreign currency reserves amid concern that a run on the Pakistani rupee could force the country to default on its international debt, AP said.

Meanwhile Iceland still waits. From Bloomberg: Icelanders Protest Government Failure to Clinch Loan

Icelanders will take to the streets in their thousands tomorrow to protest the government's failure to clinch a $6 billion International Monetary Fund-led loan while countries in less dire economic straits jump the IMF queue.

Weekly protests in downtown Reykjavik may swell to 20,000 soon, or 6 percent of the population, said Andres Magnusson, chief executive of the Icelandic Federation of Trade and Services. The islanders are venting their anger on politicians as prices soar, the krona collapses and the economy goes into reverse.

Here is a video of the protests in Iceland:



In Pakistan they protest receiving aid. In Iceland they protest not receiving aid. In the U.S. everyone just becomes a bank ...

by Calculated Risk on 11/15/2008 07:01:00 PM

From the NY Times: Downturn Drags More People Into Bankruptcy

The number of personal bankruptcy filings jumped nearly 8 percent in October from September, after marching steadily upward for the last two years ... Filings totaled 108,595, surpassing 100,000 for the first time since a law that made it more difficult — and often twice as expensive — to file for bankruptcy took effect in 2005. That translated to an average of 4,936 bankruptcies filed each business day last month, up nearly 34 percent from October 2007.

“Earlier downturns followed strong booms, so families went into recessions with higher incomes and lower debt loads,” said Elizabeth Warren, a professor at Harvard Law School ... “But the fundamentals are off for families even before we hit the recession this time, so bankruptcy filings are likely to rise faster.”

Not surprisingly, filings are increasing most rapidly in states where real estate values skyrocketed and then crashed, including Nevada, California and Florida. In Nevada, bankruptcy filings in October were up 70 percent compared with last year. In California, bankruptcies jumped 80 percent in the same period, while Florida’s filings rose 62 percent.

Click on graph for larger image in new window.

This graph shows the non-business bankruptcy filings per quarter since the beginning of 1996 through Q2 2008 (Source: USCourts.gov). According to the NY Times article, filing were over 100 thousand in Oct 2008 and will probably be well over 300 thousand for Q4 2008 - so the graph is still trending up.

Note that there was a small surge in filings during the last recession (in 2001). As Professor Warren noted, usually household balance sheets are in pretty good shape at the end of a boom, but not this time. Instead, this time many households were struggling with too much debt even before the current recession started. So the surge in filings will probably be much larger than in 2001 (also that was a business led recession).

In addition, it is likely that some changes will be made to the bankruptcy law early next year, and it is possible we will see a record number of non-business bankruptcies in 2009 (or perhaps the 2nd highest total behind 2005 when many people rushed to beat the changes in the bankruptcy law).

by Calculated Risk on 11/15/2008 10:53:00 AM

From the Mercury News: San Jose mayor seeks slice of bailout pie

San Jose Mayor Chuck Reed said Friday he's working with leaders of other large California cities to make sure they're not left behind.

The stimulus package Congress passed last month wasn't designed to dole out money to governments, so it's far from clear whether San Jose will get a piece. But with $1.6 billion in unfunded retiree health care obligations, plus $500 million worth of local and regional road work to be done and the $750 million price tag to bring BART to the South Bay, Reed noted the city has a full slate of needs.
...
Reed created a minor furor Friday when he told an Associated Press reporter he would seek 2 percent of the bailout, or $14 billion, for San Jose — an eye-popping figure, given that the city's entire annual budget is $3.3 billion.

The Bank of San Jose!

by Calculated Risk on 11/15/2008 09:20:00 AM

From the Financial Times: Banks see rise in voluntary repossessions

Banks are seeing an increase in the numbers of homeowners deciding voluntarily to hand back their properties because they cannot afford to keep up mortgage payments.

Voluntary repossessions involve the bank selling the property at auction but this will not show up in official figures as a repossession because there has been no court order.
...
[A] mainstream mortgage lender ... said it had seen cases of voluntary repossessions jump from 10 a month in January and February to 55 a month in September and October....

Another big bank said it had seen a rise - from a low base - in voluntary repossessions by consumers who faced financial problems. "This is consumers acting to manage their exposure to a downturn," the lender said.
...
The Council of Mortgage Lenders, the industry body, said it had no data but there was some anecdotal evidence that voluntary repossessions were increasing.

It's not clear if these homeowners can afford the mortgage, but are "walking away" because they are underwater - or if they can no longer can afford the mortgage due to hardship or rising mortgage costs. Whichever ... it seems there are many ways to leave your lender!

Just slip out the back, jack
Make a new plan, stan
You dont need to be coy, roy
Just get yourself free
Hop on the bus, gus
You dont need to discuss much
Just drop off the key, lee
And get yourself free
Paul Simon, 50 ways to leave your lover

by Calculated Risk on 11/15/2008 02:39:00 AM

The AP reports: 4 insurers ask government to let them acquire thrifts so they can receive bailout funds

In addition to Hartford Financial, the AP reports that Genworth Financial Inc., Lincoln National Corp. and Aegon NV have all asked the Office of Thrift Supervision for permission to buy thrifts - and access the TARP.

The line keeps getting longer ...

by Calculated Risk on 11/14/2008 08:57:00 PM

"Armageddon is here."
a private comment from a Senior Buyer at a home improvement retailer, Nov 13, 2008

Note: this was private and I can't reveal the source or company (I have no position in the company)

From a previous post, here are a couple of graphs on two key components of Residential Investment (RI):

Click on graph for larger image in new window.

As everyone knows, investment in single family structures has fallen off a cliff. This is the component of RI that gets all the media attention - although usually from stories about single family starts and new home sales (related to RI in single family structures).

Currently investment in single family structures is at 1.22% of GDP, significantly below the average of the last 50 years of 2.35% - and just above the record low in 1982 of 1.20%.

But what about home improvement?

The second graph shows home improvement investment as a percent of GDP.

Home improvement is at 1.21% of GDP, off the high of 1.3% in Q4 2005 - but still well above the average of the last 50 years of 1.07%. Maybe lenders are boosting home improvement spending fixing up all those damaged REOs!

This would seem to suggest there is significant downside risk to home improvement spending over the next couple of years.

Lowe's is scheduled to announce results on Monday and Home Depot on Tuesday.

by Calculated Risk on 11/14/2008 06:31:00 PM

From the Silicon Valley / San Jose Business Journal: Sobrato Development puts Santa Clara office project on hold (hat tip ShortCourage)

... For the first time in its almost 30-year history, the valley’s largest property owner decided not to finish a building under construction until the market turns around.
...
“The steel seemed like a logical stopping place,” [John Michael Sobrato, chief executive officer] said at a luncheon meeting of the National Association of Industrial and Office Properties.
...
Had it been completed, the complex would have joined a growing list of new developments available and empty in the valley. Almost 32 million square feet of speculative construction from Menlo Park to Morgan Hill are in the pipeline.

“We have enough product to satisfy demand for 2009 and 2010,” [Phil Mahoney, principal and executive vice president of with Cornish & Carey Commercial/ONCOR International] said.

Talk about an eyesore ...

by Calculated Risk on 11/14/2008 04:24:00 PM

From the WSJ: Hartford Aims to Become S&L, Gain Access to Treasury Program

Struggling insurer Hartford Financial Services Group Inc. announced it has applied to convert to savings-and-loan status and said it will buy Federal Trust Corp. for $10 million.

The move, which also involves Hartford applying to be part of the Treasury Department's $250 billion capital-injection effort, marks the company's biggest attempt to stem the crisis of confidence afflicting it and other life insurers.
...
Hartford estimated it would be eligible for a $1.1 billion to $3.4 billion investment from Treasury if its application is accepted.

Can a city become a bank too? From the WSJ: TARP City

In a letter to Treasury Secretary Henry Paulson Friday, the mayors of Philadelphia, Phoenix and Atlanta asked for the creation of a $50 billion fund to spur infrastructure investments as well as for loans to cover unfunded pension liabilities and to address cash flow crunches amidst tight credit markets.
...
The mayors envision funds to fulfill their requests coming from the government’s $700 billion Troubled Asset Relief Program.

Philadelphia: a Bank?

by Calculated Risk on 11/14/2008 02:57:00 PM

From CNBC: Paulson: Worsening Crisis Forced Change in Strategy

"By the time the process with Congress was completed, it was clear that we were facing a much more severe situation than we had envisioned earlier on," Paulson said in a live interview. "We have this limited pool of resources—big, but limited, $700 billion—and how do we use that, and get the maximum impact, and it's by putting capital in (banks)."

And from Reuters: US's Paulson-adding bank capital needed-CNBC

"We have in many ways humiliated ourselves as a nation with some of the problems that have taken place here," Paulson said in an interview with CNBC television.

Speak for yourself Mr. Paulson.

Update: Looks like Kashkari had fun today (a 36 second video):

by Calculated Risk on 11/14/2008 01:03:00 PM

Once again, as economic activity dives off a cliff, here is another daily look at a few credit indicators ...

LIBOR increased again, for the 2nd day in a row, after falling for 23 straight days:

The London interbank offered rate, or Libor, for three-month dollar loans edged above 2.23% from just below 2.15% Thursday, the British Bankers Association reported.

The three-month LIBOR was 2.15% yesterday and the rate peaked at 4.81875% on Oct. 10. (slightly worse)

The yield on 3 month treasuries fell to 0.145% from 0.18%. (slightly worse).

With the effective Fed Funds rate at 0.35% (as of yesterday), this is probably somewhat in the right range. At some point, I'd like to see the effective Fed funds rate close to the target rate (currently 1.0%) and the 3 month yield within 25 bps of the target rate.

The TED spread: 2.09, up from 1.98 (slightly worse)

The TED spread is back above 2.0 again, and still too high. The peak was 4.63 on Oct 10th. I'd like to see the spread move back down to 1.0 or lower. A normal spread is around 0.5. From reader Kai using data back to 1986: "The average TED spread is 58bps, but the median TED spread is 42bps and the non-crisis (i.e. less than 100bps spread) median is 37.8bps."

The two year swap spread from Bloomberg: 112.75, esentially unchanged (unchanged). This spread peaked at near 165 in early October, so there has been significant progress, but I'd like to see this below 100.

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. It has been a few days without an announcement from the Treasury... (no progress).

Weekly Fed Balance Sheet.

Click on graph for larger image in new window.

The Federal Reserve assets increased $139 billion this week to $2.214 trillion.

Note: the graph shows Total Factors Supplying Federal Reserve Funds and is an available series that is close to assets.

The A2P2 spread is down to 4.4 down from 4.47, and down from 4.72 two weeks ago. (slightly better).

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

The Fed is buying higher quality commercial paper (CP) and this is pushing down the yield on this paper (0.65% yesterday!) - and increasing the spread between AA and A2/P2 CP. So this indicator has been a little misleading. Also the recession is creating concern for lower rated paper. Still, if the credit crisis eases, I'd expect a significant decline in this spread.

If anything these indicators suggest a small step backwards ...

by Calculated Risk on 11/14/2008 12:41:00 PM

From the FDIC: FDIC Loss Sharing Proposal to Promote Affordable Loan Modifications

Although foreclosures are costly to lenders, borrowers and communities, the pace of loan modifications continues to be extremely slow (around 4 percent of seriously delinquent loans each month). It is imperative to provide incentives to achieve a sufficient scale in loan modifications to stem the reductions in housing prices and rising foreclosures.

Modifications should be provided using a systematic and sustainable process. The FDIC has initiated a systematic loan modification program at IndyMac Federal Bank to reduce first lien mortgage payments to as low as 31% of monthly income. Modifications are based on interest rate reductions, extension of term, and principal forbearance. A loss share guarantee on redefaults of modified mortgages can provide the necessary incentive to modify mortgages on a sufficient scale, while leveraging available government funds to affect more mortgages than outright purchases or specific incentives for every modification. The FDIC would be prepared to serve as contractor for Treasury and already has extensive experience in the IndyMac modification process.

Basic Structure and Scope of Proposal
This proposal is designed to promote wider adoption of such a systematic loan modification program:

by paying servicers $1,000 to cover expenses for each loan modified according to the required standards; and

sharing up to 50% of losses incurred if a modified loan should subsequently re-default

We envision that the program can be applied to the estimated 1.4 million non-GSE mortgage loans that were 60 days or more past due as of June 2008, plus an additional 3 million non-GSE loans that are projected to become delinquent by year-end 2009. Of this total of approximately 4.4 million problem loans, we expect that about half can be modified, resulting in some 2.2 million loan modifications under the plan.

There are more details in the press release, and the following table provides a summary:

by Calculated Risk on 11/14/2008 11:54:00 AM

From American Research Group, Inc.: Shoppers Cut 2008 Christmas Spending Plans in Half from 2007

Shoppers around the country say they are planning to spend an average of $431 for gifts this holiday season, down from $859 last year according to the twenty-third annual survey on holiday spending from the American Research Group, Inc. The overall average planned spending is down almost 50% from 2007 and it is the lowest level of planned spending recorded by the American Research Group since 1991.

While planned spending increases as Christmas approaches, a majority of shoppers are beginning the holiday shopping season saying they plan to cut their gift spending in half from a year ago.

In telephone interviews with a random sample of 1,100 adults nationwide conducted November 10 through 13, 2008, the average planned spending of $431 for 2008 is down about 50% from planned spending in the 2007 survey.

Year	Average Spending	Percent Change
2008	$431	-50%
2007	$859	-5%
2006	$907	-4%
2005	$942	-6%
2004	$1,004	+3%
2003	$976	-6%
2002	$1,037	-1%
2001	$1,052	+ 9%
2000	$968	+ 3%
1999	$939	+ 1%
1998	$928	+ 34%

This table from American Research Group shows the planned spending for each holiday season since 1998. Although actual spending changes (and spending will not be off 50% compared to 2007), this does show consumer pessimisim is very high.

Combined with the sharp plunge in October retail sales, this suggests a very weak fourth quarter for personal consumption expenditures (PCE) and suggests that forecasts for Q4 GDP might be too high.

Although the table only goes back to 1998, planned spending is a the lowest since the 1991 recession.

by Calculated Risk on 11/14/2008 10:13:00 AM

From Reuters: Record loss forces Freddie Mac to tap $100 bln fund

Freddie Mac reported a $25.3 billion quarterly loss on Friday as the housing slump worsened, forcing the second-largest provider of U.S. home loan funding to draw on a $100 billion Treasury Department lifeline.

The company attributed much of the record loss to a write down of tax-related assets ...

Freddie Mac said ... [housing market] conditions worsened "dramatically" during July through September.

The companies' regulator has submitted a request for the Treasury Department to provide $13.8 billion for Freddie Mac to erase the shareholder equity deficit.

Remember Fannie and Freddie have much lower default rates than the loans packaged by Wall Street. If conditions worsened dramatically for Freddie and Fannie, imagine how bad it is for Wall Street MBS and loans held by lenders like Wachovia (Wells Fargo) and WaMu (JPMorgan Chase).

by Calculated Risk on 11/14/2008 09:20:00 AM

Click on graph for larger image in new window.

This graph shows the combined loaded inbound and outbound traffic at the ports of Long Beach and Los Angeles in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container). Although containers tell us nothing about value, container traffic does give us an idea of the volume of goods being exported and imported.

Inbound traffic has peaked for the year as retailers have already imported most of the goods for the holiday season. Inbound traffic is about 7% below last October.

This slowdown in exports (inbound traffic to the U.S.) is hitting countries like China hard, from the NY Times: Factories Shut, China Workers Are Suffering

[A]n export slowdown that began earlier this year and that has been magnified by the global financial crisis of recent months is contributing to the shutdown of tens of thousands of small and mid-size factories here and in other coastal regions, forcing laborers to scramble for other jobs or return home to the countryside.

But even more concerning for the U.S. is that export traffic is declining. For the LA area ports, outbound traffic fell off a cliff in September, and was even lower in October. Outbound traffic was about 8% below the level of October 2007.

The key supports for the economy earlier this year - consumer spending, exports, and investment in non-residential structures - are all declining sharply now.

by Calculated Risk on 11/14/2008 08:43:00 AM

The Census Bureau reports that retail sales collapsed in October:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for October, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $363.7 billion, a decrease of 2.8 percent from the previous month and 4.1 percent below October 2007. Total sales for the August through October 2008 period were down 1.3 percent from the same period a year ago.

Retail trade sales were down 3.1 percent from September 2008 and were 5.0 percent below last year.

The following graph shows the year-over-year change in nominal and real retail sales since 1993.

Click on graph for larger image in new window.

To calculate the real change, the monthly PCE price index from the BEA was used (October PCE prices were estimated based on the increases for the last 3 months).

Although the Census Bureau reported that nominal retail sales decreased 5.0% year-over-year (retail and food services decreased 4.1%), real retail sales declined by 8.8% (on a YoY basis). This is the largest YoY decline since the Census Bureau started keeping data.

Retail sales are a key portion of consumer spending and real retail sales have fallen off a cliff.

by Calculated Risk on 11/14/2008 01:57:00 AM

From Professor Krugman: Depression Economics Returns. A few excerpts:

I don’t expect another Great Depression ... [but] We are ... well into the realm of what I call depression economics. By that I mean a state of affairs like that of the 1930s in which the usual tools of economic policy — above all, the Federal Reserve’s ability to pump up the economy by cutting interest rates — have lost all traction. When depression economics prevails, the usual rules of economic policy no longer apply: virtue becomes vice, caution is risky and prudence is folly.

To see what I’m talking about, consider the implications of the latest piece of terrible economic news: Thursday’s report on new claims for unemployment insurance, which have now passed the half-million mark. Bad as this report was, viewed in isolation it might not seem catastrophic. After all, it was in the same ballpark as numbers reached during the 2001 recession and the 1990-1991 recession, both of which ended up being relatively mild by historical standards (although in each case it took a long time before the job market recovered).

But on both of these earlier occasions the standard policy response to a weak economy — a cut in the federal funds rate, the interest rate most directly affected by Fed policy — was still available. Today, it isn’t: the effective federal funds rate (as opposed to the official target, which for technical reasons has become meaningless) has averaged less than 0.3 percent in recent days. Basically, there’s nothing left to cut.

Krugman suggests a huge fiscal stimulus package on the order of $600 billion.

by Calculated Risk on 11/13/2008 07:09:00 PM

This is a story that is playing out everywhere ...


Click on graph for larger image in new window.

Credit: Greg Cross, The Bulletin.

This graph from The Bulletin shows the office and industrial vacancy rates in Bend, Oregon. The office vacancy rate has doubled from last year and has almost tripled from the low in Q1 2007.

From Jeff McDonald at The Bulletin: More offices empty as demand goes soft

The vacancy rate in Bend’s office market more than doubled from third quarter 2007 to third quarter 2008, to 17.1 percent ... The vacancy rate is the highest in at least 15 years, said Darren Powderly, a Bend-based broker for Compass Commercial Real Estate Services ...

[T]he spike in demand for office space that occurred during the boom years between 2004 and 2006 resulted in a glut of new office buildings that appeared on the market this year — just as demand levels waned with the economic downturn ...

The good news is very little building is planned for 2009, so vacancy rates are expected to flatten in Redmond and Bend, Powderly said.

This happened in many places across the country - demand for offices increased with the housing bubble, developers responded by building new office buildings (and industrial buildings, malls and hotels) and now demand is waning just as the new buildings are coming on line.

The "good news" in the article is that "little building is planned for 2009". That is also happening everywhere, and while less building might be good news for building owners, it also means a significant decline in non-residential investment in 2009.