by Calculated Risk on 2/10/2009 12:41:00 PM

The Senate has approved their version of the stimulus package. The vote was 61 to 37.

There are significant differences between the House and Senate bills, and this might cause some problems in gaining final approval.

For a chuckle, from Krugman on the bailout:

I was going to dub the new financial plan TANF 2 — temporary assistance to needy financial institutions ... But Jamie Galbraith (private communication) has trumped me; he says it’s the Bad Assets Relief Fund.

by Calculated Risk on 2/10/2009 11:25:00 AM

From the Federal Reserve:

The Federal Reserve Board on Tuesday announced that it is prepared to undertake a substantial expansion of the Term Asset-Backed Securities Loan Facility (TALF). The expansion could increase the size of the TALF to as much as $1 trillion and could broaden the eligible collateral to encompass other types of newly issued AAA-rated asset-backed securities, such as commercial mortgage-backed securities, private-label residential mortgage-backed securities, and other asset-backed securities. An expansion of the TALF would be supported by the provision by the Treasury of additional funds from the Troubled Asset Relief Program.
emphasis added

Here is the new Treasury website. Geithner says this site will help provide much better transparency.

Here is a Financial Stability Plan Fact Sheet on the new plan (update: now available).

This was just a broad outline of a plan - not a specific plan.

by Calculated Risk on 2/10/2009 10:34:00 AM

The Geithner news conference is scheduled for 11 AM ET.

Here is the CNBC feed.

And a live feed from C-SPAN.

Here is a summary from CNBC: Financial Plan to Focus on Consumer, Business Aid

by Calculated Risk on 2/10/2009 08:51:00 AM

From the Boston Globe: Boston's tallest building faces foreclosure

Click on photo for larger image in new window.

Photo Credit: Tomtheman5

The article notes that the 60-story John Hancock tower is facing foreclosure and is scheduled to be auctioned off next month.

The owners, Broadway Partners, paid $1.3 billion for the building in 2006 and the current value is estimated at between $700 and $900 million. Quite a haircut!

Broadway Partners was an aggressive buyer at the height of the commercial real estate market. From Bloomberg in January: Broadway Partners Talks With Lenders After Loan Deadline Passes

Broadway Partners, the New York real estate investment firm that used short-term debt to buy more than $8 billion of office towers from December 2006 to May 2007, is negotiating with its banks after missing a repayment deadline last week.
...
Broadway ... borrowed $1.5 billion through mezzanine loans to help finance the purchases of two groups of buildings from Beacon Capital Partners LLC, including Boston’s John Hancock Tower. Broadway borrowed the money from Lehman Brothers Holdings Inc. and RBS Greenwich Capital Markets Inc.

More losses for the lenders too.

by Calculated Risk on 2/10/2009 01:19:00 AM

Press Release: UBS Reports a Fourth Quarter Loss of CHF 8.1 Billion

Update: From the WSJ: UBS Posts Loss, Plans Job Cuts

UBS AG Tuesday reported a narrower fourth-quarter net loss and said it will cut 15,000 jobs by the end of this year in its loss-making investment bank.

The confessional is still very busy.

And oldie (Source: Jan-Martin Feddersen, Immobilienblasen)



Here is the actually UBS logo.

by Calculated Risk on 2/09/2009 11:18:00 PM

From the NY Times: Geithner Said to Have Prevailed on the Bailout. According to the NY Times, the plan includes:

[T]he creation of a joint Treasury and Federal Reserve program, at an initial cost of $250 billion to $500 billion, to encourage investors to acquire soured mortgage-related assets from banks.

The Fed will use its balance sheet to provide the financing, and the Federal Deposit Insurance Corporation might provide guarantees to investors who participate in the program, which some people might call a “bad bank.”

A second component of the plan would broadly expand, to $500 billion to $1 trillion, an existing $200 billion program run by the Federal Reserve to try to unfreeze the market for commercial, student, auto and credit card loans.
...
A third component would involve a review of the capital levels of all banks, including projections of future losses, to determine how much additional capital each bank should receive.

The capital injections would come out of the remaining $350 billion in the Troubled Asset Relief Program, or TARP.

Mortgage relief for homeowners will be a separate plan announced next week.

The first and third components are related. The first component sounds like a plan to encourage investors to buy toxic mortgage securities from banks with non-recourse financing from the Fed and possibly some guarantees from the FDIC. One of the keys will be the percent the investors have to put down (skin in the game), but their downside will probably be limited.

This will almost certainly lead to more losses for many banks, and that will require additional capital injections. Apparently Geithner believes the remaining $350 billion in the TARP is sufficient for the capital injections.

Treasury Secretary Timothy Geithner will announce the plan at 11 am EST.

by Calculated Risk on 2/09/2009 09:46:00 PM

From the WSJ: Bond Market in Winter Thaw

A growing number of big companies are taking advantage of the thawing credit markets to raise large sums of money at low interest rates, with Cisco Systems Inc. Monday selling $4 billion in bonds ...

The big Cisco offering follows a string of successful efforts just in the past five weeks to tap the market for corporate debt. The size of the offering -- and the relatively low risk premiums attached to the bonds -- indicate that investors are hungry for debt from highly rated companies that issue infrequently.
...
Cisco's 10-year notes were sold Monday at two percentage points above Treasurys for a yield of 4.979%, while a 30-year portion of Cisco's offering sold for a yield of 5.916%.
...
Cablevision Systems Corp. had to pay interest of 9.375% to borrow $500 million on Monday. [10 year notes]
...
Other companies are still shut out of the market completely.

The following graph shows the spread between 30 year Moody's Aaa and Baa rated bonds and the 30 year treasury.

The Moody's data is from the St. Louis Fed:

Moody's tries to include bonds with remaining maturities as close as possible to 30 years. Moody's drops bonds if the remaining life falls below 20 years, if the bond is susceptible to redemption, or if the rating changes.

Click on table for larger image in new window.

There has been some improvement (decline in spread) in recent weeks, but the spreads are still very high - even for higher rated paper - but especially for lower rated paper like Cablevision.

by Calculated Risk on 2/09/2009 06:55:00 PM

The Obama news conference is scheduled for 8 PM.

Here is the CNBC feed.

And a live feed from C-SPAN.



CNBC has a comparison of the House and Senate versions of the stimulus plan. It looks like the homebuilders are going to get their gift - and other companies too - but it is the homebuilders that lobbied hard for this provision (including withholding political contributions at one time). The homebuilders made huge profits in 2004 and 2005, and they would like to offset the current losses against those profits:

MONEY LOSING COMPANIES:

--House -- $15 billion to allow companies to use current losses to offset profits made in the previous five years, instead of two, making them eligible for tax refunds.

--Senate -- Allows companies to use more of their losses to offset previous profits, increasing the cost to $19.5 billion.

This is a clear gift to shareholders of the homebuilders. How does this help create jobs? This provision could be dumped - no problem. Between this and the useless $35.5 billion housing tax credit, we could cut $55 billion from the bill and maybe add back a couple of the stimulus programs that would help. Oh well ...

by Calculated Risk on 2/09/2009 05:10:00 PM

From CNBC: 'Bad Bank' Is Dropped From Financial-Rescue Package

The Obama administration’s wide-ranging plan to stabilize the financial system no longer includes creating a "bad bank" but will still contain measures to encourage private firms to buy up toxic assets from financial institutions ...

The latest version of the plan no longer addresses any immediate aid to insurance companies with thrift units that have applied for capital injections under the existing TARP.
...
In a statement Monday, the Treasury said that senior officials from Treasury, the Federal Reserve Board and the Federal Deposit Insurance Corporation would hold a media briefing on the plan at 11:45 a.m. ET

The leaked details might keep changing, but I guess the time is set for the announcement.

by Calculated Risk on 2/09/2009 02:44:00 PM

Barry Ritholtz provides us with the following chart: Job Losses in Post WWII Recessions

Click on graph for larger image in new window.

This graph shows job losses during recessions from the peak month of employment until jobs recover.

The current recession has had the most job losses and the 2001 recession had the weakest job recovery.

However this graph is not normalized for increases in the work force.

The second graph (that Barry asked me for) shows the job losses from the start of the employment recession, in percentage terms (as opposed to the number of jobs lost).

For the current recession, employment peaked in December 2007, and this recession is about as bad as the 1981 recession in percentage terms at this point.

In the earlier post-war recessions, there were huge swings in manufacturing employment. Now manufacturing is a much smaller percentage of the economy, and the swings aren't as significant because of technological advances. This is the main reason that job losses were larger in those earlier recessions.

Here is Barry's updated post (with another graph). Barry asks: Are recessions taking longer to recover from? The answer appears to be yes. And I expect unemployment to be elevated for some time (even after the economy starts to recover).

by Calculated Risk on 2/09/2009 02:37:00 PM

Video from CNBC: Predicting Crisis: Dr. Doom & the Black Swan (hat tip Dwight)

Nouriel Roubini and Nassim Taleb discuss the recession.

by Calculated Risk on 2/09/2009 12:36:00 PM

On CNBC this morning, PIMCO's Bill Gross said:

"I think at some point we're going to see a 4.5 percent mortgage rate and the 10-year Treasury rate capped at some level."

How far would the Ten Year yield have to fall for mortgage rates to decline to 4.5%? The ten year yield is currently at 3.045%.

Click on graph for larger image in new window.

This graph shows the relationship between the Ten Year yield (x-axis) and the 30 year mortgage rate (y-axis, monthly from Freddie Mac) since 1971. The relationship isn't perfect, but the correlation is very high.

Based on this historical data, the Fed would have to push the Ten Year yield down to around 2.3% for the 30 year conforming mortgage rate to fall to 4.5%.

The Fed could also buy more agency MBS to push down mortgage rates, but if they buy Ten Year treasuries with the goal of 4.5% mortgage rates, they might have to push Ten Year yields down significantly.

by Calculated Risk on 2/09/2009 11:20:00 AM

From CNBC: Mortgage Rates Likely Headed to 4.5%: Pimco's Gross

"I think at some point we're going to see a 4.5 percent mortgage rate and the 10-year Treasury rate capped at some level," he said. "When the Fed comes in to buy Treasurys that will be a big day."

CNBC has a video of the interview with Gross.

Click on graph for larger image in new window.

The 10-year yield is at 3.04% today, well above the record low of 2.07% set on Dec 18th.

This graph shows the 10 year yield since 1962. The smaller graph shows the ten year yield since the start of 2008. In the bigger scheme, this has been a fairly small rebound in yield.

To move the 30 year mortgage rate to 4.5%, the Fed would probably have to cap the Ten Year yield near 3.0%.

by Calculated Risk on 2/09/2009 10:00:00 AM

From Bloomberg: Lyondell Banks Caught in Bankruptcy Lose $3.7 Billion in Loans

The five banks that helped finance the takeover of Lyondell Chemical Co. have lost at least $3.7 billion, and that figure may climb to more than $8 billion, which would make the leveraged buyout the costliest in history for lenders.
...
The financing includes $8 billion of low-ranking loans still held by the banks that may be worthless ...

Each of the five banks [Goldman Sachs Group Inc., Citigroup Inc., UBS AG, Merrill Lynch & Co. and ABN Amro Holding NV] holds $1.6 billion of so-called second- and third-lien loans, the people familiar with the situation said.

Lyondell’s losses dwarf those from the busted LBOs of the 1980s, such as Ohio Mattress Co., the $965 million takeover dubbed “the burning bed” by bond traders.

Back in 2007, when the liquidity crisis first started, many banks were stuck with LBO related pier loans (bridge loans that they couldn't sell). Now the banks are being forced to take write downs on these loans. Or in this case, since these are second and third lien loans, complete write-offs.

by Calculated Risk on 2/09/2009 08:31:00 AM

From the Financial Times: Demand for office space falls at record pace

Demand for offices and shops has fallen at the fastest pace on record, spelling further trouble for commercial property landlords struggling to find tenants in worsening economic conditions.
...
Most of the headline indicators of commercial property performance tracked by Rics fell to their lowest levels in the survey’s 11-year history in the fourth quarter, with particular pessimism in the retail sector where almost four-fifths of surveyors reported a fall in demand.

"Demand falling at a record pace" ... Just another "record" being set, this time in CRE.

by Calculated Risk on 2/09/2009 01:32:00 AM

Kash Mansori writes at Econbrowser: Will a Home Purchase Tax Credit Help Boost House Prices?

Check it out. Kash provides a couple of simple diagrams that suggest that the tax credit will probably not meet the stated goal of stabilizing house prices.

If my hunch is correct, then all the house purchase tax credit will do is to modestly increase the number of houses sold each month... with no noticeable impact on house prices.

That doesn't mean that the tax credit would have no impact. In particular, it may be a boon to some cash-constrained households that want to buy a house right now but can't borrow enough. And it should help to reduce inventories of unsold houses by a bit. But if you're hoping that it will make house prices rise, with all of the beneficial economic effects on home equity that such a rise might have... think again.

That is $35 billion for nothing.

by Calculated Risk on 2/08/2009 10:50:00 PM

From Floyd Norris at the NY Times: U.S. Bank Bailout to Rely in Part on Private Money

Administration officials said the plan, to be announced Tuesday, was likely to depend in part on the willingness of private investors other than banks — like hedge funds, private equity funds and perhaps even insurance companies — to buy the contaminating assets that wiped out the capital of many banks.

... The government would guarantee a floor value, officials say, as a way to overcome investors’ reluctance to buy them. ... Details of the new plan, which were still being worked out during the weekend, are sketchy.
...
By trying to bring in private sector buyers to set prices for the distressed assets, and to take some but not all of the risk that the asset value will continue to decline, Obama officials evidently hope to restore confidence in the banking system. They will also try to avoid the politically perilous course of having the government directly buy the assets at prices that could turn out to be far higher, or lower, than their eventual value.
...
A possible model for the way the new Treasury plan could work arose in a deal last July that had no government involvement. In that case, Merrill Lynch sold $31 billion in securities for 22 cents on the dollar. The buyer, the Lone Star group of private equity funds, put down only one-quarter of the purchase price and had the right to walk away, forfeiting only the down payment, if it later turned out the securities were worth even less than it had agreed to pay.

Thus Lone Star stands to receive the upside profit if the securities prove to be more valuable, but has only a limited downside risk if they do not.

Liz Rappaport and Jon Hilsenrath at the WSJ had a story earlier: U.S. Weighs Fed Program to Loosen Lending

Some hedge funds, which often use borrowed money to boost returns, are lining up to get in on the Fed program, seeing a chance to make high double-digit-percentage returns with little downside using low-cost loans made on easy terms.

This really depends on the details. If the model is similar to the Lone Star deal, with hedge funds (or others) putting 25% down, the the Fed loaning the other 75% at attractive rates (with no recourse), and the transaction completely transparent (as they should be), I don't think the returns for investors would be in the "high double digits" as the WSJ article suggests.

This structure would definitely increase the price investors would be willing to pay for toxic assets, as compared to current market values (while putting the taxpayers at risk). For any bank that has aggressively marked down assets to current market values, this could mean a potential markup. But I think most banks will have to take further write downs and will need additional capital.

by Calculated Risk on 2/08/2009 08:10:00 PM

From Mathew Padilla at the O.C. Register: Good O.C. borrowers brought down by bank's bad loans

Even as the housing market began to crack, investment bank Bear Stearns increased its bets on mortgages to Orange County homeowners.

The loans were often to people with good jobs and solid credit. But many borrowers stretched their incomes to buy some of the county’s pricier homes. Now an alarming number of those borrowers are facing foreclosure.
...
In Orange County, Bear’s borrowers generally had credit scores, known as FICO, above 700 – considered strong during the housing boom.

But by the middle of last year, 12.9 percent of Bear’s loans were in foreclosure. By comparison, subprime loans, which have lower credit scores, had an industry-wide foreclosure rate of 11.8 percent at the time. ... Many of the loans allowed borrowers to provide little or no proof of income, while at the same time delaying payment of interest and sometimes principal too.

These were "good borrowers" in the sense that they had high FICO scores. But they used affordibility products - Option ARMs and stated income loans - to buy overpriced homes in Orange County, California. The lenders forgot the three C's!

This is a good time to reread Tanta's post: Reflections on Alt-A. Here is a brief excerpt:

Residential mortgage lending never, of course, limited itself to considering creditworthiness; we always had "Three C's": creditworthiness, capacity, and collateral. "Capacity" meant establishing that the borrower had sufficient current income or other assets to carry the debt payments. "Collateral" meant establishing that the house was worth at least the loan amount--that it fully secured the debt. It was universally considered that these three things, the C's, were analytically and practically separable.

That, I think, is very hard for people today to understand. The major accomplishment of last five to eight years, mortgage-lendingwise, has been to entirely erase the C distinctions and in fact to mostly conflate them.
...
A lot of folks see the failure of Alt-A as a failure of FICO scores. I don't see it that way. FICO scoring is just an automated and much more consistent way of measuring past credit history than sitting around with a ten-page credit report counting up late payments and calculating balance-to-limit ratios and subtracting for collection accounts and all that tedious stuff underwriters used to do with a pencil and legal pad. I have seen no compelling evidence that FICO scoring is any less reliable than the old-fashioned way of "scoring" credit history.

To me, the failure of Alt-A is the failure to represent reality of the view that people who have a track record of successfully managing modest amounts of debt will therefore do fine with very high amounts of debt. Obviously the whole thing was ultimately built on the assumption that house prices would rise forever and there would always be another refi.

by Calculated Risk on 2/08/2009 03:32:00 PM

This house is a flipper - the buyer bought in December at the Trustee sale for $502 thousand, and is now asking $750 thousand.

Here is the price history from Redfin:

Date	Event	Amount
Jan 16, 2009	Listed	$749,000
Dec 17, 2008	Sold	$502,000
Jun 26, 2007	Sold	$752,287
Jan 21, 2004	Sold	$752,000

The house was built in 2003, and it appears the house was first sold in Jan 2004. The buyer in 2007 bought at the 2004 price, and then lost the home in foreclosure.

The house looks pretty nice, but Realtor Jim unmasks the "running-pool trick"! Enjoy.

by Calculated Risk on 2/08/2009 11:02:00 AM

From ABC News: 'This Week' Transcript

STEPHANOPOULOS: Let me ask about that financial overhaul. Originally, Secretary Geithner was supposed to give that speech tomorrow. Administration officials are telling me it's now more likely on Tuesday?

SUMMERS: Yes, I think there's a desire to keep the focus right now on the economic recovery program, which is so very, very important.

STEPHANOPOULOS: So Tuesday it is.

And on the Stimulus Package:

STEPHANOPOULOS: Let me start out by putting up a little chart that shows the House and Senate versions of this stimulus package. Let me show our viewers that right now. The overall cost is about the same, the House $820 billion, Senate $827 billion, but the composition different. The Senate has about $100 billion more in tax cuts, but $40 billion less in state aid, $20 billion less in education, $15 billion less in payments to individuals, some other differences.

I know that, when the president was meeting with these moderate Republican senators this week, including Senator Susan Collins of Maine, he told them he endorsed their efforts to scrub the bill of what they called excessive spending. Does that mean the president prefers the Senate version to the House version?

SUMMERS: No, the president feels that, above all, we need a major program enacted very quickly that will create 3 million to 4 million jobs. He believes we need to perfect it in every way we can.

If there are programs that aren't going to serve important purposes, they should be -- they should be eliminated. He certainly believes that. He's open to good ideas from both -- from both sides.

But we're going to have to look at both these bills, assuming the Senate bill passes, as most people expect at this juncture, and craft the best possible approach going forward.
...
STEPHANOPOULOS: Some of the critics of the Senate bill say that the most important elements have been -- have been brought down. Paul Krugman, writing on his blog this morning, said, "Some of the most effective and most needed parts of the plan have been cut." He's citing especially that $40 billion in state aid.

And he goes on to say that, "My first cut says that the changes to the Senate bill will ensure that we have at least 600,000 fewer Americans employed over the next two years."

SUMMERS: There's no question we need -- we need a large, forthright approach here. There are crucial areas, support for higher education, that are things that are in the House bill that are very, very important to the president.

STEPHANOPOULOS: But will the Senate bill produce fewer jobs?

SUMMERS: There's no question -- no question what we've got to do is go after support for education. And there are huge problems facing state and local governments, and that could lead to a vicious cycle of layoffs, falling home values, lower property taxes, more layoffs. And we've got to prevent that.

So we're going to have to try to come together in the conference. And the president is certainly going to be active in sharing his views as that process -- as that process...

And on the economy:

STEPHANOPOULOS: Let me -- let me get to the state of the economy, because some economists have been even more alarming than you are right now.

STEPHANOPOULOS: This week, two economists, the president of the Federal Reserve Bank of San Francisco, Janet Yellen, said, "I think we do have the same type of dynamics taking place that do happen in a depression." The managing director of the IMF, Dominique Strauss- Kahn, was quoted in Bloomberg News as saying, "Advanced economies are already in a depression, and the financial crisis may deepen unless the banking system is fixed. The worst cannot be ruled out."

Already in a depression?

SUMMERS: We're in a very serious situation, George. This is worse than any time since the Second World War. It's worse than I think most economists like me ever thought we would see.

But let's remember. In the Depression, the unemployment rate was 25 percent. GDP had fallen in half. We were really in a very different situation than that.

But all of this concern -- the risks of deflation, for example -- points up the importance of acting as aggressively as we can. That's why the president's economic recovery program is so important. That's why it needs to be twinned, as it will be this week, with the financial recovery program directed at shoring up the flow of credit so that people can get the loan to buy a car...

STEPHANOPOULOS: Let me -- let me ask you about that.

SUMMERS: ... so that we can address the problem which has, frankly, gone unattended for much too long of declining house prices.

I hope Summers understands that house prices are still too high by most measures and need to fall further. On the question of depression, the answer is no, although the Senate appears to be trying for one!