by Calculated Risk on 2/27/2009 07:45:00 PM

From the FDIC: Bank of Nevada, Las Vegas, Nevada Assumes All of the Deposits of Security Savings Bank, Henderson, Nevada

Security Savings Bank, Henderson, Nevada was closed today by the Nevada Financial Institutions Division, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. ...

As of December 31, 2008, Security Savings Bank had total assets of approximately $238.3 million and total deposits of $175.2 million. Bank of Nevada did not pay a premium to acquire the deposits of Security Savings Bank.
...
The FDIC estimates that the cost to the Deposit Insurance Fund will be $59.1 million. The Bank of Nevada's acquisition of all the deposits of Security Saving Bank was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Security Savings Bank is the sixteenth bank to fail in the nation this year.

That makes two today! Update ... by Soylent Green Is People

Heritage is gone
Security is toast as well
Yes, Friday is here.

by Calculated Risk on 2/27/2009 07:27:00 PM

From the FDIC: MB Financial Bank, N.A., Chicago, Illinois, Assumes All of the Deposits of Heritage Community Bank, Glenwood, Illinois

Heritage Community Bank, Glenwood, Illinois, was closed today by the Illinois Department of Financial Professional Regulation, Division of Banking, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. ...

As of December 5, 2008, Heritage Community Bank had total assets of $232.9 million and total deposits of $218.6 million. ...

The FDIC and MB Financial Bank entered into a loss-share transaction. MB Financial Bank will share in the losses on approximately $181 million in assets covered under the agreement. ...

The FDIC estimates that the cost to the Deposit Insurance Fund will be $41.6 million. MB Financial Bank's acquisition of all the deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Heritage Community Bank is the fifteenth FDIC-insured institution to fail in the nation this year and the third in the state.

It is Friday ... oh wait, there is another one too!

by Calculated Risk on 2/27/2009 06:09:00 PM

The old comment system went down today. I switched over to the JS-Kit system and this is probably a permanent switch. The Haloscan system was no longer being improved, and JS-Kit has a number of new features in development.

There is a control feature at the bottom for threaded or flat comments. I'm still trying to figure everything out! Suggestions welcome ...

Now back to waiting for the FDIC.

by Calculated Risk on 2/27/2009 03:59:00 PM

The S&P 500 closed at 735 or so. The low in 1997 was 737.01.

Note: the S&P 500 was at 744 when Greenspan spoke of "irrational exuberance"!

Click on graph for larger image in new window.

DOW off 1.6%

S&P 500 off 2.3%

NASDAQ off 1.0%

The second graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears". (Doug should update soon)



Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

by Calculated Risk on 2/27/2009 03:17:00 PM

From the LA Times: California unemployment rate reaches 10.1%

More than 1 in 10 California workers were unemployed in January ...

The 10.1% jobless rate is the highest since June 1983 and not far below the 11% record set in November 1982 at the worst point of a severe recession ... Job losses escalated in January, with the state's unemployment rate jumping by 1.4 percentage points from a revised 8.7% for December.

Ouch.

by Calculated Risk on 2/27/2009 02:00:00 PM

The following graph shows the contribution to GDP from residential investment, equipment and software, and nonresidential structures. The graph shows the rolling 4 quarters for each investment category.

This is important to follow because residential tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.

Click on graph for larger image in new window.

Residential investment (red) has been a huge drag on the economy for the last couple of years. The good news is the drag is getting smaller, and the drag on GDP will be significantly less in 2009, than in 2007 and 2008.

Even if there is no rebound in residential investment later this year, the drag will be less because there isn't much residential investment left! The bad news is any rebound in residential investment will probably be small because of the huge overhang of existing inventory.

The REALLY bad news is nonresidential investment (blue) is about to fall off a cliff. Nonresidential investment subtracted -0.24% (SAAR) from GDP in Q4, and will decline sharply in 2009 based on the Fed's Senior Loan Officer Survey, the Architecture Billings Index, and many many other reports and stories. In previous downturns the economy recovered long before nonresidential investment - and that will probably be true again this time.

As always, residential investment is the investment area to follow - it is the best predictor of future economic activity.

by Calculated Risk on 2/27/2009 01:49:00 PM

This is a big story because it shows how quickly the economy has changed. Just last November, GE once again promised not to cut the dividend through the end of 2009.

From MarketWatch: GE to cut dividend to 10 cents from 31 cents: WSJ

General Electric will cut its quarterly dividend to 10 cents from 31 cents, the Wall Street Journal reported on its Web site Friday.

And from GE last November: An update on the GE dividend

On Sept. 25, GE stated that its Board of Directors had approved management’s plan to maintain GE’s quarterly dividend of $0.31 per share, totaling $1.24 per share annually, through the end of 2009. That plan is unchanged.

This dividend cut was inevitable. But hoocoodanode? Apparently not GE management.

by Calculated Risk on 2/27/2009 12:05:00 PM

It has been widely reported that the stress tests will be completed "no later than the end of April", based on this FAQ:

Q10: When will the process be completed?

A: The Federal supervisory agencies will conclude their work as soon as possible, but no later than the end of April.

Just to let everyone know, I've heard the banks have been told to submit their stress test results by Wednesday March 11th. Too bad the results will not be made public.

UPDATE: Questions from a reader:

The Fed published macroeconomic assumptions for the US. What about international markets?

Should the banks assume mark-to-market accounting will stay or will be repealed?

Should the banks still assume that in 2010 they will have to bring off-balance sheet exposures back on their books?

Just to repeat the first question: With all that is happening in Asia and Europe (especially the exposure to Eastern Europe and other emerging markets), what are the macro assumptions for these markets? I'm sure other readers have excellent questions too.

by Calculated Risk on 2/27/2009 10:57:00 AM

From the National Restaurant Association (NRA): Restaurant Industry Outlook Improved Somewhat in January as Restaurant Performance Index Rebounded From December’s Record Low

The outlook for the restaurant industry improved somewhat in January, as the National Restaurant Association’s comprehensive index of restaurant activity bounced back from December’s record low. The Association’s Restaurant Performance Index (RPI) – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 97.4 in January, up 1.0 percent from December’s record low level of 96.4.

“Despite the encouraging January gain, the RPI remained below 100 for the 15th consecutive month, which signifies contraction in the key industry indicators,” said Hudson Riehle, senior vice president of Research and Information Services for the Association. “Same-store sales and customer traffic remained negative in January, and only one out of four operators expect to have stronger sales in six months.”
...
Restaurant operators reported negative customer traffic levels for the 17th consecutive month in January.
...
Along with soft sales and traffic levels, capital spending activity remained dampened in recent months. Thirty-four percent of operators said they made a capital expenditure for equipment, expansion or remodeling during the last three months, matching the proportion who reported similarly last month and tied for the lowest level on record.
emphasis added

Click on graph for larger image in new window.

Unfortunately the data for this index only goes back to 2002.

The index values above 100 indicate a period of expansion; index values below 100 indicate a period of contraction.

Based on this indicator, the restaurant industry has been contracting since November 2007. Also note the record low business investment by restaurant operators - this is happening in most industries, and is showing up as a significant decline in equipment and software investment in the GDP report (-28.8% annualized in the Q4 report!)

by Calculated Risk on 2/27/2009 09:13:00 AM

From the NY Times: U.S. Agrees to Raise Its Stake in Citigroup

[T]he government will increase its stake in the company to 36 percent from 8 percent.
...
Under the deal, Citibank said that it would offer to exchange common stock for up to $27.5 billion of its existing preferred securities and trust preferred securities at a conversion price of $3.25 a share, a 32 percent premium over Thursday’s closing price.

The government will match this exchange up to a maximum of $25 billion of its preferred stock at the same price. In its statement, the Treasury Department said the dollar-for-dollar match was intended to strengthen Citigroup’s capital base.

The government of Singapore Investment Corporation, Saudi Prince Walid bin Talal, Capital Research Global Investors and Capital World Investors have already agreed to participate in the exchange, Citibank said in a statement. Existing shareholders will own about 26 percent of the outstanding shares.
...
The bank will also suspend dividends on its preferred shares and its common stock.

From MarketWatch: Citi CEO says latest deal should end nationalization fear

"[F]or those people who have a concern about nationalization, this announcement should put those concerns to rest," Pandit said.

Here is the Treasury statement: Treasury Announces Participation in Citigroup's Exchange Offering

by Calculated Risk on 2/27/2009 09:00:00 AM

From the WSJ: GDP Shrank 6.2% in 4th Quarter, Deeper Than First Thought

The U.S. recession deepened a lot more in late 2008 than first reported, according to government data showing a big revision down because businesses cut supplies to adjust for shriveling demand.
...
The sharply lower revision to a decline of 6.2% reflected adjustments downward of inventory investment, exports and consumer spending.

The report showed businesses inventories shrank $19.9 billion in the fourth quarter, instead of rising by $6.2 billion as Commerce originally estimated.
...
Fourth-quarter investment in structures decreased 5.9%. Equipment and software plunged 28.8%.

I'll have more on investment, but this is more in line with expectations in Q4.

by Calculated Risk on 2/27/2009 12:07:00 AM

From the WSJ: Citi, U.S. Reach Deal on Government Stake

... expected to be announced Friday morning ... the Treasury has agreed to convert some of its current holdings of preferred Citigroup shares into common stock ... The government will convert its stake only to the extent that Citigroup can persuade private investors such as sovereign wealth funds do so as well ... The Treasury will match private investors' conversions dollar-for-dollar up to $25 billion.

The size of the government's new stake will hinge on how many preferred shares private investors agree to convert into common stock. The Treasury's stake is expected to rise to up to 40% of Citigroup, the people said.

MarketWatch has some details.

by Calculated Risk on 2/26/2009 08:34:00 PM

Another summary post and open thread (for discussion).

New home sales in January 2009 (309 thousand SAAR) were 10.2% lower than last month, and were 48% lower than January 2008 (597 million SAAR). See link for graphs of sales and inventory.

There was some discussion that the seasonal adjustment might be distorting the sales number. The following graph of the January sales numbers (no adjustment) shows this decline in sales wasn't a seasonal issue.

Click on graph for larger image in new window.

This shows the Census Bureau reported sales for every January since 1963. The label is the sales for the month (in thousands).

Clearly January 2009 was the worst ever - and this wasn't adjusted for changes in population either, and the U.S. population has grown substantially since 1963.

Initial unemployment claims hit 667,000 last week (highest since 1982) and continued claims were over 5 million for the first time ever. The numbers aren't quite as bad when adjusted by covered employment (see graphs)

Here was an analysis on the impact of falling rents: What If Rents Cliff Dive?

Fannie Mae reported a loss of $25.2 billion, the U.S. may backstop AIG CDS losses (likely to be announced Sunday or Monday morning), and oh yeah, we are still waiting for the Citi deal!

Scroll down for more ... and there will probably be more tonight. Best to all.

by Calculated Risk on 2/26/2009 07:19:00 PM

Jon Lansner at the O.C. Register has more including responses from the NAR and the NAHB: Obama plans mortgage-deduction cut (ht John and Tom)

From the WSJ: $318 Billion Tax Hit Proposed

The tax increases would ... [reduce] the value of such longstanding deductions as mortgage interest ... for people in the highest tax brackets. Households paying income taxes at the 33% and 35% rates can currently claim deductions at those rates. Under the Obama proposal, they could deduct only 28% of the value of those payments.

The changes would be phased in gradually over the next few years. For the 2009 tax year, the 33% tax bracket starts with couples with taxable earnings of $208,850, when adjusted for personal exemptions and various deductible expenses. A taxpayer in the top bracket paying $1,000 of mortgage interest, for example, would see a tax break worth $350 reduced to $280.

The mortgage interest deduction is capped to $1 million in mortgage debt.

by Calculated Risk on 2/26/2009 06:11:00 PM

From Fannie Mae:

Fannie Mae reported a loss of $25.2 billion ... in the fourth quarter of 2008, compared with a third-quarter 2008 loss of $29.0 billion ...

On February 25, 2009, the Director of FHFA submitted a request for $15.2 billion from the U.S. Department of the Treasury on our behalf under the terms of the Senior Preferred Stock Purchase Agreement in order to eliminate our net worth deficit as of December 31, 2008. FHFA has requested that Treasury provide the funds on or prior to March 31, 2009.
...
We expect the market conditions that contributed to our net loss for each quarter of 2008 to continue and possibly worsen in 2009, which is likely to cause further reductions in our net worth.

The confessional is very busy ...

by Calculated Risk on 2/26/2009 05:58:00 PM

From Reuters: S&P may cut $140 bln of prime jumbo mortgage deals (ht Brian)

Standard & Poor's said on Thursday it may downgrade 3,279 prime tranches of jumbo residential mortgage-backed deals with a market value of around $140 billion, after increasing its loss expectations for deals issued in 2006 and 2007.

More details from S&P (no link):

Standard & Poor's Ratings Services today placed its ratings on 3,279 classes from 209 U.S. first-lien prime jumbo residential mortgage-backed securities (RMBS) transactions issued in 2006 and 2007 on CreditWatch with negative implications. The affected classes totaled approximately $172.02 billion of original par amount, and have a current principal balance of $139.96 billion.
...
The CreditWatch placements reflect an increase in projected losses for prime jumbo transactions from these vintage years ... Our revised loss projections reflect an increase in our loss severity assumption to 40% from 30% for prime jumbo transactions issued in 2006 and 2007. This change is based on our belief that the influence of continued foreclosures, distressed sales, an increase in carrying costs for properties in inventory, costs associated with foreclosures, and more declines in home sales will depress prices further and lead loss severities higher than we had previously assumed. Additionally, there has been a persistent rise in the level of delinquencies among the prime mortgage loans supporting these transactions. ...

We anticipate reviewing and resolving these CreditWatch actions over the next several weeks.

Just more downgrades coming ...

by Calculated Risk on 2/26/2009 04:22:00 PM

Yesterday I posted two graphs based on the Capital Assistance Program house price scenarios. The first graph was the change in nominal house prices, and the second was a house price-to-rent ratio (assuming rents are flat for the next two years).

But what if rents decline?

Here is a story from the Guardian in the UK: Steep fall in rents as unsold homes flood the market

A glut of unsold properties hitting the ­lettings market since the beginning of the year has pushed rents down by as much as 25% across Britain.
...
Average rents dropped to £795 a month in February compared to £950 in May last year, a fall of 16.3%, according to property search engine Globrix ...

It estimates that the number of new properties for let has jumped by 88% over the past year, with the biggest increase occurring since the start of 2009.

... FindaProperty said that the number of rental properties advertised on its site almost doubled between September 2008 and February 2009 ... average rental prices fell from £872 a month last year to £830 in February this year, and that landlords are offering lures such as free satellite TV and free weekly cleaner in a desperate attempt to secure new tenants.

Rents are declining in the U.S. too, although this hasn't shown up in the BLS' Owners Equivalent Rent.

Here is a graph that shows the price-to-rent ratio under three rent scenarios (using the "more severe" economic scenario). House prices are based on the Composite 10 index (used by Treasury) and are assumed to decline 22% in 2009 and 7% in 2010 under the "more severe" scenario.

Click on graph for larger image in new window.

This shows three scenarios for rents in the U.S. over the next two years: Flat, a 10% decline in rents, and a 25% decline in rents.

As I noted yesterday, with the "more severe" scenario and flat rents, the price-to-rent ratio will be slightly below the normal range. If rents fall 10%, this metric would be in the normal range, and with a 25% decline in rents house prices would be too high.

With the largest bubble in history, I'd expect house prices to overshoot and the price-to-rent ratio to decline to the bottom of the normal range. This suggests even a 10% decline in rents would make the "more severe" scenario too mild.

by Calculated Risk on 2/26/2009 03:25:00 PM

The FDIC released the Quarterly Banking Profile for Q4 today. Here is an excerpt from the FDIC press release:

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported a net loss of $26.2 billion in the fourth quarter of 2008, a decline of $27.8 billion from the $575 million that the industry earned in the fourth quarter of 2007 and the first quarterly loss since 1990. Rising loan-loss provisions, losses from trading activities and goodwill write-downs all contributed to the quarterly net loss as banks continue to repair their balance sheets in order to return to profitability in future periods.
...
The FDIC's "Problem List" grew during the quarter from 171 to 252 institutions, the largest number since the middle of 1995. Total assets of problem institutions increased from $115.6 billion to $159 billion.
emphasis added

It is going to be a busy year for the FDIC.

by Calculated Risk on 2/26/2009 02:37:00 PM

From Bloomberg: AIG Rescue May Include Credit-Default Swap Backstop

American International Group Inc. may get a backstop from the U.S. to protect against further losses on credit-default swaps, according to a person familiar with the matter.

The federal guarantees may be included in New York-based AIG’s restructured bailout ...

There you have it.

This will probably be announced Sunday night or Monday morning.

by Calculated Risk on 2/26/2009 12:59:00 PM

From CNBC: Troubled Banks Could Get $250 Billion More in Budget

President Barack Obama penciled into his budget on Thursday the possibility that he may request an additional $250 billion to help fix the troubled U.S. financial system.

The figure, described as a "placeholder" and not a specific funding request, would support asset purchases of $750 billion via government financial stabilization programs, administration officials said.

Any additional request to Congress would come on top of the $700 billion financial bailout program enacted last year ...

"Additional action is likely to be necessary to stabilize the financial system and thereby facilitate economic growth," the White House said in budget documents released on Thursday.

What a surprise ...