by Calculated Risk on 5/13/2009 07:02:00 PM

From Bloomberg: William Seidman, Who Led Cleanup of S&L Crisis, Dies

In his memoir [published in 1993], Seidman offered a set of lessons learned. They included, “Instruct regulators to look for the newest fad in the industry and examine it with great care. The next mistake will be a new way to make a loan that will not be repaid.”

Those two sentences should be emblazoned above every desk of every financial regulator.

My condolences to Mr. Seidman's family and friends.

by Calculated Risk on 5/13/2009 05:38:00 PM

From the U.S. Treasury: Regulatory Reform Over-The-Counter (OTC) Derivatives

As the AIG situation has made clear, massive risks in derivatives markets have gone undetected by both regulators and market participants. But even if those risks had been better known, regulators lacked the proper authorities to mount an effective policy response.

Today, to address these concerns, the Obama Administration proposes a comprehensive regulatory framework for all Over-The-Counter derivatives.

The press release has the details, but basically the Obama Administration is proposing all derivatives must be centrally cleared and subject to oversight and regulation.

From Reuters: U.S. regulators propose OTC derivatives crackdown

Authorities proposed subjecting all over-the-counter derivatives dealers to "a robust regime of prudential supervision and regulation," including conservative capital, reporting and margin requirements.

Treasury Secretary Timothy Geithner, Securities and Exchange Commission Chairman Mary Schapiro, and Mike Dunn, acting chairman of the Commodity Futures Trading Commission, announced the proposal at a news conference.

Under current law, over-the-counter (OTC) derivatives are largely excluded or exempted from regulation.

"We're going to require for the first time all standardized over-the-counter derivative products be centrally cleared," said Geithner.

About time.

by Calculated Risk on 5/13/2009 04:00:00 PM

Click on graph for larger image in new window.

The first graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".

This is still the 2nd worst S&P 500 / DOW bear market in the U.S. in 100 years.

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

The second graph shows the S&P 500 since 1990.

The dashed line is the closing price today.

The market is only off 43.5% from the peak.

Note: I'm still looking for Derivatives announcement (previous thread)

by Calculated Risk on 5/13/2009 03:50:00 PM

From Dow Jones: Treasury, SEC, CFTC To Unveil OTC Derivatives Regulatory Plan

The Treasury Department will unveil its plan for regulatory reform of over-the-counter derivatives late Wednesday afternoon, Michael Dunn, the acting chairman of the Commodity Futures Trading Commission, said Wednesday.

Speaking at an advisory committee meeting at the CFTC's offices, Dunn said he will appear alongside Treasury Secretary Timothy Geithner and Securities and Exchange Commission Chairman Mary Schapiro at 4 p.m. EDT to discuss the details.

Here is the CNBC feed. (hopefully)

by Calculated Risk on 5/13/2009 01:32:00 PM

A few excerpts from Economists React: ‘Green Shoots Withering’ in Retail

We now have to expect flat consumption in April, which means there has been no net increase since January ... the freefall is over but shredded balance sheets and declining incomes mean a broadly flat trend is about the best we can expect. Greens shoots withering ...
Ian Shepherdson, High Frequency Economics

Overall, these data suggest consumers could not sustain the modest first quarter gains in spending and at least one “green shoot” appears to be wilting.
Nomura Global Economics

Some people mistook the end of "cliff diving" for "green shoots" and started predicting a "V-shaped" recovery. Although the worst of the declines is probably over, an immaculate recovery seems very unlikely. (See Immaculate Recovery? )

by Calculated Risk on 5/13/2009 11:05:00 AM

The Q1 GDP report showed a strong inventory correction is under way, with the BEA reporting inventories declined -136.8 billion (SAAR) in Q1. The Manufacturing and Trade Inventories and Sales report from the Census Bureau today showed more evidence of declining inventories.

Click on graph for larger image in new window.

The Census Bureau reported:

Manufacturers' and trade inventories, adjusted for seasonal variations but not for price changes, were estimated at an end-of-month level of $1,404.1 billion, down 1.0 percent (±0.1%) from February 2009 and down 4.8 percent (±0.3%) from March 2008.

The above graph shows the 3 month change (annualized) in manufacturers’ and trade inventories. The inventory correction was slow to start in this recession, but inventories are now declining sharply.

However, even with the sharp decline in inventories, the inventory to sales ratio was flat in March at 1.44.

There has been a race between declining sales and declining inventory. And even if sales start to stabilize, inventory levels are still too high, and further inventory reductions are coming.

by Calculated Risk on 5/13/2009 10:13:00 AM

This is a story we've discussed for a few years, but it is probably worth repeating: Small and regional banks couldn't compete in the residential mortgage market during the housing bubble (with some exceptions), so they focused on Construction & Development (C&D) and other Commercial Real Estate (CRE) loans. The C&D loans are defaulting in large numbers now and this is impacting a number of regional banks (like BankUnited and Corus).

And defaults are just starting to increase on other CRE loans. Most of the coming bank failures will be due to C&D and CRE loans.

From the LA Times: Sour commercial real estate loans threaten to hurt regional banks

The slumping market for commercial real estate -- viewed by many as the next big shoe to drop on the economy -- now threatens to drag down regional banks as they struggle to collect on loans made against shopping centers and office buildings.

Seriously overdue loans against commercial developments have shot up dramatically in recent months, as delinquencies snowball on construction loans and mortgages for office buildings, malls and apartments.
...
"Commercial lending is our bread and butter, the lion's share of our business," said Dominic Ng, chairman of East West Bancorp, which with $12 billion in assets is the second-largest bank based in Los Angeles County.

The Pasadena bank ... set aside $226 million to cover loan losses last year, up from $12 million in 2007. The bank lost $49 million in 2008, compared with a profit of $161 million in 2007.

Land development and construction loans, the main problem so far for East West, total about 20% of the bank's loan portfolio. Now Ng says he is nervously watching delinquencies on commercial mortgages -- about 40% of East West's loans.

For a few graphs on C&D loan concentrations and noncurrent rates (from the FDIC Q4 Quarterly Banking Profile), see: Bank Failures and C&D Loans . The Q1 FDIC report should be released in a few weeks.

by Calculated Risk on 5/13/2009 02:07:00 AM

On a monthly basis, retail sales decreased 0.4% from March to April (seasonally adjusted), and sales are off 11.4% from April 2008 (retail and food services decreased 10.1%).

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 (April PCE prices were estimated as the average increase over the previous 3 months).

Although the Census Bureau reported that nominal retail sales decreased 11.4% year-over-year (retail and food services decreased 10.1%), real retail sales declined by 11.9% (on a YoY basis).

The second graph shows real retail sales (adjusted with PCE) since 1992. This is monthly retail sales, seasonally adjusted.

NOTE: The graph doesn't start at zero to better show the change.

This shows that retail sales fell off a cliff in late 2008, and are still declining - but at a slower pace.

Here is the Census Bureau report:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for April, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $337.7 billion, a decrease of 0.4 percent (±0.5%)* from the previous month and 10.1 percent (±0.7%) below April 2008. Total sales for the February through April 2009 period were down 9.2 percent (±0.5%) from the same period a year ago. The February to March 2009 percent change was revised from -1.2 percent (±0.5%) to -1.3 percent (±0.3%).

Retail trade sales were down 0.4 percent (±0.7%)* from March 2009 and 11.4 percent (±0.7%) below last year. Gasoline stations sales were down 36.4 percent (±1.5%) from April 2008 and motor vehicle and parts dealers sales were down 20.7 percent (±2.3%) from last year.

No green shoots here.

by Calculated Risk on 5/13/2009 12:12:00 AM

From RealtyTrac: Foreclosure Activity Remains at Record Levels in April

RealtyTrac ... today released its April 2009 U.S. Foreclosure Market Report(TM), which shows foreclosure filings - default notices, auction sale notices and bank repossessions - were reported on 342,038 U.S. properties during the month, an increase of less than 1 percent from the previous month and an increase of 32 percent from April 2008. The report also shows that one in every 374 U.S. housing units received a foreclosure filing in April, the highest monthly foreclosure rate ever posted since RealtyTrac began issuing its report in January 2005.

"Total foreclosure activity in April ended up slightly above the previous month, once again hitting a record-high level," said James J. Saccacio, chief executive officer of RealtyTrac. "Much of this activity is at the initial stages of foreclosure - the default and auction stages - while bank repossessions, or REOs, were down on a monthly and annual basis to their lowest level since March 2008. This suggests that many lenders and servicers are beginning foreclosure proceedings on delinquent loans that had been delayed by legislative and industry moratoria. It's likely that we'll see a corresponding spike in REOs as these loans move through the foreclosure process over the next few months."
emphasis added

by Calculated Risk on 5/12/2009 09:04:00 PM

BankUnited filed a Notification of Late Filing with the SEC today (ht Brian). Here are a few excerpts:

We are not able to file a timely Second Quarter 2009 Form 10-Q because we have not completed the preparation of our financial results for either the fiscal year ended September 30, 2008 (the “fiscal 2008”) or the fiscal quarters ended March 31, 2009 and December 31, 2008. This delay results from the continuing adverse market conditions, the complexity of accounting and disclosure issues, which increased the need for additional review and analysis of our business including, without limitation, regulatory issues, liquidity and capital and the material weaknesses in internal control over financial reporting discussed below.

And the bank needs approximately $1 billion in capital:

Most recently, on April 14, 2009, the Board of Directors of the Bank entered into a Stipulation and Consent to Prompt Corrective Action Directive (the “PCA Agreements”) with the OTS. ... The PCA Agreements further required the Bank to achieve and maintain, at a minimum, the following ratios: (i) Total Risk Based Capital Ratio of 8%; (ii) Tier I Core Risk Based Capital Ratio of 4%; and (iii) Leverage Ratio of 4% within twenty days of the effective date of the PCA Agreements. Based on our March 31, 2009 reported capital levels, we would need to raise approximately $1.0 billion to meet the Total Risk Based Capital Ratio of 8%, approximately $706 million to meet the Tier I Core Risk Based Capital Ratio of 4% and approximately $937 million to meet the Leverage Ratio of 4%. The twenty-day period to raise capital and achieve the mandatory minimum capital requirements under the PCA Agreements expired on May 4, 2009 without compliance by the Bank.

It was reported in the Miami Herald that BKUNA was granted an extension until Thursday May 14th:

The Federal Deposit Insurance Corp. allowed a two-week extension and extended the deadline until May 14 for prospective buyers or investors to submit their bids ...

I couldn't find mention of the extension in BKUNA's NT 10-Q filing.

Something to watch this Friday.

by Calculated Risk on 5/12/2009 06:25:00 PM

From MarketWatch: Freddie reports quarterly net loss of $9.9 billion

Freddie's first-quarter loss widened to $9.85 billion ... Freddie set aside $8.8 billion in provisions to cover credit losses during the first quarter. That's up from $7 billion in the final three months of 2008. The rise was driven by increases in the number and rate of delinquent mortgages and the rising severity of losses from foreclosures, Freddie explained.

Freddie also invests in mortgage-backed securities and is suffering as rising delinquencies and foreclosures cut into the value of these holdings. The company recorded $7.1 billion in impairments on securities that are available for sale.
...
Freddie Mac said its conservator asked for $6.1 billion in extra funding from the Treasury Department.

From the SEC filing:

Home prices nationwide declined an estimated 1.4% in the first quarter of 2009 based on our own internal index, which is based on properties underlying our single-family mortgage portfolio. The percentage decline in home prices in the last twelve months has been particularly large in the states of California, Florida, Arizona and Nevada, where we have significant concentrations of mortgage loans.
...
While temporary suspensions of foreclosure transfers reduced our charge-offs and REO activity during the first quarter of 2009, our provision for credit losses includes expected losses on those foreclosures currently suspended. We also observed a continued increase in market-reported delinquency rates for mortgages serviced by financial institutions, not only for subprime and Alt-A loans but also for prime loans, and we experienced an increase in delinquency rates for all product types during the first quarter of 2009. This delinquency data suggests that continuing home price declines and growing unemployment are significantly affecting behavior by a broader segment of mortgage borrowers. Additionally, as the slump in the U.S. housing market has persisted for more than a year, increasing numbers of borrowers that began with significant equity are now “underwater,” or owing more on their mortgage loans than their homes are currently worth. Our loan loss severities, or the average amount of recognized losses per loan, also continued to increase in the first quarter of 2009, especially in the states of California, Florida, Nevada and Arizona, where home price declines have been more severe and where we have significant concentrations of mortgage loans with higher average loan balances than in other states.
emphasis added

There are several key points:

Although the foreclosure moratorium "reduced REO activity" in Q1, Freddie did take provisions for the expected losses.

The loss severities are increasing.

Falling prices are "significantly affecting behavior by a broader segment of mortgage borrowers."

Sounds like walking away ... in prime time!

by Calculated Risk on 5/12/2009 04:24:00 PM

From CNBC: Homeowners Turn to Renting, Waiting for Market to Recover

Still having trouble selling your house? More homeowners are deciding to rent out their homes while they wait for the market to recover.

"I had my condo on the market for three months and I didn't have any bites," says Molly Smith, a public relations executive in Newburyport, Massachusetts. "I realized if I was going to sell it, I'd take a big loss."

So the 29-year-old Smith, who wanted a shorter commute to her job, decided to rent out her house and move into a rental herself.

And here is a video I took this morning in Newport Beach (note: this also fits with the Home Sales: One and Done post too. Who will buy in these more expensive beach communities when there are no move up buyers?

Please be patient with me - I'm still working on this video stuff!

The construction noise at the beginning of the video is a new Senior Center being built (still demolishing the old structure and grading the property).

Although rentals are common in Newport Beach, the market is usually very tight. Not right now.

by Calculated Risk on 5/12/2009 02:32:00 PM

GE Chief Executive Jeff Immelt is uncertain when growth will resume ...

From Reuters: GE CEO says economy stabilized, growth a question

Improved credit markets have brought stabilization to the economy but it is still not clear when growth will resume, General Electric Co Chief Executive Jeff Immelt said on Tuesday.

"The credit picture, we think, is improving and that's really one of the fundamentals to getting the broader economy doing better," Immelt said in an interview with Reuters. "Things certainly have stabilized and now the goal is to see where growth goes in the second half of the year."

And from PIMCO's El-Erian:

It was clear to us that, despite the very high hurdle that we always apply to such a statement, the world has changed in a manner that is unlikely to be reversed over the next few years. Put another way, markets are recovering from a shock that goes way, way beyond a cyclical flesh wound.
...
For the next 3–5 years, we expect a world of muted growth ...

And Bloomberg quotes Paul Krugman:

“It looks to me now as if the markets are now pricing in a rapid recovery, that they’re pricing in a V-shaped recession, which I consider extremely unlikely,” Krugman said at a forum in Shanghai today. “The market seems to be looking as if this is going to be an average recession, but it’s not.”

I thought a depression was unlikely, and I think an immaculate recovery is also unlikely. Something in the middle - that will feel like a recession to many - is more likely.

As I noted last week (see A Return to Trend Growth in 2010? and The Impact of Changes in the Saving Rate on PCE ), the usual engines of recovery - personal consumption expenditures (PCE) and residential investment (RI) - will both remain under pressure (even if they show some sluggish growth).

My forecast is for unemployment to stay elevated for some time, and the suggests minimal wage growth. And I also think household will increase their saving rate to repair their household balance sheet (and because of an aging population). This suggests PCE growth will probably be below trend.

And for RI, there is far too much inventory for any significant rebound in new home construction. So where will the growth come from?

by Calculated Risk on 5/12/2009 11:32:00 AM

The NAR reported today: Foreclosure and Short Sale Discounts Weigh Down Metro Area Median Prices

" ... first-time buyers account[ed] for half of all purchases during the first quarter ..."

“Close to 455,000 buyers purchased their first home during the first quarter, and those are likely just the first wave of new buyers coming into the market – they’re critical for a housing recovery,” [Lawrence Yun, NAR chief economist] said.

Most of the press release discusses the median price (something to ignore because of the change in mix), but there is a key point being missed - many of these sales are "one and done" with no move up buyer.

Click on graphis for larger image in new window.

Here is a graphic I created a couple years ago to show a normal market chain reaction.

At that time I wrote: "Not all chain reactions start with a first time buyer using a subprime loan, but the loss of a large number of subprime buyers will impact the entire chain."

Where are the move up buyers going to come from?

There is no "chain reaction" in the housing market - over half the sales are to first time buyers, and frequently the sellers are banks.

I hear this from real estate agents all the time: the agents (low end) are plenty busy with REOs and short sales, but the deals are mostly "one and done".

by Calculated Risk on 5/12/2009 09:25:00 AM

From Bloomberg: Advanta Shuts Down Credit-Card Lending Amid Surging Charge-Offs

Advanta Corp., the issuer of credit cards for small businesses, will halt new lending for its 1 million customers next month as the recession causes a surge in loan defaults. ... Advanta said ... charge-offs, or uncollectible debt, reached 20 percent on some cards as of March 31.
...
“We’ll be shutting down accounts for future transaction activities, but many of the customers will maintain balances and pay us off over time,” [Chief Financial Officer Philip Browne] said yesterday in a telephone interview.

Advanta was the 11th-biggest U.S. credit-card issuer at the end of 2008 with about $5 billion in outstanding balances, and the only major lender focused on small business borrowers ...

This is much higher loss rate than for consumer credit cards - the Fed's two year indicative loss rate was 18% to 20% for consumer credit cards - Advanta is seeing that in one year for some cards!

by Calculated Risk on 5/12/2009 08:31:00 AM

The Census Bureau reports:

The ... total March exports of $123.6 billion and imports of $151.2 billion resulted in a goods and services deficit of $27.6 billion, up from $26.1 billion in February, revised. March exports were $3.0 billion less than February exports of $126.6 billion. March imports were $1.6 billion less than February imports of $152.8 billion.

Click on graph for larger image.

The first graph shows the monthly U.S. exports and imports in dollars through March 2009.

Both imports and exports declined in March, although it appears the cliff diving in trade might be over.

On a year-over-year basis, exports are off 17.4% and imports are off 27%!

The second graph shows the U.S. trade deficit, with and without petroleum, through March.

The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.

Import oil prices increased slightly to $41.36 in March following eight consecutive monthly declines. Spot prices have increased since March, so it appears the decline in the trade deficit due to lower oil prices is over for now.

The trade deficit is mostly oil and China now, so any further significant decline in the deficit is unlikely in the short term. Although the NY Times reports: Chinese Exports Fall 22.6% in April

Exports from mainland China slumped 22.6 percent in April from a year earlier, official statistics showed — a fall that was not only larger than economists had expected but also bigger than that in March, when overseas shipments declined 17.1 percent.

by Calculated Risk on 5/11/2009 11:31:00 PM

From the NY Times: As Storefronts Become Vacant, Ads Arrive

Almost every category of advertising is declining precipitously in this economy, but there is one that is thriving. ...

Taking advantage of all the abandoned retail spaces in urban areas, marketers are leasing them at cut-rate prices and filling them with their ads.
...
“In the last year and a half, it’s been much easier to acquire locations,” said [Ray Lee, the managing director of ... a company that creates storefront advertisements].

Yeah ... "much easier to acquire locations". I bet!

by Calculated Risk on 5/11/2009 09:12:00 PM

From Crain's Chicago Business: Foreclosure wave slams suburbia (ht Atrios)

Home foreclosures are surging in Chicago's suburbs just as they level off or decline in many city neighborhoods already ravaged by mortgage defaults.

Foreclosure cases filed in the first quarter jumped between 25% and 70% from the fourth quarter in DuPage, Will, McHenry, Lake and Kane counties, according to new data provided to Crain's by the Woodstock Institute, a Chicago-based housing advocacy group. Meanwhile, foreclosures fell 8% in Chicago, the first quarterly decline in a year.
...
The shifting locus of new foreclosures shows how the recession and job losses are supplanting subprime lending as the main driver of mortgage defaults ... While the first wave of foreclosures hit hardest in poorer city neighborhoods ... the latest round is striking middle-class areas where most borrowers qualified for standard-rate mortgages.

The decline in foreclosures in Chicago might be because of the recent moratorium, but clearly foreclosures are moving into the middle-class areas.

We're all subprime now!

And that gives me an excuse to post this ...

Click on drawing for larger image in new window.

My friend and co-blogger Tanta originated the phrase "We're all subprime now!" One of her many talents was something she called "Excel Art". This drawing is from December 2007 and is titled "The Adventures of Mortgage Pig, Chapter 4: Hanging Over the Cubicles of the Mod Squad".

The drawing is from an excel file that Tanta used to explain how Option ARM loans recast - see Tanta's UberNerd post: On Option ARMs

by Calculated Risk on 5/11/2009 06:52:00 PM

UPDATE: Speech Text: The Supervisory Capital Assessment Program

My remarks this evening will focus on the Supervisory Capital Assessment Program, popularly known as the banking stress test. ...

It is important to note that this was not a solvency test. After including capital previously provided by the Treasury, all of these banking organizations currently have capital well in excess of the minimum stated capital requirements of the supervisors. Instead, the purpose of the exercise was to determine the size of the capital cushion that each organization would need to remain well capitalized and still be able to lend--even in an economic scenario more severe than expected.
...
Conclusion
In summary, the Supervisory Capital Assessment Program is an important element of broader and ongoing efforts by the Federal Reserve, other federal bank regulators, and the Treasury to ensure that our banking system has sufficient resources to navigate a challenging economic downturn. A collateral benefit is that many lessons of the exercise can be used to improve our supervisory processes. In particular, the supervisory capital assessment has demonstrated the benefits of using cross-firm, cross-portfolio information and the simultaneous review of a number of major firms to develop a more complete and fine-grained view of the health of the banking system.

Whether the objectives of the assessment program were achieved will only be known over time. We hope that in two or three years we will be able to reflect on the banking system's return to health with a sharply diminished reliance on government capital. More immediately, we hope and expect that the public and investors will take considerable comfort from the fact that our largest financial institutions have been evaluated in a comprehensive and rigorous fashion; and that they will, as a consequence, be required to have a capital buffer adequate to weather future losses and to supply needed credit to our economy--even if the economic downturn is more severe than is currently anticipated.

Fed Chairman Ben Bernanke will speak tonight at the Atlanta Fed's Financial Markets Conference in Jekyll Island, Georgia.

I believe Bernanke will be talking about the stress tests.

I'll post a link and excerpts from the prepared text when available ...

Here is the CNBC feed (maybe they will cover the speech).

by Calculated Risk on 5/11/2009 04:52:00 PM

Here is Meredith Whitney on banks and stress tests today ...

On the stress test leaks:

"I couldn't believe how poorly the impressions leaked, how effectively people say it was leaked, if it was any other company leaking that information there would be SEC investigations all over the place."