by Calculated Risk on 7/21/2009 10:14:00 AM

Click on headlines for larger image in new window.

See losses of more than $1.5 billion.

Insufficient liquidity.

May seek bankruptcy without successful tender offer.

by Calculated Risk on 7/21/2009 09:47:00 AM

Fed Chairman Ben Bernanke will testify before the House Financial Services Committee at 10 AM (semiannual Humphrey-Hawkins testimony on monetary policy).

Prepared testimony below the video links ...

Here is the CNBC feed.

And a live feed from C-SPAN.

Prepared Testimony: Semiannual Monetary Policy Report to the Congress

by Calculated Risk on 7/21/2009 08:57:00 AM

Note: Federal Reserve Chairman Ben Bernanke testifies at 10AM today in front of the House Financial Services Committee. I'll post a video link ...

From Fed Chairman Ben Bernanke: The Fed’s Exit Strategy

The depth and breadth of the global recession has required a highly accommodative monetary policy. Since the onset of the financial crisis nearly two years ago, the Federal Reserve has reduced the interest-rate target for overnight lending between banks (the federal-funds rate) nearly to zero. We have also greatly expanded the size of the Fed’s balance sheet through purchases of longer-term securities and through targeted lending programs aimed at restarting the flow of credit.

These actions have softened the economic impact of the financial crisis. They have also improved the functioning of key credit markets, including the markets for interbank lending, commercial paper, consumer and small-business credit, and residential mortgages.

My colleagues and I believe that accommodative policies will likely be warranted for an extended period. At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road. The Federal Open Market Committee, which is responsible for setting U.S. monetary policy, has devoted considerable time to issues relating to an exit strategy. We are confident we have the necessary tools to withdraw policy accommodation, when that becomes appropriate, in a smooth and timely manner.
emphasis added

There is much more, but clearly the Fed expects policy to be accommodative for some time, and when the appropriate time comes, the Fed believes they have an exit strategy to avoid inflation.

by Calculated Risk on 7/21/2009 12:06:00 AM

From the NY Times: The Rent Signs Are Sprouting

The storefront vacancy rate in Manhattan is now at its highest point since the early 1990s — an estimated 6.5 percent — and is expected to exceed 10 percent by the middle of next year ...

Some of the more desirable shopping districts are littered with empty storefronts. For example, Fifth Avenue between 42nd Street and 49th Street, the stretch just south of Saks Fifth Avenue, has a vacancy rate of 15.3 percent, according to the brokerage Cushman & Wakefield.

In SoHo, from West Houston Street to Grand Street and Broadway to West Broadway, among the high-end boutiques, art galleries and restaurants, 1 in 10 retail spaces are now empty or about to be.

For more on retail vacancies, see: Reis: Strip Mall Vacancy Rate Hits 10%, Highest Since 1992

by Calculated Risk on 7/20/2009 10:18:00 PM

From the SacBee: Schwarzenegger, lawmakers reach state budget agreement

Gov. Arnold Schwarzenegger and legislative leaders agreed Monday to balance Californias $26 billion deficit ... The proposal includes spending cuts to programs ranging from schools to welfare-to-work to prisons. It takes money from local governments, including borrowing $2 billion that the state will repay starting in 2013 and taking gas taxes that normally go toward local road projects.

by Calculated Risk on 7/20/2009 08:23:00 PM

Press Release: CIT Announces $3 Billion Credit Facility and Initiates Recapitalization Plan (ht jb)

CIT Group Inc. ... today announced that it entered into a $3 billion loan facility provided by a group of the Company’s major bondholders. CIT further announced that it intends to commence a comprehensive restructuring of its liabilities to provide additional liquidity and further strengthen its capital position.

Today’s actions, including a $3 billion secured term loan with a 2.5 year maturity (the “Term Loan Financing”), are intended to provide CIT with liquidity necessary to ensure that its important base of small and middle market customers continues to have access to credit. Term loan proceeds of $2 billion are committed and available today, with an additional $1 billion expected to be committed and available within 10 days.
...
As the first step in a broader recapitalization plan, CIT has commenced a cash tender offer for its outstanding Floating Rate Senior Notes due August 17, 2009 ... for $825 for each $1,000 principal amount of notes tendered on or before July 31, 2009. Lenders in the Term Loan Financing have agreed to tender all of their August 17 notes. ...

Additional information regarding the financing will be available in a Form 8-K to be filed by the Company with the Securities and Exchange Commission. Further, the Company’s earnings release and conference call previously scheduled for July 23, 2009, have been cancelled. The Company will report its results for the quarter ended June 30, 2009 when it files its quarterly report on Form 10-Q.
emphasis added

Cancelling the earnings release and conference call, and proposing a 20% haircut on debt due in 30 days, does not inspire confidence.

by Calculated Risk on 7/20/2009 06:40:00 PM

Texas Instruments is seeing a pickup in orders, but is this just inventory restocking or because of a pickup in end demand?

From the conference call (ht Brian):

Analyst: You mentioned that visibility has improved markedly. And it's obvious in a way because your bookings were up and your backlog is higher. Are there -- is there anything that you're hearing or seeing from your customers that says to you what we're seeing is more sustainable than one might have thought a quarter ago?

TXN: Well, the signals that we're seeing, Glen, have to do with the rate of decline that we're seeing in their inventory levels. It has slowed substantially. Which certainly signals to us that they believe their inventories are much better aligned now with their true end demand. So that's probably one of the better signals that we're seeing. And the second, of course, is the orders. We actually saw our backlog for the current quarter increase about 27% versus where we were 90 days ago. In other words, starting the third quarter, we had 27% more backlog than we did starting the second quarter. So that's given us increased visibility and increased confidence for the third quarter.

Analyst: your guidance [for Q3 indicates] the mid-point would be up 7.8% from where you came in in Q2. I'm curious how much of that you feel is [inventory] restocking which might occur in the channel. I just note that a little more typical seasonal might be up maybe 3% to 4%.

TXN: Where we have great visibility in terms of actually knowing the specifics of inventory trends will be at distribution. When we start moving out into the OEMs and EMS , we generally will have a feel for what's going on, but it's difficult to be specific. If you just look at for example last quarter, our largest customer which did report last week announced that they reduced their inventory 14%, the other area where I said we had great visibility was at distribution where we saw inventory go down 10%. So, between those two guys alone, they represent half of our revenue, in second quarter we continued to ship below the rate at which they're shipping out. The other half of our revenue basically we think there are general trends that probably match the other half -- the first half I described. So going into third quarter, we know based upon the half of our revenue that I just described, our shipments entering the quarter are below the rate at which the customers are shipping out. So we know or we believe there's more room to go in terms of what I would call the convergence of our shipments and the rate at which our customers are [shipping]. Does it go beyond that and have those customers start to replenish inventory, that wouldn't be surprising just given the seasonality of third quarter coming into the holiday market. But I don't want to speculate on what will or will not happen other than a normal seasonal trend would indicate that.

It sounds like TI's customers are trying to match their inventory to their new lower level of shipments, but it isn't clear there is any pickup in end demand.

by Calculated Risk on 7/20/2009 05:30:00 PM

From CNBC: Roubini: Economic Recovery to Be 'Very Ugly'

"The recovery is going to be subpar," [Nouriel] Roubini said. "I see a one percent growth in the economy in the next few years. There will also be 11 percent unemployment next year and the recovery is going to be slow. It's going to feel like a recession even when it ends."
...
When asked about the economy Monday, Roubini said, "We may be out of a freefall for the financial system," said Roubini. "We have seen the worst in that sense. But in my view there is a sluggish U shaped recovery that might go into a W double dip if we don't fix the problems in the economy."
...
On a second stimulus: "I think there will be another one toward the end of the year. We need to have more shovel ready labor intensive infrastructure projects. We'll need it."

by Calculated Risk on 7/20/2009 03:09:00 PM

This is the second consecutive month were vehicles miles driven were flat, or slightly above, the comparable month in 2008 (May 2009 compared to the May 2008).

The Dept of Transportation reports on U.S. Traffic Volume Trends:

Travel on all roads and streets changed by +0.1% (0.2 billion vehicle miles) for May 2009 as compared with May 2008. Travel for the month is estimated to be 257.3 billion vehicle miles.

Click on graph for larger image in new window.

The first graph shows the rolling 12 month of U.S. vehicles miles driven. (label corrected: trillions)

By this measure (used to remove seasonality) vehicle miles declined sharply and are now moving sideways.

The second graph shows the comparison of month to the same month in the previous year as reported by the DOT.

As the DOT noted, miles driven in May 2009 were 0.1% greater than in May 2008.

Year-over-year miles driven started to decline in December 2007, and really fell off a cliff in March 2008. This makes for an easier comparison for May 2009.

by Calculated Risk on 7/20/2009 02:28:00 PM

From Bloomberg: Banks Fail to Make Adequate Loan-Loss Provisions, Moody’s Says (ht Brian, Bob_in_MA)

Banks have failed to make adequate provision for the losses on loans and securities they face before the end of next year ... U.S. banks may incur about $470 billion of losses and writedowns by the end of 2010, which may cause the banks to be unprofitable in the period ...

“Large loan losses have yet to be recognized in the banking system,” Moody’s said. “We expect to see rising provisioning needs well into 2010.”

This can't just be regional and community banks - this must include some of the stress test 19. Maybe it is time for another round of stress tests.

by Calculated Risk on 7/20/2009 01:32:00 PM

From Atlanta Fed President Dennis Lockhart: On the Economic Outlook and the Commitment to Price Stability . Here is Lockhart's economic outlook:

Often a deep recession is followed by a sharp rebound in business and overall economic activity. Unfortunately, as I look ahead, I do not foresee this trajectory. I expect real growth to resume in the second half and progress at a modest pace. I do not see a strong recovery in the medium term.

There are risks to even this rather subdued forecast. The risk I'm watching most closely is commercial real estate. There is a heavy schedule of commercial real estate financings coming due in 2009, 2010, and 2011. The CMBS (commercial real estate mortgage-backed securities) market is very weak, and banks generally have no appetite to roll over loans on properties that have lost value in the recession. Refinancing problems will not directly affect GDP—it's commercial construction that factors into GDP—but I'm concerned problems in commercial real estate finance could adversely affect the otherwise improving banking and insurance sectors.

... the healing of the banking system will take time. Working off excess housing inventory will take time. The reallocation of labor to productive and growing sectors of the economy will take time. It will take time to complete the deleveraging of American households and the restoration of consumer balance sheets.

In short, I believe the economy must undergo significant structural adjustments. We're coming out of a severe recession, and it's not too much an exaggeration to say the economy is undergoing a makeover. We must build a more solid foundation for our economy than consumer spending fueled by excessive credit—excessive household leverage—built on a house price bubble.

The surviving financial system must find a new posture of risk taking. The balance of consumption and investment must adjust, with investment being financed by greater domestic saving. The distribution of employment must adjust to match worker skills, including newly acquired skills, with jobs in growth markets. Some industrial plant and equipment must be taken offline to remove excess and higher-cost capacity.

As I said, these adjustments will take time and will suppress growth prospects in the process. I believe the economy will underperform its long-term potential for a while because of the obstacles to growth that must be removed, adjustments it must undergo.
...
Let me summarize my argument here today. The economy is stabilizing and recovery will begin in the second half. The recovery will be weak compared with historic recoveries from recession. The recovery will be weak because the economy must make structural adjustments before the healthiest possible rate of growth can be achieved. While this adjustment process is going on in the medium term, I believe inflation and deflation are roughly equal risks and require careful monitoring. Slack in the economy will suppress inflation. And inflation is unlikely to result—by direct causation—from the recent growth of the Fed's balance sheet. In any event, the Fed has a number of tools being readied to unwind the policies used to fight the recession, and it will be some time before their use is appropriate.
emphasis added

by Calculated Risk on 7/20/2009 12:21:00 PM

From Dow Jones: Moody's: Commercial Real-Estate Prices Fall 7.6% In May

Commercial real-estate prices fell 7.6% in May ... The indexes are down 29% from a year ago and 35% from their October 2007 peak.

According to Moody's, CRE prices fell in 8.6% in April (about 16% in two months).

Talk about cliff diving!

by Calculated Risk on 7/20/2009 09:56:00 AM

From the Conference Board:

The Conference Board Leading Economic Index™ (LEI) for the U.S. increased 0.7 percent, The Conference Board Coincident Economic Index™ (CEI) decreased 0.2 percent ... The Conference Board LEI for the U.S. has risen for three consecutive months now ... With these large and widespread gains, its six month growth has picked up to the highest rate since the first quarter of 2006. Meanwhile, The Conference Board CEI for the U.S., measuring current economic activity, remains on a downtrend, but the pace of its decline has moderated somewhat in recent months. All in all, the behavior of the composite indexes suggest that the recession will continue to ease and that the economy may begin to recover in the near term.

This isn't something I follow very closely, but I'm curious to see when (or if) they try to call the end of the recession. The Conference Board was still saying "sluggish economic growth will likely continue in the near term" even after the recession started - so this might not be useful for turning points.

by Calculated Risk on 7/20/2009 08:13:00 AM

From Lingling Wei and Maurice Tamman at the WSJ: Commercial Loans Failing at Rapid Pace

U.S. banks have been charging off soured commercial mortgages at the fastest pace in nearly 20 years ... losses on loans used to finance offices, shopping malls, hotels, apartments and other commercial property could reach about $30 billion by the end of 2009.
...
Many of the most troubled [regional] banks have heavy exposure to commercial real estate. ...

In contrast to home loans, the majority of which were made by about 10 lenders, thousands of U.S. banks, especially regional and community banks, loaded up on commercial-property debt.
...
Some analysts, meanwhile, worry that banks aren't sufficiently recognizing losses on their commercial real-estate loans, thereby exposing themselves to bigger losses later. ..."Net charge-offs to date have been highly inadequate," said Richard Parkus, head of commercial mortgage-backed securities research at Deutsche Bank. "This is clearly a problem that is being pushed out into the future."

Many regional and community banks had excessive loan concentrations in Construction & Development (C&D) and CRE loans. The FDIC identified this as an emerging risk in 2006 - so it is no surprise. These smaller banks have been slow to recognize the related losses - possibly because many of the deals had interest reserves that mask the performance of the commercial building until the reserve runs dry. Then there is just more work for the FDIC ...

by Calculated Risk on 7/19/2009 11:58:00 PM

“I had people calling me crying, and we were telling them, ‘You can pay me or you can lose your house. People were giving me every dime they had, opening credit cards. But I never saw one client come out of it with a successful loan modification.”
Paul Pejman, a former sales agent for FedMod in Irvine, Calif

That quote is from Peter Goodman's article in the NY Times about ex-mortgage brokers now offering loan modifications: Cashing In, Again, on Risky Mortgages

Goodman mentions this interesting tidbit that Jillayne (at CEForward and RainCityGuide) had previously told me about:

The California Department of Real Estate warns consumers that many dubious loan modification companies have organized themselves as law firms solely to allow them to collect upfront fees, even though the lawyers have little, if anything, to do with the services provided. The department cautions consumers against hiring such companies.

by Calculated Risk on 7/19/2009 09:11:00 PM

UPDATE, Deal Approved by Board: From the NY Times CIT Is Said to Obtain Urgent Loan to Prevent Bankruptcy (ht Basel Too)

Directors of the CIT Group, one of the nation’s leading lenders to small and midsize businesses, approved a deal Sunday evening with some of the bank’s major bondholders to help it avert a bankruptcy filing through a $3 billion emergency loan ...

From Reuters: CIT bondholder plan backed by unsecuritized assets (ht jb)

"The $3 billion is new money but securitized by all the remaining unsecuritized assets which probably exceed $10 billion," the source said.

A few points:

This is new debt at a reported 10% plus LIBOR rate. This is not debt for equity. This is essentially a bridge loan, with a reported 2 1/2 year term.

This deal hasn't has received CIT Board approval (UPDATE Above: Deal Approved).

This new debt is apparently secured by all the remaining unsecured assets of CIT. This probably means CIT will survive through 2009 (if approved), but long term debt holders will be behind this debt.

The parties are trying to negotiate a debt-for-equity swap, and that would probably seriously dilute current shareholders.

This doesn't solve the problem, just kicks the can down the road.

Other story links:
WSJ broke the story: Bondholders Plan CIT Rescue

NY Times: CIT Is Near Deal for $3 Billion Loan to Avert Bankruptcy

by Calculated Risk on 7/19/2009 05:52:00 PM

From the WSJ: CIT cuts deal with key bondholders for $3 billion in financing. CIT will avoid bankruptcy, restructure outside court. (ht Noah at UrbanDigs in NY)

UPDATE: From WSJ: Bondholders Plan CIT Rescue

The deal, which was being considered by CIT's board Sunday night, charges CIT very high interest rates, and it doesn't permanently fix the company's long-term financing needs ... Under the proposal, CIT would likely pay interest rates 10 percentage points above the London interbank offered rate, said these people. ... CIT has also agreed to pledge some of its highest-quality loans as collateral on the $3 billion package.

The new loan could act like a "bridge" to a series of debt-exchange offers that CIT would launch in order to get bondholders to swap some of their bonds for equity in the company or for new debt that matures later.

So it is a bridge loan while CIT tries for a debt-for-equity exchange or new debt. This is a short term fix, but probably gets CIT through the year.

by Calculated Risk on 7/19/2009 03:10:00 PM

From the Sacramento Business Journal: Office vacancies piling up (ht Brad)

Office vacancies in Sacramento continue to rise as new buildings come online while many businesses are retrenching or closing altogether.

During the second quarter, local office vacancy surged to [a record] 20.9 percent ...

Brokers say these lowlights reflect the clash between today’s economic uncertainty and the confidence of the past, as large new buildings planned years ago are being completed just as companies hit by the recession are hunkering down, getting leaner or closing down.

While conditions would appear dreary even without new construction, the completion of major office projects is compounding the problem.

“You’ve got very significant new buildings being added to the base,” said Cornish & Carey managing partner John Frisch ...

Companies are "hunkering down, getting leaner or closing down" and giving up office (negative absorption) just as long planned new space comes online. This is pushing up vacancy rates, and pushing down rents. The article mentions suburban Class B office lease rates are back to levels last seen in the 1980s.

I posted the following nationwide graph a few months ago based on CoStar's The State of the Commercial Real Estate Industry: 2008 Review/2009 Outlook (no link). This shows that 2009 will be the peak office space delivery year for this cycle.

Click on graph for larger image in new window.

This graph graph shows the amount of office space delivered per year in the U.S. in millions of square feet since 1958. The over investment during the '80s (S&L crisis) is obvious, as is the office boom during the stock bubble.

The red columns are based on projections from Costar for projects already in the pipeline. Although deliveries will be strong in 2009 (with all the projects currently under construction), CoStar projects new office deliveries in 2010 will the lowest since 1996, and deliveries in 2011 will be the lowest in over 50 years.

by Calculated Risk on 7/19/2009 12:19:00 PM

The FDIC closed four more banks on Friday, and the following graph shows bank failures by week for 2009.

Click on graph for larger image in new window.

So far there have been 57 FDIC bank failures in 2009.

It appears there will be close to 100 bank failures this year.

Note: Week 1 ends Jan 9th.

This is nothing compared to the S&L crisis. There were 28 weeks during the S&L crisis when regulators closed 10 or more banks, and the peak was April 20, 1989 with 60 bank closures (there were 7 separate weeks with more than 30 closures in the late '80s and early '90s).

The second graph covers the entire FDIC period (annually since 1934).

Back in the '80s, there was some minor multiple counting ... as an example, when First City of Texas failed on Oct 30, 1992 there were 18 different banks closed by the FDIC. This multiple counting was minor, and there were far more bank failures in the late '80s and early '90s than this year.

The third graph includes the 1920s and shows that failures during the S&L crisis were far less than during the '20s and early '30s (before the FDIC was enacted).

Note how small the S&L crisis appears on this graph with the change in they-axis! The number of bank failures soared to 4000 (estimated) in 1933.

During the Roaring '20s, 500 bank failures per year was common - even with a booming economy - with depositors typically losing 30% to 40% of their bank deposits in the failed institutions. No wonder even the rumor of a problem caused a run on the bank!

Of course the number of banks isn't the only measure. Many banks today have more branches, and far more assets and deposits.

The FDIC era source data is here - including by assets (in most cases) - under Failures and Assistance Transactions

The pre-FDIC data is here.

by Calculated Risk on 7/19/2009 09:31:00 AM

Not much news on CIT ...

From Bloomberg: CIT Group’s Banks Said to Weigh Bankruptcy Financing

CIT Group Inc. advisers, including JPMorgan Chase & Co. and Morgan Stanley, are discussing options for funding the lender if it enters bankruptcy, people with knowledge of the matter said.
...
“This thing doesn’t have a future,” CreditSights analyst David Hendler said yesterday in a telephone interview. “Anything is possible but the problem is not solvable anymore. They’re just in denial it’s finally over,”

From Bloomberg: Alabama Hardware Distributor Blames CIT Woes for Its Bankruptcy

A hardware distributor in Alabama became the first company to blame the troubles of commercial lender CIT Group Inc. for its bankruptcy yesterday when it filed for protection from creditors.

From WSJ Real Time Economics: CIT’s Customers Issue an Urgent Request

Thirty-two trade groups, in an unusual display of unity, pleaded in a letter on Friday night for the Obama administration to reverse its decision and extend aid to the beleaguered small-business lender CIT Group Inc ...

From the letter:

Dear Secretary Geithner:

As the U.S. and world economies struggle to recover from the most devastating recession in recent memory, we are writing to impress upon you the very severe ramifications that a CIT bankruptcy would have on more than one million small- and medium-sized businesses, their partners in the U.S. retail industry and the manufacturers and service providers that supply that sector. Our organizations represent thousands of these small- and medium-sized enterprises and their suppliers as well as the most significant retail operations in this country. We urge the government to reconsider every possible option to address the current stresses confronting CIT and to prevent further tightening of the credit markets.

... Without CIT, thousands of retailers may be forced out of business because their suppliers will be put out of business. Such a ripple effect could set back the recovery of the manufacturing and retail sectors, and therefore the U.S. economy, by several years. CIT is one of the leading factoring companies in the United States and is a vital source of financing for manufacturers as well as the small and medium-sized vendors who are the primary suppliers of merchandise sold in U.S. retail establishments. Because of CIT’s primacy in this field, they have essentially become the banker to “Main Street”, and as such, it is absolutely essential for the government to utilize every tool at its disposal to prevent a CIT bankruptcy.

Uncertainties over CIT have already provoked a credit squeeze that threatens payments and payrolls in thousands of businesses. As this uncertainty persists, and if CIT is forced to undertake a bankruptcy filing, the ripple effect will be felt in every city and state across this country as the further tightening of credit markets will make it incredibly difficult, if not impossible, for many of the companies who currently rely on CIT for financing to remain in business. The number of jobs that depend on the successful outcome of the CIT crisis is immeasurable.