by Calculated Risk on 4/12/2010 08:59:00 AM

Business Cycle Dating Committee statement:

The Business Cycle Dating Committee of the National Bureau of Economic Research met at the organization’s headquarters in Cambridge, Massachusetts, on April 8, 2010. The committee reviewed the most recent data for all indicators relevant to the determination of a possible date of the trough in economic activity marking the end of the recession that began in December 2007. The trough date would identify the end of contraction and the beginning of expansion. Although most indicators have turned up, the committee decided that the determination of the trough date on the basis of current data would be premature. Many indicators are quite preliminary at this time and will be revised in coming months. The committee acts only on the basis of actual indicators and does not rely on forecasts in making its determination of the dates of peaks and troughs in economic activity. The committee did review data relating to the date of the peak, previously determined to have occurred in December 2007, marking the onset of the recent recession. The committee reaffirmed that peak date.

NBER always waits some time before declaring a recession over.

Click on cartoon for larger image in new window. Repeat of cartoon from Eric G. Lewis

It took the National Bureau of Economic Research (NBER) Business Cycle Dating Committee over a year and half after the 2001 recession ended to call the trough of the cycle. And it took 21 months after the 1990-1991 recession ended for NBER to date the end of the recession.

The previous NBER announcements make it clear that NBER will not date the trough of the recession until certain economic indicators - like real GDP - are above the pre-recession levels. Any downturn before economic activity reaches pre-recession levels will probably be considered a continuation of the recession that started in December 2007.

Here is the NBER dating procedure.

by Calculated Risk on 4/11/2010 11:49:00 PM

From Sewell Chan at the NY Times: U.S. Faults Regulators Over a Bank

Regulators failed for years to properly supervise the giant savings and loan Washington Mutual, even as the company wobbled ... a federal investigation has concluded.
...
The report, prepared by the inspectors general for the Treasury Department and the Federal Deposit Insurance Corporation, is expected to be released Friday. A draft was obtained by The New York Times.

... WaMu was the largest institution regulated by the Office of Thrift Supervision ... Although regulators found problems ... the office consistently deemed WaMu “fundamentally sound,” giving it a rating of 2, the second-highest on a five-point scale ... The office did not lower the rating to 3 ... until February 2008, and to 4 ... until September 2008, days before WaMu collapsed. “It is difficult to understand how O.T.S. continued to assign WaMu a composite 2 rating year after year,” the report found.

The FDIC rating system is called CAMELS and stands for Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. The scale is from 1 to 5, with 1 being the strongest. Banks with ratings of 4 or 5 are included on the FDIC's official problem bank list (ratings are not made public). So WaMu wasn't considered a "problem bank" until days before it collapsed.

The report will apparently be released on Friday. Earlier reports for other bank failures showed that the field examiners identified the problems early - and then for some unexplained reason, no action was taken. The regulatory system failed.

by Calculated Risk on 4/11/2010 05:49:00 PM

Note: The previous post is the weekly summary and a look ahead to a pretty busy week. Best wishes to all!

For those who missed the news, from the NY Times: Euro-Zone Nations Offer $40 Billion to Greece

A financial rescue of the debt-laden Greek economy moved into focus Sunday when the 16 nations that use the euro offered to lend Athens up to $40 billion, or €30 billion, at rates far below what the debt-laden country is paying now.
...
Greece has so far not formally requested aid from the European Union ... The I.M.F. will also make financing available to Greece, though the amount was yet to be determined. Olli Rehn, the European Union’s monetary affairs commissioner, suggested that euro-zone nations might end up providing two-thirds of the final package, with one-third coming from the I.M.F.

And a proposal from Matthew Richardson and Nouriel Roubini in the WaPo: How to reduce risk on Wall Street? Make the banks pay.

To create a truly safe financial system, we have to focus on two goals. First, we have to drive a stake through the heart of the "too big to fail" mantra that only fattens our financial beasts. Second, we should stop focusing on the problems of individual banks and look at the broader risk that the largest and most complex financial institutions pose.

We can accomplish both goals by charging such institutions an annual fee, or tax, or surcharge, or levy, or whatever the politicians need to call it.

I'm sure we will hear many more ideas this week at the Hyman P. Minsky Conference. The topic is After the Crisis: Planning a New Financial Structure.

by Calculated Risk on 4/11/2010 01:01:00 PM

There will be two key housing reports released this week: Housing Starts to be released on Friday, and the NAHB homebuilder index on Thursday. Most of the focus will be on March retail sales to be released on Wednesday.

The 19th Annual Hyman P. Minsky Conference will be held in New York this week. The topic is After the Crisis: Planning a New Financial Structure. Several Fed Presidents will be speaking; other speakers include Paul Krugman, Jan Hatzius, and Paul Volcker.

Early in the week, the March National Federation of Independent Business (NFIB) small business survey will be released and also the March rail traffic report from the Association of American Railroads (AAR). Other reports that will probably be released this week include the HAMP March report, the LoanPerformance house price index (for February) and LA port traffic for March.

On Tuesday the February Trade Balance report will be released at 8:30 AM by the Census Bureau. The consensus is for a further increase in the U.S. trade deficit to around $39 billion (from $37.3 billion).

On Wednesday March retail sales will be released at 8:30 AM. The consensus is for an increase of 1.2% from the February rate. The consumer price index (CPI) will also be released on Wednesday (the consensus is for a 0.1% increase in prices), and business inventories will be released at 10 AM. Also on Wednesday the Fed Beige Book will be released at 2 PM. The New York Fed’s Brian Sack will be speaking at 7 PM on the financial crisis.

On Thursday the closely watched initial weekly unemployment claims will be released. The consensus is for a decline to 440K this week from the Easter related increase to 460K last week The Fed will release the Industrial Production and Capacity Utilization report at 9:15 AM. Expectations are for a 0.8% increase in production and an increase in utilization to 73.3% from 72.7%.

The NAHB homebuilder survey for April will be released at 1 PM. This has been mostly moving sideways for months but might show some increase since this is the final month to sign a contract to qualify for the homebuyer tax credit. Also on Thursday, the Empire State manufacturing survey and the Philly Fed survey will both be released.

And on Friday, Housing Starts for March will be released at 8:30 AM. The consensus is for a slight increase to 605K (SAAR) in March from 575K in February. The Reuters/University of Michigan April consumer sentiment survey will be released at 9:55 AM. In addition, the BLS will release the Regional and State Employment and Unemployment report for March at 10 AM.

Also on Friday the FDIC might close several more banks ...

And a summary of last week:

Reis on Office, Mall and Apartment Vacancy Rates

1) Offices: From the Financial Times: Signs that worst is over for commercial property

New figures from Reis ... showed that the vacancy rate in the US office sector climbed to 17.2 per cent during the first three months of the year..
...
"We expect less of a bloodbath in fundamentals in 2010 versus 2009, but rents will still decline and vacancies will still continue to rise," said Victor Calanog, director of research at Reis. ... During the first quarter, asking rents and effective rents, which include special offers and concessions, both fell by just 0.8 per cent.
excerpts with permission

2) Apartments: From Nick Timiraos at the WSJ: Apartment Rents Rise as Sector Stabilizes

Nationally, the apartment vacancy rate stayed flat at 8%, the highest level since Reis Inc., a New York research firm, began its tally in 1980...

3) Malls: From the WSJ: Shopping-Center Malaise

Vacancies at shopping centers in the top 77 U.S. markets increased to 10.8% in the first quarter ... according to Reis.

It is the highest vacancy rate since 1991, when vacancies reached 11%.

Distressed Sales Again on the Rise

First American Corelogic released their first distressed sales report this morning: Distressed Sales Again on the Rise, Reaching 29% in January

Click on graph for larger image in new window.

Credit: First American Corelogic.

This graph shows the total percent of distressed sales broken down by REO and Short Sales. Notice that the percent short sales has increased significantly over the last year - that trend will probably continue.

Euro Bonds Spreads: Greece at Record

NOTE: This was before the bailout was announced this weekend.

Here is a graph from the Atlanta Fed weekly Financial Highlights:

From the Atlanta Fed:

European bond spreads (over German bonds) reflect
investors’ worries about Greece’s sovereign credit risk.

On April 6, the spread of the 10-year Greek bond over its German counterpart widened by 72bps to 404.5 bps, the widest since 1998, according to the Wall Street Journal.

According to The Times: Greece on the brink as bond rates surge to record highs the Greek Bond spread increased to an all time record 463 bps today (shown on graph in red).

BLS: Low Labor Turnover, Fewer Job Openings in February

From the BLS: Job Openings and Labor Turnover Summary

There were 2.7 million job openings on the last business day of February 2010, the U.S. Bureau of Labor Statistics reported today. The job openings rate was little changed over the month at 2.1 percent. The hires rate (3.1 percent) and the separations rate (3.1 percent) were also little changed in February.

This graph shows job openings (purple), hires (blue), Total separations (include layoffs, discharges and quits) (red) and Layoff, Discharges and other (yellow) from the JOLTS.

According to the JOLTS report, there were 3.961 million hires in February (SA), and 3.957 million total separations, or 4 thousand net jobs gained. The comparable CES report showed a loss of 14 thousand jobs in February (after revision).

Layoffs and discharges have declined sharply from early 2009 - however, hiring has not picked up.

Other Economic Stories ...

From Diana Olick at CNBC: Foreclosures Are Rising

From Adam Davidson, Chana Joffe-Walt and Jacob Goldstein at Planet Money: The Friday Podcast: New York Fed Chief, Bubble Fighter

From Professor Hamilton at Econbrowser: Do rising oil prices threaten the economic recovery?

From ISM: Non-Manufacturing sector expanded in March

Unofficial Problem Bank List at 682

Best wishes to all.

by Calculated Risk on 4/11/2010 11:24:00 AM

From the BBC: Greece is offered 30bn euros loan

Leaders of the 16 eurozone nations have agreed to fund up to 30bn euros in emergency loans for debt-hit Greece, if the country wants the cash.

The price of the loans will be fixed using IMF formulas, and be about 5%.

Luxembourg Prime Minister Jean-Claude Juncker, speaking for eurozone finance ministers, said there were no elements of subsidy in the loan proposal.

"The total amount put up by the eurozone member states for the first year will reach 30bn euros," he said.
...
Mr Juncker added that the financing would be "completed and co-financed" by the International Monetary Fund.

by Calculated Risk on 4/11/2010 09:20:00 AM

From Bloomberg: Germany Said to Accept EU Loan Compromise for Greece

Germany is prepared to give Greece loans at below-market interest rates ... a European government official said.

The loans would be priced above the rate charged by the International Monetary Fund, which would also participate in a European Union-led rescue ...

The European Commission said in an e-mailed statement that there will be a news conference today in Brussels at about 4 p.m. local time

by Calculated Risk on 4/10/2010 10:46:00 PM

From Robert Shiller in the NY Times: Don’t Bet the Farm on the Housing Recovery

MUCH hope has been pinned on the recovery in home prices that began about a year ago. A long-lasting housing recovery might provide a balm to households, mortgage lenders and the entire United States economy. But will the recovery be sustained?

Alas, the evidence is equivocal at best.

The most obvious reason for hope is that, unlike stock prices, home prices tend to show a great deal of momentum.

Momentum only goes so far. And I think it is likely that prices will fall further in many bubble areas later this year as more distressed properties hit the market.

Shiller also argues prices might fall:

Consider some leading indicators. The National Association of Home Builders index of traffic of prospective home buyers measures the number of people who are just starting to think about buying. In the past, it has predicted market turning points: the index peaked in June 2005, 10 months before the 2006 peak in home prices, and bottomed in November 2008, six months before the 2009 bottom in prices.

The index’s current signals are negative. After peaking again in September 2009, it has been falling steadily, suggesting that home prices may have reached another downward turning point.

Usually I graph the total NAHB Housing Market Index. Here is a graph of the NAHB traffic of prospective buyers and two home prices indexes: the Case-Shiller Composite 10 (seasonally adjusted) and First American Corelogic's LoanPerformance HPI (NSA).

Click on graph for larger image in new window.

Although Shiller is correct about traffic index peaking in 2005 and declining sharply in 2006 (when prices started to fall), I think this isn't a reliable indicator of future house price movements. I think a better indicator that prices were about to decline in 2006 was the rapid rise in inventories in the 2nd half of 2005 and into 2006 - and I think we should watch inventory levels again this year.

I think the NAHB does provide hints about housing starts.

This second graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the March release for the HMI and the February data for starts.

This shows that the HMI and single family starts mostly move generally in the same direction - although there is plenty of noise month-to-month.

For house prices, I think we need to watch inventory levels - especially distressed inventory.

Shiller concludes:

Recent polls show that economic forecasters are largely bullish about the housing market for the next year or two. But one wonders about the basis for such a positive forecast.

Momentum may be on the forecasts’ side. But until there is evidence that the fundamental thinking about housing has shifted in an optimistic direction, we cannot trust that momentum to continue.

by Calculated Risk on 4/10/2010 05:17:00 PM

From Professor Hamilton at Econbrowser: Do rising oil prices threaten the economic recovery?

Ten of the 11 recessions in the United States since World War II have been preceded by a sharp increase in the price of crude petroleum. Oil had been holding around $80/barrel over the last month, but traded as high as $87 last week, leading the Financial Times to ask whether oil could give the "kiss of death to recovery." Here is how I would answer that question.

See Hamilton's post for his analysis with several graphs. He concludes:

$87 oil is certainly not helping the recovery. But I would be very surprised if it proves to be the kiss of death.

And with the opposite view from the Financial Times article:

Olivier Jakob, of Swiss consultant Petromatrix, said in a note that the “recovery of 2009 was fuelled with crude oil at $62 a barrel, not at $90 a barrel or $100 a barrel. We fear that the latest run on WTI will be the kiss of death for a global economy that was trying to avoid the possibility of a double-dip recession.”
excerpted with permission

I tend to agree with Dr. Hamilton. However I also vehicle watch miles driven from the Department of Transportation (DOT), and the DOT recently reported that vehicle miles driven in January were down from January 2009:

Travel on all roads and streets changed by -1.6% (-3.7 billion vehicle miles) for January 2010 as compared with January 2009. Travel for the month is estimated to be 222.8 billion vehicle miles.

Here is a repeat of the graph I posted last month:

Click on graph for larger image in new window.

This graph shows the percent change from the same month of the previous year as reported by the DOT.

As the DOT noted, miles driven in January 2010 were down -1.6% compared to January 2009, and miles driven have declined 2.9% compared to January 2008, and are down 4.7% compared to January 2007.

If miles driven continues to decline, I'll be more concerned about oil prices.

by Calculated Risk on 4/10/2010 01:01:00 PM

From Adam Davidson, Chana Joffe-Walt and Jacob Goldstein at Planet Money: The Friday Podcast: New York Fed Chief, Bubble Fighter

And here is the transcript of the interview: New York Fed Chief: We Should 'Try To Identify Bubbles'. An excerpt:

MR. DUDLEY: I mean, my view is not so much that we are going to prevent all asset bubbles. I think that's unrealistic. But what we might be able to do is prevent the asset bubbles from being quite so big and maybe preventing the consequences of the asset bubbles from when they burst being quite so bad.

So imagine in the last few years if, let's say, a much tougher approach had been taken to subprime underwriting. So we basically said, you can't have no-doc loans. You have to have restrictions on loan-to-value ratios. You have to make sure the subprime loans that the people actually can afford them once their teaser rates periods end.

Q: Crazy ideas. Why would you want to do any of that?

MR. DUDLEY: If you had done all those things -- if you had done all those things, I would speculate that -- if all those had been in place, there would have been less credit that had flowed into the housing sector, housing prices would have gone up less far and when the whole situation reversed, we'd see a less severe decline in housing prices, less stress on the financial system and therefore less stress on the macro-economy.

So it seems to me that, you know, obviously, hindsight is 20-20. But it seems to me with the benefit of hindsight, it seems like things could have been done to restrain the asset price movements in a way that would have generated a more stable financial system and a more stable macro-economy.

There were quite a few people arguing that the regulators should tighten standards in 2004 and 2005. And I don't think Dudley should focus on subprime mortgage - there were weak underwriting standards in Prime and Alt-A residential mortgages, commercial real estate, and many other areas.

Oh, and one final excerpt (based on Bear Stearns assets):

Q: So just one very last question. We actually called one of the REO properties, a mall in Oklahoma that's in default. And I don't know how to say this other than as inarticulately as, it just blows my mind to think that we could call a mall in Oklahoma and realize their owner is the Fed. Just how do you feel when you think about that? It's such a weird thing.
...
MR. DUDLEY: I did not expect as president of the New York Federal Reserve that I'd be having to worry about a mall in Oklahoma City.

by Calculated Risk on 4/10/2010 08:59:00 AM

The following article makes a couple of key points: 1) office vacancy rates are still rising as leases expire, and 2) new construction has essentially stopped - and there will probably be little new office construction for a number of years. That is also what the Architecture Billings Index, a leading indicator for commercial real estate (CRE) suggests ...

From Robert Selna at the San Francisco Chronicle: Office vacancy rate rises in San Francisco

The 13 million square feet of available space in the first quarter of 2010 translates to a 17.7 percent office vacancy rate, up from 14.7 percent a year ago and nearly one percentage point from the previous quarter ending in December, according to data released Friday by the real estate firm Jones Lang LaSalle.
...
Boston's commercial district has a vacancy rate of 18.4 percent and Chicago's is 16.3 percent, according to Jones Lang LaSalle.
...
[Colin Yasukochi, research director at Jones Lang LaSalle] said that only one office building, located in Mission Bay, is currently under construction.

by Calculated Risk on 4/09/2010 10:25:00 PM

This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for April 9, 2010.

Changes and comments from surferdude808:

This week the Unofficial Problem Bank List stands at 682 institutions with assets of $364 billion compared with 683 institutions with assets of $361 billion last week. There are seven removals including one failure -- Beach First National Bank ($602 million), and six unassisted mergers that have happened during the first quarter. However, two of the unassisted deals were just a combination of weak affiliates as the survivor is still on the list. For example, on March 1, 2010 Community Banks of Northern California merged with its sister bank Community Banks of Colorado ($1.7 billion), which is subject to a formal enforcement action by the Federal Reserve.

There are six additions this week with aggregate assets of $3.3 billion. Additions include PremierWest Bank, Medford, OR ($1.5 billion Ticker: PRWT); First Commercial Bank of Florida, Orlando, FL ($669 million); and Cornerstone Community Bank, Chattanooga, TN ($530 million Ticker: CSBQ.OB)

We have updated the transition matrix for the first appearance of the Unofficial Problem Bank List on August 7, 2009. (see below) Back then, the list had 389 institutions with assets of $276.3 billion. Subsequently, 296 institutions or 76 percent still remain open with an outstanding formal enforcement action.

Approximately 24 percent or 93 institutions have been removed from the initial list. The majority of the removals have occurred through failure (70 institutions or 75 percent of removals). Other removals are for action termination or a return to healthy status (16 institutions or 17 percent of removals) and unassisted mergers (7 institutions or 7.5 percent of removals).

So far, the failure rate for institutions on the initial list is approximately 18 percent (70 institutions/389 institutions). This failure rate is higher than the historical 13 percent rate mentioned by the FDIC and frequently cited by the media (see links):

From CNNMoney: Banks at risk of going bust tops 700
From CNNMoney: Bank 'problem' list climbs to 552
Video: Problem Bank List Growing (listen to analyst quoting FDIC historical rate)

We have long suspected that the often cited historical failure rate of 13 percent for institutions on the problem bank list was a bit misleading for the current crisis because it is most likely derived from a long time series that includes non-crisis periods. Thus, the FDIC historical metric cannot be used to estimate how many institutions on the problem bank list during this crisis will fail. Already, the failure rate is 18 percent, which is five percentage points above the historical rate. Moreover, it can only go higher for institutions on the initial list. Therefore, anyone that continues to cite this statistic, especially to downplay the magnitude of having 700 institutions on the official list, is badly misinformed.

Interestingly, in an interview with Time Magazine, FDIC Chairman Shelia Bair is now citing a higher failure rate of 23 percent for institutions on the problem bank list. In addition, Chairman Bair sounds more sanguine on the outlook for failures and predicts they peak in 2010 at a rate not much higher than 2009. See comments from a Time Magazine interview published April 9, 2010: FDIC's Sheila Bair on Bank Failures and Too-Big-To-Fail

Time: We saw 140 bank failures in 2009; another 41 so far this year. Is the worst behind us?

Bair: I think we'll go above the 2009 level, but that bank failures will peak this year. The institutions by asset size might be a little smaller, but there will be more of them. But it's important that people understand that the number of bank failures is still a very small percentage of the overall number of insured institutions in the country — and obviously their insured deposits are protected.

Time: How many banks are on your watch list right now?

Bair: There are about 700 right now, but most of these banks will not fail. Historically, about 23% of banks that go on the list actually fail. One of the reasons we put them on the troubled bank list is so that they can get some extra supervisory attention and...get nursed back to health.

Unofficial Problem Bank List
Change Summary
		Number of Institutions	Assets ($Thousands)
Start (8/7/2009)		389	276,313,429
Subtractions
	Action Terminated	16	(2,932,948)
	Unassisted Merger	7	(988,349)
	Failures	70	(120,826,006)
	Asset Change		(12,544,845)
Still on List at 4/02/2010		296	139,021,281
Additions		387	222,013,694
End (4/02/2010)		683	361,034,975
Interperiod Deletions1
	Action Terminated	0	-
	Unassisted Merger	5	1,184,165
	Failures	38	39,300,874
	Total	43	40,485,039
1Institution not on 8/7/2009 or 4/02/2010 list but appeared on a list between these dates.

by Calculated Risk on 4/09/2010 05:10:00 PM

The beach gets bigger
When the tide it does recede
Taxpayers stranded
by Rob Dawg
From the FDIC: Bank of North Carolina, Thomasville, North Carolina, Assumes All of the Deposits of Beach First National Bank, Myrtle Beach, South Carolina

Beach First National Bank, Myrtle Beach, South Carolina, was closed today by the Office of the Comptroller of the Currency, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. ...

As of December 31, 2009, Beach First National Bank had approximately $585.1 million in total assets and $516.0 million in total deposits. ...

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $130.3 million. ... Beach First National Bank is the 42nd FDIC-insured institution to fail in the nation this year, and the first in South Carolina. The last FDIC-insured institution closed in the state was Victory State Bank, Columbia, on March 26, 1999.

The FDIC gets back to work ...

by Calculated Risk on 4/09/2010 02:15:00 PM

Back in 2006 some analysts argued that strong local economies (because of construction) would keep certain areas from being impacted by the housing bust. I disagreed and wrote:

As the housing bubble unwinds, housing related employment will fall; and fall dramatically in areas like the Inland Empire. The more an area is dependent on housing, the larger the negative impact on the local economy will be.

So I think some pundits have it backwards: Instead of a strong local economy keeping housing afloat, I think the bursting housing bubble will significantly impact housing dependent local economies.

Here is an update to one of the graphs I posted in 2006 (data is not seasonally adjusted):

Click on graph for larger image in new window.

This graph shows the percentage of construction payroll jobs in three areas of California: San Diego, Riverside (Inland Empire), and Sacramento. The California percentages exclude the three metropolitan areas.

Sure enough, generally the areas with the largest price declines and total lost jobs, were the areas with the highest percentage of construction employment during the boom. As an example, total employment in the Inland Empire is off 14.3% compared to 10.4% for all of California.

I also took a look at some of the Case-Shiller cities. The next graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices (NSA).

Unfortunately the BLS doesn't break out construction employment for Denver, Dallas or Charlotte (the cities with the smallest Case-Shiller house price declines).

So I compared Boston (4th smallest price decline) with Las Vegas and Phoenix with the largest price declines. I added Texas because of the minimal housing bust in that state.

Sure enough - the cities with the highest level of construction employment were hit the hardest. Boston has a fairly low percentage of construction jobs and a fairly mild bust. In Texas there are a fair number of construction jobs, but there wasn't a huge surge in construction (construction in Texas is probably heavily commercial).

In Las Vegas total employment is down 14.6%, and in Phoenix employment is off 12.9%, but in Boston total employment only declined 7% - and only 4.9% in Texas.

This was all part of the cycle. Rising prices meant more home construction - and more construction meant more construction employment and that meant more homebuyers. When the bust came, many of these workers lost their jobs, and then their homes, and that put additional pressure on the local housing markets. So it was pretty easy to tell in 2006 which areas would get crushed.

by Calculated Risk on 4/09/2010 11:03:00 AM

From Ron Orol (updated) at MarketWatch: Fannie Mae official: We were surprised by extent of crisis. First the obligatory "no one saw it coming" comment:

"Few if any predicted the unusual and rapid destruction of real estate values that occurred," Robert Levin, former Executive Vice President and Chief Business Officer of Fannie Mae told a financial crisis inquiry panel.

"In hindsight, if we and the industry as a whole had been able to appreciate the nature and extent of the crisis, it is clear we all would have conducted our business differently during this period, but we like everyone else were surprised by the unprecedented extent of the economic crisis."

And the real argument:

During the build up to the financial crisis the two entities were hybrid public private entities - so-called government-sponsored entities -- that had goals of increasing their stock price and competing with Wall Street at the same time as they met low-income housing goals set by the Department of Housing and Urban Development

Levin and Mudd argued that in a key period, in 2005 and early 2006, the dollar volume of private label mortgage securities issued by Wall Street outpaced mortgages securities issued by Fannie Mae, Freddie Mac and Ginnie Mae combined.

Yes, the worst loans - by far - were in the private label MBS issued by Wall Street. But the Fannie and Freddie structure - that privatized profits and socialized losses - incentivized executives at Fannie and Freddie to compete with Wall Street.

Note: It is the one year anniversary of the comment section called "Hoocoodanode?" - (Who could of known?) - a running joke on this blog for several years. Thanks to Ken for the awesome site - and to all the great contributors in the comments. Try it out!

by Calculated Risk on 4/09/2010 08:49:00 AM

It appears the FDIC is getting closer to taking action in Puerto Rico.

Back in February, José Carmona and John Marino at caribbeanbusinesspr.com wrote: Feds expected to take action against island banks next month and last month from Dow Jones: FDIC Seeks Buyers for Three Puerto Rican Banks

Joe Adler explains some of the complications in Puerto Rico writing in American Banker: Puerto Rico Forces FDIC to Scramble

Three banks on the island holding more than $20 billion of assets are in trouble ... The banks — $12 billion-asset Westernbank Puerto Rico, $6 billion-asset R-G Premier Bank of Puerto Rico and $2.6 billion-asset Eurobank — account for nearly a quarter of the assets on the island ...

Many observers said the FDIC cannot afford to deal with each failure individually. ... if the FDIC needs to resolve all three institutions at the same time, it may face a shortage of buyers. ...

Moreover, the large mainland banking companies ... have all but abandoned Puerto Rico. ... "There hasn't been a lot of interest from banks who aren't already in Puerto Rico," said Joe Gladue, an analyst with B. Riley & Co. Inc.

It appears the remaining healthy banks in Puerto Rico don't have the capacity to acquire these troubled banks - and most banks not in Puerto Rico just aren't interested.

by Calculated Risk on 4/08/2010 08:46:00 PM

From Fed Chairman Ben Bernanke: Economic Policy: Lessons from History

I thought that I would speak to you about the parallels--and differences--between [the Great Depression] and the [great recession], particularly regarding the responses of policymakers. I draw four relevant lessons from the financial collapse of the 1930s ...

The first lesson--economic prosperity depends on financial stability--seems obvious, but this connection was not always well understood. After the stock market crash of 1929, many thought a financial and economic crisis was necessary--even desirable--to wring out speculative excesses that had built up in the 1920s. Remarkably, despite the fact that the Federal Reserve had been founded to mitigate financial panics, the central bank made essentially no effort to prevent the wave of bank failures that paralyzed the financial system at the start of 1930s. ...

Economists themselves have not always fully appreciated the importance of a healthy financial system for economic growth or the role of financial conditions in short-term economic dynamics. ... In contrast, more recent work on the subject, to which I contributed, showed that the health of the financial system and the performance of the broader economy are closely interrelated, both in the short run and in the long run.

CR Note: Bernanke goes on to argue the first "lesson has been learned". Maybe. I think financial stability means being proactive, not reactive. And I think NY Fed President William Dudley was on the right track when he discussed identifying bubbles, and the possible tools available to policymakers to pop bubbles early.

[T]he second [lesson]--policymakers must respond forcefully, creatively, and decisively to severe financial crises. Early in the Depression, policymakers' responses ran the gamut from passivity to timidity. They were insufficiently willing to challenge the orthodoxies of their day--such as the liquidationist doctrine of Mellon and others, or the rigid adherence to the variant of the gold standard adopted after World War I. ...

In the Depression, effective policy responses came only after three to four years of financial crisis and economic contraction. In our own time, policymakers acted sooner and with greater force than in the 1930s. For example, in October 2008, just weeks after the sharp intensification of the crisis, the Congress authorized the Troubled Asset Relief Program (TARP) to support stabilization of the financial system. It was far from perfect legislation, but it was essential for preventing an imminent financial collapse. For its part, the Federal Open Market Committee, the monetary policymaking arm of the Federal Reserve, sharply and proactively cut its target for short-term interest rates from the fall of 2007 through 2008. After the target could go no lower, the Committee embarked on an unprecedented (for the United States) program of long-term securities purchases, recently completed, to support private credit markets, including the mortgage market.

CR: Bernanke deserves praise for his creative and aggressive response - once he finally understood what was happening.

[T]he third lesson: International crises require an international response. ... In the recent episode, policymakers, bankers, and business people recognized that the world's economies and financial systems would sink or swim together.
...
I'll conclude with the cautionary fourth lesson--history is never a perfect guide. ... [O]ur traditional tools, developed in an earlier era, were of little use in addressing panic in the shadow banking system or in the money market mutual fund industry. So, we engaged in what I call "blue sky thinking"--generating many ideas. Most were discarded, but, crucially, some led to the development of new ways for the Federal Reserve to fulfill the traditional stabilization function of central banks. Using emergency authority last employed during the Depression, we created an array of new facilities to provide backstop liquidity to the financial system (and, as a byproduct, coined many new acronyms). Thus, we were able to help restore the flow of credit to American families and businesses by shoring up important financial markets, such as those for commercial paper and securities backed by consumer loans.

Excuse my snark, but it is refreshing to hear Bernanke speaks about monetary policy issues.

by Calculated Risk on 4/08/2010 05:20:00 PM

Here is a graph from the Atlanta Fed weekly Financial Highlights released today (graph as of April 6):

Click on graph for larger image in new window.

From the Atlanta Fed:

European bond spreads (over German bonds) reflect
investors’ worries about Greece’s sovereign credit risk.

On April 6, the spread of the 10-year Greek bond over its German counterpart widened by 72bps to 404.5 bps, the widest since 1998, according to the Wall Street Journal.

According to The Times: Greece on the brink as bond rates surge to record highs the Greek Bond spread increased to an all time record 463 bps today (shown on graph in red).

There is very little change for the other PIIGS (Portugal, Italy, Ireland, and Spain), although the UK spreads suggest we might need to add a "U" to "PIIGS".

by Calculated Risk on 4/08/2010 02:33:00 PM

First American Corelogic released their first distressed sales report this morning: Distressed Sales Again on the Rise, Reaching 29% in January

First American CoreLogic today released its first monthly report on distressed sales activity. The report below indicates that distressed home sales – such as short sales and real estate owned (REO) sales – accounted for 29 percent of all sales in the U.S. in January: the highest level since April 2009. The peak occurred in January 2009 when distressed sales accounted for 32 percent of all sales transactions (Figure 1). After the peak in early 2009, the distressed sale share fell to 23 percent in July, before rising again in late 2009 and continuing into 2010.

Here are a couple of graphs from the report:

Click on graph for larger image in new window.

Credit: First American Corelogic.

This graph shows the total percent of distressed sales broken down by REO and Short Sales. Notice that the percent short sales has increased significantly over the last year - that trend will probably continue.

The second graph shows the breakdown by certain metropolitan areas.

Among the largest 25 markets, Riverside, CA, had the largest percentage of distressed sales in January (62 percent), followed closely by Las Vegas (59 percent) and Sacramento (58 percent) (Figure 2). The top REO market was Detroit where the REO share was 48 percent, followed closely by Riverside (47 percent) and Las Vegas (45 percent). San Diego’s short sale share was 19 percent in January, making it the highest ranked short sale market, followed by Sacramento (18 percent) and Oakland (16 percent). Although the top 10 markets for foreclosures are all located in Florida, only two Florida markets, Orlando and Cape Coral, made the top 10 distressed sale list. The most likely reason: Florida is a judicial state where foreclosures process through the courts and take quite a bit longer than in California, Arizona or Nevada, where non‐judicial foreclosures are the norm.

I've been following the Sacramento market as an example of a distressed market - and the Sacramento Association of REALTORS® reported that almost 69% of sales were distressed in January, with 24% short sales, and 45% REOs. The FACL data shows about 58% as distressed. The difference is probably in the methodology.

The exact numbers probably aren't as important as the trend - and this will be an interesting trend to follow in 2010.

by Calculated Risk on 4/08/2010 11:32:00 AM

From HotelNewsNow.com: STR: Luxury leads weekly performance

Overall, the U.S. industry’s occupancy ended the week with a 3.6-percent decrease to 54.1 percent, ADR dropped 4.4 percent to US$94.45, and RevPAR was down 7.9 percent to US$51.05.

The following graph shows the occupancy rate by week for 2009 and 2010, and the median for 2005 through 2007.

Click on graph for larger image in new window.

Notes: the scale doesn't start at zero to better show the change, and the holidays don't always line up.

The graph shows the distinct seasonal pattern for the occupancy rate; higher in the summer because of leisure/vacation travel, and lower on certain holidays.

The decline in occupancy this week breaks a streak of six consecutive weeks with higher year-over-year occupancy rates. Remember that last year (2009) was the lowest occupancy rate since the Great Depression - the average for this week is around 66%, so the current 54.1% is far below normal.

Data Source: Smith Travel Research, Courtesy of HotelNewsNow.com

by Calculated Risk on 4/08/2010 08:35:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending April 3, the advance figure for seasonally adjusted initial claims was 460,000, an increase of 18,000 from the previous week's revised figure of 442,000. The 4-week moving average was 450,250, an increase of 2,250 from the previous week's revised average of 448,000.
...
The advance number for seasonally adjusted insured unemployment during the week ending March 27 was 4,550,000, a decrease of 131,000 from the preceding week's revised level of 4,681,000.

Click on graph for larger image in new window.

This graph shows the 4-week moving average of weekly claims since 1971.

The four-week average of weekly unemployment claims increased this week by 2,250 to 450,250.

The dashed line on the graph is the current 4-week average. The current level of 460,000 (and 4-week average of 450,250) is still high, and suggests continuing weakness in the jobs market. Note: There is no way to compare directly between weekly claims, and net payrolls jobs.