by Calculated Risk on 12/12/2007 02:55:00 PM

This morning, Tanta mentioned that the House was considering Cram Downs.

Now from the AP: House Panel Approves Bankruptcy Bill (hat tip Branden)

... House lawmakers on Wednesday advanced legislation that would enable homeowners to shrink their mortgages in bankruptcy court.

The bill ... was passed by the House Judiciary Committee 17 to 15 ...

House leaders appeared unlikely to bring the bill up for a vote before year-end. ...

Mortgage-industry leaders argue that giving judges this power, which they term a "cramdown," would force lenders to charge higher rates to offset any unpaid loan balances that would be reduced in court.

by Calculated Risk on 12/12/2007 02:36:00 PM

Back in June, Tanta celebrated some good news (with obvious sarcasm): The Drag Stops Here:

The worst U.S. housing slump in 16 years will begin to ease in the next month or two, and job growth will lift home prices and spur construction early next year, Bank of America Corp. Chief Executive Officer Kenneth Lewis said.

``The drag stops in the next few months,'' Lewis said in an interview yesterday in New York. ``It's just about to be over. We're seeing the worst of it.''

Now from Bloomberg: Bank of America's Lewis Muffs Housing Market Forecast

Six months after saying the slowdown in U.S. housing sales was ``just about to be over,'' Lewis said today at an industry conference in New York that fourth-quarter profit will be ``quite disappointing'' and predicted a `challenging'' 2008 with higher writedowns for securities tied to the mortgage market.

Oops. Re-cork the Champagne!

Lewis did get something right in May: Bank of America's Lewis Calls for Lending `Sanity'

``We are close to a time when we'll look back and say we did some stupid things,'' Lewis said, speaking at a lunch at the Swiss-American Chamber of Commerce in Zurich. ``We need a little more sanity in a period in which everyone feels invincible and thinks this is different.''

And he wasn't talking about "stupid things" in housing:

The chief executive said that while the bank has turned down some corporate customers as too risky, ``the deals we've turned down have been taken up quickly by others.''
...
Lewis, 60, said ``We need a deal to go bad, as long as we're not in it.''

Just remember he wasn't worried about housing - although he should have been - his concern was for corporate loans. Hmmm ... Chrysler?

by Calculated Risk on 12/12/2007 11:50:00 AM

From Greg Ip at the WSJ: Fed Joins Other Banks in Measures To Inject More Funds Into Markets

The Federal Reserve has joined with four other major central banks to announce a series of measures designed to inject added cash into global money markets in hopes of thawing a credit freeze that threatens their economies.

The Fed said today it would create a new "term auction facility" under which it would lend at least $40 billion and potentially far more, in four separate auctions starting this week. The loans would be at rates far below the rate charged on direct loans from the Fed to banks from its so-called "discount window." But the new loans can still be secured by the same, broad variety of collateral available that banks pledge for discount window loans.
...
The Fed also said it had created reciprocal "swap" lines with the European Central Bank, for $20 billion, and the Swiss National Bank, for $4 billion. These will enable the ECB and SNB to make dollar loans to banks in their jurisdiction, in hopes of putting downward pressure on interbank dollar rates in the offshore markets, principally the London Interbank Offered Rate, or Libor, market. The inability of foreign central banks to inject funds in anything other than their own currency has been a factor creating the squeeze on bank funding in those markets.
...
The new "term auction facility" overcomes the principal obstacles the Fed has faced using its two main tools for injecting liquidity. Open market operations can be used to inject cash at the federal funds rate, which is relatively cheap, but only against a limited range of collateral. The discount rate, on the other hand, is half a point higher than the federal funds rate and banks are reluctant to access it for fear of the stigma of being seen to be desperate for funds.

The new loans will be auctioned off with a minimum rate linked to the expected actual federal funds rate over the duration of the loan. Since the federal funds rate is expected to decline over the next two months, when the loans will be outstanding, the loan rate could end up being close to or even below the current federal funds rate.

So much for discouraging future risk taking. Here is what the BofE's Mervyn King said in September:

The path ahead is uncertain. There are strong private incentives to market players to recognise early and transparently their exposures to off-balance sheet entities and to accelerate the re-pricing of asset-backed securities. Policy actions must be supportive of this process. Injections of liquidity in normal money market operations against high quality collateral are unlikely by themselves to bring down the LIBOR spreads that reflect a need for banks collectively to finance the expansion of their balance sheets. To do that, general injections of liquidity against a wider range of collateral would be necessary. But unless they were made available at an appropriate penalty rate, they would encourage in future the very risk-taking that has led us to where we are. All central banks are aware that there are circumstances in which action might be necessary to prevent a major shock to the system as a whole. Balancing these considerations will pose considerable challenges, and in present circumstances judging that balance is something we do almost daily.

The key objectives remain, first, the continuous pursuit of the inflation target to maintain economic stability and, second, ensuring that the financial system continues to function effectively, including the proper pricing of risk. If risk continues to be under-priced, the next period of turmoil will be on an even bigger scale. The current turmoil, which has at its heart the earlier under-pricing of risk, has disturbed the unusual serenity of recent years, but, managed properly, it should not threaten our long-run economic stability.
emphasis added

The idea of lending “quickly, freely and readily” during a crisis, but at a penalty rate, and only on good collateral, comes from Walter Bagehot's 1873 “Lombard Street”.

UPDATE: Floyd Norris smells Fear at the Fed

by Calculated Risk on 12/12/2007 11:19:00 AM

The Census Bureau reported today for October 2007:

"a goods and services deficit of $57.8 billion, $0.7 billion more than the $57.1 billion in September"

Click on graph for larger image.

The red line is the trade deficit excluding petroleum products. (Blue is the total deficit, and black is the petroleum deficit).

The ex-petroleum deficit is falling fairly rapidly, almost entirely because of weak imports (export growth is still strong). The ex-petroleum deficit is now almost all China! From Greg Robb at MarketWatch: Trade gap widens in October on high oil prices

The U.S. trade deficit with China widened to a record $25.9 billion in October from $24.4 billion in the same month last year and $23.8 billion in September. The trade gap with China rose to $213.5 billion in the first 10 months of the year, up from $190.7 billion in the same period last year.

Unlike the previous decline in the trade deficit (during the '01 recession), the value of petroleum imports - in dollar terms - are still strong. In barrels, imports appear to be flat or declining slightly year over year.

Note also that not only oil import prices are surging. From Rex Nutting at MarketWatch: Import prices rise 2.7%, the most in 17 years

Driven by a weaker dollar and much higher prices for petroleum and natural gas, import prices surged 2.7% in November, the largest monthly increase in 17 years, the Labor Department reported Wednesday.

Even excluding fuels, import prices rose 0.5%.

Import prices have now risen 11.4% in the past year, the largest gain in the 25-year history of the import price index.

by Calculated Risk on 12/12/2007 10:19:00 AM

From MarketWatch: Bank of America, Wachovia, PNC see tough fourth quarter, more credit losses

Bank of America Chief Executive Ken Lewis said the firm would have to write down a larger amount of its investment in some debt securities than previously planned.

"Based on conditions today, we expect those write-downs will be larger than have already been reported -- although obviously we won't know our final numbers until we close the fourth quarter," Lewis said in remarks prepared for delivery at a Goldman Sachs conference.
...
Lewis said the problems continue to grow, based on a slowing economy, but he stopped short of predicting a recession. "We're getting closer to 50-50 though, "Lewis said, referring to the likelihood of a recession.
...
Also Wednesday, Wachovia ... in a Securities and Exchange Commission filing, said it now estimates its loan-loss provision for the fourth quarter will be about $1 billion in excess of charge-offs.

Its previous forecast was between $500 million and $600 million due to slowing loan growth and ongoing deterioration in its loan portfolio.
...
PNC said it expects to report fourth-quarter earnings in the range of 60 cents to 75 cents a share, and adjusted earnings between $1 and $1.15 a share. Analysts polled by Thomson Financial are looking for profit of $1.39 a share, on average.

The revised expectation is due to write-downs on its $1.5 billion of commercial mortgage loans held for sale and lower trading revenue as a result of "unprecedented market price volatility," PNC said in the filing.