by Calculated Risk on 4/24/2009 01:07:00 AM

A late night thread ...

Here is the letter from Cuomo to Congress today (2.0 MB PDF). And a Bloomberg discussion:

by Calculated Risk on 4/23/2009 10:09:00 PM

From Floyd Norris at the NY Times: Subprime Loans, Corporate-Style, Will Fuel Defaults

It appears that defaults on leveraged loans and corporate bonds will soon rise to levels not seen since the Great Depression.
...
The default rate on leveraged loans and speculative grade bonds is rising rapidly. “We expect the default rate to get to the range of 14 percent by the end of the year,” said Kenneth Emery, a senior vice president of Moody’s. That compares to peak default rates of 10 to 12 percent during the last two recessions ...

How did we get into this mess? The story is remarkably similar to the tale of subprime mortgages.

Just another area with rapidly rising defaults. Norris also discusses toggle-PIKs (kind of like Option ARMs for corporations).

Note: PIK stands for Payment-in-kind (i.e. pay interest with more debt). These were used in the '80s LBO craze with predictable results (high defaults). Toggle means the borrower has the choice of paying in cash or PIK.

There were negatively amortizing loans everywhere: Option ARMs for homeowners, toggle PIKs for corporations, and of course interest reserves for Construction & Development loans (always common, but are blowing up on lenders).

by Calculated Risk on 4/23/2009 07:10:00 PM

From Brian on AmEx Conference Call:

They expect to see writeoff rates climb from 8.5% to 10.5-11.0% in Q2 and up another 50 BP in Q3 and flattening out in Q4. Part of the driver of writeoff rates is their denominator is falling fairly quickly as charge volumes decline (denominator for CC cos will drop faster than for mortgages and other loan categories). They are assuming 9.7% unemployment in December 09.

They are seeing some improvement in early stage DQ and roll rates. There is probably some seasonality involved, but they also think that there is some non seasonal improvement. 30DQ increase for last 4 Q’s (starting with Q2 08) are +10BP, +60BP, +80BP, +40BP – so it isn’t going down, it’s just another second derivative thing.

And some CC comments:

Analyst: American Express has more exposure as we all know in California and Florida and some of the housing states where you have higher income as well and I think credit maybe started to go bad in the fourth quarter of '07, maybe a little bit ahead of the competition because of your exposure in some of those states, and as you looked closely and I think tightened sooner than others did because of that, when you're looking at your roll rates improving and understanding there's seasonality and it's too early to get too constructive on that, but are you seeing signs of improvement in more so in states that went bad earlier because of the tightening? You know, where are you seeing that improvement?

AmEx: I would say that early in the cycle I think that housing was a significant driver of higher delinquencies and writeoff rates and we certainly did see that in states that had larger drops in housing. However, at this juncture, I really think that unemployment has taken over as the primary driver of delinquency and writeoff rates, so I think that's what we will need to see for a real turn. I think stabilization in the housing market will be important. I think consumer confidence will be critically important, people have to feel comfortable that we are going to retain their job and when those things start to happen, I think is when we will really start to see some notable improvements.
emphasis added

by Calculated Risk on 4/23/2009 06:31:00 PM

A friend called me up early last year and told me that she had just put a significant amount of money in Auction Rate Securities with Wells Fargo. She started to tell me what a great deal it was, and I interrupted her: "Hang up. Call Wells Fargo. Get out now." She called Wells Fargo immediately, and she couldn't sell - and she has been stuck in this "investment" ever since.

From the LA Times: Wells Fargo accused of securities fraud by state lawsuit

California today sued investment subsidiaries of Wells Fargo & Co. for securities fraud, alleging that the San Francisco financial services company misled investors by selling $1.5 billion worth of risky securities that it peddled as being as safe as cash.

The securities "were sold to customers on the basis that they were like cash and people could get their money back in eight days," Atty. Gen. Jerry Brown said in an interview. "Now, it turns out they were not like cash and people can't get their money back even after many, many months, and they're mad as hell."

My friend was also told these securities were "as good as cash" and she could get her money back with eight days notice. It is especially irritating to see a Wells Fargo spokesperson say:

"We fully understand and deeply regret the effects this prolonged liquidity crisis has had on our clients," Charles W. Daggs, chief executive of Wells Fargo Investments, said in a statement.

"Wells Fargo could not have predicted these extraordinary circumstances, and even with the benefit of hindsight is not responsible for them."

Yeah, hoocoodanode?

by Calculated Risk on 4/23/2009 04:40:00 PM

The Federal Reserve released the Factors Affecting Reserve Balances today. Total assets increased to $2.2 trillion.

The Term Asset-Backed Securities Loan Facility (TALF) is off to a slow start, with just under $6.4 billion in assets.


Click on graph for larger image in new window.

After spiking last year to $2.31 trillion the week of Dec 18th, the Federal Reserve assets then declined somewhat. Now the Federal Reserve is starting to expand their balance sheet again.

Three trillion here we come!

Note: the graph shows Total Factors Supplying Federal Reserve Funds and is an available series that is close to assets.

Most of the increase this week in factors supplying reserve funds came from the Fed buying MBS (increased by $75 billion). This is still pushing down mortgage rates: see Freddie Mac: Long-term rates Now Lower than Short-term

Freddie Mac (NYSE:FRE) today released the results of its Primary Mortgage Market Survey® (PMMS®) in which the 30-year fixed-rate mortgage (FRM) averaged 4.80 percent with an average 0.7 point for the week ending April 23, 2009, down from last week when it averaged 4.82 percent. Last year at this time, the 30-year FRM averaged 6.03 percent.