by Calculated Risk on 5/08/2009 08:30:00 AM

From the BLS:

Nonfarm payroll employment continued to decline in April (-539,000), and the unemployment rate rose from 8.5 to 8.9 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Since the recession began in December 2007, 5.7 million jobs have been lost. In April, job losses were large and widespread across nearly all major private-sector industries. Overall, private sector employment fell by 611,000.

Click on graph for larger image.

This graph shows the unemployment rate and the year over year change in employment vs. recessions.

Nonfarm payrolls decreased by 539,000 in April. March job losses were revised to
699,000. The economy has lost almost 4 million jobs over the last 6 months, and over 5.7 million jobs during the 16 consecutive months of job losses.

The unemployment rate rose to 8.9 percent; the highest level since 1983.

Year over year employment is strongly negative (there were 5.2 million fewer Americans employed in Apr 2009 than in Apr 2008).

The second graph shows the unemployment rate compared to the stress test economic scenarios on a quarterly basis as provided by the regulators to the banks (no link).

This is a quarterly forecast: in Q1 the unemployment rate was higher than the "more adverse" scenario. For Q2, April is already higher than the "more adverse" scenario, and will probably rise further in May and June.

Note also that the unemployment rate has already reached the peak of the "baseline scenario".

This is another weak employment report ... more soon.

by Calculated Risk on 5/07/2009 11:00:00 PM

Earlier I pointed out that some of the numbers seemed puzzling.

Peter Eavis at the WSJ has a similar reaction, but uses a different example: U.S. Banks' Not-So-Stressful Test

The government's 13.8% worst-case loss-rate for second-lien mortgages seems fair. But it is a stretch to think Wells Fargo, with its large home-equity book focused on stressed housing markets, will have a lower-than-sector loss rate of 13.2%.

That doesn't make sense.

And on commercial real estate:

The government may have been too optimistic in positing an 8.5% commercial-real-estate loss rate. This sector is just starting to fall apart, and defaults may move sharply higher as borrowers struggle to refinance loans.

Unfortunately the Fed grouped Construction & Development loans (C&D) in with other CRE loans. The losses on C&D at loans are rising sharply, and it would have been easier to analyze if the Fed had released the data by each separate CRE category.

by Calculated Risk on 5/07/2009 09:29:00 PM

With the recent increase in treasury yields, reader shortcourage asked for a graph comparing the 30 year fixed mortgage rate and the ten year treasury yield. Sometimes we do requests ...

Click on graph for larger image in new window.

This graph compares the weekly 30 year fixed rate conforming rate from Freddie Mac, and the 10 year treasury yield. The black line is the spread between the two rates.

The spread is back down near the lower end of the range - and this suggests any further increase in the ten year yield will push up morgage rates.

Freddie Mac reported today:

Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®) in which the 30-year fixed-rate mortgage (FRM) averaged 4.84 percent with an average 0.7 point for the week ending May 7, 2009, up from last week when it averaged 4.78 percent. Last year at this time, the 30-year FRM averaged 6.05 percent.

by Calculated Risk on 5/07/2009 07:04:00 PM

The Fed released the stress test results earlier today.

The projected $600 billion in losses over the next two years under the "more adverse" scenario are in addition to the estimated $400 billion in losses and write downs are already taken by these 19 banks. Because of existing resources, future earnings, and planned transactions, the Fed estimates the banks need to raise $75 billion in capital. This is a huge question mark: Is this enough?

Note: Shuffling preferred to common doesn't really help with solvency (except with some ratios). See Paul Kasriel's Preferred Equity into Common Equity – Accounting Alchemy?

Some of the numbers don't make much sense. Using BofA as an example, the indicative two year loss rates for first lien mortgages are 7% to 8.5%, and I believe BofA is in worse shape (because of their acquisition of Countrywide) than most banks. So I would expect losses substantially higher than the indicative rates. Instead they were lower (only 6.8% of first lien mortgages).

And I was expecting more details. Under Commercial Real Estate (CRE), the Fed grouped Construction & Development (C&D), Multi-family, and other non-residential in the same category. However the indicative loss rates suggest these assets perform very differently (C&D the worst), and it would help to break out each category. Especially since it appears the banks have under reserved for CRE losses.

How can BofA only have 9.1% in CRE losses over two years under the "more adverse" scenario? I'd like to see their exposure to C&D, and other categories.

Also, I was expecting to see the losses and loss rates for both the baseline and more adverse scenarios. Although the "more adverse" is the new baseline, I was hoping to construct a new scenario based on differences in these losses. Without the baseline data, this is impossible.

On the Obama dinner with several economists, Michael Hirsh writes: No-Stress Tests

It’s not that Barack Obama isn’t aware of what’s at stake. That’s very likely why on April 27, the president gathered in some of his chief outside economic critics —including two of the most vociferous, Nobelists Joseph Stiglitz and Paul Krugman—for a secretive dinner in the old family dining room of the White House. Also in attendance: Paul Volcker, who has one foot in and one foot out of the administration as the head of Obama’s largely cosmetic economic recovery board; Princeton economist and former Fed vice chairman Alan Blinder; Columbia’s Jeff Sachs; and Harvard’s Ken Rogoff. Representing the home team, as it were: Obama’s chief economic adviser Larry Summers, Treasury Secretary Tim Geithner and Chief of Staff Rahm Emanuel. Why did Obama hold the meeting? “I think he wanted to hear the [opposing] arguments right in front of him,” says Blinder. “All I can say is if the president of the United States devotes that much personal time, and it was about two-hour dinner, he must want to hear what people outside the administration are saying and hear what his own people say in rebuttal to that. Why would you do that if you aren’t at least turning over your mind what to do next?”

What to do next? If this fails, nationalize.

by Calculated Risk on 5/07/2009 05:00:00 PM

From the Fed:

The results of a comprehensive, forward-looking assessment of the financial conditions of the nation's 19 largest bank holding companies (BHCs) by the federal bank supervisory agencies were released on Thursday.

The exercise--conducted by the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation--was conducted so that supervisors could determine the capital buffers sufficient for the 19 BHCs to withstand losses and sustain lending--even if the economic downturn is more severe than is currently anticipated. In a detailed summary of the results of the Supervisory Capital Assessment Program (SCAP), the supervisors identified the potential losses, resources available to absorb losses, and resulting capital buffer needed for the 19 participating BHCs.

The SCAP is a complement to the Treasury's Capital Assistance Program (CAP), which makes capital available to financial institutions as a bridge to private capital in the future. Together, these programs play a critical role in ensuring that the U.S. banking sector will be in a position of strength.

Overview of Results (333 KB PDF)

The results of the SCAP suggest that if the economy were to track the more adverse scenario, losses at the 19 firms during 2009 and 2010 could be $600 billion. The bulk of the estimated losses –approximately $455 billion – come from losses on the BHCs’ accrual loan portfolios, particularly from residential mortgages and other consumer‐related loans. The estimated two‐year cumulative losses on total loans under the more adverse scenario is 9.1 percent at the 19 participating BHCs; for comparison, this two‐year rate is higher than during the historical peak loss years of the 1930s. Estimated possible losses from trading‐related exposures and securities held in investment portfolios totaled $135 billion.

Ten banks need $185 billion in additional capital:

After taking account of losses, revenues and reserve build requirements, in the aggregate, these firms need to add $185 billion to capital buffers to reach the target SCAP capital buffer at the end of 2010 under the more adverse scenario. But a number of these firms have either completed or contracted for asset sales or restructured existing capital instruments since the end of 2008 in ways that increased their Tier 1 Common capital. These actions substantially reduced the final SCAP buffer. In addition, the preprovision net revenues of many of the firms exceeded what was assumed in the more adverse scenario by almost $20B, allowing them to build their capital bases. The effects of these transactions and revenues rendered the additional capital needed to establish the SCAP buffer equal to $75 billion.

Note: It's important to note these are future losses in addition to write-downs already taken.