by Calculated Risk on 9/29/2009 07:46:00 PM

From the WSJ: CIT in Last-Ditch Rescue Bid

CIT is preparing a sweeping exchange offer that would eliminate 30% to 40% of its more than $30 billion in outstanding debt ... The plan would offer bondholders new debt secured by CIT assets, as well as nearly all of the equity in a restructured company. ... If not enough bondholders agreed to the plan, the company could seek to execute the restructuring in bankruptcy court, the person said. The result could potentially be one of the largest Chapter 11 bankruptcy-court filings in U.S. history.

The writing was on the wall in July when CIT obtained a $3 billion emergency loan secured by all of their assets. As I noted in July, the emergency loan just kicked the can down the road.

Now it appears CIT is at the end of the road ...

by Calculated Risk on 9/29/2009 07:26:00 PM

From Dow Jones: Citi Prices $5B Four-Part FDIC-Backed Deal-Source

Citigroup Inc. priced a $5 billion government-backed bond Tuesday, its second benchmark-sized bond offering this month under the U.S. Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program ... Since November of last year, when the FDIC program was launched, Citi has issued $49.6 billion of these deals ...

If the TLGP is extended, Citi might be the only user.

Also, the FDIC earlier today announced a plan to "require insured institutions to prepay their estimated quarterly risk-based assessments" for the next three years. This plan would raise approximately $45 billion.

Bloomberg has a story on the costs: Bank of America, 3 Other Banks’ FDIC Fees May Top $10 Billion

Bank of America, the biggest U.S. lender by deposits, may owe $3.5 billion under the FDIC proposal for banks to prepay three years of premiums, based on the lowest assessment rate multiplied by the bank’s $900 billion in second-quarter U.S. deposits.
...
U.S. bank premiums range from 12 cents per $100 in deposits for the safest lenders to 45 cents for banks the U.S. considers risky, said Chris Cole, senior regulatory counsel for the Independent Community Bankers of America.
...
Based on the current assessment and each bank’s deposits, Wells Fargo & Co.’s fee may be $3.2 billion based on its $814 billion in deposits, JPMorgan Chase & Co. may pay $2.4 billion and Citigroup Inc. $1.2 billion.

Ouch.

by Calculated Risk on 9/29/2009 04:12:00 PM

Note: Looking ahead, Thursday and Friday will be heavy economic news days with vehicle sales (how bad will the post-clunker slump be?), construction spending, personal income and outlays for August, the employment report on Friday and more.

A couple of market graphs ... the S&P 500 was first at this level in March 1998; about 11 1/2 years ago.

Click on graph for larger image in new window.

The first graph shows the S&P 500 since 1990.

The dashed line is the closing price today.

The S&P 500 is up 57% from the bottom (384 points), and still off 32% from the peak (505 points below the max).

The second graph is from Doug Short - Instead of comparing the markets from the peak (See: the Four Bad Bears), Doug Short matched up the market bottoms for four crashes (with an interim bottom for the Great Depression).

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

by Calculated Risk on 9/29/2009 12:56:00 PM

This following graph compares the Case-Shiller Composite 10 SA index with the Stress Test scenarios from the Treasury (stress test data is estimated from quarterly forecasts).

The Stress Test scenarios use the Composite 10 index and start in December. Here are the numbers:

Case-Shiller Composite 10 Index (SA), July: 154.69

Stress Test Baseline Scenario, July: 147.23

Stress Test More Adverse Scenario, July: 138.14

Unlike with the unemployment rate (worse than both scenarios), house prices are performing better than the the stress test scenarios.

Price-to-Rent

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Here is a similar graph through July 2009 using the Case-Shiller Composite Indices (SA):

Click on image for larger graph in new window.

This graph shows the price to rent ratio (January 2000 = 1.0) for the Case-Shiller composite indices. For rents, the national Owners' Equivalent Rent from the BLS is used.

Back in 2004 or 2005, it was obvious that prices were out of line with fundamentals. This was clear in the price-to-income and price-to-rent ratios - and there was also widespread speculation (the definition of a bubble).

Now, looking at the price-to-rent ratio based on the Case-Shiller indices, the adjustment in the price-to-rent ratio is mostly behind us. Although the ratio is still a little high. Note: some would argue the ratio being a little too high is reasonable based on mortgage rates and "affordability".

With rents now falling almost everywhere, a further downward adjustment in house prices seems likely.

by Calculated Risk on 9/29/2009 11:03:00 AM

From the FDIC:

The Board of Directors of the Federal Deposit Insurance Corporation today adopted a Notice of Proposed Rulemaking (NPR) that would require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC estimates that the total prepaid assessments collected would be approximately $45 billion.

MarketWatch has more details: Fund to protect deposits has shrunk to low levels

Absent the prepaid premiums, the FDIC said that the agency's Deposit Insurance Fund ... would face a liquidity crunch early next year, and that it will be operating in the red by the end of this month.

The FDIC said that the prepayments would raise $45 billion for the fund. The board said it estimates that total bank failure losses could reach $100 billion by 2013.
emphasis added