by Calculated Risk on 11/03/2009 08:38:00 AM

From Bloomberg: RBS, Lloyds Get $51 Billion in Second Bank Bailout

The Treasury will inject 25.5 billion pounds of capital into RBS, for a total of 45.5 billion pounds, making it the costliest bailout of any bank worldwide. The government will fund about a quarter of Lloyds’s 21 billion-pound fundraising.

And from The Times: Banks defer bonuses in return for extra £40 billion

In return for receiving billions of pounds more of taxpayers' money, the Treasury said, both banks will not pay cash bonuses for 2009 to any staff earning more than £39,000 a year while the board of each lender will defer bonuses due for this year until 2012.

Stephen Hester, the chief executive of RBS, who took over the role from his disgraced predecessor, Sir Fred Goodwin, said today: “That does mean we will be making extensive use of deferred payments and payments in shares."

by Calculated Risk on 11/02/2009 09:40:00 PM

More from the Q3 GDP underlying detail tables ...

Note: Residential investment (RI), according to the Bureau of Economic Analysis (BEA), includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories.

Back in Q4 2008 - for the first time ever - investment in home improvements exceeded investment in new single family structures. This has continued through Q3 2009.

Click on graph for larger image in new window.

This graph shows the various components of RI as a percent of GDP for the last 50 years. The most important components are investment in single family structures followed by home improvement.

Investment in home improvement was at a $154.7 billion Seasonally Adjusted Annual Rate (SAAR) in Q3, significantly above the level of investment in single family structures of $105.2 billion (SAAR).

Home improvement spending, as a percent of GDP, is close to the long term average. And Brokers' commissions are slightly above average (2009 was a solid year for agents).

Of course investment in single family structures is near the record low, and far below the normal level. Also far below normal is investment in multifamily structures. These two categories will not increase significantly until the number of excess housing units is reduced (I'll have more on the number of excess housing in the next few days).

by Calculated Risk on 11/02/2009 06:33:00 PM

Update: from Bloomberg: Locke Was ‘Imprecise’ in Comments on Second Stimulus

Kevin Griffis, a Commerce Department spokesman, said in a telephone interview after Locke spoke that the secretary was referring to “all the different job-creating measures being considered” by lawmakers rather than a single stimulus measure.

Earlier post: From Bloomberg: Obama’s Advisers Are Considering Second Stimulus, Locke Says

President Barack Obama’s advisers are “seriously” considering proposing a second stimulus measure to boost the economy, Commerce Secretary Gary Locke said in an interview.

Locke said another stimulus would be “very targeted and specific and we need to be mindful of the deficit as well.”

Atrios notes: "Had a pet theory that they'd wait until unemployment rounded that magic 10% mark."

We could see 10% on Friday. The unemployment rate was 9.83% in September (before rounding); an increase of 0.17% from August.

Although there probably were fewer job losses in October than in September (BLS reported 263,000 jobs lost), if a few more people were participating in the work force - perhaps looking for one of the scarce holiday retail jobs - the unemployment rate could easily hit 10% for October. If not in October, then probably in November.

by Calculated Risk on 11/02/2009 04:09:00 PM

Here is a graph of office, mall and lodging investment through Q3 2009 based on the underlying detail data released by the BEA ...

Click on graph for larger image in new window.

This graph shows investment in offices, lodging and malls as a percent of GDP.

The recent boom in lodging investment has been stunning. Lodging investment peaked at 0.32% of GDP in Q2 2008 and has started to decline (0.21% in Q3 2009).

I expect lodging investment to continue to decline through at least 2010, to perhaps one-third of the peak (investment as percent of GDP).

Investment in multimerchandise shopping structures (malls) peaked in 2007 and has fallen by 40% (note that investment includes remodels, so this will not fall to zero). As projects are completed, mall investment will decline through most of next year. REIS recently reported the "third-quarter vacancy rate at U.S. strip malls, which include local shopping and big-box centers, rose 0.3 percentage points from the second quarter to 10.3 percent, the highest since 1992".

Office investment as a percent of GDP peaked at 0.46% in Q3 2008 and has declined sharply. Reis is reporting the vacancy rate rose to 16.5% in Q3 from 15.9% in Q2. The peak following the previous recession was 17%. With the office vacancy rate rising, office investment will also probably decline through 2010.

Notice that investment in all three categories typically falls for a year or two after the end of a recession, and then usually slowly recovers. Also office investment is usually the most overbuilt in a boom, but this time the office market struggled for a few years after the stock market bubble burst and there was comparatively more investment in malls and hotels.

As projects are completed there will be little new investment in these categories probably at least through 2010. This will be a steady drag on GDP (nothing like the decline in residential investment though), and a steady drag on construction employment.

by Calculated Risk on 11/02/2009 02:12:00 PM

Testimony of Jon D. Greenlee, Associate Director, Division of Banking Supervision and Regulation on Residential and commercial real estate

[T]he condition of the banking system is far from robust. Two years into a substantial economic downturn, loan quality is poor across many asset classes and, as noted earlier, continues to deteriorate as weakness in housing markets affects the performance of residential mortgages and construction loans. Higher loan losses are depleting loan loss reserves at many banking organizations, necessitating large new provisions that are producing net losses or low earnings. In addition, although capital ratios are considerably higher than they were at the start of the crisis for many banking organizations, poor loan quality, subpar earnings, and uncertainty about future conditions raise questions about capital adequacy for some institutions. Diminished loan demand, more-conservative underwriting standards in the wake of the crisis, recessionary economic conditions, and a focus on working out problem loans have also limited the degree to which banks have added high-quality loans to their portfolios, an essential step to expanding profitable assets and thus restoring earnings performance.
emphasis added

On Commercial Real Estate (CRE):

Prices of existing commercial properties have already declined substantially from the peak in 2007 and will likely decline further. As job losses have accelerated, demand for commercial property has declined and vacancy rates have increased. The higher vacancy levels and significant decline in the value of existing properties have placed particularly heavy pressure on construction and development projects that do not generate income until after completion. ...

As a result, Federal Reserve examiners are reporting a sharp deterioration in the credit performance of loans in banks’ portfolios and loans in commercial mortgage-backed securities (CMBS). At the end of the second quarter of 2009, approximately $3.5 trillion of outstanding debt was associated with CRE, including loans for multifamily housing developments. Of this, $1.7 trillion was held on the books of banks and thrifts, and an additional $900 billion represented collateral for CMBS, with other investors holding the remaining balance of $900 billion. Also at the end of the second quarter, about 9 percent of CRE loans in bank portfolios were considered delinquent, almost double the level of a year earlier. Loan performance problems were the most striking for construction and development loans, especially for those that financed residential development. More than 16 percent of all construction and development loans were considered delinquent at the end of the second quarter.

Of particular concern, almost $500 billion of CRE loans will mature during each of the next few years. In addition to losses caused by declining property cash flows and deteriorating conditions for construction loans, losses will also be boosted by the depreciating collateral value underlying those maturing loans. The losses will place continued pressure on banks' earnings, especially those of smaller regional and community banks that have high concentrations of CRE loans.

The current fundamental weakness in CRE markets is exacerbated by the fact that the CMBS market, which previously had financed about 30 percent of originations and completed construction projects, has remained closed since the start of the crisis. Delinquencies of mortgages backing CMBS have increased markedly in recent months. Market participants anticipate these rates will climb higher by the end of this year, driven not only by negative fundamentals but also by borrowers’ difficulty in rolling over maturing debt. In addition, the decline in CMBS prices has generated significant stresses on the balance sheets of financial institutions that must mark these securities to market, further limiting their appetite for taking on new CRE exposure.

Higher vacancy rates, sharply lower rents, reduced leverage and much higher cap rates - back in July, Brian called this the "neutron bomb for RE equity"; destroys CRE investors and banks, but leaves the buildings still standing.