by Calculated Risk on 12/13/2009 11:39:00 AM

From Der Spiegel: Interview with US Economic Recovery Advisory Board Chair Paul Volcker (ht jb)

Volcker: ... We had a quarter of increased growth but I don't think we are out of the woods.

SPIEGEL: You expect a backlash?

Volcker: The recovery is quite slow and I expect it to continue to be pretty slow and restrained for a variety of reasons and the possibility of a relapse can't be entirely discounted. I'm not predicting it but I think we have to be careful.

SPIEGEL: What is the difference between this deep recession and all the other recessions we have seen since World War II?

Volcker: What complicates this situation, as compared to the ordinary garden variety recession, is that we have this financial collapse on top of an economic disequilibrium. Too much consumption and too little investment, too many imports and too few exports. We have not been on a sustainable economic track and that has to be changed. But those changes don't come overnight, they don't come in a quarter, they don't come in a year. You can begin them but that is a process that takes time. If we don't make that adjustment and if we again pump up consumption, we will just walk into another crisis.
...
Volcker: ... We have not yet achieved self-reinforcing recovery. We are heavily dependent upon government support so far. We are on a government support system, both in the financial markets and in the economy.
emphasis added

And on the banks:

Volcker: It's amazing how quickly some people want to forget about the trouble and go back to business as usual. We face a real challenge in dealing with that feeling that the crisis is over. ...

SPIEGEL: You have been clear about your ideas. Do you really believe we have to break up the big banks in order to create a more sustainable financial system?

Volcker: Well, breaking them up is difficult. I would prefer to say, let's just slice them up. I don't want them to get heavily involved in capital market activities so my view is: Hedge funds, no. Equity funds, no. Proprietary trading, no. Trading in commodities, no. And that in itself would reduce the size of the big banks. So you get some reduction in size. Equally important, you make them more manageable and easier to deal with if they do get in trouble.

There is much more in the interview.

by Calculated Risk on 12/13/2009 09:27:00 AM

Click on graph for larger image in new window.

Kirsten Grind provides some of the responses to the Puget Sound Business Journal's requests for information: The fight for WaMu documents (ht Spatch)

The Puget Sound Business Journal for months has asked the Office of Thrift Supervision (OTS), the federal agency that regulated Washington Mutual, to release internal communications between WaMu's regulators.

The newspaper made its requests under the U.S. Freedom of Information Act, the decades-old law that requires federal agencies to disclose public documents.

Of particular interest were internal emails, which could help explain why regulators seized the bank in September 2008 even though WaMu appeared to meet regulatory standards for operating banks, despite its burden of bad loans. (You can read the second installment of our six-month investigation about that decision here. The first in the series, about the bank's final days is here.)

On Wednesday, an OTS official told the Business Journal in an email: “After careful review, I have determined that your request, as it pertains to the above-referenced documents, is denied in full.”

In her article last week, Kirsten asks: Why Did They Close WaMu?. From the piece:

[D]ocuments and interviews with former WaMu employees show that regulators closed WaMu even though it had liquidity and capital that were well above the levels at which a bank might normally be threatened with closure.

Typically, a bank is in danger of being seized if its net liquidity dips below 5 percent of total assets, according to banking experts and former regulators. On the day regulators shut WaMu, the bank had $29 billion in net liquidity—about 9.4 percent of assets, and nearly twice the closure threshold. The figure was provided by a former senior WaMu manager who closely tracked the bank’s liquidity at the time. It was confirmed by a former top WaMu executive who had full knowledge of the bank’s liquidity position.

“With the cash it had, WaMu should never have been seized,” said a senior banking regulator familiar with the matter.
...
Other documents also support the view that WaMu had sufficient liquidity to stay open. The last liquidity report from inside WaMu shows that on September 11 the bank could borrow $6.2 billion from the Federal Home Loan Banks in Seattle and San Francisco. It could borrow an additional $8.2 billion from the Federal Reserve Bank, a line that it hadn’t accessed at the time of its seizure, according to two people familiar with the matter.

It appears that WaMu employees considered the untapped FHLB and Fed lines of credit of over $14 billion as part of WaMu's $29 billion in net liquidity - and unmentioned (but likely) is that the Seattle FHLB and the Fed were probably about ready to pull those lines - and the FDIC probably knew that was about to happen and closed WaMu. Of course we don't know from the FOIA documents!

But this would be just like a homeowner with an unused HELOC. Just when the homeowner is about to use the HELOC, the bank reduces or eliminates the line, and the homeowner's "liquidity" vanishes. Funny thing about liquidity - it can be there one day, and gone the next.

by Calculated Risk on 12/12/2009 10:48:00 PM

Jim shows several more homes in foreclosure in a nice area of north county coastal San Diego.

by Calculated Risk on 12/12/2009 07:37:00 PM

Here is a graph of bank failures, by number of institutions and assets, from the December Congressional Oversight Panel’s Troubled Asset Relief Program report. (ht Catherine Rampell):

Click on graph for larger image in new window.

From the report (page 45):

Figure 11 shows numbers of failed banks, and total assets of failed banks since 1970. It shows that, although the number of failed banks was significantly higher in the late 1980s than it is now, the aggregate assets of failed banks during the current crisis far outweighs those from the 1980s. At the high point in 1988 and 1989, 763 banks failed, with total assets of $309 billion.¹⁶⁷ Compare this to 149 banks failing in 2008 and 2009, with total assets of $473 billion.¹⁶⁸

Note: This is in 2005 dollars and this includes the failure of WaMu in 2008 with $307 billion in assets that didn't impact the DIF.

The second graph shows bank failures by week in 2009.

Note: Week 1 on graph ended Jan 2nd.

There have been 133 bank failures this year, and there are only two more weeks left to close banks in 2009 (Dec 18th and maybe Dec 24th). This will set the over-under line for 2010 - will there be more bank failures in 2010 than in 2009?

I'll take the over (more failures in 2010 than in 2009).

by Calculated Risk on 12/12/2009 03:37:00 PM

From David Streitfeld in the NY Times: Rates Are Low, but Banks Balk at Refinancing (ht Dave)

On refinancing with negative equity:

Mark Belvedere bought a condominium in a San Francisco suburb in early 2004 and refinanced it in 2005. He now owes $235,000 on a property that would sell for barely half that today.

Mr. Belvedere said he would be willing to live with all that lost equity if he could refinance his loan from a variable rate, which could eventually go as high as 12 percent, into a 30-year fixed term.

His lender said no, citing the diminished value of the property. “It makes no sense and is so frustrating,” Mr. Belvedere said. “I’m ready and willing to pay the mortgage for the next 30 years, but they act like they’d rather have me walk away.”

Unfortunately David Streitfeld doesn't provide any further information on Belvedere's loan. If the loan was held by a bank, then it might make sense for the bank to refinance the loan (this lowers the bank's risk of default). However Belvedere's "lender" might be a servicing company and the loan may have been securitized. Then it is impossible to refinance because the current holders of the note would be paid off, and no new lender would make a loan greater than the value of the collateral.

As Streitfeld notes, the GSEs have a program called Home Affordable Refinance Program (HARP) that will allow lenders to refinance loans upto 125% of the property value. But this is only for loans the GSEs already holds or insures (and because refinancing lowers the risk of default). This wouldn't help Belvedere because he owes almost twice what his property is worth.