by Calculated Risk on 12/17/2009 10:59:00 AM

From Bloomberg: Morgan Stanley to Give Up 5 San Francisco Towers Bought at Peak (ht MikeinLongIsland, Brian)

Morgan Stanley ... plans to relinquish five San Francisco office buildings to its lender two years after purchasing them from Blackstone Group LP near the top of the market.

“This isn’t a default or foreclosure situation,” [Alyson Barnes, a Morgan Stanley spokeswoman] said. “We are going to give them the properties to get out of the loan obligation.”
...
The Morgan Stanley buildings may have lost as much as 50 percent since the purchase ...

Note that Morgan Stanley is current on the loan and is not in foreclosure. They are simply "walking away" because the buildings are worth less than the amount owed.

On residential, the WSJ has an article: Debtor's Dilemma: Pay the Mortgage or Walk Away? (ht Sabine). The article contains a graph of "strategic defaults" by state - however I'm not sure how this is estimated. In very few cases does the borrower admit they can afford the payments and are just walking away (like Morgan Stanley above). In most cases the borrower either doesn't respond or says they are having a financial crisis.

From a research paper earlier this year on homeowners with negative equity walking away: Moral and Social Constraints to Strategic Default on Mortgages by Guiso, Sapienza and Zingales.

It is difficult to study the strategic default decision, because it is de facto an unobservable event. While we do observe defaults, we cannot observe whether a default is strategic. Strategic defaulters have all the incentives to disguise themselves as people who cannot afford to pay and so they will appear as non strategic defaulters in all the data.

The researchers argued that the pace of strategic defaults is increasing - and that is terrifying for lenders.

This is what I wrote in 2007:

One of the greatest fears for lenders (and investors in mortgage backed securities) is that it will become socially acceptable for upside down middle class Americans to walk away from their homes.

And that remains the greatest fear - and it probably doesn't help that companies like Morgan Stanley are walking away from commercial buildings. As the researchers noted, the more people hear about strategic defaults, the more willing they are to walk away. Zingales was quoted in the WSJ earlier this year:

“Our research showed there is a multiplication effect, where the social pressure not to default is weakened when homeowners live in areas of high frequency of foreclosures or know others who defaulted strategically”

I wonder if hearing about "rich" banks that are paying "large" bonuses walking away from commercial buildings also weakens the social pressure?

by Calculated Risk on 12/17/2009 10:00:00 AM

Manufacturing has been one of the bright spots for the economy beause of a combination of inventory restocking and increased exports - and the Philly Fed survey shows continued expansion in December. However, it appears the manufacturing boom is slowing - with the new orders index declining (although still positive) and the future activity index declining "notably".

Here is the Philadelphia Fed Index released today: Business Outlook Survey.

Activity in the region's manufacturing sector is expanding, according to firms polled for this month's Business Outlook Survey. Indexes for general activity, new orders, and shipments all remained positive this month. ...

The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, increased from 16.7 in November to 20.4 this month. The index has now remained positive for five consecutive months (see chart). Other broad indicators suggest continued growth this month, but they fell somewhat from their November readings. The current new orders index, which has also remained positive for five consecutive months, decreased 8 points. The current shipments index fell less than 1 point. The current inventory index, although still negative, increased 10 points, to its highest reading in four months. Indicators for unfilled orders and delivery times edged higher and reached their highest readings since well before the recession began at the end of 2007.

Labor market conditions have been stabilizing in recent months, and for the first time since late 2007, more firms reported an increase in employment than reported declines. The current employment index increased 7 points, to its highest reading since October 2007. The workweek index edged four points higher, to 6.4, its second consecutive positive reading. ...

The future general activity index remained positive for the 12th consecutive month but decreased notably from 36.8 in November to 24.4, its lowest reading since March. The future activity index has been trending downward since mid-year. Indexes for future new orders and shipments declined this month, falling 15 points and 7 points, respectively.

Click on graph for larger image in new window.

This graph shows the Philly index for the last 40 years.

The index has been positive for five months now, after being negative for 19 of the previous 20 months.

by Calculated Risk on 12/17/2009 08:30:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending Dec. 12, the advance figure for seasonally adjusted initial claims was 480,000, an increase of 7,000 from the previous week's revised figure of 473,000. The 4-week moving average was 467,500, a decrease of 5,250 from the previous week's revised average of 472,750.
...
The advance number for seasonally adjusted insured unemployment during the week ending Dec. 5 was 5,186,000, an increase of 5,000 from the preceding week's revised level of 5,181,000.

Click on graph for larger image in new window.

This graph shows the 4-week moving average of weekly claims since 1971.

The four-week average of weekly unemployment claims decreased this week by 5,250 to 467,500. This is the lowest level since September 2008.

Although falling, the level of the 4 week average is still high, suggesting continuing job losses.

by Calculated Risk on 12/17/2009 12:00:00 AM

Note: This is just the House. The Senate votes early next year.

From Reuters: U.S. House approves $155 billion jobs bill

This includes:

More infrastructure spending

The bill would provide $48.3 billion for infrastructure projects that promise to get workers back on job sites by April. Highway construction projects would get $27.5 billion, while subway, bus and other transit systems would get $8.4 billion.

Extends COBRA subsidy to 15 months

Extends unemployment benefits for six months (that expire at the end of the year).

Aid to states:

States would get $23 billion to pay 250,000 teacher salaries and repair school buildings, and $1.2 billion to pay for 5,500 police officers ... $23.5 billion to help pay their share of federal healthcare programs for the poor.

The bill doesn't include:

Proposed hiring tax credit

Cash-for-caulkers.

by Calculated Risk on 12/16/2009 09:08:00 PM

Jon Stewart's take on the bank CEOs missing the meeting with President Obama ...

Click here if the embed doesn't work.