by Calculated Risk on 12/21/2007 11:26:00 AM

From the Fed weekly report on commercial paper this morning, here is the discount rate spread:

Click on graph for larger image.

According to the Fed, the discount rate spread is still increasing. This is the graph released this morning.

Meanwhile, the Fed is still pouring liquidity into the market with another $20 billion TAF auction yesterday. And the Fed has announced:

The Federal Reserve intends to conduct biweekly Term Auction Facility (TAF) auctions for as long as necessary to address elevated pressures in short-term funding markets. The Board of Governors will announce the sizes of the January 14 and January 28 TAF auctions at noon on January 4.

Here is the discount rate spread graph from last week:



Clearly this indicator of the credit crisis has worsened.

Here is a simple explanation of this chart: This is the spread between high and low quality 30 day nonfinancial commercial paper.

What is commercial paper (CP)? This is short term paper - less than 9 months, but usually much shorter duration like 30 days - that is issued by companies to finance short term needs. Many companies issue CP, and for most of these companies the risk of default is close to zero (think companies like GE or Coke). This is the high quality CP. Here is a good description.

Lower rated companies also issues CP and this is the A2/P2 rating. This doesn't include the Asset Backed CP - that is another category and is even at a higher rate (see commercial paper table).

The spread between the A2/P2 and AA paper shows the concern of default for the A2/P2 paper. Right now the spread is indicating that "fear" is very high. It is actually very rare for CP defaults, but they do happen (see table 5 in the above Fed link).

by Tanta on 12/21/2007 09:55:00 AM

With a curtsey to sunsetbeachguy, we stare in wonder at an interview with the Treasury Secretary in the LAT.

On disclosures:

The key is to get the balance right and not go so far that you cut off credit and make the situation worse. The Fed has also been looking at disclosure. I think when you look at the mortgage area, it's almost a caricature of what you see in other areas. You've got pages and pages of disclosure, which doesn't mean you're getting the people good information that they can understand. It's sort of, "Everybody cover their rear end," protect themselves legally. But, I've made the case several times, with all the disclosure there should be one simple page signed by the lender and the borrower that says, "Your monthly payment is x and it could be as high as y in a couple of years." The Fed I know has done some real consumer research on this.

I also have done some real research on this. I have found that when you prepare a simple, one-page document that says, "Your monthly payment is x and it could be as high as y in a couple of years, and you can't afford that, which is why we are denying your application for credit," you call it an "Adverse Action Notice" instead of a "Disclosure." But that kind of runs into that "cutting off credit" problem.

On interests, best:

And the way I think about it is this: that historically when a homebuyer, homeowner has a problem, a default's clearly not in the homeowner's interest. And it's clearly not in the lender's interest. It's very costly; defaults are very costly. So in a normal world the two sides come together and they strike a deal. Today we're dealing with two factors that make this more difficult. First, as you know, the institution or company that made the mortgage no longer holds it. It's spread all around the world with investors. That creates a cumbersome, complex decision-making process. It's one that can be dealt with when you've got home prices rising or you've got a stable mortgage market.

Historically, homeowners had a down payment invested in the property; also, historically homeowners who defaulted knew they'd have a hard time getting credit again in the future. Having removed the downpayment and minimal credit standards, there isn't much "cost" to default for a lot of people. Furthermore, if a default is costly to the "lender," then it is surely costly to whoever the "lender" is today. Why a transfer of servicing rights would, in and of itself, remove the incentive for working out loans is still kind of hard to see. But, as Paulson notes, this incentive failure can be responsibly managed when defaults are not costly. We pay this guy with tax dollars.

The whole interview goes on for a lot longer, but I can't take any more of this. You all will have to take it apart in the comments.

by Calculated Risk on 12/21/2007 09:33:00 AM

From the WSJ: Chrysler Faces Financial Pinch, Sees Asset Sales

Chrysler LLC has slipped into a serious financial crunch just four months after Cerberus Capital Management LP swept in to save the auto maker.

At a meeting earlier this month, Chief Executive Robert Nardelli told employees the company is headed for a substantial loss this year and is scrambling to sell assets to raise cash ...

"Someone asked me, 'Are we bankrupt?'" Mr. Nardelli said at the meeting. "Technically, no. Operationally, yes. The only thing that keeps us from going into bankruptcy is the $10 billion investors entrusted us with."

Back in August, when the sale of Chrysler to Cerberus was closed, the investment banks were unable to sell $10 billion in debt and had to take the debt on their balance sheets. This played a role in the credit crunch in early August.

The banks, led by JPMorgan Chase, and including Goldman Sachs Group, Bear Stearns, Morgan Stanley and Citigroup, have tried several times to sell some of these loans, and each time the offering has been postponed. In November, the banks tried to sell a portion of the debt at 97 cents on the dollar and found no takers. With the news that Chrysler's financial situation is "serious", the value of these loans has probably dropped sharply.

This is reminiscent of the Burning Bed incident mentioned in the WSJ in May:

In a famous event dubbed the "Burning Bed," First Boston Corp. in 1989 made a $457 million bridge loan to the purchasers of Ohio Mattress. When the junk-bond market collapsed soon afterward, First Boston couldn't refinance the loan and ended up owning most of Ohio Mattress. Credit Suisse had to inject additional capital into First Boston, culminating in a full takeover.

Even adjusted for inflation, $457 Million is chump change compared to the Chrysler pier loans.

Note: a bridge loan is supposed to be temporary financing while the banks syndicate the debt. When the debt can't be sold, the bridge loan becomes a "pier loan" - a bridge to nowhere - and ties up the capital of the investment banks.

by Tanta on 12/21/2007 08:46:00 AM

What's Friday morning without a good laugh? Via our friends at Housing Doom, this solution to the RE market doldrums from a bona-fide Relitter:

Here is a moderate solution to the real-estate market:

There are more than 58,000 homes on the market. If each and every person who does not need to sell his or her home, or can wait to sell, takes his or her home off the market, the market will correct very quickly.

What we would see is all the homes that the banks have had to take back or the short-sale homes. After a few months, we would have a strong housing market. In fact, if many Realtors would educate their sellers about this, everyone would be happy.

Sellers would get closer to their asking price, buyers would feel more confident when making a decision to purchase, and Realtors would not be throwing their hard-earned money out the window to market a property that will not sell.

I honestly believe that the greed of the banks and mortgage companies are to blame for a majority of this mess. We are helping them out. But in order to keep happy customers and create a strong housing market, we all must work together.

If you are planning to sell your home in this market, think again. Waiting just a little longer could mean extra money in your pocket. - Jason Grandon, Scottsdale

You have to admit it would be a way to find out how many folks in Scottsdale don't actually have to sell. I suspect, however, that they'd both be a little disappointed later . . .

And before I get accused of going after low-hanging fruit by picking on Relitters, there's this from Bloomberg yesterday, by "a senior fellow in economic history at the Council on Foreign Relations," which may possibly be one of the most ridiculous things I've read in nearly a whole week (the op-ed, not the author's title, although that's pretty funny too). There seem to be a lot of people who are confused about where "prices" come from. Certainly this is a classic:

The whole subprime problem can be seen as a consequence of too few prices and too many deals in the first place. The price of a standard fixed-rate mortgage is too high for many families, even at today's historically low rates. The appeal of the adjustable-rate loan, never mind that of the subprime no-doc mortgage, lay precisely in that it allowed borrowers to fool themselves about the true price of the debt they were assuming.

You can, apparently, be a senior fellow of something having to do with "economics" and not realize that "loan amount" is one of the variables in =PMT. I fault the educational system: too much economic history, too little Excel.

by Calculated Risk on 12/20/2007 07:23:00 PM

Press Release via MarketWatch: MBIA Further Addresses Previously Disclosed $30.6 Billion Multi-Sector CDO Exposure

MBIA Inc. has announced that in response to media and other inquiries received as a result of information the Company posted on December 19, 2007 on its Web site relating to its collateralized debt obligations ("CDO") exposure, the Company is issuing the following statement:

The information posted on December 19, 2007 discloses no additional Multi-Sector CDO exposure. The information provides detail on the composition of MBIA's $30.6 billion Multi-Sector CDO exposure that had previously been provided in its Operating Supplement. MBIA discussed its exposure to CDO transactions with inner CDOs ("CDO-Squared") during a conference call for investors on August 2, 2007.

Standard & Poor's, Moody's and Fitch have confirmed that this information was provided to them and was taken into consideration in their recent ratings analyses. The information was also made available to Warburg Pincus prior to their entering into the previously disclosed Investment Agreement, and that agreement is not affected by this information.

by Calculated Risk on 12/20/2007 05:38:00 PM

Press Release: Fitch Places 173,022 MBIA-Insured Issues on Rating Watch Negative (hat tip Mike)

Concurrent with its related rating announcement earlier today on MBIA Inc. (MBIA) and its financial guaranty subsidiaries, Fitch Ratings has placed 173,022 bond issues (172,860 municipal, 162 non-municipal) insured by MBIA on Rating Watch Negative.

Only 173,022 issues. Ho-hum.

by Calculated Risk on 12/20/2007 04:00:00 PM

Within the next couple of years, probably somewhere between 10 million and 20 million U.S. homeowners will owe more on their homes, than their homes are worth. (See Homeowners With Negative Equity)

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.

See these comments from Bank of America CEO Kenneth Lewis via the WSJ: Now, Even Borrowers With Good Credit Pose Risks

"There's been a change in social attitudes toward default," Mr. Lewis says. Bankers typically have believed that cash-strapped borrowers would fall behind on their credit cards, car payments and other debts -- but would regard mortgage defaults as calamities to be avoided at all costs. That isn't always so anymore, he says.

"We're seeing people who are current on their credit cards but are defaulting on their mortgages," Mr. Lewis says. "I'm astonished that people would walk away from their homes." The clear implication: At least a few cash-strapped borrowers now believe bailing out on a house is one of the easier ways to get their finances back under control.

... there is a new class of homeowners in name only. Because these people never put up much of their own money, they don't act like owners, committed to their property for the long haul.

If every upside down homeowner resorted to "jingle mail" (mailing the keys to the lender), the losses for the lenders could be staggering. Assuming a 15% total price decline, and a 50% average loss per mortgage, the losses for lenders and investors would be about $1 trillion. Assuming a 30% price decline, the losses would be over $2 trillion.

Not every upside down homeowner will use jingle mail, but if prices drop 30%, the losses for the lenders and investors might well be over $1 trillion (far in excess of the $70 to $80 billion in losses reported so far).

by Calculated Risk on 12/20/2007 03:21:00 PM

From MarketWatch: Fitch puts MBIA on ratings watch negative after CDO review

Fitch Ratings put several ratings of MBIA Inc. on Rating Watch Negative on Thursday because of the bond insurer's exposure to structured finance collateralized debt obligations ...

Yes, more "closing the barn door".

by Calculated Risk on 12/20/2007 03:10:00 PM

From DataQuick: Bay Area home sales stuck at two-decade low; price picture mixed

The Bay Area's housing market remained in a bit of deep freeze in November, when sluggish demand kept sales at a two-decade low for the third straight month. Prices continued to hold up best in the region's core markets, while some outlying areas posted more double-digit annual declines, a real estate information service reported.

A total of 5,127 new and resale houses and condos sold in the Bay Area in November. That was down 6.5 percent from 5,486 in October, and down 36.2 percent from 8,042 in November 2006, DataQuick Information Systems reported.

Sales have decreased on a year-over-year basis for 34 consecutive months. Last month was the slowest November in DataQuick's statistics, which go back to 1988. Until last month, the slowest November was in 1990, when 6,015 homes sold. The strongest November, in 2004, saw 11,906 sales. The average for the month is 8,367.
...
The median price paid for a Bay Area home was $629,000 last month, down 0.3 percent from $631,000 in October, and up 1.5 percent from $620,000 in November last year. Last month's median was 5.4 percent lower than the peak median of $665,000 reached last June and July.

Prices in the core metro markets close to large job centers or the coast are holding up relatively well, while areas far from the core are experiencing the most price erosion. Individual counties have seen their median prices decline from peak levels by as little as 2.4 percent in San Francisco and by as much as 21.9 percent in Solano.
...
Foreclosure activity is at record levels ...

by Calculated Risk on 12/20/2007 03:05:00 PM

From Bloomberg: Credit Agricole to Take Further Subprime Writedowns (hat tip Steve)

Credit Agricole SA, France's second- biggest bank by assets, will take a further 2.5 billion euros ($3.6 billion) in writedowns as the U.S. subprime crash roils debt markets.

The Paris-based bank said it will write down investments in collateralized debt obligations, securities created by bundling together bonds, by a further 1.3 billion euros before tax, and take 1.2 billion euros of provisions linked to a ratings downgrade of bond insurer ACA Financial Guaranty Corp.