by Tanta on 1/22/2008 11:13:00 AM

by Calculated Risk on 1/22/2008 10:33:00 AM

On CDOs:

“From a valuation and management standpoint, we've evolved towards a view that for many if not most of these structures will see terminations and therefore have looked through the securities to the net asset value support by the underlying securities. In these cases we utilized external pricing services consistent with our normal valuation processes. We priced over 70% of the exposure in this manner”

Via MarketWatch:

CFO Joe Price also told listeners on a conference call Tuesday morning that the company marked down its value for CDOs and subprime loans to less than half their original value. "The combined subprime CDO sales and trading positions at 12/31 are carried at 600 million or about 30 cents on the dollar," Price said.

Credit Cards:

“We have seen an increase in delinquency in our card portfolio in those states most affected by housing problems. So give you a little insight, the quarter-over-quarter rate of increase in 30-day plus delinquencies in the combined states of California , Florida , Arizona , and Nevada increased over five times the pace of the rest of the portfolio. That group makes up a little more than a quarter of our domestic consumer card book. We have mentioned before that we expect to be in the 5 to 5.5% range for overall consumer card losses for the full year of '08. That compares to the 4.75% we experienced in the fourth quarter”

Home Equity:

“Home equity reported an increase in net charge-offs of 179 million or 63 basis points, up from 20 basis points at the end of September. 30-day plus performing delinquencies are up 25 basis points to 1.26%. Nonperformers in home equity rose to 1.25% of the portfolio from 82 basis points in the prior quarter. Even though our averaged refreshed FICO score remains strong at 721 and the combined loan to value is at 70%, we have seen a rise in the percentage of loan that is have a CLTV above 90% driven by the more recent vintaging. 90% plus CLTV currently represents 21% of the loans versus 17% in the third quarter. We believe net charge-offs in home equity will continue to rise given seasoning in the portfolio and softness in the real estate values. We increased reserves for this portfolio to 84 basis points but wouldn't be surprise to do see losses cross the 100 basis point mark by the middle of this year as we work through higher CLTV vintages. And relative to the industry's performance, we believe that our results will continue to benefit from our relationship base direct-to-consumer strategy. Again, continued economic deterioration could drive losses higher. Our residential mortgage portfolio continues to say perform well with losses at only 4 basis points in the fourth quarter. While we've seen some deterioration in subsegments, namely our community reinvestment act portfolio under our low to moderate income programs to total some 8% of the book, nothing really stands out to us at this point”

On Countrywide (from MarketWatch): Bank of America sees Countrywide deal done in second half

Bank of America CEO Ken Lewis said Tuesday that the company expects to close its previously announced acquisition of mortgage giant Countrywide Financial in the second half of 2008.

by Calculated Risk on 1/22/2008 08:25:00 AM

From the Federal Reserve: Emergency Rate Cut

The Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points to 3-1/2 percent.

The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Appreciable downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Eric S. Rosengren; and Kevin M. Warsh. Voting against was William Poole, who did not believe that current conditions justified policy action before the regularly scheduled meeting next week. Absent and not voting was Frederic S. Mishkin.

In a related action, the Board of Governors approved a 75-basis-point decrease in the discount rate to 4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Chicago and Minneapolis.

by Calculated Risk on 1/22/2008 08:10:00 AM

Reuters reports: Wachovia 4th-quarter profit sinks 98 percent

Results reflected $1.7 billion of net market-related losses, virtually all of which related to structured products including collateralized debt obligations. This included losses of $1 billion related tied to subprime mortgages, $600 million for commercial mortgages, and $123 million for other consumer mortgages, Wachovia said.

Wachovia said it also set aside $1.5 billion for credit losses.

The problems aren't contained to residential mortgages, from the WSJ: Wachovia's Net Plummets As Loan-Loss Provision Rises

Commercial loans 90 days past due grew to 0.89% of loans from 0.23%, while consumer loans 90 days past due rose 1.39% of loans from 0.59%. Nonperforming assets, those loans near default, grew to 1.08% of loans from 0.32%.

Delinquencies are rising across the board.

by Calculated Risk on 1/22/2008 08:05:00 AM

From the WSJ: Bank of America Reports Sharp Drop in Earnings

Bank of America Corp.'s fourth-quarter net income fell 95% as the company recorded a higher-than-expected $5.28 billion in collateralized debt obligation write-downs and said credit costs soared.

by Calculated Risk on 1/21/2008 11:59:00 PM

From MoneyControl.com: Mkts hit lower circuit; trading stopped for an hour

Sensex and Nifty both opened with over 10% cut and hit the lower circuit and the trading got halted for one hour only fourth time in Indian history. Sensex opened down 9.75% or 1716.41 points at 15888.94 and Nifty was down 12.10% or 630.45 points at 4578.35. Sensex so far was down 25% and Nifty 28% from its all time high.

Meanwhile in Japan the Nikkei is down 651.01 or 5.5%. It is the same story throughout Asia.

by Calculated Risk on 1/21/2008 09:55:00 PM

When a bank makes a bridge loan, and then can't syndicate the debt, it is known as a "pier loan"; a bridge that goes nowhere. With all the discussion of real estate debt, it is easy to forget that Wall Street is still saddled with pier loans from the LBO frenzy of 2007.

From the WSJ: New Year, Old Problem: Buyout Debt

The banks now sit on $158 billion in leveraged loans in the U.S., which are credits with a high default risk, according to Standard & Poor's Corp. That pool includes private-equity deals valued at $88.25 billion that have been funded by the banks but not fully syndicated, according to data tracker Dealogic.

The investment banks are trying to sell the debt:

The market will get another test as a group of underwriters led by Deutsche Bank AG and Bank of America Corp. begin unloading $7.25 billion in loans related to the buyout of casino operator Harrah's Entertainment Inc. by Apollo Management LP and TPG. Last week, the banks began marketing the bonds at a discount of 96.5 cents on the dollar, for a deal widely seen as one of the most desirable credits created during the 2006 buyout boom.

It will be interesting to see if this "most desirable" of buyout debt gets sold, and at what price. Imagine the haircuts for the less desirable debt. And these pier loans also contributes to the credit crunch by limiting the amount the banks can loan to other companies.

by Calculated Risk on 1/21/2008 07:13:00 PM

Update: From Mike in Long Island here is a live DOW future (at the CBOT):

Here are a couple of places to track the futures market.

Bloomberg Futures.

Futures at 7:10 PM ET:

INDEX	VALUE	CHANGE
DJIA INDEX	11,657.00	-449.00
S&P 500	1,271.50	-53.80
NASDAQ 100	1,779.25	-70.25

Barchart.com Indices

Note: make sure you read the ones that are open. Some people sent me the Bloomberg site before they opened! At the barchart.com site, look at the time. If it shows a date, then that future is closed.

by Calculated Risk on 1/21/2008 03:45:00 PM

The O.C. Register's Jon Lansner shares an email from Pimco's Paul McCulley:

“Sometimes when you are ill, you make an appointment with your doctor; other times, you go straight to the emergency room. Now is an other time. ... Time is of the essence. What needs to be done needs to be done. Now."

Wow. Some people are really scared.

by Calculated Risk on 1/21/2008 12:48:00 PM

UPDATE: Same graph for DOW added back to Great Depression.

Here is a look back at previous recessions and bear markets.

The following graph shows the change from the three year daily high and the monthly close. Not all market declines are associated with recessions. As an example, there was a sharp market decline in 1987 and also in 1998 (the Asian financial crisis).

When looking at this graph, monthly closes within 5% of so of the three year high usually indicates the market was setting new three year highs.

Click on graph for larger image.

Note: the probable 2007/2008 recession is shown starting in December 2007.

Using the monthly close doesn't capture the entire down move - but it does capture most of it (the change is from the daily high) - but my graphics package won't handle any more data!

Here is a table of the recession related down moves:

Recession Year	Market Correction
1953	-12.5%
1957	-19.4%
1960	-12.1%
1970	-33.5%
1974	-47.8%
1980	-15.8%
1982	-24.6%
1990	-17.8%
2000	-47.4%
2008	-15.9% (through last friday)
Median (previous 9 recessions)	-19.4%
Average	-25.6%

All recessions are different, but based on the S&P futures, it appears the current decline will be close to the median decline tomorrow.


Here is the same chart for the DOW (I used four year max to capture entire Depression decline). I'd ignore the WWII period.