by Calculated Risk on 3/31/2008 07:56:00 PM

Update: According to the Financial Times, the latest writedowns are expected to be released Tuesday or Wednesday (hat tip sk)

From the Financial Times: UBS set for further writedowns (hat tip crispy&cole)

UBS is poised to reveal further writedowns of up to $18bn and seek a capital increase of about SFr13bn ($13.1bn) ...

Details of the latest writedowns and capital-raising are expected to be released alongside the agenda for the bank’s annual meeting on April 23, which is to be published on Tuesday or on Wednesday.

Just a reminder that the confessional is still open, and the numbers will be huge.

by Calculated Risk on 3/31/2008 05:18:00 PM

From Bloomberg: Lehman to Sell $3 Billion of Shares to Institutional Investors (hat tip Tim)

Lehman Brothers Holdings Inc. ... is selling at least $3 billion of new shares to U.S. institutions to reassure investors it has ample access to capital.

Here are the details from the press release: Lehman Brothers to Offer 3.0 Million Shares of Convertible Preferred Stock (hat tip Dwight)

The non-cumulative dividend rate, conversion rate and other terms are yet to be determined.

TBD?

Update from Reuters: Lehman converts seen having 7-7.5 percent dividend

Lehman Brothers Holdings Inc's $3 billion of convertible preferred shares are seen having a dividend of 7 percent to 7.5 percent and a conversion premium of 30 percent to 35 percent ... The deal is expected to be sold by Tuesday before market close ...

by Calculated Risk on 3/31/2008 02:07:00 PM

Remember when the Shanghai stock market declined 9% on Feb 27, 2007? That caused shock waves around the world, including a 400 points decline in the DOW index the following day. Well, that was nothing and hardly shows up on the following graph.

Click on graph for larger image.

After falling to 2772 in Feb 2007, the SSE composite index more than doubled! Now the index has fallen back to 3,472 - still well above the close after the one day sell off - but 43% below the peak.

Is this sell off in anticipation of a slowing Chinese economy? Or is this sell off just giving back some of the "irrational exuberance" of the last year?

There are some concerning signs. From the WSJ last week: Tables Turn Quickly on Chinese Developers

Just six months ago, Chinese property developers were on a shopping spree ... borrowing heavily to snap up more, and more expensive, pieces of land.

How quickly things have changed.

Three months into 2008, China's property developers are under siege. Property prices are showing signs of weakness in many of the country's key markets, and capital markets have all but seized up for these -- and other -- offerings. The Chinese government is on a high-profile campaign to clamp down on new bank loans, hoping to curb inflation, rising at its fastest clip in a decade.

Another concern for foreign manufacturers is the new labor laws in China. Over the weekend I spoke with an executive of a U.S. based company that manufactures in China. He told me the new Chinese labor laws, combined with other factors, have increased their manufacturing costs in China by 30%!

Here is an article from Crain's Manchester Business: Made in China

Manchester-based importers who source in China are about to pass on price rises of between 10 and 15 per cent. They say that currency fluctuations, Chinese wage inflation, raw material cost increases and higher freight charges mean that stable or falling prices of manufactured goods are now a thing of the past.
...
“Four of the factories that we do business with in China won't take dollars now,” said [Stuart Illingworth, managing director of Widdop, Bingham & Co, the Oldham-based giftware importer]. ...

Meanwhile, new labour laws came into force in January which have restricted Chinese workers' hours and led to an increase in labour unit costs.

I've always been skeptical of the decoupling argument, so I wouldn't be surprised to finally see a slowdown in China after the Olympics this summer. In the long run, this rebalancing of the world economy, and these new labor laws are healthy - but in the short term this might lead to more inflation in the U.S.

Note: a slowing Chinese economy might have a positive impact on the U.S. economy by leading to lower oil prices, as I speculated in Petroleum Prices and GCC Spending

by Tanta on 3/31/2008 11:51:00 AM

UPDATE: I don't have time to spend the day deleting racist trolling. I have therefore closed the comments on this thread. We simply are not here to host such things.

Alphonso Jackson resigned as Secretary of HUD today. And not a moment too soon. Think Progress has the list:

A look at Jackson’s tenure of incompetence and corruption:

Loyalty Over Merits: During a speech on April 28, 2006, Jackson recounted a conversation he had with a prospective contractor who had a “heck of a proposal.” This contractor, however, told Jackson, “I don’t like President Bush.” Jackson subsequently refused to award the man the contract. A former HUD assistant secretary confirmed that Jackson told agency employees to “consider presidential supporters when you are considering the selected candidates for discretionary contracts.”

Political Retaliation: In 2006, Jackson allegedly demanded that the Philadelphia Housing Authority (PHA) “transfer a $2 million public property” at a “substantial discount” to Kenny Gamble, a developer, former soul-music songwriter, and friend of Jackson’s. When PHA director Carl Greene refused, Jackson and his aides called Philadelphia’s mayor and “followed up with ‘menacing’ threats about the property and other housing programs in at least a dozen letters and phone calls over an 11-month period.”

Contracts For Golfing Buddies: In October 2007, federal investigators looked into whether, after Hurricane Katrina, Jackson lined up an emergency “no-bid contract” at the HUD-controlled Housing Authority of New Orleans for “golfing buddy” and friend William Hairston. According to HUD, the emergency contract paid Hairston $392,000 over a year and a half; Hairston’s partner companies also received “direct contracts” with HUD. One of the companies which received a contract in New Orleans, Columbia Residential, had “significant financial ties to Jackson.” Jackson’s wife also had “ties to two companies that did business with the New Orleans authority.”

Awarding Corrupt Companies: Shirlington Limousine and Transportation Inc. is the firm that defense contractor Brent Wilkes used to “transport congressmen, CIA officials, and perhaps prostitutes to his Washington parties.” The firm’s president had a “lengthy history of illegal activity,” detailed in his 62-page rap-sheet, and his limo company “operates in what looks to be a deliberately murky way.” Despite all this, Jackson’s HUD awarded Shirlington a contract worth $519,823.

Lucrative Salaries For Cronies: Atlanta lawyer Michael Hollis, another Jackson friend, “appears to have been paid approximately $1 million for managing the troubled Virgin Islands Housing Authority,” despite having “no experience in running a public housing agency.” A “top Jackson aide” reportedly made it clear to officials within HUD that “Jackson wanted Hollis” for the job. Hollis received more than four times the salary of his predecessor.

Let's hope someone gets this taken down before the end of the day.

by Tanta on 3/31/2008 11:11:00 AM

Forbes, via Atrios.

Thornburg, which is based in Santa Fe, N.M., has been beset by "margin calls," or lenders demanding their money back.

The company reached a deal under which its lenders would stop issuing margin calls if Thornburg raised $948 million.

A bond sale arranged to raise money at a 12 percent interest rate failed, and now the company is trying to sell $1.35 billion in bonds at an 18 percent interest rate.

by Calculated Risk on 3/31/2008 10:24:00 AM

Paul Krugman explains the Paulson plan in the NY Times: The Dilbert Strategy

Anyone who has worked in a large organization — or, for that matter, reads the comic strip “Dilbert” — is familiar with the “org chart” strategy. To hide their lack of any actual ideas about what to do, managers sometimes make a big show of rearranging the boxes ...

You now understand the principle behind the Bush administration’s new proposal for financial reform, which will be formally announced today: it’s all about creating the appearance of responding to the current crisis, without actually doing anything substantive.

One of the key points is this plan was mostly in place to further deregulate the financial industry:

... the new plan was originally conceived of as “promoting a competitive financial services sector leading the world and supporting continued economic innovation.” That’s banker-speak for getting rid of regulations that annoy big financial operators.

Now, using the credit crisis as cover, the plan is being sold as "a fix" for the current problems.

I’ve been disappointed to see some news outlets report as fact the administration’s cover story — the claim that lack of coordination among regulatory agencies was an important factor in our current problems.

The truth is that that’s not at all what happened. The various regulators actually did quite well at acting in a coordinated fashion. Unfortunately, they coordinated in the wrong direction.

For example, there was a 2003 photo-op in which officials from multiple agencies used pruning shears and chainsaws to chop up stacks of banking regulations. The occasion symbolized the shared determination of Bush appointees to suspend adult supervision just as the financial industry was starting to run wild.

by Calculated Risk on 3/31/2008 10:01:00 AM

From Bloomberg: New York City Real Estate Market Slows as Wall Street Cuts Jobs

New York City's residential real estate market is showing the first signs of fallout as U.S. banks and securities firms cut the most jobs in seven years.

Manhattan apartment sales fell in January and February from a year earlier and new properties came to the market at the fastest pace since at least 2000 ... Transactions slid 6.4 percent to 3,250, while the number of condominiums, co- operatives and townhouses for sale at the end of last month climbed to 6,225, 15 percent more than at the start of the year.

With sales falling, and inventory rising, price declines will follow.

by Calculated Risk on 3/30/2008 02:05:00 PM

John Mauldin writes: Where is the Bottom in Housing? (hat tips: many!)

Mauldin provides a good overview of the housing market. His analysis is based on information from John Burns Real Estate Consulting and T2 Partners. Both Burns and T2 have made their presentations public.

There is all kinds of charts and information available, but I'll comment on a couple of points. Mauldin writes:

Bottom Line? There is no Bottom in Sight

[Burns] most likely timeline is that resale stability will come back by 2011, and it will be even earlier for the homebuilders. He is projecting 6,000,000 home sales (new and existing) in 2008, but falling to only 4,000,000 in 2009. Low sales volume and high foreclosures will delay inventory reduction, which is required for there to be a stable market.

This means that home ownership will fall to 66% of the population in 2009 from the recent high of 69%. He thinks that may overcorrect to 65% in 2010. When I asked him why the overcorrection, he said it has to do with psychology. Housing will go from the greatest investment in 2006 to a bad one by 2009. The market typically overcorrects at the end of every cycle. It will take rising prices to lure the marginal homebuyer back into the market.

We discussed the recent rise in the price of the homebuilder stocks, which he attributes to short covering. Many of the homebuilders, public and private, are selling land at 16% of book value, or are trying to. He suggests that many of the privately owned homebuilders are in the worst shape.

Bottom line? We are nowhere near the bottom in the home markets.

First, on sales, I think Burns is too optimistic for 2008 and too pessimistic for 2009. Right now we are on pace for just under 5 million existing home sales in 2008, and 600 thousand new home sales (and sales will probably fall further). A forecast for 6 million total sales in 2008 is probably too high.

Similarly a forecast of 4 million total sales in 2009 is probably too pessimistic. The reason Burns is probably too pessimistic on total sales in 2009 is because prices will likely decline further than Burns is forecasting (helping sales). Burns is only forecasting a 16% nationwide price decline from peak to trough. Based on the Case-Shiller National index, house prices are already off 10.1% as of the end of 2007 - with much more declines likely in 2008.

Also according to Burns, there are "3.5 million excess homes that need to be filled by qualified buyers". This is really a confusing metric. Burns arrives at this total by adding excess vacant units to his estimate of future vacant homes due to the declining homeownership rate.

But this approach really confuses a few numbers and concepts. Burns estimate of 1.55 million "vacant homes" is about right, but this includes about 560 thousand excess vacant rental units! (see Inventory, Inventory, Inventory) So a decline in the homeownership rate cannot be added to this number directly - or there would be some double counting.

Also Burns is probably too pessimistic on the decline in the homeownership rate. Recent academic research by Matthew Chambers, Carlos Garriga, and Don E. Schlagenhauf (Sep 2007), "Accounting for Changes in the Homeownership Rate", Federal Reserve Bank of Atlanta, suggests that there were two main factors for the increase in homeownership rate between 1994 and 2004: 1) mortgage innovation, and 2) demographic factors (a larger percentage of older people own homes, and America is aging).

The authors found that mortgage innovation accounted for between 56 and 70 percent of the recent increase in homeownership rate, and that demographic factors accounted for 16 to 31 percent. Even as we unwind some of the excesses of recent years, not all innovation is going away (securitization and some smaller down payment programs will stay). And the population is still aging, so the homeownership rate will probably only decline to 67%, or maybe "over correct" to 66% - but will probably not decline to 65% or lower. (No one has a crystal ball, so maybe Burns pessimistic view will be proven correct).

And one more point on the declining homeownership rate: this is probably better viewed as a head wind for demand, not as additional supply. Using an excess inventory number of 1.6 million or so is probably more useful when discussing supply.

Even with these minor flaws, this is a good overview.

by Tanta on 3/30/2008 09:29:00 AM

Taking notice of the endless silliness in the political blogosphere is no part of the mandate of this blog, and we normally try to carry on with our main mission while pretending that we can't hear most of the background noise and cannot feel that terrier gnawing on our ankles. It has never, really, been that we're stupid; it was mostly that we didn't want them to come over here and ruin a perfectly good nerd blog. Political discourse in this country has been so poisoned for so long that we were quite attracted to the possibility of pretending that it wasn't there in case it decided to go away while we weren't looking.

However, I for one did argue, quite early in this mess, that 1) housing policy is political in this country and 2) financial crises are even more so and that therefore 3) whether or not it "should" be that way is immaterial; it is so. The housing bust and the debt bubble pop have been and are going to remain political footballs for the foreseeable future. The least we can do about that is insist that everyone get the elementary concepts right.

Let me therefore do my obligatory least by pointing out that this kind of thing just has to stop:

Apparently, a lot of foreclosed tenants like to trash the house before they leave. I don't get it. It's hardly the bank's fault that you can't make your mortgage payment. I mean, I understand the rage at fate that has pushed you out of your home and left your credit record in shreds--yea, even if you had a hand in that fate yourself. But I don't get pointless destruction.

I can't do anything about anyone who can't quite "get" vandalism, as if it had never existed in the world before middle-class homeowners got in over their heads with mortgage loans. (Really. I was "not getting" the point of cutting off the handset on pay phones and stealing the directory back in the days when we had pay phones and they cost a dime. I was therefore prepared to "not get"--or to "get," as it were--foreclosure "trash-outs," at the point they began to arise (again, in this cycle), since, well, it's a reusable conceptual paradigm thingy.)

But it isn't the not-getting of the "pointless" destruction that makes it less than completely pointless for us to examine this silly little blog post. It's that first sentence with the term "foreclosed tenants" in it.

I "get" vandalism a whole lot more than I "get" a self-described "economics blogger" weilding the English language like that. Which is to say, I suspect I do "get" it. And I don't approve of the latter any more than the former.

There has, for a long time now, been a certain persistent critique of a variety of boom-lending that went something like this: when you take an interest-only no-down-payment loan to buy a house at market price--that is, at anything other than a significant discount to market price--you are in effect, if not in fact, merely "leasing" the house from the bank.

This is a "critique" because, see, "secured lending" only really works when the collateral that secures the loan belongs to the borrower, not the lender. I suppose I could write you a loan that involved my promising to hand over an asset that I already owned to myself--that'll teach me!--in the event that you fail to pay me back as agreed. I'm not sure I could pass a licensing exam with an understanding of the process like that, but you never know.

So the critique came in on the grounds that 1) this is self-defeating for lenders and that 2) it is self-defeating for borrowers. I occasionally run into newbies to the financial world who demand to know why anyone would buy one of these "PO strips" or bonds that do not pay interest. They "get it" once you explain that such bonds are purchased at a "deep discount" to their par or face value. Of course their next question was always why people were using wacky subprime and Alt-A loans to buy houses at "par," and out of the mouths of babes came wisdom.

The point being that "foreclosed tenant" is not simply a curious misunderstanding of law and fact. It is, you know, a way to "get" the "pointless" behavior, if you apply any degree of attention to a contradiction in terms. Possibly some borrowers are coming to the belated recognition that they were, de facto, not much more than tenants who were paying well above "market rent," but the market no longer allows them to "sell" the "lease" to the next sucker, and the law does not allow them to simply forfeit the security deposit and move away. To be a "foreclosed tenant" is to live in the worst of both worlds.

It is possible, you know, that about-to-be-former homeowners understand these things better than self-anointed "economic thinkers" do. They begin to grasp that they had only ever been given a short-term lease on the "American Dream," not a piece of the "ownership society" pie. More than a few of them are very, very, crabby. This, I can "get."

What I also "get" is that here you have a classic example of where the rush to start making a list of people you don't have any "sympathy" for gets you: nowhere, fast. It always disappoints me whenever a thread on one of our foreclosure or predatory lending posts immediately degenerates into a lot of people writing the same comment repeatedly: "I have no sympathy for these people."

It has, actually, been hard for me to "get" why some people think that the first question to be established in any discussion of the real world is whether their own personal sympathies are engaged or not. You'd think I'd be more familiar with the profoundly self-involved than I apparently am, coming out of the banking industry, but there you are. Some entertainment can be wrested out of the situation by responding that I don't have any sympathy for people who don't have any sympathy for other people, but it's limited entertainment because we are often dealing with heads over which such a response tends to fly at a fairly high altitude.

The trouble is I do "get" it. I get why some people need to turn it all into a matter of which contestant is more conventionally attractive, sympathies-wise. The original point of the "joke" about borrowers with these dumb loans just "renting" from the bank was about puncturing the claims of a certain class of economists, who seemed ready to believe that a finance-based "ponzi" economy could go on forever, and that it ought to. If you require to have the joke "foreclosed" in order to defend against its implications for the kool-aid you've been drinking for years about the larger economy, not just real estate, then you might want to willfully misunderstand the point of making jokes. Namely, to see it as making fun of "contemptible" people rather than unmasking the contradictions in economic silliness.

Joking around actually has a long and storied history in the old, old project of arriving at conceptual clarity about important problems, you know. Jokes are not merely "transgressive" of a kind of stuffy demeanor of academics and legislators and courts of law and so on, although they do have an invaluable function in ratcheting down the pompousness to tolerable levels. Jokes are, in fact, often funny because they fail to "resolve" or paper over real contradictions and conflicts: the joke drags it out into the light of day, and leaves it to squirm while we all laugh. We are all subprime now. Is a joke. With, as they say, more than a bit of "truth" in it.

It is of course not always easy to distinguish between a joke and a bog-standard stupidity. We touched on that the other day with the Zippy Tricks. Sometimes the joke actually arises when we find the naive or uninformed or logic-impaired coming up with an inspired phrase like "foreclosed tenants."

Sometimes people feel like they're being "laughed at." That, say, the joke's on them. It has been known for them to get very, very angry. Enough, say, to knock holes in the drywall and rip out the plumbing before following one's belongings to the curb.

Those whose only understanding of humor is to ridicule the victim--not to deflate the hot air filling the designers of this doomed system--will never quite "get" why the butts of the joke become so "pointlessly" destructive. Those humorless souls who do not see an appropriate role for humor in intellectual critique--who really just have to say that this is too serious for such lightmindedness, tut tut--will fail to grasp the overall dynamics of the situation from the other end of it. Between those who have no sympathy for others and those who have only sympathy--syrupy, patronizing, Sunday School-tract simple-minded sympathy--it's a wonder you can get a good joke going some days. Not that I've ever quit trying.

It is within the realm of possibility that some folks engaging in "trash-out refinances" are, well, making the point that the joke's on you, Mr. Bank. You might consider it a kind of performance art of the gallows-humor subgenre. I do think it's a usual expectation that people who write for outfits with the pretensions of The Atlantic are, frequently, expected to try to "get" that. We call these attempts to try to "get" such things intellectual effort. Expenditure of this kind of effort is way harder than, well, just asking yourself if you feel sorry for someone today. Or yukking it up at someone else's "expense."

by Calculated Risk on 3/29/2008 06:29:00 PM

Nelson Schwartz and Floyd Norris provide an analysis of the new regulatory plan from the Treasury: In Treasury Plan, a Reluctant Eye Over Wall Street

[T]he proposal would impose the first regulation of hedge funds and private equity funds, that oversight would have a light touch, enabling the government to do little beyond collecting information ...

The plan hands vast new authority to the Federal Reserve, essentially formalizing what has been an improvised process over the last three weeks.

There is much more in the analysis.