by Calculated Risk on 9/04/2008 10:06:00 AM

"Respondents' comments remain mixed about business conditions and reflect concern about the uncertainty of the economy."
Anthony Nieves, ISM Vice President

From the Institute for Supply Management (ISM):

Economic activity in the non-manufacturing sector grew in August, say the nation's purchasing and supply executives ...

The index increased 1.1 percentage points in August to 50.6 percent. Anything above 50 indicates expansion. So this report suggests modest expansion in the service sector in August after two months of contraction.

The employment index declined to 45.4.

by Calculated Risk on 9/04/2008 12:24:00 AM

From Michael J. de la Merced and Vikas Bajaj at the NY Times: Investments Are Faltering in Chrysler and GMAC

Mr. Feinberg’s giant investment fund, Cerberus Capital Management, is racing to salvage multibillion-dollar investments in Chrysler, the smallest of the Detroit automakers, and GMAC, the financing arm of General Motors.

But for Cerberus, named after the mythological three-headed dog who guards the gates of hell, the news keeps getting worse.

On Wednesday, Chrysler ... said its sales in the United States fell by a third in August — nearly twice the industry average ... Honda eclipsed Chrysler as the nation’s No. 4 seller of cars, and Nissan is closing in fast.

The same day, GMAC, in which Cerberus holds a 51 percent stake, said it was trying to stanch the bleeding from ... home mortgage lending. GMAC and its home loan unit, Residential Capital, announced that they would dismiss 5,000 employees, or 60 percent of the unit’s staff, and close all 200 of its retail mortgage branches.

The mythical Cerberus - an unfortunate choice of names - had two tasks: to keep the living and righteous out of hell, and to ensure that no one exits. Perhaps the founders forgot about the second task, because it appears GMAC and Chrysler are now in hell, and based on mythology, there is no escape.

by Calculated Risk on 9/03/2008 11:00:00 PM

Here is another cartoon from Eric G. Lewis, a freelance cartoonist living in Orange County, CA. This one is a little different:


Click on cartoon for larger image in new window.

by Calculated Risk on 9/03/2008 08:20:00 PM

The Mortgage Bankers Association (MBA) delinquencies and foreclosures report is scheduled to be released on Friday at 10 AM ET.

Goldman Sachs released a research note tonight in advance of the report (no link). Goldman analysts expect a slight rise in delinquencies (seasonally adjusted), and "well over 1% of mortgages" to have entered the foreclosure process in the 2nd quarter.

Goldman sees mixed signals on subprime loans - perhaps even a decline in delinquencies - but rising delinquencies for prime loans (and Alt-A). This is similar to Tanta's post: Subprime and Alt-A: The End of One Crisis and the Beginning of Another

If Goldman's analysis is correct, this will continue the trend reported by Housing Wire last quarter: Primed for Trouble: Pace of Mortgage Distress Shifts to Prime Borrowers

While foreclosure activity hit an all-time record in the first quarter, according to statistics released Thursday morning by the Mortgage Bankers Association, a shift of the mortgage mess towards prime borrowers appears to be taking place as well — signaling that the credit crunch that began among those with less-than-perfect credit may now be marching onward towards borrowers usually deemed better credit risks.

Expect more foreclosure records on Friday, but the details will be interesting too.

by Calculated Risk on 9/03/2008 05:05:00 PM

Professor Stiglitz writes in the New Republic: Falling Down. (hat tip Justin)

Stiglitz makes several thought provoking arguments. He points out that financial manager incentives encouraged gambling:

Perhaps the worst problems--like those in the subprime mortgage market--occurred when non-transparent fee structures interacted with incentives for excessive risk-taking in which financial managers got to keep high returns made one year, even if those returns were more than offset by losses the next.

Professor Hamilton and others have been warning about these incentives for several years (see Hamilton's Hedge fund risk and Wharton Professor Dean Foster and Oxford Professor Peyton Young's Hedge Fund Wizards).

But the following passage is key (and very optimistic!). I hear the argument all the time that the U.S. needs to increase it's manufacturing base. I agree with Stiglitz:

Some looking at the U.S. economy's decreasing reliance on manufacturing and increasing dependence on the service sector (including financial services) have long worried that the whole thing was a house of cards. After all, aren't "hard objects"--the food we eat, the houses we live in, the cars and airplanes that we use to transport us from one place to another, the gas and oil that provides heat and energy--the "core" of the economy? And if so, shouldn't they represent a larger fraction of our national output?

The simple answer is no. We live in a knowledge economy, an information economy, an innovation economy. Because of our ideas, we can have all the food we can possibly eat--and more than we should eat--with only 2 percent of the labor force employed in agriculture. Even with only 9 percent of our labor force in manufacturing, we remain the largest producer of manufactured goods. It is better to work smart than to work hard, and our investments in education and technology have enabled us to enjoy higher standards of living--and to live longer--than ever before.

Exactly. Innovation is the key.

by Calculated Risk on 9/03/2008 03:57:00 PM

Press Release via MarketWatch: Chrysler LLC Reports August 2008 U.S. Sales

Chrysler LLC today reported total August 2008 U.S. sales of 110,235 units, down 34 percent from the same period last year.

GM sales were off 20%. Toyota off 9.4%. From the WSJ: GM, Ford, Toyota Report Weak August Sales

U.S. auto sales continued their slide in August despite stepped-up incentives to buyers, highlighted by General Motors Corp.'s 20% drop and Ford Motor Co.'s 27% decline.
...
Japan's Toyota Motor Corp. ... reported a 9.4% decline in August sales.

As in June and July, Honda Motor Co. was a bright spot, with its U.S. sales declining just 7.3% ...

by Calculated Risk on 9/03/2008 02:30:00 PM

From the Fed Beige Book:

Reports from the twelve Federal Reserve Districts indicate that the pace of economic activity has been slow in most Districts. Many described business conditions as "weak," "soft," or "subdued."
...
Consumer spending was reported to be slow in most Districts, with purchasing concentrated on necessary items and retrenchment in discretionary spending.

And on Real Estate:

Residential real estate conditions weakened or remained soft in all Districts, except Kansas City, which reported a modest increase in sales since the last report.
...
Commercial real estate activity moved down or remained weak in all Districts except Dallas.

A pretty weak report.

by Calculated Risk on 9/03/2008 01:32:00 PM

"We expect the second half of 2008 will be more challenging than the first half, as weak economic conditions and the consumer credit crunch continues."
Jim Farley, Ford group vice president of marketing and communications.

From the WSJ: Ford Posts 27% Drop In August Sales

U.S. auto sales continued their slide in August despite stepped-up incentives to buyers, with Ford Motor Co. posting a 27% drop from a year earlier as sport-utility-vehicle sales plunged 53%.

Ford also lowered its second-half North American production forecast and revised its overall industry forecast to the low end of its range.

BTW, Boston Fed President Rosengren spoke today on the "Implications of a Credit Crunch”. An excerpt:

It was hoped that banks with a more national footprint would be less susceptible to regional shocks and thus more able to lend during regional downturns. Unfortunately, many of the largest commercial and investment banks had a significant concentration of their assets in complex securities that have declined in value, had significant exposures to subprime mortgages or so-called “Alt A” mortgages that have declined in value, and also had exposure to construction and residential loans that have suffered from national rather than just regional declines in value.

In terms of securitization, the loss of confidence in complex financial instruments and their ratings has dried up the demand for all but the simplest and least-risky securitizations. So rather than serving as a shock absorber for banking problems, it seems that securitization has actually exacerbated the problem. Indeed, a wide variety of loans that were once widely securitized are now not available (e.g., subprime mortgages) or are only available from financial institutions at much higher costs (e.g., jumbo loans).

The auto industry has been hit hard by both the change in credit conditions and higher oil prices.

by Calculated Risk on 9/03/2008 12:51:00 PM

"Conditions in the mortgage and credit markets have not abated and, therefore, we need to respond aggressively by further reducing both operating costs and business risk."
ResCap Chairman and Chief Executive Officer Tom Marano

Press Release: GMAC Financial Services and ResCap Announce Further Streamlining of Mortgage Operation (hat tip Brian and Alain)

On Sept. 2, 2008, a plan was approved that included closing all 200 GMAC Mortgage retail offices, ceasing originations through the Homecomings wholesale broker channel, further curtailing business lending and international business activities, and right-sizing functional staff support. In addition, the company is evaluating strategic alternatives for the GMAC Home Services business and the non-core servicing business. These collective actions will reduce the ResCap workforce by approximately 5,000 employees, or 60 percent.
emphasis added

And the beat goes on ...

by Calculated Risk on 9/03/2008 11:46:00 AM

Related to the WaPo article this morning on BB&T, here are three key graphs concerning C&D loans (construction and development) based on the FDIC Q2 Quarterly Banking Profile:

Click on graph for larger image in new window.

The first graph shows the number of FDIC insured institutions with construction loans exceeding total capital.

Not all of these institutions will fail (most estimates of number of bank failures are in the 100 to 200 range over the next couple of years), and not all failures will be because of C&D loans, but this gives an idea of the number of institutions with excessive exposure to C&D loans.

The second graph shows the concentration of C&D loans by institution asset size.

This suggests that many of the bank failures from C&D losses will be in the $1 to $10 billion range. Integrity Bank of Alpharetta, Georgia (failed last week) was at the low end of this range. First National Bank of Nevada (failed a few weeks ago) had $3.4 billion in assets.

The third graph shows the noncurrent rate for C&D loans. The rate is rising quickly, although still below the level of the early '90s (related to overbuilding of CRE and the S&L crisis).

Put together, these graphs suggest many more bank failures as the C&D noncurrent rate continues to rise. Other banks will fail because of bad residential loans (like IndyMac), and some institutions from bad CRE loans, but most bank failures will probably be C&D related.