Interest Rate Roundup

Thursday, July 31, 2008

S&P takes the axe to its auto ratings

Standard & Poor's is taking the axe to its credit ratings for the major automobile manufacturers. GM, Ford Motor, and Chrysler were cut to B- from B. GM and Ford were removed from CreditWatch with negative implications as part of this move. A rating of B- is six steps below the investment grade threshold.

S&P said the following in its announcement of the action:

"We believe sharply lower U.S. light-vehicle demand and the recent dramatic shift in demand away from large pickup trucks and SUVs amid higher gas prices will complicate the turnaround efforts of all three automakers and reduce their currently adequate liquidity considerably over the next year and a half," said Standard & Poor's credit analyst Robert Schulz. "This will leave them more vulnerable to already adverse industry, economic, and credit market conditions." The greatest threats to the ratings over the next 18 months are the depth of economic weakness and the extent of the demand shift away from light trucks in the U.S.

Q2 2008 GDP, jobless claims stink up the joint

I'm not going to sugarcoat this morning's economic data. It stunk to high heaven. A few details:

- Q2 2008 Gross Domestic Product grew just 1.9%, below the average forecast for a 2.3% rise. Q1 2008 growth was revised down slightly to 0.9% from 1%. Moreover, Q4 2007 GDP was slashed to NEGATIVE 0.2% from positive 0.6%

- Personal consumption was +1.5% in the quarter, vs. a forecast of 1.7%. Durable goods consumption was weak (-3%), while services spending was up just 1.1%, the worst reading since Q1 2001.

- Gross private investment plunged at a 14.8% rate, the worst showing since Q4 2006 (-15%). Residential fixed investment (think housing) tanked 15.6%. That’s less than the -25.1% reading in Q1, but the 10th consecutive quarter of declines.

- Business investment in equipment and software was very weak: -3.4% vs. -0.6% a quarter earlier. That’s the worst reading since Q4 2006 and it shows that businesses are following consumers and cutting back on spending.

- The “good news” was on the inflation front. The GDP price index rose just 1.1% vs. a forecast of 2.4% and a revised 2.6% in Q1. The core PCE price index rose 2.1%, slightly higher than the 2% forecast, though that's down from 2.3% a quarter earlier.

What about jobless claims? Fasten your seatbelts. Initial jobless claims soared to 448,000 in the week of July 26 from a revised 404,000 in the prior week. That was way higher than the 393,000 forecast and the worst reading since mid-April 2003. Continuing claims climbed to 3.282 million from 3.097 million, the highest since December 2003.

The market reaction? So much for the good feeling engendered by the ADP surprise. Long bond futures are up 30/32 as I write, while 2-year Treasury Note yields are down 11 basis points to 2.52%. The dollar index is down 37 bps to 72.96, S&P futures are off 8 points, and spot gold is up almost $12 an ounce to $918.

Wednesday, July 30, 2008

ADP employment figures show surprising gain; Plus, the Fed says it will continue to dole out tens of billions of dollars for the foreseeable future

A bit of a surprise on the economic front this morning: ADP employer services said the economy ADDED 9,000 jobs in July. Economists were expecting a loss of 60,000 workers, which would have followed a revised loss of 77,000 jobs in June.

The ADP and government employment statistics don't always track each other. In fact, ADP has shown job losses in only two of the past seven months, while the Labor Department has reported six consecutive months of losses. But this could point toward a surprise on Friday, when the government is expected to report a July decline of 75,000.

In the other news of the morning, the Federal Reserve's ongoing bailout/support programs for banks and brokers will be extended. Can you imagine how incredibly surprised I am that these "limited, emergency" measures are proving to be anything but? Here's an excerpt from a Bloomberg story:

"The Federal Reserve extended its emergency lending programs to Wall Street firms through January after policy makers judged that markets are still too weak to go without a backstop from the central bank.

"The Fed also plans to give securities dealers options for tapping one of the loan programs to ensure financing through key dates, such as the ends of quarters, when funding needs can jump. Commercial lenders will be able to borrow from the central bank for a longer period, and the Fed boosted its swap line with the European Central Bank."

Also, here are some more specifics on the move:

"The central bank also will start selling 84-day loans to commercial banks under the Term Auction Facility beginning next month, in addition to the sales of 28-day loans that have occurred since the program began in December. The biweekly sales will alternate between auctions of $75 billion in 28-day loans, and $25 billion in 84-day loans.

"The Fed is planning the TAF sales to keep the program at $150 billion and released a schedule indicating it will remain at that size through November.

"In related moves, the European Central Bank and Swiss National Bank are also extending their operations to include auctions of 84-day funds, the Fed said in a press release. The Federal Open Market Committee authorized an increase in the ECB's swap line with the Fed to $55 billion from $50 billion; the SNB's swap line is unchanged at $12 billion. The swaps are authorized through Jan. 30."

Housing rescue bill now official

This morning, President Bush signed the housing and mortgage bailout/rescue bill into law. From Bloomberg ...

"President George W. Bush signed into law legislation that helps 400,000 homeowners facing foreclosure and extends a lifeline to Fannie Mae and Freddie Mac.

Bush signed the measure at the White House about 7 a.m. today, spokesman Tony Fratto said.

"We look forward to putting in place new authorities to improve confidence and stability in markets, and to provide better oversight for Fannie Mae and Freddie Mac,'' Fratto said.

The law is aimed at stemming foreclosures and halting a free-fall in housing prices by providing federal insurance for refinanced 30-year mortgages for homeowners struggling to make their monthly payments.

The measure also is designed to restore confidence in Fannie Mae and Freddie Mac by tightening regulations and authorizing the Treasury secretary to inject capital into the two biggest U.S. providers of mortgage money."

This bill will help some borrowers and some lenders put some foreclosures and losses behind them. But it isn't a cure all, as I've noted before. The big-picture problem for the housing market is quite simple: Too much housing supply, not enough housing demand. It will take time to bring the equation back into balance.

Tuesday, July 29, 2008

Retailer, restaurant, casino bankruptcies piling up as spending falls and economy slumps

The fallout from rising energy prices, the slowing economy, the slumping housing market, and tighter credit markets is increasing. Mid-tier department store Mervyns just confirmed what the Wall Street Journal reported earlier today: Namely, that it is filing Chapter 11 bankruptcy. Here's a WSJ excerpt on the Mervyn's saga, and the potential impact and causes:

"Mervyn's, which operates 177 stores, mostly in California, has been struggling in the face of sharp sales declines this year in California and Arizona, where the real-estate markets have collapsed. Nervous factoring companies, which provide financing for apparel makers, have cut off funding, leaving Mervyn's with limited merchandise for the critical back-to-school season. A spokesman for Mervyn's declined to comment.

"A filing by Mervyn's would follow those of several other retailers that have sought bankruptcy protection this year, including Steve & Barry's LLC, cataloger Lillian Vernon and home-products chain Linens 'n Things.

"My clients are all holding their orders [for Mervyn's] at this time," said Bob Carbonell, chief credit officer at Bernard Sands LLC, which advises factoring firms and apparel manufactures of the credit-worthiness of retailers. He said he also has advised clients to hold orders for Boscov's Inc., a beleaguered chain of 49 department stores. Boscov's, based in Reading, Pa., didn't return calls seeking comment.

"Our experience is that a lot of manufacturers and wholesalers are being very tentative with these types of struggling retailers," said Lee Diercks, managing director at Clear Thinking Group LLC, a financial-advisory and restructuring firm. "They've gotten burned so many times this year."

"If Mervyn's is liquidated, it would deal another blow to mall owners, which have seen a wave of store closings in the past year. Vacancies at malls in 76 major U.S. markets rose to 6.3% in the second quarter, the highest level since early 2002, according to real-estate-research firm Reis Inc. The International Council of Shopping Centers estimates that 144,000 stores will shutter their doors in 2008, up 7% from last year and the biggest increase in the 14 years the group has been tracking the figures."

Meanwhile, restaurant chains Bennigan's and Steak & Ale are filing for bankruptcy and likely going to liquidate, according to the Journal:

"National restaurant chains Bennigan's and Steak & Ale have closed their doors and filed for Chapter 7 bankruptcy protection, shuttering more than 300 locations and letting go of thousands of employees.

"It is one of the country's largest restaurant bankruptcies and eliminates two sit-down chains that have been part of the casual-dining landscape for decades. The chains will liquidate and aren't likely to re-open.

"Late Monday, managers at Bennigan's and Steak & Ale were told not to open restaurants the next day, according to two people familiar with the matter. Employees were told there wouldn't be enough money to pay them for the rest of the week, these people said.

"Leah Templeton, a spokeswoman for the company, said in an email that the companies that filed bankruptcy cases are popularly known as Steak & Ale, Bennigan's and Tavern restaurants. She said that not all stores using these trade names have filed bankruptcy, and that stores operated by franchisees aren't named as debtors in these filings. She said the filing doesn't include the company's Ponderosa and Bonanza restaurants, which operate under Metromedia Steakhouses Company L.P.

"The pub-themed Bennigan's had 310 restaurants in 32 states. It was founded in 1976. It is heavily concentrated in states like Texas, Illinois and Michigan. It posted U.S. sales of $542 million in 2007, according to Technomic Inc., a food-industry research and consulting firm."

Another major sector of the economy that's getting hit by a slowdown in consumer spending and travel: Casinos. So it's no surprise that Bloomberg is reporting on how MGM and Dubai World are having a tougher time obtaining financing for their massive CityCenter project in Las Vegas:

"MGM Mirage and Dubai World are late in raising as much as $3.5 billion for their $11.2 bllion CityCenter project in Las Vegas because banks saddled with debt to casinos and hotels are wary of making new loans.

"Deutsche Bank AG and Credit Suisse Group, the Zurich-based bank that advised Dubai World last year when it invested $5.1 billion in MGM, are among the holdouts, bankers with knowledge of the matter said. Funding was supposed to be completed by the end of June, MGM Chief Financial Officer Daniel D'Arrigo told analysts in May. President James Murren said Frankfurt-based Deutsche Bank has been part of every MGM loan since 1998.

"No company in America is having an easy time doing bank deals right now,'' Murren said in an interview. "There will be some banks that can't commit because they have a lot of exposure in the area or don't like the pricing.''

"Deutsche Bank, the biggest German bank, hasn't yet made a decision on financing CityCenter, said spokesman John Gallagher in New York. "We continue to evaluate the opportunity,'' he said. Duncan King, a New York-based spokesman for Credit Suisse, the second-largest Swiss bank, declined to comment.

"Wall Street firms are scrutinizing their extension of credit, particularly to the gaming industry, where the sentiment is pretty weak,'' said Michael Paladino, an analyst at Fitch Ratings in New York.

"The amount of commercial and industrial loans from banks, plus short-term commercial paper, fell almost 3 percent during the past year to $3.27 trillion, according to data compiled by the Federal Reserve."

Why the hesitancy? As Bloomberg notes, the slumping economy has hurt the bottom line at Vegas casinos, while tighter financing conditions have put the squeeze on developers:

"The Las Vegas casino industry has been struggling with revenue falling 16 percent in May, the fifth straight monthly decline, amid near-record gasoline prices and rising unemployment in the U.S., according to the Nevada Gaming Control Board.

"Deutsche Bank took over the $3.5 billion Cosmopolitan Resort & Casino in January after developer Ian Bruce Eichner defaulted on a loan. The Cosmopolitan, due to be completed next year, is on the Las Vegas strip near the Tropicana Resort & Casino, whose parent filed for bankruptcy protection in May.

"Deutsche Bank, Credit Suisse and Citigroup provided financing for the $27 billion takeover of Las Vegas-based Harrah's Entertainment Inc. by leveraged buyout firms Apollo Management LP in New York and TPG Inc. of Fort Worth, Texas, in January. Harrah's $1.4 billion of 10.75 percent notes due in 2018 have fallen to about 70 cents on the dollar to yield 17 percent since the start of the year."

July consumer confidence inches higher

The Conference Board just released its July consumer confidence index. The index ticked up to 5.19 from a revised 51 in June. That was slightly better than the 50.1 reading that was forecast. The present situation index dipped ever so slightly to 65.3 from 65.4. The expectations index climbed to 43 from 41.4.

There isn't a heck of a lot that's interesting in the details of the report. Most indicators were up or down by small amounts. Plans to buy major appliances sank again, as did plans to buy a car, though the percentage of those who said they would buy a house in the next six months rose to 2.7 from 2.4. Consumer said they are expecting an inflation rate of 7.6% over the next year, down slightly from 7.7% a month earlier.

That said, early dollar strength has accelerated a bit on the number (Dollar Index up 49 bps at last count), while the bonds have weakened to the day's low (-18/32 on the long bond futures).

May Case-Shiller data: 15.8% YOY drop in prices

We just got the latest S&P/Case-Shiller figures (PDF link), this time for May. Here is what the numbers showed:

* Prices fell 0.9% from April in 20 major U.S. metropolitan areas. That was another improvement on the month (April was -1.3%, March was -2.2%, and February was -2.6%). However, the year-over-year decline in prices came to 15.8%, worse than the 15.2% drop in April. That's also the largest decline so far for the monthly index, which was first published in 2001 (A chart showing the history of the YOY price changes can be seen above).

* The 10-city index has a longer history. It declined 16.9% YOY in April, compared with 16.2% in April. That's the worst reading since S&P started tracking in the late 1980s.

* Once again, prices fell from year-ago levels in every single one of the 20 metropolitan areas the group tracks. The biggest declines were found in Las Vegas (-28.4%), Miami (-28.3%), Phoenix (-26.5%) and multiple markets in California (-24.6% in L.A., -23.2% in San Diego, and -22.9% in San Francisco). Charlotte, N.C. (-0.2%) and Dallas (-3.1%) were the best performing markets on a relative basis.

The S&P/Case-Shiller figures show that home prices are still deteriorating, at a faster year-over-year pace and in a broad array of markets. Even former standouts have joined the weaker metropolitan areas in the red. If there's a glimmer of hope, it's that the monthly rate of decline has eased since February. But that's a thin reed to cling to. With inventories still elevated, mortgage credit harder to obtain, and the economy struggling, home prices will likely continue to decline, even if they do so at a less aggressive pace.

Monday, July 28, 2008

Merrill Lynch dials for more dollars

It used to be that you grabbed your wallet and ran as soon as you heard the famous words "I'm from the government and I'm here to help." Now you have to do that as soon as you hear someone in corporate America say: "No, we don't need to raise any more capital." Just about every time a bank, broker, or insurance company has said that in the past year, they have reneged on their promise. And any investor foolish enough to believe it has been hosed when the company has later come out and said: "Oops."

This evening, it's Merrill Lynch that is out dialing for dollars. Specifically, the company is taking a $5.7 billion writedown and raising another $8.5 billion in capital. Some $3.4 billion of the shares being sold are going to go to Temasek Holdings, the Singapore sovereign wealth fund. Merrill earlier this year raised $6.6 billion in capital, a sizable chunk of which came from Temasek.

Here's something else that really jumps out at you:

"On July 28, 2008, Merrill Lynch agreed to sell $30.6 billion gross notional amount of U.S. super senior ABS CDOs to an affiliate of Lone Star Funds for a purchase price of $6.7 billion. At the end of the second quarter of 2008, these CDOs were carried at $11.1 billion, and in connection with this sale Merrill Lynch will record a write-down of $4.4 billion pre-tax in the third quarter of 2008."

Is Merrill saying that a portfolio of securities with a face value of $30.6 billion was sold for $6.7 billion? Roughly 22 cents on the dollar? What does that "mark" now mean to the value of similar assets that other banks or brokers might be holding?

White House: Record deficit coming

It looks like 2009 could be a real doozy on the unbalanced budget front. While the federal budget deficit should come in around $389 billion this year -- down from an earlier forecast of $410 billion -- it is set to explode to a record $482 billion next year. That's according to a new Bush administration forecast released today.

Next year's deficit was previously estimated at $409 billion. But war expenses and the slower economy have combined to drive the expected number much higher. The previous record deficit (in dollar terms, rather than as a percentage of GDP), was $413 billion in 2004.

Will it be necessary to sell boatloads of U.S. Treasuries to fund that deficit, driving interest rates higher over the long term? We'll see. In the here and now, bond traders are clearly more concerned about falling stock prices and ongoing credit tremors. The long bond futures were recently up 1 5/32 in price, while 2-year Treasury Note yields were down 12 basis points to 2.59%.

More bank failures and more thoughts on the mortgage bailout bill

Good Monday morning. Hope you're all ready for another exciting week. I'm working on plenty of things at my "day job," so I'll have to be brief. The big news, from where I sit, is that we saw more "Friday Night Lights Out" announcements from the FDIC over the weekend.

Specifically, the FDIC stepped in after both First National Bank of Nevada in Reno and First Heritage Bank of Newport Beach, Calif. failed. Mutual of Omaha Bank will take over their deposits and certain assets. Together, the failed institutions had assets of $3.6 billion. FDIC says the cost of the failures will be approximately $862 million.

Meanwhile, the housing bailout package originally passed by the House sailed through the Senate over the weekend. That clears the way for President Bush to sign it into law this week. The big question now is simple: "How much of an impact will it have?" I've shared some thoughts. Now, here are a few excerpts and quotes from other stories on this bill ...

From the Wall Street Journal:

"The housing rescue bill passed by the Senate Saturday hasn't been signed into law, but top Democrats already are putting pressure on regulators and bankers to make sure a major program to prevent foreclosures doesn't fall flat.

"For struggling U.S. homeowners, the success or failure of the program -- which would let roughly 400,000 owners refinance into affordable, government-backed loans -- depends largely on bankers' willingness to take a partial loss on the loans and to reduce the amount of money borrowers owe.

"Bankers say they will do it, but it isn't clear how many loans they might be willing to restructure.

"I absolutely do believe that there will be more principal reductions," Michael Gross, Bank of America Corp.'s managing director for loss mitigation, mortgage, home-equity and insurance services, told a congressional panel Friday."


"The Senate approved the bill 72-13 after the House of Representatives passed it Wednesday in a 272-152 vote. Minutes after the Senate vote, Senate Banking Committee Chairman Christopher Dodd (D., Conn.) called for a prompt meeting with the Federal Reserve, the Department of Housing and Urban Development, and other regulators to determine the quickest way to get the program up and running.

"House Financial Services Committee Chairman Barney Frank (D., Mass.) on Friday asked lenders to hold off on foreclosures until Oct. 1 if it is possible the borrower would qualify for the government program. He threatened legislation if loan servicers and investors don't work together to help prevent foreclosures.

"Taking a loss on a loan by writing down the principal owed is one of the least desirable options for loan servicers. They typically prefer to either lower the interest rate or extend the life of the loan -- from 30 years, for example, to 40 years.

"The real problem is going to be, just like with every program out there, are the banks going to take this seriously?" said Rebecca Case-Grammatico, a staff attorney at the Empire Justice Center in Rochester, N.Y., who advises clients facing foreclosure. "And if they don't, we're in the same position we've been in all along."

From the Washington Post ...

"The centerpiece of the legislation is a plan to prevent as many as 400,000 foreclosures by authorizing the FHA to help people who, because of falling prices, owe the banks more than their homes are worth. If lenders agree to forgive a portion the debt and write new loans worth no more than 90 percent of the home's current, lower value, the FHA will insure the new loans and agree to pay off the lenders if borrowers default.

Homeowners also would get an immediate equity stake in their properties, which they would have to share with the government if they sell or refinance.

At a hearing Friday before the House Financial Services Committee, representatives of the mortgage industry promised Chairman Barney Frank (D-Mass.), one of the bill's chief authors, they would take advantage of the new program.

"Clearly in areas where home prices have dropped, it's going to be utilized more," Steve O'Connor, senior vice president of government affairs for the Mortgage Bankers Association, said afterward. "It also depends on the borrower's unique financial circumstances. Why are they struggling? Did they lose their job? If it's a temporary hardship, then you're not going to use this program at all. If it's something of greater significance, then this may be the best option."

But consumer advocates have their doubts. More than a year after the mortgage crisis began, banks are still foreclosing on far more loans than they modify. In May, as a coalition of lenders known as the Hope Now Alliance modified 70,000 loans, RealtyTrac reported 261,000 foreclosure filings. An April report by the State Foreclosure Prevention Working Group found that 70 percent of seriously delinquent borrowers were not receiving help.

"How effective can the FHA refinancing program be in light of how slow and ineffective mortgage servicers have been so far?" said Alys Cohen, a staff attorney at the National Consumer Law Center. "We're encouraged that steps are being taken. But we're worried."

Even if the program works, its goals are modest compared with the scope of the problem, said Mark Zandi, chief economist for Moody's He estimates that 5.5 million loans will default by the end of 2009, with about half of them going into foreclosure.

"If we're lucky enough to help 400,000 households," said economist Jared Bernstein, "I'm afraid it's a drop in the bucket."

Friday, July 25, 2008

S&P puts some ratings on Freddie Mac and Fannie Mae debt on CreditWatch Negative

Via (my emphasis added) ...

"S&P affirmed its 'AAA/A-1+' senior unsecured debt ratings on Fannie Mae (FNM) and Freddie Mac (FRE). At the same time, S&P placed our 'AA-' risk-to-the-government, subordinated debt, and preferred stock ratings on Freddie Mac, and our 'AA-' subordinated debt and preferred stock ratings, and 'A+' risk-to-the-government rating on Fannie Mae on CreditWatch Negative. "The affirmation of the senior unsecured debt ratings reflects the strong explicit and implicit support these government-sponsored enterprise securities hold in the marketplace." The most recent public demonstrations of government support by the U.S. Treasury underscore the key public policy role and the key liquidity role the congressional chartered GSEs have in the U.S. mortgage markets. This is reflected in the current stable outlook on the senior unsecured debt. The weak mortgage credit cycle driving credit losses higher at Fannie Mae and Freddie Mac has led to a crisis of confidence in the strength of their capital positions as the GSEs are facing higher demands for liquidity while their own core mortgage performance is weaker, and there is a higher degree of uncertainty regarding the broader market conditions. This is reflected in the weak pricing of their equity shares during the past few weeks ... Both firms face weak earnings due to rising credit expenses. The CreditWatch listing on the subordinated debt, preferred stock, and risk-to-the-government ratings underscores the expected higher stress on capital and earnings these firms face during the next several quarters. The confidence crisis in the equity markets is adding to the already stressed business cycle and creates additional challenges in the near term for capital-raising initiatives."

UPDATE: Bloomberg has a story that explains exactly what S&P did and why a little bit better.

New home sales slip; Inventory progress the key story

This morning, we got the new home sales figures for June. Here's a recap of what they showed:

* Sales dipped 0.6% to a seasonally adjusted annual rate of 530,000 in June from 533,000 in May (previously reported as 512,000). That was less than the forecast for a 1.8% decline. Sales were down sharply -- 33.2% -- from the June 2007 pace of 793,000 units.

* Regionally, sales rose 2.5% in the Midwest and 5.3% in the Northeast. They dipped 0.9% in the West and fell 2% in the South.

* The inventory of new homes for sale continued to fall. It dropped 5.3% to 426,000 from 450,000 in May. Supply is also down 21.5% from a year earlier. The "months supply at current sales pace" indicator of inventory dipped to 10 from 10.4 in May. The cycle high was 11.4 months in March.

* The median price of a new home rose 1.4% to $230,900 from $227,700 in May. That was down 2% from a year ago, when the median price of a new home was $235,500.

For the new home builders, selling houses is a business. There is no emotional attachment to the homes - they are just units of inventory that need to be managed. Lately, the strategy to cull that inventory has been two-fold: Slash production dramatically and sell off existing product at whatever price you can get. And it is achieving results: The supply of homes for sale has dropped to 426,600, down more than 25% from the July 2006 peak of 572,000.

That's the good news. The bad news is that we're still about 100,000 units over the long-term average. Moreover, there has been little -- if any -- sign of progress on the existing home inventory front. The demand side of the equation remains weak in both new and existing homes as well. Despite upward revisions totalling 50,000 units over the past few months, new home sales are still running at roughly the slowest pace since 1991. Homes are sitting on the market longer, too. Completed new homes were taking a median of 8.4 months to sell as of June. That's the highest going all the way back to April 1983.

Bottom line: The new home figures are slightly more encouraging than the existing home numbers. But they still show a housing market that's facing significant headwinds.

UPDATE: Bonds are getting rocked today on the stronger-than-expected economic data. Long bond futures were recently down 1 4/32. 10-year yields are up about 9 basis points to 4.09%. This will continue to pressure mortgage rates higher.

Surprising pop in durable goods orders

This isn't a huge week for economic data. But we did just get a report on durable goods orders in June and they were much stronger than expected. Overall orders were up 0.8%, versus expectations for a decline of 0.3%, and orders ex-transportation were up 2%, versus forecasts for a drop of 0.2%. A key measure of business investment, non-defense capital goods orders, ex-aircraft (Yes, it's a mouthful), was up 1.4%.

Bonds are a bit weak on the news (down 7/32 on the long bond futures), while stock futures have popped. The dollar index is off its lows, but still down about 17 points. Next up: June new home sales figures, due out at 10 a.m. Expectations are for a monthly drop of 1.8%.

Thursday, July 24, 2008

Yet another credit fire flares up, this time at Washington Mutual; Plus, discount window borrowing hits a new record

Just when Congress and Treasury (to say nothing of the SEC, FDIC, and so on) manage to put out one credit or banking market fire, another erupts somewhere else. Today, it was Washington Mutual that sent tongues wagging on Wall Street. Wamu shares dropped more than 13% after tanking 20% yesterday amid concern about its financing options and its large mortgage exposure. From an AP story today ...

"Shares of Washington Mutual Inc. fell sharply Thursday, as concerns persisted about the company's mortgage portfolio following its report of a $3 billion quarterly loss earlier this week.

"Shares dropped 90 cents, or 19.4 percent, to $3.75 in afternoon trading. Shares are down about 72 percent for the year.

"Late Tuesday, the nation's largest thrift posted a $3 billion loss due to increases in its loss reserves to cover souring loans in its mortgage portfolio. The stock fell 20 percent Wednesday.

"We are concerned that credit and market conditions will continue to damage Washington Mutual's financial flexibility over the near to intermediate term," wrote Citi Investment Research analyst Bradley Ball in a note to clients Wednesday. "In particular, we think a credit rating agency downgrade of Washington Mutual's debt to junk levels, as threatened by Moody's, would likely raise the cost of doing business and further dampen performance during the currently challenging environment."

"Moody's Investors Service's said late Tuesday that it put WaMu's senior unsecured rating of "Baa3" on review for possible downgrade. A rating of "Baa3" is one notch above junk status.
Standard & Poor's has subsequently downgraded WaMu's counterparty credit rating to "BBB-minus," one notch above junk status."

Downey Financial was another big loser on the day, down 34% today and 94% year-to-date. The Newport Beach-based S&L was a big option ARM lender during the bubble days, and its nonperforming assets are surging as a result. Here's an excerpt from a Bloomberg story on the firm:

"Downey Financial Corp., the California savings and loan, replaced top management and may seek investors or buyers after a fourth straight quarterly loss. The stock fell as much as 29 percent after Friedman, Billings, Ramsey Group Inc. raised doubt about the company's survival.

Chief Executive Officer Daniel Rosenthal, 55, stepped down and Downey is exploring "strategic alternatives,'' the Newport Beach-based lender said today in a statement. FBR analyst Paul Miller said finding a buyer may be difficult because of losses from adjustable-rate mortgages.

Downey was one of the biggest sellers of option-ARMs, which let borrowers defer part of the monthly payment and add it to the principal. Option-ARMs become more risky for banks when housing prices are falling because the loan's size can quickly exceed the home's value. In Downey's home state, households are foreclosing at 2.6 times the national average, contributing to a $258.9 million loss in the second quarter for the company and about $600 million in losses over the past year.

"The company is under extreme stress given the current housing market situation in California,'' Miller said in a report today. "With borrowers walking away from their homes coupled with the inventory overhang and weakening unemployment, defaults and loss severity will further increase.'' Miller, top performer in Bloomberg's survey of analysts, said Downey's operations are at risk'' and cut his price target to $1 from $13."

Meanwhile, some late news out of the Federal Reserve: Borrowing at the discount window jumped to a record high in the week ended yesterday. Per Bloomberg, loans to commercial banks increased by $2.47 billion to an average of $16.4 billion per day (chart above). The previous high was $16 billion per day in the week ended May 28. The daily average during the week of the 9/11 attacks (which included the largest single day's worth of borrowing, $45.5 billion) was $11.7 billion.

June existing home sales fall; SFH sales at lowest since 1998

It's existing home sales day, with the latest numbers recently released by the National Association of Realtors. Here's what the June data showed ...

* Sales fell 2.6% to a seasonally adjusted annual rate of 4.86 million in June from 4.99 million in May. That was slightly worse than the average forecast of 4.94 million home sales. Sales were down 15.5% from the year-earlier reading of 5.75 million. This is the lowest rate on record for all existing home sales. Single-family only sales, at 4.27 million, were the lowest since January 1998 (shown in the chart above).

* The supply of homes for sale climbed inched up to 4.49 million units in June from 4.482 million in May (previously reported as 4.485 million). They were up from 4.368 million a year earlier. On a months supply at current sales pace basis, inventory climbed to 11.1 months from 10.8 months in May. That was also up from 9.1 a year earlier, but ever so slightly below the cycle peak of 11.2 months in April.

The single-family only supply reading was 11 months, up from 10.5 in May. That's the highest going all the way back to June 1985 (11.4 months).

* Median home prices rose 3.5% to $215,100 in June from $207,900 in May (previously reported as $208,600). They fell 6.1% from $229,000 a year earlier.

June was another weak month for the existing home market, with sales of single-family homes falling to the lowest level in more than a decade and the supply of homes on the market hovering near mutli-year highs. The list of reasons for the weakness is long: Consumer confidence is down. Unemployment is up. Mortgages are harder to get now that lenders have found religion. And the broader economy has been decelerating. We're also seeing long-term mortgage rates climb precipitously. At 6.63%, 30-year fixed loan rates are within a whisker of their multi-year high (6.8%, set in July 2006).

That's the bad news. On the flip side, Congress is passing a significant package of reforms and bailout programs designed to support the housing market. President Bush will sign this into law within days. Some of its provisions, such as the FHA refinance program, are designed to keep more stressed borrowers in their homes, reducing the supply of foreclosures coming to market. Others, like the tax credit for new home buyers, are targeted at the demand side of the equation. And of course, raising the loan limits permanently will allow Fannie Mae, Freddie Mac, and the FHA to back more loans in higher cost areas. This should bring some relief to formerly jumbo buyers who have been paying much higher rates to get loans.

But like other reform packages before it, this one can only soothe the pain for some buyers and borrowers, not cure the disease. Only lower prices, less construction activity, and the passage of time can fix the underlying imbalance between housing supply and housing demand.

Wednesday, July 23, 2008

Beige book looks blue

The Beige Book report, just released by the Federal Reserve, doesn't tell a very happy tale about the U.S. economy. In fact, I'd call it downright "blue." A few excerpts with my emphasis added:

From the summary of the overall economy ...

"Residential real estate markets declined or were still weak across most of the country. Commercial real estate activity also slowed or remained sluggish in a majority of Districts, although a few Districts noted slight improvement. In banking, loan growth was generally reported to be restrained, with residential real estate lending and consumer lending showing more weakness than commercial lending. Districts reporting on agricultural activity said conditions were mixed, based largely on how June precipitation affected them. Districts reporting on the energy sector said it continued to strengthen.

All reporting Districts characterized overall price pressures as elevated or increasing. Input prices continued to rise, particularly for fuel, other petroleum-based materials, metals, food, and chemicals. Retail price inflation varied across the country, with some Districts reporting increases but others noting some stability, at least for the present."

From a section on consumer spending ...

"Consumer spending was reported as mixed, weak, or slowing in nearly all Districts since the last report, although tax rebate checks boosted sales for some items, especially electronics ... Sales at discount stores were also reported as growing in the Philadelphia, Richmond, St. Louis, Dallas, and San Francisco Districts, and New York reported brisk sales in New York City. However, sales at most other types of stores, especially for discretionary and housing-related items, were typically characterized as weak or falling, and restaurant sales were also reported as slow in the Philadelphia and Minneapolis Districts. The outlook for retail activity was also generally downbeat, with expectations "subdued" among Atlanta District contacts and "grim" among Dallas District contacts.

From a section on commercial real estate ...

"Commercial real estate activity weakened or remained sluggish in a majority of Districts, although Cleveland, Minneapolis, and Kansas City noted some improvement. Boston characterized sentiment in the sector as "decidedly morose," and industrial markets were especially weak in that District. Office market conditions in the Richmond District continued to weaken and were "bleak" in the Washington, DC area. Vacancy rates increased in the Philadelphia and Atlanta Districts, and were up noticeably in both Midtown and Downtown Manhattan, according to contacts in the New York District. Office rents remained steady in the Philadelphia District, and were little changed in the Boston District after taking concessions into account. More positively, contacts in the Minneapolis District noted rent increases and positive absorption in the Minneapolis-St. Paul area office market. Districts reporting on nonresidential construction generally noted sluggishness, which contacts in the Chicago and Kansas City Districts attributed in part to prohibitively high construction costs. Contractors in the Cleveland District were also worried about cuts but reported strong backlogs and a steady flow of inquiries. Contacts in many Districts also cited tightened financing as a constraint. San Francisco noted particularly steep drops in commercial construction in the San Diego area. Retail space was described as overbuilt in the Boston and Chicago Districts."

From a section on loan quality and loan standards ...

"Most Districts reported a further tightening of credit standards, especially for residential real estate and construction loans. Dallas reported that lenders were tightening non-price terms and boosting loan spreads in response to increases in their cost of capital. Tighter standards for construction loans were reported in the Atlanta and Chicago Districts, and San Francisco indicated that credit standards remained quite restrictive for both residential real estate and construction loans. Tighter standards for business loans were reported in three Districts, but banks in the Atlanta District were reported to be competing more intensely for business customers with good credit histories. Kansas City and Boston reported that tightened standards were especially prevalent on commercial real estate loans.

"Among the Districts that commented on bank loan quality, some deterioration was reported, including in the Philadelphia, Richmond and San Francisco Districts. New York reported increased delinquencies on consumer and residential real estate loans, and San Francisco indicated that declines in loan quality were greatest for real estate loans and construction loans. In the Dallas District, contacts had not yet observed a significant decline in loan quality but expected deterioration in coming months, especially for residential real estate and consumer loans."

The immediate impact of the Beige Book's release was a minor downtick in stocks. But we quickly reverted back to the tick-for-tick inverse relationship with crude oil, whereby stocks go up every time oil ticks down.

Housing bill finally getting passed? And at what cost?

It looks like the long-awaited, long-debated housing bill will finally be passed and signed into law, according to the AP. As a reminder, this is the bill with various provisions related to Fannie Mae, Freddie Mac, the FHA loan program, and more. Here's an excerpt from the story:

"The bill would let hundreds of thousands of homeowners trapped in mortgages they can't afford on homes that have plummeted in value escape foreclosure by refinancing into more affordable, fixed-rate loans backed by the Federal Housing Administration. Lenders would have to agree to take a substantial loss on the existing loans, and in return, they would walk away with at least some payoff and avoid the often-costly foreclosure process.

"The plan also creates a new regulator with tighter controls for Fannie Mae and Freddie Mac and modernizes the FHA.

"It includes about $15 billion in housing tax breaks, including a credit of up to $7,500 for first-time home buyers for people who bought homes between April 9, 2008, and July 1, 2009. It also allows people who don't itemize their taxes to claim a $500-$1,000 deduction on their 2008 property taxes. That chiefly benefits homeowners who have paid off their homes and can't claim a deduction for mortgage interest.

"And it increases the statutory limit on the national debt by $800 billion, to $10.6 trillion."

My view about these provisions, like all the other bailout/rescue programs we've seen is simple: Every little bit helps, but there is no magic bullet to cure the housing and mortgage markets. The bubble was years in the making, and the recovery will take years as well.

There is a real question about the impact of all these bailouts on interest rates, too. Treasury yields have been steadily rising in recent weeks amid concerns about the cost to the government of bailing everyone and his sister out. Some are also wondering whether Fannie and Freddie can really afford to step up and buy billions and billions of dollars worth of additional mortgages and mortgage securities, given the market's capital concerns.

For now, as Bloomberg notes this morning, higher rates are already impacting mortgage demand:

"Mortgage applications in the U.S. dropped 6.2 percent last week, led by declining demand for loans to purchase homes as interest rates jumped.

The Mortgage Bankers Association's index of applications to buy a home or refinance a loan fell to 489.6 in the week ended July 18 from 522.2 the prior week. The group's refinancing gauge declined 5.6 percent while the purchase index decreased 6.7 percent.

The average rate on a 30-year fixed mortgage reached the highest level in a year, threatening to deepen the U.S. housing recession and prolong the economic slowdown. Lenders are charging more for home loans after posting billions of dollars of losses resulting from the credit rout. That has sent rates higher even after the Federal Reserve lowered interest rates seven times.

There's certainly no sign of recovery at this point,'' James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut, said before the report.

"The mortgage bankers' applications index reached 461.3 a month ago, the lowest level in almost seven years.

"The average rate on a 30-year fixed-rate loan jumped to 6.59 percent last week from 6.22 percent, today's mortgage bankers report showed. The rate is the highest since the week ended July 20, 2007. At the current rate, monthly borrowing costs for each $100,000 would be $638, up $70 from the 2008 low in January."

Tuesday, July 22, 2008

The bank warnings parade continues

More and more banks and lenders are stepping up to the podium and warning about loan losses, increased provisioning, dividend cuts, and worsening economic conditions. Some of the bottom line results have been better than expected, leading to sharp, short-term stock rallies. But fundamentally, even those reports were generally negative -- just slightly less negative than people were looking for. Here's a quick roundup of today's greatest hits (with my emphasis added in parts):

From an AP story on American Express:

"In a sign that even wealthier consumers are feeling the pinch of the credit crisis, American Express Co. said its second-quarter profit tumbled as it set aside more money to cover souring loans across all its portfolios.

The credit card lender, known for catering to America's elite, said late Monday that its second-quarter earnings fell 38 percent, well below Wall Street's expectations.

The effects of the weakening economy were evident even among its more established members with excellent credit.

"Consumer spending slowed during the latter part of the quarter and credit indicators deteriorated beyond our expectations," American Express Chairman and Chief Executive Kenneth I. Chenault said. "The scope of the economic fallout was evident even among our longer term, superprime cardmembers."

The company's shares shed $4.65, or 11.4 percent, to $36.25 in aftermarket trading. They are down about 21 percent for the year.

For the period ended June 30, American Express reported net income of $653 million, or 56 cents per share, compared with $1.06 billion, or 88 cents per share, in the year-ago period.

Analysts, on average, expected earnings of 83 cents per share, according to Thomson Financial.
The results include a $374 million addition to credit reserves, reflecting higher credit losses and the expectation for increased write-offs in the third and fourth quarter.

The company's U.S. card services division reported a profit of just $21 million, down from $580 million a year ago. Revenue net of interest expense in the segment rose a modest 1 percent to $3.6 billion. Results were hurt by a $1.5 billion provision for loan losses, up from $640 million in the 2007 quarter."

From a story on Wachovia:

"Wachovia shares were plunging more than 9% in premarket trading after the troubled bank posted a nearly $10 billion second-quarter loss and slashed its dividend.

The Charlotte, N.C.-based bank recorded a loss of $8.9 billion, or $4.20 a share, compared to a profit of $2.34 billion, or $1.22 a share, in the year-earlier period. Analysts, according to Thomson Reuters, expected the firm to post a loss of 78 cents a share.

The loss included a $6.1 billion non-cash goodwill impairment charge in commercial-related sub-segments reflecting declining market valuations and asset values. Wachovia said the goodwill impairment charge has no impact on its tangible capital levels, regulatory capital ratios or on liquidity.

Excluding the goodwill impairment charge and a merger and restructuring expense of $128 million, Wachovia posted a net loss of $2.67 billion, or $1.27 per share.

The company also took a $5.6 billion provision to cover net charge-offs and increase the reserve by $4.2 billion, it said."

From an AP story on Regions Financial:

"Regions Financial Corp. said Tuesday its second-quarter profit dropped 55 percent, below Wall Street expectations, as it set aside more than $300 million to cover bad loans.

For the quarter ended June 30, the bank reported net income of $206.4 million, or 30 cents per share, compared with $453.3 million, or 63 cents per share, in the year-ago quarter.

Excluding the impact of $100.1 million in pretax merger-related expenses, income from continuing operations was 39 cents per share, compared with 69 cents per share in the prior-year quarter.

Analysts polled by Thomson Financial, on average, anticipated earnings of 42 cents per share. Analyst estimates typically exclude one-time, unusual charges."

Friday, July 18, 2008

Back on board after a nasty bug

Ugh. There's nothing worse than a nasty stomach bug to put you on your back for a while. That's why I didn't have anything to say at the blog yesterday. I'm feeling better now so let me take a crack at updating you, dear reader, on some of the things I'm seeing ...

First, an interesting study from the American Institute of Architects (via Bloomberg) caught my eye. The AIA noted that tenant demand is falling and that credit conditions are tightening. The combination of those factors, plus rising building costs, should hit portions of the commercial construction business pretty hard. Office construction should fall 3.7% this year and 12.3% in 2009 and retail construction should drop 8.3% this year and 9.9% in 2009. Hotel construction should fare fine this year -- up 6.6% -- but drop 9.9% in '09. A similar trend should unfold in warehouse and industrial property construction -- +4.6% this year, -5.5% next year.

Second, how about that volatility in financial shares? Companies like Wells Fargo, JPMorgan, and Citigroup haven't been releasing good earnings news. But because the news has been only awful, rather than monumentally terrible, the stocks have responded explosively. Wells was up almost 33% on Wednesday, while JPMorgan shot up roughly 40% from intraday low to high in just a couple of days. This kind of extreme volatility is simply astounding.

Third, I can't help but chuckle at this newfound approach of government officials. Oil prices up? It's all speculation! Let's find those meanies and put them in their place. Stocks going down? Let's shoot the short-sellers! It's obviously their fault. Financial companies imploding? It's rumor-mongering. It has absolutely nothing to do with all the crummy loans they foisted on consumers, or the slicing and re-slicing of those crummy loans into all kinds of complicated securities no one really understood. It's great to see our tax dollars being put to such good use.

Wednesday, July 16, 2008

NAHB index drops to record low n July

The National Association of Home Builders recently released its housing market index data for July. Here is what the numbers showed ...

* The group's overall index dropped to 16 in July from 18 in June. Economists were expecting no change. This is the lowest reading in the history of the index, which dates back to 1985.

* The sub-index measuring present home sales fell to 16 from 17. The sub-index measuring expectations about future sales dropped to 23 from 27. Meanwhile, the sub-index measuring prospective buyer traffic dropped to 12 from 16.

* Regionally, the index dropped in three out of four regions -- to 10 from 16 in the Midwest, to 20 from 21 in the South, and to 13 from 16 in the West. It rose to 14 from 12 in the Northeast.

It's tough to be confident about housing when the credit markets are imploding, gas is $4 a gallon, unemployment is climbing, and consumers are the gloomiest they've been about the future in several decades. So it's not surprising that the NAHB index set a fresh low this month. The question is, what happens next?

The government is taking extraordinary steps to backstop Fannie Mae and Freddie Mac. The FHA is ramping up originations to make up for the exit of private lenders (including the recently re-named IndyMac Bancorp, a $77 billion mortgage originator in its last full year of loan-making). And policymakers are putting on a full court press to restore confidence in the housing and financial markets.

It's an open question as to whether they succeed in the longer term. But no matter what, it's going to be a rocky road for home sales. Home sellers and home builders will be forced to adjust appropriately.

CPI shows we are an inflation nation

The June Consumer Price Index just hit the tape. Both the headline and "core" numbers were worse than expected. Have a look ...

* The overall CPI shot up by 1.1% in June. That compares with a forecast for an increase of 0.7%. It's the largest one-month rise since September 2005, when hurricane-related damage to oil production and refining facilities drove energy prices higher. Excluding that month, you have to go all the way back to June of 1982 to find a one-month change equaling this one (and all the way back to March 1980 to find a larger increase).

That pushed the year-over-year inflation rate to a whopping 5%. That's up from 4.2% a month earlier and the highest going back to May 1991 (a tie).

* The "core" CPI - which eliminates those products none of us use, like gas and food -- rose 0.3%, faster than the 0.2% gain that analysts were expecting. Core CPI is now rising at a 2.4% rate, up from 2.3% a month earlier but roughly within the range of the past few months.

* Inflation was widespread, with housing inflation up 0.5% on the month, food and beverage prices up 0.7%, education and communication prices up 0.5%, and inflation in other goods and services up 0.4%.

Tuesday, July 15, 2008

Bernanke, Bush, Paulson speaking today

Ben Bernanke is giving his semi-annual economic testimony before the Senate Banking, Housing, and Urban Affairs Committee. He is talking about both weak growth and rising inflation pressures -- yes, that's stagflation folks. Here is what I consider to be the most important excerpt:

"At present, accurately assessing and appropriately balancing the risks to the outlook for growth and inflation is a significant challenge for monetary policy makers. The possibility of higher energy prices, tighter credit conditions, and a still-deeper contraction in housing markets all represent significant downside risks to the outlook for growth. At the same time, upside risks to the inflation outlook have intensified lately, as the rising prices of energy and some other commodities have led to a sharp pickup in inflation and some measures of inflation expectations have moved higher. Given the high degree of uncertainty, monetary policy makers will need to carefully assess incoming information bearing on the outlook for both inflation and growth. In light of the increase in upside inflation risk, we must be particularly alert to any indications, such as an erosion of longer-term inflation expectations, that the inflationary impulses from commodity prices are becoming embedded in the domestic wage- and price-setting process."

President Bush is also speaking right now, urging Congress to move the housing support legislation as quickly as possible and emphasizing steps to boost confidence in Fannie Mae and Freddie Mac.

UPDATE: Here is Treasury Secretary Henry Paulson's testimony. It contains some more details and language about the Fannie and Freddie support/bailout plan:

"First, as a liquidity backstop, the plan includes an 18-month temporary increase in Treasury's existing authority to make credit available for the GSEs. Given the difficulty in determining the appropriate size of the credit line we are not proposing a particular dollar amount. Flexibility is the best means of increasing market confidence in the GSEs, and also the best means of minimizing taxpayer risk.

"Second, to ensure the GSEs have access to sufficient capital to continue to fulfill their mission, the plan gives Treasury an 18-month temporary authority to purchase – only if necessary – equity in either of the two GSEs.

"Let me stress that there are no immediate plans to access either the proposed liquidity or the proposed capital backstop. If either of these authorities is used, it would be done so only at Treasury's discretion, under terms and conditions that protect the U.S. taxpayer and are agreed to by both Treasury and the GSE. I have for some time urged a broad range of financial institutions to raise capital and at Treasury we have constantly encouraged the GSEs to do just that. In March, at my request, both the Chairman and Ranking Member of this Committee hosted a meeting with me and the CEOs of the two GSEs where they agreed to raise capital and you began the effort to move your GSE reform bill, which is now hopefully about to be enacted with the modifications we are recommending today.

"Third, to help protect the financial system from future systemic risk, the plan strengthens the GSE regulatory reform legislation currently moving through Congress by providing the Federal Reserve authority to access information and perform a consultative role in the new GSE regulator's process for setting capital requirements and other prudential standards. Let me be clear, the Federal Reserve would not be the primary regulator. As I have said for some time, the Fed already plays the role of de-facto market stability regulator and we must give it the authorities to carry out that role. This role for the Federal Reserve with respect to the GSEs is consistent with the recommendation made in Treasury's Blueprint for a Modernized Financial Regulatory Structure. Clearly, given the scope of the GSEs' operations in world financial markets, a market stability regulator must have some line of sight into their operations."

Bottom line: Today could be a very important day. Does the recent "no confidence" trend in the currency and stock markets continue? Or do we reverse, with the dollar rising, gold falling, stocks rising, and so on. Lots of markets are at key levels, as I noted earlier.

UPDATE2: Wachovia is weighing in just now with a statement about its own financial strength, similar to what we saw from National City and Washington Mutual yesterday. It reads:

"Wachovia is a fundamentally strong and stable company on solid footing. Wachovia has $150 billion in liquidity funding capability and is well capitalized, with more than $50 billion of Tier 1 regulatory capital at June 30, 2008.

"Many of our businesses continue to experience strong underlying performance, and we remain focused on serving our customers well. Our teams are prepared to help customers navigate this difficult environment.

"We are intensely focused on maintaining excellent service to customers, and we are winning new business every day. In fact, Wachovia opened 17,000 new checking accounts and generated $800 million in new deposits on Monday, July 14."

PPI soars; Retail sales weak

Some economic data just hit the tape -- and it provides even more evidence that we're experiencing "stagflation lite." The details ...

* The Producer Price Index surged 1.8% in June, more than the 1.4% that was expected. The year-over-year rate of inflation is truly out of control -- 9.2%. That is up from 7.2% a month earlier and the worst reading going all the way back to June 1981. The "core" PPI was "only" up 0.2%, versus the 0.3% gain that was expected. The YOY change in the core PPI was 3%, the same as in May.

* Retail sales rose a paltry 0.1%, below the 0.4% gain that was expected. May's gain was revised down to 0.8% from 1%. Even excluding autos, sales were up just 0.8%, below forecasts for a 1% rise. There were notable declines in vehicles and parts sales (-3.3%), furniture sales (-1.4%), electronics (-0.6%), and building materials (0.9%).

* The July Empire State Manufacturing Index was actually a bit better than expected, -4.9 vs. a forecast of -8 and a prior reading of -8.7. But there too, the news on the inflation front wasn't pretty. The prices paid index shot up to 77.9 from 66.3 a month earlier, while the prices received index climbed to 32.6 from 26.7. New orders were solid (+8.3 vs. -5.5 a month earlier), but employment was weak (-6.3 vs. +1.2).

Markets losing confidence in Fed, Treasury

After reading the "play by plays" of the Fannie Mae and Freddie Mac rescue plan in the New York Times and the Wall Street Journal this morning, I have to ask: "Where were these guys months ago? Why wasn't a mechanism put in place for some kind of rescue long ago, when the mortgage crisis started unfolding? Couldn't someone at the Fed or Treasury have foreseen that the GSEs could get in serious trouble, given their excessive leverage and their exposure to the biggest decline in the U.S. housing market in modern history? If everything was prepared in advance, it should have been a simple process of "flipping a switch" and backstopping the market.

I can't help but thing that if Fed and Treasury officials spent more time preparing for the unfolding calamity IN ADVANCE -- and less time issuing speeches about how the subprime mortgage crisis was contained ... how the problems in the mortgage world weren't too serious from a credit availability perspective ... and wouldn't spill over to the regulated banks and thrifts -- then we wouldn't have to do these hastily arranged, weekend bailout scrambles.

Am I being too tough on Washington policymakers? I don't think so. Heck, I'm not even griping about the other, multiple errors they've made in recent years: The Fed keeping interest rates too low for too long, thereby creating monetary conditions ripe for the inflation of a housing bubble ... the banking regulators not cracking down more aggressively on high-risk lending when there was still time ... policymakers denying there was a housing bubble over and over, even as many of us could see it plain as day. You get the picture.

Why am I bringing this up today? Well, this slapdash policy approach is causing international investors to lose (even more) confidence in Bernanke and Paulson, as near as I can tell. Just look at the dollar. The value of the dollar is determined by many things. But one of the most important ways to look at it is as a barometer of international confidence in the U.S. economy and its stewardship.

Right now, investors are giving these guys a big "thumbs down." The EUR set an intraday, all-time high this morning ... the AUD set a 25-year high ... the GBP is back above the 2-dollars-per-1-pound mark ... and the Dollar Index is within a few ticks of its all-time low (recently 71.50 vs. a low of 70.69 on 3/17 of this year).

Monday, July 14, 2008

Regional banks getting clobbered; BKX hits almost 12-year low

IndyMac's FDIC takeover appears to be causing a lot of concern about other regional banks. Indeed, regional bank shares have been getting killed today amid worries about their ability to weather the credit storm.

Buffalo, New York-based M&T Bank is one of the big losers after the company released some ugly numbers. Second quarter profit dropped 25% year-over-year. The $1.44 per share in earnings it released missed the average forecast of $1.55 in profit. The company also took a $100 million loan loss provision, more than triple the $30 million of a year earlier. Net chargeoffs surged to $99 million from $22 million.

Who else has been getting hit? National City. Its shares were recently halted amid a steep decline. The company released the following statement in response to the move:

"National City is experiencing no unusual depositor or creditor activity. As of the close of Friday's business, the bank maintained more than $12 billion of excess short-term liquidity. Further, as a result of our recent $7 billion capital raise, National City maintains one of the highest Tier I regulatory capital ratios among large banks."

UPDATE: Bloomberg is reporting that the KBW Bank Index's (BKX) 8.7% decline today is the biggest in the history of the index. The S&P 500 Financials index tanked 6.1%, the most since April 2000. If you chart the BKX on a weekly basis, you see that we have now undercut the bear market lows .... and the lows from the middle of the Long-Term Capital Management crisis in 1998. In fact, this broad index is at its lowest level since November 1996 (chart above). In other words, almost 12 years of gains have been wiped out if you are invested in some of the biggest financial institutions in this country. That’s a sobering thought.

UPDATE2: Washington Mutual is out after the close with the following statement:

"Washington Mutual recently raised $7.2 billion in capital and its tangible equity to total tangible assets ratio was 7.8% as of June 30. The company significantly exceeds all regulatory “well-capitalized” minimums for depository institutions. In addition, WaMu has current excess liquidity of more than $40 billion and a national franchise with approximately $150 billion in retail deposits. The company will provide a more detailed report on its capital position and liquidity, as well as the steps it is taking to work through the current environment, on its July 22 earnings call."

Fed enacts new mortgage rules

I am extremely busy this morning for obvious reasons, so I don't have time to blog extensively on the new Federal Reserve mortgage rules (PDF link) that were officially published today. For now, here is the text of the Fed's announcement:

"The Federal Reserve Board on Monday approved a final rule for home mortgage loans to better protect consumers and facilitate responsible lending. The rule prohibits unfair, abusive or deceptive home mortgage lending practices and restricts certain other mortgage practices. The final rule also establishes advertising standards and requires certain mortgage disclosures to be given to consumers earlier in the transaction.

The final rule, which amends Regulation Z (Truth in Lending) and was adopted under the Home Ownership and Equity Protection Act (HOEPA), largely follows a proposal released by the Board in December 2007, with enhancements that address ensuing public comments, consumer testing, and further analysis.

"The proposed final rules are intended to protect consumers from unfair or deceptive acts and practices in mortgage lending, while keeping credit available to qualified borrowers and supporting sustainable homeownership," said Federal Reserve Chairman Ben S. Bernanke. "Importantly, the new rules will apply to all mortgage lenders, not just those supervised and examined by the Federal Reserve. Besides offering broader protection for consumers, a uniform set of rules will level the playing field for lenders and increase competition in the mortgage market, to the ultimate benefit of borrowers," the Chairman said.

The final rule adds four key protections for a newly defined category of "higher-priced mortgage loans" secured by a consumer's principal dwelling. For loans in this category, these protections will:

* Prohibit a lender from making a loan without regard to borrowers' ability to repay the loan from income and assets other than the home's value. A lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan. To show that a lender violated this prohibition, a borrower does not need to demonstrate that it is part of a "pattern or practice."

* Require creditors to verify the income and assets they rely upon to determine repayment ability.

* Ban any prepayment penalty if the payment can change in the initial four years. For other higher-priced loans, a prepayment penalty period cannot last for more than two years. This rule is substantially more restrictive than originally proposed.

* Require creditors to establish escrow accounts for property taxes and homeowner's insurance for all first-lien mortgage loans.

"These changes have made for better rules that will go far in protecting consumers from unfair practices and restoring confidence in our mortgage system," said Governor Randall S. Kroszner.

In addition to the rules governing higher-priced loans, the rules adopt the following protections for loans secured by a consumer's principal dwelling, regardless of whether the loan is higher-priced:

* Creditors and mortgage brokers are prohibited from coercing a real estate appraiser to misstate a home's value.

* Companies that service mortgage loans are prohibited from engaging in certain practices, such as pyramiding late fees. In addition, servicers are required to credit consumers' loan payments as of the date of receipt and provide a payoff statement within a reasonable time of request.

* Creditors must provide a good faith estimate of the loan costs, including a schedule of payments, within three days after a consumer applies for any mortgage loan secured by a consumer's principal dwelling, such as a home improvement loan or a loan to refinance an existing loan. Currently, early cost estimates are only required for home-purchase loans. Consumers cannot be charged any fee until after they receive the early disclosures, except a reasonable fee for obtaining the consumer's credit history.

For all mortgages, the rule also sets additional advertising standards. Advertising rules now require additional information about rates, monthly payments, and other loan features. The final rule bans seven deceptive or misleading advertising practices, including representing that a rate or payment is "fixed" when it can change.

The rule's definition of "higher-priced mortgage loans" will capture virtually all loans in the subprime market, but generally exclude loans in the prime market. To provide an index, the Federal Reserve Board will publish the "average prime offer rate," based on a survey currently published by Freddie Mac. A loan is higher-priced if it is a first-lien mortgage and has an annual percentage rate that is 1.5 percentage points or more above this index, or 3.5 percentage points if it is a subordinate-lien mortgage. This definition overcomes certain technical problems with the original proposal, but the expected market coverage is similar.

One element of the original proposal has been withdrawn. The Federal Reserve Board had proposed for public comment certain requirements pertaining to so-called "yield-spread premiums." During the intervening period, the Board engaged in consumer testing that cast significant doubt on the effectiveness of the proposed rule. As part of its ongoing review of closed-end loan rules under Regulation Z, however, the Board will consider alternative approaches.

In finalizing the rule, the Board carefully considered information obtained from testimony, public hearings, consumer testing, and over 4,500 comment letters submitted during the comment period. "Listening carefully to the commenters, collecting and analyzing data, and undertaking consumer testing, has led to more effective and improved final rules," Governor Kroszner said.

The new rules take effect on October 1, 2009. The single exception is the escrow requirement, which will be phased in during 2010 to allow lenders to establish new systems as needed.
In a related move, the Board is publishing for public comment a proposal to revise the definition of "higher-priced mortgage loan" under Regulation C (Home Mortgage Disclosure), which requires lenders to report price information for such loans, to conform to the definition the Board is adopting under Regulation Z.

Sunday, July 13, 2008

Fed, Treasury taking steps to support Fannie Mae, Freddie Mac

The news started leaking earlier in the day that the government would take various steps to try to build support for Fannie Mae and Freddie Mac. Now, more details are being officially released.

Here's an announcement from the Fed:

"The Board of Governors of the Federal Reserve System announced Sunday that it has granted the Federal Reserve Bank of New York the authority to lend to Fannie Mae and Freddie Mac should such lending prove necessary. Any lending would be at the primary credit rate and collateralized by U.S. government and federal agency securities. This authorization is intended to supplement the Treasury's existing lending authority and to help ensure the ability of Fannie Mae and Freddie Mac to promote the availability of home mortgage credit during a period of stress in financial markets."

And here's an excerpt from an AP story with more details on what the Treasury will do:

"Secretary Henry Paulson said the Treasury is seeking authority to expand its current line of credit to the two companies should they need to tap it and to make an equity investment in the companies — if needed. Such moves will require congressional approval.

"Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owner companies," Paulson said Sunday. "Their support for the housing market is particularly important as we work through the current housing correction."

"The Treasury's plan also seek a "consultative role" for the Federal Reserve in any new regulatory framework eventually decided by Congress for Fannie and Freddie. The Fed's role would be to weigh in on setting capital requirements for the companies."

The complete statement is available here.

UPDATE: Early market reaction? A 10-point pop in the S&P 500 futures traded on the Globex exchange. September long bond futures are off about 21/32. Gold is up $6-and-change. And the dollar has caught a little bit of a bid as well, but we're not talking about a major pop. For instance, it was trading up slightly to 1.5894 against the euro, vs. a previous New York close of 1.5938. We'll have to see if this strength carries through and builds overnight, or if it fades as we head toward the start of the U.S. trading day.

Can't make your mortgage payment? Just eat less!

That was the fantastic advice that Countrywide Financial's foreclosure mitigation team apparently gave Dan Bailey, as reported in a New York Times story today called "The Silence of the Lenders." Here's the complete passage:

"After all, Mr. Bailey had received little else from Countrywide after he began trying to renegotiate an adjustable-rate loan that he could no longer afford. Until then, he says, the only guidance the lender provided was a suggestion from an employee of Countrywide’s “home retention team” that he cut back on groceries to pay his mortgage.

“I told her that I probably spend $10 a day on groceries,” Mr. Bailey recalls. “And she said ‘Maybe you can eat less.’ ”

"As record numbers of homeowners try to avoid foreclosure, the responses of big lenders and loan servicers like Countrywide are drawing increased scrutiny. While these companies maintain that they’re doing all they can to help imperiled borrowers, critics contend that homeowners routinely meet roadblocks.

"Many borrowers have trouble even reaching a workout specialist; others soon find that the modifications they received are as unaffordable as the mortgages they replaced. Some homeowners, eager to sell their homes before the value falls further, say they are impeded by loan servicers’ inaction or incompetence."

Now I know it's easy to cherry pick a single story like this that really hits home. I have no doubt that many borrowers ARE receiving modifications, and that plenty of those mods are succeeding in keeping people in their homes. But I also know that with hundreds of thousands of borrowers trying to get relief from unaffordable mortgage payments, many are falling through the cracks. Servicers are overwhelmed and understaffed for the tsunami of bad loans that have been battering their books. And as the story notes, many of the modifications being offered are trivial and not all that much help in the long run.

Then again (trying to think positively here), if more troubled borrowers take Countrywide's mortgage advice, maybe we can kick America's obesity problem once and for all!

Friday, July 11, 2008

IndyMac fails

It's Friday night, and you know what that means -- at least in times of banking stress. It's "failure hour." And IndyMac just went down. Cost to the Deposit Insurance Fund could be as much as $8 billion (The fund had a balance of $52.4 billion at the end of 2007). With assets of $32 billion as of March 31, IndyMac is the second largest institution to fail in U.S. history (other recent failures pale in comparison as you can see at this FDIC page -- the last one had assets of just $58.5 million)

Here's the text of the FDIC's press release:

"IndyMac Bank, F.S.B., Pasadena, CA, was closed today by the Office of Thrift Supervision. The Federal Deposit Insurance Corporation (FDIC) was named conservator. The FDIC will transfer insured deposits and substantially all the assets of IndyMac Bank, F.S.B., Pasadena, CA, to IndyMac Federal Bank, FSB. Brokered deposits will be held by the FDIC and those insured deposits will be paid off when the insurance determination is complete. IndyMac Bank, FSB had total assets of $32.01 billion and total deposits of $19.06 billion as of March 31, 2008. As conservator, the FDIC will operate IndyMac Federal Bank, FSB to maximize the value of the institution for a future sale and to maintain banking services in the communities formerly served by IndyMac Bank, F.S.B.

"Insured depositors and borrowers will automatically become customers of IndyMac Federal, FSB and will continue to have uninterrupted customer service and access to their funds by ATM, debit cards and writing checks in the same manner as before. Depositors of IndyMac Federal Bank, FSB will have no access to on-line and phone banking services this weekend. These services will be operational again on Monday. Loan customers should continue making loan payments as usual.

"Beginning on Monday, July 14, IndyMac Federal Bank, FSB's 33 branches will observe normal operating hours and will continue to offer full banking services, including on-line banking. For additional information, the FDIC has established a toll-free number for customers of IndyMac Federal Bank, FSB. The toll-free number is 1-866-806-5919 and will operate today from 3:00 p.m. to 9:00 p.m. (PDT), and then daily from 8:00 a.m. to 8:00 p.m. thereafter, except Sunday, July 13, when the hours will be 8:00 a.m. to 6:00 p.m. Customers also may visit the FDIC's Web site at for further information.

"At the time of closing, IndyMac Bank, F.S.B. had about $1 billion of potentially uninsured deposits held by approximately 10,000 depositors. The FDIC will begin contacting customers with uninsured deposits to arrange an appointment with an FDIC claims agent by Monday. Customers can contact the FDIC for an appointment using the toll-free number above. The FDIC will pay uninsured depositors an advance dividend equal to 50 percent of the uninsured amount.

"Based on preliminary analysis, the estimated cost of the resolution to the Deposit Insurance Fund is between $4 and $8 billion. IndyMac Bank, F.S.B. is the fifth FDIC-insured failure of the year. The last FDIC-insured failure in California was the Southern Pacific Bank, Torrance, on February 7, 2003."

I discussed IndyMac and gave some perspective on its size in a blog post a few days ago.

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