Interest Rate Roundup

Tuesday, March 31, 2009

All I can say is "Amen"

Here's a good read over at The Daily Beast on the Obama banking recovery plan (my emphasis added). An excerpt:

"Timothy Geithner, Larry Summers, and a host of other economists—myself among them—spent the late 1990s yelling at Japanese and other Asian officials to clean up their banking crises. A typical conversation would end with the American adviser bursting with frustration: “Don’t you understand? The money is gone. If you just wish for the banks’ asset values to come back, any recovery will be short-lived and you will only get more losses in the end. We all know this from long experience.”

"Then we would go to conferences and discuss what it was about Japanese (or Korean or Indonesian) political economy that prevented resolute action.

"So it is with some irony if not humility that we should approach Treasury Secretary Geithner’s Public Private Investment Plan presented on March 23. A number of major American banks have lost huge amounts of money, and clearly have insufficient capital if they are not literally insolvent. Why else would they be pushing so hard to change the accounting rules to avoid showing what they really have on their books instead of raising private capital? Why else is the U.S. government taking so long to perform “stress tests” and trying to get expectations of overpayment for some of the bad assets on the banks’ books before the test results are out? In short, the U.S. government is looking to shovel capital into the banks without sufficient conditions, hiding rather than confronting the actual situation.

"That is just like the Japanese government in their lost decade, or the U.S. officials during the 1980s before they really tackled the savings-and-loan crisis. In those cases, the delay simply made the problem worse over time and in the end the government had to put more money into the troubled banks directly, taking over or shutting down the weakest of them. Whatever the political culture, it would seem we have not learned from experience. Or perhaps we cannot act on our learning. The universal barrier would appear to be the political difficulty of recapitalizing banks. That seems obvious, but the constraint it puts on good policy is enormous."

Meanwhile, I hope you didn't miss the just-completed foreclosure auction of the John Hancock Tower in Boston. The premier, trophy piece of commercial real estate sold for $660.6 million. Its purchase price? $1.3 billion in late 2006. Total decline in value? 49.2% in less than three years.

Policymakers claim that all the paper that's tied to the performance of the underlying housing and CRE markets is being "mispriced." Bankers say that the vulture buyers are being unrealistic and that the prices of these securities are "artificially" low and signs the market is "broken."

But maybe -- just maybe -- the "false" value of these securities is really the true value after all ... and we should all stop pretending that isn't the case. It sure as heck looks like the value of the assets underlying all this toxic paper are plunging in value (See S&P/Case-Shiller post earlier for details on the residential side of the ledger).

Chicago PMI, consumer confidence disappoint

Normally, I don't spend much time talking about the regional purchasing managers indices. But the Chicago NAPM index that just hit the tape is noteworthy for its weakness. In fact, it stands out against certain other reports, which appeared to be showing a bit of stabilization and/or pickup in the economy.

The index dropped to 31.4 in March from 34.2 in February. Expectations were for a reading of 34.3. That is the lowest reading for the Chicago index going all the way back to July 1980. The subindex measuring production dipped to 32.7 from 34.7, while the sub-index measuring order backlogs dropped to 21.3 from 29.3. New orders were essentially flat (30.9 vs. 30.6 a month earlier), while employment rose slightly to 28.1 from 25.2.

The other economic report out today was on consumer confidence. The Conference Board's index inched up to 26 in March from a revised 25.3 in February. That was slightly below forecasts for a reading of 28. The present situation index dipped to 21.5 from 22.3, while the expectations index climbed to 28.9 from 27.3.

The percentages of respondents saying they planned to buy cars, homes and major appliances all dipped on the month. In fact, only 2% of those surveyed said they would buy a house, the lowest reading since October 1982 -- when the average 30-year fixed mortgage went for 14.6%.

S&P/Case-Shiller: Home prices down 19% YOY in January

We just got the latest figures (PDF link) from S&P/Case-Shiller on home prices. The 20-city index dropped at a 19% year-over-year rate in January, up from the 18.6% rate of decline reported in December. On a monthly basis, the index fell 2.8%. That was up from the 2.6% drop reported in December and the fastest rate of decline in the nine years the index has been published.

All 20 cities in the index declined on both a monthly and yearly basis. On a year-over-year basis, the biggest declines were seen in Phoenix (-35%), Las Vegas (-32.5%), and San Francisco (-32.4%). Dallas (-4.9%) and Denver (-5.1%) were the best-performing markets by that metric.

Home prices continue to decline thanks to the abundance of for-sale inventory on the market, more aggressive discounting by distressed sellers, economic stress, and a lack of buyer confidence. We are seeing some evidence in some markets that bargain hunters are stepping up and buying -- but only when the price is right. Traditional sellers who are trying to hold the line on pricing are still having a hard time getting purchasers to bite.

Moreover, efforts by the Fed and Treasury to drive mortgage rates lower appear to be mostly stimulating refinance activity, rather than home purchases. Case in point: The plunge in 30-year fixed rates to 4.63% in the week of March 20 led to a 41.5% surge in the Mortgage Bankers Association's refinance index. But the purchase index gained just 4.2%.

Monday, March 30, 2009

Two "Generals" in serious debt trouble

Another driver of today's carnage is the debt problems at two Generals -- General Motors and General Growth Properties. These are two major players in the auto and commercial real estate sectors, respectively, and they're both in serious debt trouble. We'll have to see how generous the government and the creditors are in the restructurings of these two firms.

Here's more on General Motors from the Washington Post:

"The Obama administration has forced the longtime head of General Motors to resign and said yesterday that it would withhold additional federal aid to the auto industry unless the ailing companies undertake changes they so far have been unwilling or unable to make.

"The administration effectively rejected as untenable the business plans that GM and Chrysler had submitted to restructure their companies, saying that neither had fulfilled the terms of the federal loans the companies received in December.

"The president is expected to announce today that both companies may still win additional federal aid but under stricter terms.

"Chrysler, which the administration believes cannot survive as a stand-alone company, must reach an agreement to partner with the Italian automaker, Fiat, in the next 30 days to become eligible for as much as $6 billion in additional federal loans.

GM, which has shed thousands of workers since the downturn began, must devise a leaner business plan that likely will cut the company workforce and product lines even more than officials had contemplated. It has 60 days to come up with a new approach."

And here are some details on General Growth Properties from Marketwatch:

"Real estate company General Growth Properties Inc., which is fighting to avoid bankruptcy and is behind on its debt and payment deadlines, on Monday said it is continuing discussions with holders of the Rouse "TRCLP" unsecured notes. General Growth said the group of bond holders did not achieve the minimum acceptance levels for the previously announced consent solicitation, which expired on March 27. Some of General Growth's lenders have already moved to foreclose on the company's mall properties."

G-20 meeting expectations headed south

Once-lofty expectations for the upcoming Group of 20 meeting are heading south in a hurry. U.S. and European policymakers are having trouble agreeing on the proper combination of bank bailouts, economic stimulus, and so on. It'll be interesting to see how the markets react (in early trading, "risk aversion" trades -- stocks down, bonds up, dollar up, and so on) as we get closer to the gathering.

More from the Wall Street Journal ...

"It was supposed to be the inauguration of a Global New Deal, in the hopes of British Prime Minister Gordon Brown, a comprehensive policy response to the world economic crisis, a root-and-branch effort to reorder the way capitalism itself works.

"But by the time the much-heralded Group of 20 meeting of heads of government ends Thursday, it may be difficult to spot a new world order.

"Six months ago, Mr. Brown, who will host the summit here, called for "a new Bretton Woods -- a new financial architecture for the years ahead," evoking the New Hampshire site where, in 1944, American and British officials mapped out the post-World War II economic order.

"It is already clear that the summit will mostly fall short of Mr. Brown's original lofty goals. Over the past few days, European leaders continued to insist they wouldn't agree to U.S. and British calls for further fiscal stimulus for their ailing economies. According to a draft of the communiqué set to be released when the meeting adjourns, the G-20 leaders will tout a global bailout totaling up to $2 trillion, though that includes a host of measures already announced.

"White House officials over the weekend sought to back off their once high hopes for coordinated global action. They played down fiscal-stimulus targets they were urging on Germany and other European nations earlier in the month and instead focused on more modest objectives, such as new rules for tax havens and international coordination for financial regulation."

Friday, March 27, 2009

Did someone press the button early?

I just got an email release from the Office of the Comptroller of the Currency appointing the FDIC as receiver for Omni National Bank of Atlanta, Georgia. The bank had $980 million in assets as of late 2008, with branches in Georgia, Illinois, Florida, and Texas, as well as loan production offices in Alabama and Pennsylvania. Aren't these things supposed to come out AFTER 4 p.m.? Maybe someone pressed the button early.

The truth behind the "public/private" asset plan

You have to love the way this public-private asset purchase plan is constructed. Ingenious how the administration has figured out a way to massively subsidize the banking industry and claim that's not what it's doing. This FT article makes clear what is really going on (I have read similar critiques at several other blogs). Here is an excerpt:

"The Geithner-Summers plan, officially called the public/private investment programme, is a thinly veiled attempt to transfer up to hundreds of billions of dollars of US taxpayer funds to the commercial banks, by buying toxic assets from the banks at far above their market value. It is dressed up as a market transaction but that is a fig-leaf, since the government will put in 90 per cent or more of the funds and the “price discovery” process is not genuine. It is no surprise that stock market capitalisation of the banks has risen about 50 per cent from the lows of two weeks ago. Taxpayers are the losers, even as they stand on the sidelines cheering the rise of the stock market. It is their money fuelling the rally, yet the banks are the beneficiaries."

How do the mechanics work? Have a look (and try not to let your eyes glaze over; this is important stuff because AIG bonuses are small beer compared to what's going on here) ...

"Consider a simple example: a toxic asset with face value of $1m pays off fully with probability of 20 per cent and pays off $200,000 with probability of 80 per cent. A risk-neutral investor would pay $360,000 for this asset.

"Along comes the government and says it will finance 90 per cent of the investor’s purchase and, moreover, do so as a non-recourse loan. Non-recourse means the government’s loan is backed only by the collateral value of the toxic asset itself. If the pay-out is low, the loan is defaulted and the government ends up with the low pay-out rather than full repayment of the loan.

"Now the investor is prepared to bid $714,000 (with rounding) for the same asset. The investor uses $71,000 of his/her own money and $643,000 of the government loan. If the asset pays off in full, the investor repays the loan, with a profit of $357,000. This happens 20 per cent of the time, so brings an expected profit of $71,000. The other 80 per cent of the time the investor defaults on the loan, and the government ends up with $200,000. The investor just breaks even by bidding $714,000, as we would expect in a competitive auction.

"Of course, the investor has systematically overpaid by $354,000 (the bid price of $714,000 minus the market value of $360,000), reflecting the investor’s right to default on the loan in the event of a poor pay-out of the toxic asset. The overpayment equals the expected loss of the government loan. After all, 80 per cent of the time (in this example) the government loses $443,000 (the $643,000 loan minus the $200,000 repayment). The expected loss is 80 per cent of $443,000, equal to $354,000.

"The idea of “private sector price discovery” is therefore flim-flam. There would be price discovery if the government’s loan had to be repaid whether or not the asset paid off in full. In that case, the investor would bid $360,000. But under the Geithner-Summers plan the loan is precisely designed to be a one-way bet, for the purpose of overpricing the toxic asset in order to bail out the bank’s shareholders at hidden cost to the taxpayers."

Thursday, March 26, 2009

GDP revised to -6.3%, jobless claims tick higher

We got the final update on fourth-quarter GDP this morning. The government now says GDP dropped 6.3% in the fourth quarter, upwardly revised from the previous reading of -6.2% but below forecasts for a reading of -6.6%.

On the other hand, initial jobless claims rose from a revised 644,000 to 652,000 in the week of March 21. That was ever-so-slightly above forecasts. Continuing claims ramped up yet again -- to 5.560 million from 5.438 million a week earlier and far above forecasts for a reading of 5.475 million.

Markets didn't show much of an early reaction. Bonds rose a bit off their lows, while stocks gave up a couple ticks. But that's about it so far.

Wednesday, March 25, 2009

Weak 5-year auction leads to bond selling

In the wake of the failed U.K. auction of 40-year gilts, the bond market is paying close attention to this week's U.S. Treasury auctions. We're in the process of selling $98 billion of 2-year, 5-year, and 7-year notes, the biggest weekly sales of longer-term debt in U.S. history. And while I wouldn't call the 5-year auction a failure, it certainly wasn't strong.

The $34 billion of 5-year notes were sold at a yield of 1.849%, above pre-market talk of 1.801%, per Bloomberg. The bid-to-cover ratio came in at 2.02, below the average of 2.18 at the last 10 sales and down from 2.21 in the February auction. Indirect bidders purchased just 30% of the notes on offer, down from 48.9% at the last auction and the lowest since December.

Bonds are getting spanked in the wake of this sale. The long bond futures are down 1 26/32 now, with a virulent sell off taking place after the auction results came public at 1 p.m. What makes the sell off all the more interesting is that it is happening DESPITE the first actual Fed purchases of U.S. Treasuries. The Fed bought $7.5 billion of Treasuries with maturities in the 2016 to 2019 timeframe.

New home sales rise 4.7% in February

Yesterday's existing home sales report wasn't too bad. Did the new home market fare as well? Let's go to the videotape ...

* New home sales rose 4.7% to a seasonally adjusted annual rate of 337,000 from an upwardly revised 322,000 in January. That was better than the average forecast of economists surveyed by Bloomberg, who were looking for a reading of 300,000.

* The raw number of homes for sale continued to decline, falling to 330,000 from 340,000 in January. The months supply at current sales pace indicator of inventory declined to 12.2 from 12.9.

* The median price of a new home dropped again, by 2.9% to $200,900 from $206,800 in January. That was also a decline of 18.1% from $245,300 in the year-earlier period, the biggest drop ever. New home prices are now at the lowest level since December 2003 ($196,000).

When prices fall far enough, people buy houses. That's the message coming through in the latest numbers. New home sales rose for the first time since July, aided by the biggest year-over-year decline in home prices in U.S. history. New home prices are now at the lowest level in just over five years, and likely to head even lower in the months ahead. But those lower prices -- and a drastically reduced pace of construction activity -- are clearly helping eliminate the overhang of new home inventory. The raw supply of new homes on the market is now the lowest going back to June 2002 and roughly in line with the long-term average.

Surprising pop in durable orders

It's been a while since we've seen a decent pop in the economic data. But that's what we got just now. February durable goods orders rose 3.4%, far better than expectations for a 2.5% decline. Strip out transportation orders and you get a 3.9% rise, also better than the -2% forecast. Non-defense capital goods orders ex-aircraft, a key measure of business spending, were up a healthy 11%.

The caveat: The rise comes after a string of horrid readings, including a January decline that was revised down to -7.3% from -5.2%. Stock futures have gained a little ground here, as have gold prices.

Refis surge; Purchases not so much

The latest Mortgage Bankers Association figures show that lower interest rates continue to light a fire under the refinance market. Thanks to a drop in the average 30-year mortgage rate to 4.63% from 4.89%, the group's refinance application index jumped 41.5.% to 6,363.2 in the week of March 20 from 4,497.6 a week earlier. That was the third straight weekly gain and it leaves the refi index within spitting distance of its January 2009 high of 7,414.10. (The all-time high was 9,977.8 in the week of May 30, 2003).

But here's the thing: Plunging interest rates are still not having a huge impact on home purchase activity. While the purchase application index did rise, and is up three weeks in a row, the gains are much more muted than those we're seeing in the refi market. The purchase index gained just 4.2% to 267.8 in the week of March 20, despite the decline to a record low in mortgage rates. For some perspective, the all-time high for the purchase index was 529.3 the week of June 10, 2005.

The latest figures underscore the point I've made on many occasions: Refinancing when rates plunge is a no brainer, provided you're going to be in the property long enough to recoup your upfront costs. But a lot more than financing costs goes into the decision to buy a house. If people aren't confident in the future direction of home prices, or they're worried about their jobs, low interest may not be enough to get them off the fence. We will likely continue to see relatively muted activity in the housing market, and only a gradual recovery with time, despite the lowest mortgage rates in modern history.

U.K. gilt auction bombs; bonds sell off

There's some interesting action (if you'll pardon the pun) over in the U.K. bond market this morning. The government tried to auction off 1.75 billion pounds of 40-year gilts this morning. But demand was extremely weak, with investors only bidding for 1.63 billion pounds.

The failed auction comes as the U.K. government is selling massive amounts of debt to fund bailouts and stimulus packages -- efforts that could drive the U.K.'s deficit to as much as 11% of GDP by 2010. And of course, the Bank of England recently said it would buy as much as 75 billion pounds in both corporate and government bonds there, essentially monetizing the country's debt.

Ten-year gilt yields surged as much as 20 basis points from low to high before paring about half the move. We have seen spillover selling in U.S. bonds as a result, with the long bond futures down 1 7/32 as I write.

Tuesday, March 24, 2009

More comments on the Geithner plan

There are all kinds of views, both positive and negative, on the Geithner toxic asset plan today. You can read the kudos from columnists like Steven Pearlstein at the Washington Post and John Berry at Bloomberg. Or you can read critiques from Paul Krugman at the New York Times, the Institutional Risk Analyst, and the folks at various blogs, including Naked Capitalism.

Suffice it to say that I believe the administration is subsidizing/propping up weak institutions at the expense of the strong. We are pursuing a policy of "No Bank Left Behind" rather than performing proper triage -- separating out the weak institutions, letting them fail and then resolving the assets through the receivership/FDIC process. You can see the folly of this prop up policy approach by looking at what AIG is reportedly doing -- using its government subsidy/backing to undercut stronger insurers on price in an attempt to stem the defection of customers.

For a much more detailed examination of this issue, please check out the just-released white paper entitled "Dangerous Unintended Consequences."

Monday, March 23, 2009

Existing home sales rise 5.1% in February

February existing home sales figures were released earlier today. Here's what the numbers showed:

* Existing home sales rose 5.1% to a seasonally adjusted annual rate of 4.72 million units from 4.49 million in January. That was better than the forecast for a reading of 4.45 million. Single-family sales climbed 4.4%, while condo and cooperative sales spiked 11.4%. We saw gains in all four regions of the country.

* The raw number of homes for sale rose 5.2% to 3.798 million units from 3.611 million in January. That was down from 5.5% from 4.018 million a year earlier, however. The months supply at current sales pace indicator of inventory was unchanged at 9.7 months, with single family inventory ticking down slightly (to 9.1 from 9.2) and condo inventory rising (to 14.7 from 13.4).

* The median price of an existing home inched up to $165,400 from $164,800 in January. That was down 15.5% from $195,800 in the year-ago period. That leaves existing home prices right around the lowest level since September 2002 ($165,300) -- see the chart above.

February wasn't too shabby for the existing home market. Sales ticked up and inventory remained relatively stable, with strength showing up in all regions of the country. The catch? The increase in sales activity is coming at the expense of pricing.

After revisions, the median price of an existing home has now roundtripped all the way back to September 2002 levels. We have a lot of upside down homeowners in this country, and their ranks are swelling every day. We'll have to see if recent government efforts to modify more loans and expand the ranks of those who can refinance will encourage homeowners to stick things out, rather than walk away, mail their keys to the lender, and rent elsewhere.

Toxic asset plan gets rolled out

We've been waiting for weeks for the details of the government's plan to buy up toxic assets from banks. Today, those details are being released. The plan is designed to deal with both legacy whole loans and legacy securities, using a combination of Treasury capital, private capital, and debt financing backed by an FDIC guarantee. Here are some excerpts from various sources that contain more details ...

The New York Times:

"The Obama administration said Monday that it hoped to use $75 billion to $100 billion from the government’s bailout program, combined with private capital, to buy up to $500 billion in toxic assets and get them off the books of the banks.

"In a statement released Monday, the administration said the initial effort could grow to $1 trillion in purchases eventually.

"The announcement came as the Treasury Department unveiled the details of the administration’s long-awaited plan to purchase troubled assets, meant to remove them from the balance sheets of banks and, in turn, spur banks to lend more money to consumers and companies.

"The plan relies on private investors to team with the government to relieve banks of assets tied to loans and mortgage-linked securities of unknown value. There have been virtually no buyers of these assets because of their uncertain risk.

"The administration said that it expected participation from pension funds to insurance companies and other long-term investors.

"As part of the program, the government plans to offer subsidies, in the form of low-interest loans, to coax private funds to form partnerships with the government to buy troubled assets from banks.

"But some executives at private equity firms and hedge funds, who were briefed on the plan Sunday afternoon, are anxious about the recent uproar over millions of dollars in bonus payments made to executives of the American International Group.

"Some of them have told administration officials that they would participate only if the government guaranteed that it would not set compensation limits on the firms, according to people briefed on the conversations. The executives also expressed worries about whether disclosure and governance rules could be added retroactively to the program by Congress, these people said."

The Wall Street Journal:

"The Treasury plans to contribute between $75 billion and $100 billion from its $700 billion bailout to the programs to remove troubled real-estate-related assets from bank balance sheets, with the possibility of additional money in the future. The Fed and the Federal Deposit Insurance Corp. will provide other forms of financing, including low-risk loans.

"Targeting mortgages that banks no longer want to hold, the Treasury and the FDIC will provide financing to buyers. The FDIC will auction off pools of loans that a bank wants to sell and will become a co-owner by forming a partnership with the highest bidder.

"The partnership will then raise FDIC-guaranteed debt to finance a portion of the purchase price, with the Treasury willing to kick in between 50% and 80% of the equity needed to buy the assets. The Treasury will be an equal investor in the partnerships.

"To tackle risky securities, such as those backed by mortgages, the Treasury will create several investment funds run by private investors who meet certain criteria, such as experience managing similar assets. Treasury again will act as a co-investor, in most cases contributing $1 for every $1 contributed by the private sector and sharing equally in any gains or losses.

"Lastly, the government will expand the Fed's Term Asset-Backed Securities Loan Facility, or TALF, to help absorb risky assets dating back several years."

You can also get more details straight from the source -- the Treasury's own web site. It provides the following example for how a pool of legacy loans might be purchased and financed:

Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC.

Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.

Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector – in this example, $84 – would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.

Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.

Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6.

Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis – using asset managers approved and subject to oversight by the FDIC.

As for securities, the process would work somewhat differently. Here is a Treasury example of the process there:

Step 1: Treasury will launch the application process for managers interested in the Legacy Securities Program.

Step 2: A fund manager submits a proposal and is pre-qualified to raise private capital to participate in joint investment programs with Treasury.

Step 3: The Government agrees to provide a one-for-one match for every dollar of private capital that the fund manager raises and to provide fund-level leverage for the proposed Public-Private Investment Fund.

Step 4: The fund manager commences the sales process for the investment fund and is able to raise $100 of private capital for the fund. Treasury provides $100 equity co-investment on a side-by-side basis with private capital and will provide a $100 loan to the Public-Private Investment Fund. Treasury will also consider requests from the fund manager for an additional loan of up to $100 to the fund.

Step 5: As a result, the fund manager has $300 (or, in some cases, up to $400) in total capital and commences a purchase program for targeted securities.

Step 6: The fund manager has full discretion in investment decisions, although it will predominately follow a long-term buy-and-hold strategy. The Public-Private Investment Fund, if the fund manager so determines, would also be eligible to take advantage of the expanded TALF program for legacy securities when it is launched.

Thursday, March 19, 2009

Bonfire of the Dollar

It's hard to characterize just how nasty the action in the currency market is here. The Dollar Index got clubbed to the tune of 2.69% yesterday in the wake of the Fed's monetization move. That is one of the biggest declines ever (the move against the euro was the worst since 2000). DXY is down another 2.2% as I write, extending its streak of daily losses to eight (chart above). As you might expect, gold is rocking and rolling in response, up to roughly $956 an ounce from an intraday low of $884 yesterday.

Now I'll be the first to admit the stock market doesn't care -- and that most mainstream economists don't seem to care either. They are saying the Fed HAS to do anything and everything to save the economy from deflation. But the Fed is playing a dangerous game here.

Printing money at your central bank -- and using that newly created cash to buy your country's sovereign debt -- is the kind of stuff you typically see in emerging markets and Banana Republic countries. It's not what you'd expect the U.S. to do. And it's certainly not what you'd expect a country that is deeply in hock to foreign creditors to do. After all, the Fed is deliberately devaluing the greenback, and in the process, devaluing the bills, notes, and bonds those creditors are holding. We'll have to see if there's any pushback in the days ahead.

Wednesday, March 18, 2009

Federal Reserve buying up to $300 billion in long-term Treasuries, up to $750 billion extra in agency MBS, plus another $100 billion in GSE debt

The latest meeting of the Federal Open Market Committee just wrapped up. Policymakers maintained the official target for the federal funds rate at a range of 0% to 0.25%, as expected. But that's not the big deal here. The big deal is that the Fed is now going to monetize the U.S. debt by committing to buy up to $300 billion in long-term Treasuries over the next six months. The Fed also said it would buy up to an additional $750 billion in agency mortgage backed securities, adding to an existing program to buy $500 billion of agency MBS. It will also double the size of its purchase program for GSE debt to $200 billion from $100 billion.

Here is the complete Fed statement:

"Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession. Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.

"In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

"In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments

"Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen. "

UPDATE: The dollar is getting crushed on this news, while bond prices are flying and yields are down across the curve (-21 basis points on the 2-year note, -48 basis points on the 10-year note and -25 bps on the long bond). Gold has sharply reversed to the upside, while stocks are seeing a strong rally.

Tuesday, March 17, 2009

Housing starts pop 22.2% in February

Well that certainly was an interesting number -- housing starts surged in February. More details ...

* Total housing starts surged 22.2% to a seasonally adjusted annual rate of 583,000, up from 477,000 in January. Building permits rose 3% to 547,000 from 531,000. Economists were expecting 450,000 starts and 500,000 permits.

* By property type, single family starts inched up 1.1% from January, while multifamily starts soared 82.3%. Single family permits rose 11%, while multifamily permits dropped 10.8%.

* Regionally speaking, starts rose in three out of four regions -- up 30.2% in the South, 58.5% in the Midwest, and 88.6% in the Northeast. Starts dropped 24.1% in the West. Building permits rose 5.9% in the South and 27.6% in the Northeast. Permit issuance was unchanged in the Midwest and down 13.6% in the West.

After looking at the latest construction and permitting figures, you have to ask yourself whether this is a case of "Been down so long, it looks like up to me?" Or is this update more of a weather report than an economic report? In other words, did a warmer-than-usual February distort the seasonal adjustments, prompting more building activity to show up in the numbers than you would expect?

February temperatures were 2.3 degrees above the average for the 20th century, according to the National Climactic Data Center; A nifty map available here shows how much warmer than average most parts of the U.S. were last month. More trivia: It was the 8th driest February in 114 years of record keeping.

It's tough to say, frankly. You could argue that starts have fallen so low, and that the raw supply of new homes for sale has fallen sharply enough (at 342,000 in January, it's the lowest going back to July 2003), that builders now have an incentive to put their shovels and hammers back to work again.

There's just one problem: Demand for new homes remains downright anemic. Sales dropped to an annual rate of just 309,000 in January, the lowest level in the 46 years the government has been keeping track. The March NAHB figures suggest the spring buying season is off to a lousy start, too. I wouldn't get too excited about this uptick in construction unless and until we see further, consistent increases in the months ahead.

Monday, March 16, 2009

NAHB index holds near a record low in March

The National Association of Home Builders just released its latest home builder sentiment index figures.

* The overall index held at 9 in March, unchanged from February and one point above January's record low of 8.

* The subindex measuring current sales was unchanged at 7, while the subindex measuring expectations about future sales was also unchanged -- at 15. The subindex measuring prospective buyer traffic dropped to 9 from 11.

* Regionally, the index ticked up to 9 from 8 in the Northeast. All other regions were unchanged (the Midwest at 8, the South at 12, and the West at 5).

TIC data shows big U.S. security selling

Ever month, the Treasury Department releases data on international purchases and sales of U.S. assets. The figures are broken down by category -- Treasury bonds, agency bonds, stocks, and so on. The January numbers just came out, and they show substantial selling on a net basis. Foreign investors sold a net $43 billion of long-term securities in January, a big swing from +$34.7 billion in December. The selling was focused in agency bonds (think Fannie, Freddie debt) and corporates. There was fairly strong demand for Treasuries (+$12.6 billion, up slightly from December).

Friday, March 13, 2009

China "worried" about its massive Treasury holdings

Back in January, there was some talk that China was full up with U.S. Treasuries. Now that issue is once again front and center thanks to comments made by Chinese Premier Wen Jiabao at an overnight news conference. As reported by the Washington Post ...

"Chinese Premier Wen Jiabao said Friday that he is "worried" about the country's vast $1 trillion holdings in U.S. Treasuries and that China will pursue a policy of diversification when comes to its future foreign exchange holdings.

"Wen's remarks, which were made at the close of the annual National People's Congress meeting in Beijing, echoed those that have been made by other high-ranking policymakers and bankers over the past year since the subprime crisis devastated the value of the mortgage-backed securities that made up a large chunk of China's U.S. holdings.

"We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried," Wen said.

"At a number of diplomatic meetings since then, Chinese officials have raised the issue of U.S. Treasuries and have sought assurances the United States that it will do everything possible to maintain the stability of its economy. On Friday, Wen called on the Obama administration to "maintain its good credit, to honor its promises and to guarantee the safety of China's assets."

"China does not release details about its foreign reserve holdings, but there has been growing evidence of its unease about those investments."

China's comments aside, I personally wouldn't be surprised to see Treasury bonds rally into the Fed meeting next week amid talk the U.S. Fed will follow the Bank of England down the policy road of "central bank prints money, then buys debt issued by the treasury." But over the longer term, we have a real problem in that we're a massive debtor nation that relies on the kindness of creditors/strangers to pay its bills.

In case you're wondering, the latest figures (from December) show China holding $727.4 billion in U.S. Treasuries. That makes the country our largest foreign debtholder. Japan is the next largest at $626 billion.

New York Times' Norris on M2M

Couldn't agree more with this article in today's New York Times from Floyd Norris. I especially like the way it wraps up ...

"Next time you hear a banker denounce mark-to-market rules, ask if he runs his business that way. Will he offer you a mortgage loan based on what you think your home should be worth, which you can repay only if you make a lot more money than anyone will pay you? If so, then perhaps the bank should be able to use “Alice in Wonderland” accounting on its own books.

"Or maybe that is not such a good idea. The banks already tried that, with liars’ loans. Those loans did not work out so well."

I also like these comments from Zacks, which hammer on some of the same points as I have. Another piece from David Reilly at Bloomberg covers this issue nicely.

Thursday, March 12, 2009

Q4 Flow of Funds report shows record $5.1 trillion drop in wealth

Every quarter, the Federal Reserve releases its Flow of Funds report. This always makes for good reading if you're a numbers/economic wonk. But it's especially important now because it tells us a great deal about the depth and breadth of the economic downturn.

For starters, the report showed household wealth plunged $5.1 trillion between Q3 and Q4 of last year. That drop is the most on record (the data goes back to 1952) and it left the net worth of households at $51.5 trillion, the lowest in four years. The decline in the housing market also left owners' equity as a share of total household real estate holdings at just 43%, a record low.

Some other details: Household debt shrunk at a 2% annual rate, the first decline ever, driven by a 1.6% fall in home mortgage debt and a record 3.2% decline in consumer non-mortgage borrowing. Business debt increased at an anemic 1.7% pace, the slowest since Q4 2003, and state and local debt rose just 1.2%. Federal government debt exploded at a 37% rate.

Jobless claims bad ... Retail sales not so much ... Foreclosures rise

The latest batch of economic data just hit the wire and it's a mixed bag. Initial jobless claims rose to 654,000 in the week of March 7 from 645,000 a week ago. That topped forecasts for a reading of 644,000, and it was just shy of the cycle high of 670,000 set in late February. Continuing claims surged to 5.317 million from 5.124 million a week earlier. That's the highest level in U.S. history.

Retail sales in February fell just 0.1%, against forecasts for a reading of -0.5%. January's number was revised up to +1.8% from a previous reading of +1%. If you exclude autos, you get a +0.7% number for February, much better than forecasts for a -0.1% reading. January's number was revised up to +1.6% from +0.9%.

Finally, RealtyTrac's latest monthly foreclosure report showed a 5.9% rise between January and February -- to 290,631 filings from 274,399. That was also up 29.9% from a year earlier, but slightly below the recent highs (around 303,000).

Wednesday, March 11, 2009

How TALF sausage is made

No one likes to see how sausage is made; they just want to eat the end product. Turns out the TALF program is somewhat similar. The end product -- a public-private program to buy distressed assets from banks using cheap, federally subsidized money -- may or may not work. But hammering out the details of how it will work is apparently a somewhat ugly process, judging by this Wall Street Journal story. More below:

"The government's $1 trillion program to spark consumer lending hit another roadblock when investors balked at signing an agreement required to participate in the program, arguing that it gave Wall Street dealers and the Federal Reserve too much power to look at their books and reject them from the program.

"Through the Term Asset-Backed Loan Facility, or TALF, program, an investor can put down $5 to $14 for every $100 it will put up, borrowing the remaining $95 to $86 cheaply from the Fed. They agree to buy eligible, highly rated securities issued by lenders making loans to businesses and consumers to buy cars, pay for their educations or use credit cards. The amount of money an investor must initially fork over varies depending upon the types of loans backing the security.

"The Fed-and-Treasury-backed program is set to begin next week, but it faces the tough task of getting potentially hundreds of financial firms to agree on the wording of the contracts.

"Some of the issues bogging down the lawyers involved include how the dealers will protect themselves if an investor accidentally or purposefully misrepresents something about themselves as a solid borrower.

"Investors, particularly hedge funds, are bristling over language about how the Fed or dealers may decline their application, and that the Fed or any agency it deems appropriate may decide to comb through an investors' books or query any documents if and when it chooses.

"The 40-page document would uniformly govern terms of deals despite the different circumstances of every investor and each bank involved. The document was developed by financial industry trade group Sifma, or the Securities Industry and Financial Markets Association, and the American Securitization Forum, whose members include participants in the structured-finance markets."

Tuesday, March 10, 2009

It's not just accounting rules! Evil short-sellers are destroying the financial system, too!

Just when you thought accounting rules were the only reason the financial world was coming unglued, a new bogeyman has now been revealed to all: The evil short sellers. It's not that banks are loaded up with trillions in bad loans and securities, the result of stupid lending and investment decisions made over the course of the biggest credit bubble in world history.

Nope. It's those meanie short sellers ganging up to "falsely" drive bank stock prices lower. And the only way to get 'em is to do things like ban short sales and reimpose the uptick rule (never mind that the SEC's OWN ANALYSTS found that said rule doesn't really accomplish anything in the era of modern trading, as noted in this 2007 release on the rule's repeal):

"On July 28, 2004, the Commission issued an order creating a one-year pilot temporarily suspending the tick test and any short sale price test of any exchange or national securities association for certain securities. The pilot was created so that the Commission could study the effectiveness of short sale price tests. The Commission's Office of Economic Analysis and academic researchers provided the Commission with analyses of the empirical data obtained from the pilot. In addition, the Commission held a roundtable to discuss the results of the pilot. The general consensus from these analyses and the roundtable was that the Commission should remove price test restrictions because they modestly reduce liquidity and do not appear necessary to prevent manipulation. In addition, the empirical evidence did not provide strong support for extending a price test to either small or thinly-traded securities not currently subject to a price test."

By the way, how did the government's last go-round at limiting short selling impact the banking system? Did it fix the underlying problems? Did it stop the stocks from falling? For that matter, did the initial announcement of TARP ... the spending of hundreds of billions of dollars on capital infusions ... or any of the other programs to date stem the industry's bleeding?

Above is a chart of the BKX, an index that tracks the stock performance of the leading U.S. banks. I've labelled the gigantic short-term moves that occurred when Washington intervened aggressively in the market (specifically, when the SEC banned short-selling in specific financial stocks in July and when the broad outline of the TARP program was leaked in September). Clearly, these efforts have been a rousing success -- proving without a doubt that the problem with the banking industry isn't its dismal underlying fundamentals, but rather things like accounting rules and short-sellers (sarcasm off).

Bernanke on the financial system, reserves, risk

Fed Chairman Ben Bernanke is delivering a speech about the financial system, bank reserves, risk, and so on. You can read the complete comments here. Bernanke reiterated his commitment to keep plowing money into big institutions to prevent failure, and also addressed four ways bank regulation and oversight could be improved in the future. His comments there:

"At the same time that we are addressing such immediate challenges, it is not too soon for policymakers to begin thinking about the reforms to the financial architecture, broadly conceived, that could help prevent a similar crisis from developing in the future. We must have a strategy that regulates the financial system as a whole, in a holistic way, not just its individual components. In particular, strong and effective regulation and supervision of banking institutions, although necessary for reducing systemic risk, are not sufficient by themselves to achieve this aim.

"Today, I would like to talk about four key elements of such a strategy. First, we must address the problem of financial institutions that are deemed too big--or perhaps too interconnected--to fail. Second, we must strengthen what I will call the financial infrastructure--the systems, rules, and conventions that govern trading, payment, clearing, and settlement in financial markets--to ensure that it will perform well under stress. Third, we should review regulatory policies and accounting rules to ensure that they do not induce excessive procyclicality--that is, do not overly magnify the ups and downs in the financial system and the economy. Finally, we should consider whether the creation of an authority specifically charged with monitoring and addressing systemic risks would help protect the system from financial crises like the one we are currently experiencing."

Regarding mark-to-market accounting, which some banking industry officials claim is the root of all evil, Bernanke has the following to say (I've already weighed in here):

"The ongoing move by those who set accounting standards toward requirements for improved disclosure and greater transparency is a positive development that deserves full support. However, determining appropriate valuation methods for illiquid or idiosyncratic assets can be very difficult, to put it mildly. Similarly, there is considerable uncertainty regarding the appropriate levels of loan loss reserves over the cycle. As a result, further review of accounting standards governing valuation and loss provisioning would be useful, and might result in modifications to the accounting rules that reduce their procyclical effects without compromising the goals of disclosure and transparency. Indeed, work is underway on these issues through the Financial Stability Forum, and the results of that work may prove useful for U.S. policymakers."

Monday, March 09, 2009

Credit crisis indicators perking up again

There's a good story in the Wall Street Journal this morning about the return of widespread credit fears. Its piece focuses on action in the corporate bond market. But several of my indicators are also suggesting that the market is really getting spooked again.

The dollar index is ripping again, for instance, a sign that money is moving from peripheral, higher-risk investments to the center. Two-year swap spreads, which bottomed out at just under 50 in mid-January, are also breaking out to the upside now, currently +4.25 bps to 81.50. And of course, stocks have been dropping sharply for several weeks now.

More from the Journal below:

"After what seemed like the beginning of a thawing of debt markets early in the year, sentiment has deteriorated, analysts say. The markets remain open only to the strongest companies. A rally in U.S. Treasury bonds last week reflects another bout of flight-to-quality buying. Junk bonds now yield 19 percentage points more than safe Treasury bonds, up from a 16-point spread in February, according to Merrill Lynch. The spread is still narrower than the 21-percentage-point premium reached last December, but any widening shows investors are becoming more fearful.

"Part of the problem is that investors are still waiting for key details from the government about its plans to bolster U.S. banks and unfreeze the credit markets. After launching a $1 trillion program to kick-start consumer lending last week, the Obama administration is considering creating multiple investment funds to purchase bad loans and other distressed assets. The intent of the funds is to stabilize the prices of good assets and restore investor confidence. Without more clarity from the government on its bailout plans, the market could continue to drop, say analysts. That would further harm the economy and the institutions the government hopes to help, compounding its task of shoring up the financial system.

"The credit markets are a mess because the economy is a mess," says Thomas Priore, chief executive of ICP Capital, a New York fixed-income investment firm. "There's fear out there that's driving down every asset class simultaneously. It illustrates a lack of investor confidence in the government's plan for fixing the financial infrastructure."

Friday, March 06, 2009

Kansas City Fed President says "Too Big to Fail" approach is failing

There was a very interesting speech just delivered by Kansas City Fed President Thomas Hoenig. Essentially, he attacks the "Too Big To Fail" doctrine we're pursuing, where large institutions are kept on life support rather than seized/nationalized and resolved. This is the first time I can recall such a prominent member of the Fed saying anything like this. If you're interested in reading the speech, go here.

February employment report: 651,000 jobs lost, unemployment at 8.1%

The big February jobs report was just released. The numbers were grim, but largely in line with the market's dismal expectations. Here's a recap ...

* The economy shed 651,000 jobs in February. That compared to an upwardly revised 655,000 in January (previous number: 598,000). December's initial reading of 577,000 was also revised sharply higher to 681,000. In other words, taking into account all revisions, the economy lost 161,000 more jobs than previously forecast.

* By sector, construction lost another 104,000 jobs, while manufacturing shed 168,000. The trade, transport, and utility industries came in at -124,000, while the information business (think publishing, movies, telecom and so on) dropped 15,000 and the financial industry axed 44,000 workers. Leisure and hospitality shed 33,000, while education and health remained the brightest spot at +26,000. Government added 9,000 as well.

* The unemployment rate surged to 8.1% from 7.6% a month earlier. That was higher than the 7.9% forecast and the highest level going all the way back to December 1983. If you add discouraged workers and/or people who are working part-time for economic reasons to the mix, you get an all-in unemployment rate of 14.8%, up from 13.9% in January.

* Average hourly earnings gained an anemic 0.2%, equal to last month's downwardly revised 0.2% reading. Average weekly hours worked held at a dismal 33.3. The private nonfarm diffusion index, which measures how many industries are cutting jobs against how many are adding them, inched up to 23.8 in February from 23.2 a month earlier. That's a slight positive.

The mark to market canard

I keep reading about how the problem with the banking system isn't all the crappy securities and loans it's loaded up with. It's not that they took on too much excessive risk, lending against assets whose value is plunging. It's not that they funded asinine private equity deals, stupid commercial construction deals, and dumb home purchases. It's that they have to mark their securities book to market.

If only they didn't have to mark to these "artificial" prices, everything would be fine. Eureka, the banking crisis would be solved! Even Bob McTeer, the former Dallas Fed president, is chatting about this on CNBC this morning (Of course, if I heard correctly, he also said he bought Citigroup at $15 figuring it couldn't go any lower -- a sure sign of financial savvy considering it traded below a buck yesterday). Steve Forbes is weighing in with a similar viewpoint in the Wall Street Journal today.

My take? The problem isn't that there is no market for these bad securities. The problem isn't that the prices are "artificially" low. The problem is that these institutions don't want to acknowledge that today's prices are the REAL prices. I fail to see how an accounting maneuver would magically make all the underlying markets to which these securities are tied improve.

Look, in the early days of the housing market downturn, sales volume dried up and inventories of homes for sale surged. Yet mysteriously, reported median prices didn't decline. I don't know how many people asked me: If the market is so bad, why aren't prices falling, huh? I answered that fewer and fewer buyers were paying inflated prices, holding up the median, but that the huge build up in supply and dramatic fall off in the sales pace meant that the TRUE market value of U.S. homes was declining. It just wasn't being acknowledged by most sellers yet. The image that came to mind? Those old Road Runner cartoons, where the coyote runs over the cliff but doesn't start plunging until he looks down.

I believe something similar is happening today. Volume is drying up and the inventory of securities for sale is piling up. But sellers don't want to admit reality. Neither does the government for that matter. Why do you think all these vulture funds are raising gobs of cash, but not deploying most of it? Because the sellers are hanging on to the garbage securities, hoping against hope that they won't have to sell at the true market prices, and the government is too busy trying to figure out ways to prop up the price of the garbage. I understand why this is occurring: They're afraid of mass insolvencies. So they're trying to figure out how to do something akin to the early 1980s use of Regulatory Accounting Prinicples (RAP), which papered over insolvencies in the Savings & Loan industry.

Of course, papering over the problem didn't mean it went away (The unofficial nickname for RAP used to be Creative Regulatory Accounting Principles -- and you can figure out what the acronym is there). Meanwhile, many of the S&Ls granted forbearance and permitted to try to grow their way out of insolvency increasingly gambled on new ventures, especially commercial real estate. They eventually blew up anyway -- at a much BIGGER cost to U.S. taxpayers.

Will this time be different? If M2M is suspended, allowing the industry to mark its paper at higher values based on forecasts of future cash flow, will it "work?" I have my doubts. I suspect many institutions (if allowed to suspend M2M) will keep using optimistic model forecasts, based on underestimations of the depth and breadth of the economic downturn and the slump in both residential and commercial real estate. They'll end up kicking the can down the road, and ultimately need to be resolved anyway. In other words, they'll be just like those homeowners who said three years ago: "I'm not going to GIVE this house away. I think it really IS worth a half-million bucks and that the market is wrong" -- and who are now being forced to sell for $250,000.

Thursday, March 05, 2009

MBA Q4 delinquency and foreclosure rates rise to fresh records

The Mortgage Bankers Association released data on fourth quarter mortgage delinquencies and foreclosures. This is what the numbers showed:

* The overall mortgage delinquency rate surged to 7.88% in Q4 2008 from 6.99% in Q3 2008 and 5.82% a year earlier. This is yet another record high for the delinquency rate (the MBA data goes back to 1972).

* The subprime DQ rate climbed to 21.88% from 20.03% a quarter earlier and 17.31% a year earlier. The prime-only DQ rate rose to 5.06% from 4.34% in Q3 2008 and 3.24% a year earlier. Even prime fixed-rate loans, typically the best performing category, are deteriorating in quality -- the DQ rate there climbed to 3.92% from 3.35% a quarter earlier. Subprime ARMs continue to be the biggest dogs in the kennel. The DQ rate there hit 24.22%, up from 21.31% a quarter prior.

* The percentage of mortgages entering the foreclosure process inched up to 1.08% from 1.07% a quarter earlier. That tied the record high set in Q2 2008. The overall percentage of mortgages in any stage of foreclosure jumped to 3.3% from 2.97% in Q3 2008.

* Regionally, delinquency rates were the highest in Mississippi (13.1%), Nevada (11.1%), Florida (11.09%), and Michigan (11.08%). North Dakota (3.56%) and Alaska (3.81%) fared the best.

The deterioration in U.S. mortgage performance continued apace at the end of 2008. The collapse in former bubble markets drove the first wave of delinquencies and foreclosures. Now, we're experiencing a second, more powerful wave driven by sharp and widespread house price declines. Rising unemployment and the deepening recession are other key drivers of default.

The Obama administration has responded aggressively to combat the foreclosure crisis. It just launched an ambitious plan to modify more mortgages and allow more borrowers to refinance at lower rates, even if they're slightly upside down on their homes. But previous foreclosure prevention efforts have had a spotty record, with many loan modifications simply postponing the inevitable. It remains to be seen whether the latest plan will suffer the same fate. I have some concerns about how it works, which I've laid out in more detail here.

ECB cuts rates; U.K. cuts rates and shifts to "quantitative easing"

There's some more news on the global interest rate front this morning. First, the European Central Bank cut its benchmark rate by 50 basis points to a record low 1.5%. Second, the Bank of England reduced its benchmark rate 0.5% from 1% and announced it will buy as much as $211 billion in government and corporate debt as part of a quantitative easing program. This is full-scale monetization, something that is almost unprecedented in a modern, advanced economy. Long-term U.K. debt prices surged, helping drive U.S. bond prices up as well.

Wednesday, March 04, 2009

Beige Book: The economy stinks ... again

I used that headline before, minus the word "again." I think it's time to dust it off and throw it up here on the blog again. I say that because the latest Fed Beige Book goes on for page after page, talking about how horrid the economy is (in Fed-speak, of course). Here are a few of the more interesting excerpts on ..

The big picture:

"Ten of the twelve reports indicated weaker conditions or declines in economic activity; the exceptions were Philadelphia and Chicago, which reported that their regional economies "remained weak." The deterioration was broad based, with only a few sectors such as basic food production and pharmaceuticals appearing to be exceptions. Looking ahead, contacts from various Districts rate the prospects for near-term improvement in economic conditions as poor, with a significant pickup not expected before late 2009 or early 2010."

Consumer spending:

"Sales of luxury goods such as jewelry, electronic equipment, and other big ticket items were reported to be especially slow in the Philadelphia, Richmond, and Chicago Districts. Demand for furniture, appliances, and other durable household items remained quite depressed, according to Kansas City and San Francisco. Sales of new automobiles and light trucks remained exceptionally sluggish, with Philadelphia, Richmond, and Kansas City reporting further declines from an already slow pace of sales."

Dining out and travelling:

"Travel and tourist activity continued to fall in most areas, as households reduced their vacation travel and corporate travel spending was scaled back. Tourist visits and spending were reported to be slower than in the previous reporting period or down from twelve months earlier for major tourist destinations in the Richmond, Atlanta, Minneapolis, New York, and San Francisco Districts, with the declines in the latter two characterized as "substantial" and "sharp," respectively. Airline traffic fell in the Kansas City, Dallas, and San Francisco Districts. Business at restaurants dropped substantially in some areas, notably in the Kansas City and San Francisco Districts, with extensive layoffs and restaurant closures reported in the latter."

Temporary help and transportation:

"Demand for staffing services weakened considerably. Boston reported that outcomes for providers of temporary staffing services were "dismal," with revenue declines in the range of 20 to 50 percent compared with twelve months earlier. Chicago and Dallas also reported sizable declines in activity by staffing firms, and New York noted that activity by a major employment agency has "virtually ground to a halt."

"Demand for shipping and transportation services fell further. New York, Cleveland, Richmond, and Atlanta reported reduced activity and layoffs among trucking and rail companies, with the decline in activity described as considerable in some cases. Richmond also reported that shipping activity through ports in that District slowed further, as imports and exports both continued on a downward trend."


"Manufacturing activity fell on net in all Districts, with very sharp declines recorded for some sectors and only partial offsets provided by the few bright spots. Cleveland reported a drop in overall factory output of about 25 percent compared with twelve months earlier. For most Districts, the drop in activity was especially pronounced for makers of capital goods and construction-related equipment and materials, such as primary metals, wood products, and electrical equipment, along with consumer durables such as autos and furniture. Manufacturers of computers, semiconductors, and other IT products saw further declines in production and orders in the Dallas and San Francisco Districts. Slower export sales were cited as a source of weakness for various manufacturing sectors by the Atlanta, Chicago, and Kansas City Districts."

Residential and commercial real estate:

"Residential real estate markets remained in the doldrums in most areas, with only scattered, very tentative signs of stabilization reported. The pace of sales remained very low in most areas and declined further in some; most Districts reported small declines, but New York cited a sales drop of 60 to 65 percent in Manhattan compared with twelve months earlier. By contrast, Cleveland, Richmond, Dallas, and San Francisco each reported a rising or better-than-expected sales pace for existing or new homes in some areas, attributed largely to falling prices and improved financing terms for some types of home mortgages. House prices continued to decline, reportedly at double-digit paces in some areas, with little or no signs of a deceleration evident. Builders in various Districts generally remain pessimistic regarding recovery prospects this year, and consequently the pace of new home construction declined further in most areas.

"Demand for commercial, industrial, and retail space fell further during the reporting period, with some evidence of more rapid deterioration than in preceding periods. Vacancy rates rose and lease rates declined on a widespread basis; New York noted that commercial real estate markets "weakened noticeably," while Atlanta described reports on commercial real estate that were "decidedly more negative" than in previous periods. Construction activity has declined commensurately, and assorted reports suggest that market participants expect this weakness to continue at least through the end of 2009. Cleveland noted that public works projects have shown stability of late, although they declined in the San Francisco District as a result of the budgetary struggles of some state and local governments there. Credit constraints and uncertainty were reported to be a drag on commercial construction and leasing activity in the Philadelphia, Chicago, Dallas, and San Francisco Districts."

Details on the Obama loan modification and refinance plans

These have just been posted. You can read about the refinance program details here. Details on the modification program are available here. Having gone through the documentation, my concerns and comments remain the same as before. You can read those here.

First American: 19.8% of borrowers with mortgages now "upside down" -- Plus, more on CRE

First American CoreLogic is a company that tracks all kinds of mortgage and property data. The firm's latest report on "underwater" or "upside down" borrowers -- those who owe more on their mortgages than their homes are worth -- suggests the problem is getting worse.

More than 8.3 million mortgages exceeded the value of the homes securing them in Q4 2008, up from 7.6 million in Q3 2008. That's a whopping 19.8% of all homes that have mortgages against them. Add in those loans that are near the negative equity threshold, and you get a reading of 25% of all U.S. loans. Some more insight from First American on the meaning of these numbers can be found at this Wall Street Journal link.

Meanwhile, I like this Bloomberg story that details how and why lenders and loan investors are STILL hugely reluctant to cut mortgage principal balances ... and how that could doom the Obama rescue plan to the "dud parade" of federal bailout programs. Good reading.

Finally, it looks like the moronic commercial real estate investments made at the peak of that market are coming back to bite investors in a big way. If you had any doubt that big money managers could make the same stupid mistakes in commercial as casual house flippers did in residential, this story should put that out of your mind:

"In a sign that pension funds and other institutional investors are about to get clobbered by losses in commercial real estate, Morgan Stanley told investors to expect as much as a 60% fourth-quarter write-down on the equity in a marquee $8.8 billion real-estate fund, according to a letter reviewed by The Wall Street Journal.

"Morgan Stanley hailed the commercial-property MSREF VI International fund as "the largest-ever real-estate fund" when it announced its debut in June 2007. The Wall Street firm projected a 22.4% overall average annual return for the vehicle, which made big, highly leveraged investments on commercial properties scattered mostly in Japan, Germany, China and Australia.

"The fourth-quarter losses come on top of a $1 billion shortfall during the first nine months of 2008, which means the fund has lost about two-thirds of its $6.5 billion in invested capital in 18 months. Among the fund's bad bets: a $3 billion acquisition of more than two dozen office buildings in Germany in July 2007 at a very low yield of 3.5%. The fund invested $350 million of equity in the project. As of September, Morgan Stanley valued the equity stake at just $23 million, according to the fund's third-quarter report."


ADP Employment Report: -697,000 jobs in February

It's "employment week" in the market, with the big February jobs report from the government hitting the tape on Friday. But we got a sneak preview from ADP Employer Services, as we always do on the first Wednesday of each month. No use sugarcoating it: The report was grim. ADP says the economy (PDF link) shed 697,000 jobs in February, up from an upwardly revised 614,000 a month earlier (previously reported as 522,000). The number was also above forecasts for a reading of 630,000.

A separate report from outplacement firm Challenger, Gray & Christmas said companies announced 186,350 job cuts in February. That was down from a cycle high of 241,749 in January, but up a hefty 158% from the year-ago level of 72,091. There were very large increases in cuts from the automotive (+52,518 on the month) and financial (+12,092) industries.

Tuesday, March 03, 2009

Utter collapse in auto sales in February

I've been watching the auto sales figures trickle out for February and I have to tell you, they are absolutely horrid. General Motors said sales plunged 52.9% from a year ago. Ford reported a 48% drop, Toyota said sales tanked 40%, Nissan said sales dropped 37%, while Honda confessed to a 38% decline and BMW said sales tanked 35%. Economists were looking for a seasonally adjusted sales rate of 9.4 million units on the month overall. That compares with a typical rate over the past several years of 16 million.

UPDATE: The annual rate of sales for February came in at 9.1 million units, the lowest since December 1981.

Pending home sales drop 7.7% in January to a record low

Pending home sales data was released for the month of January this morning. Here is what the figures from the National Association of Realtors looked like:

* Pending home sales plunged 7.7% in January. That was much worse than the 3.5% decline that economists were expecting. December's reading was also revised to a gain of just 4.8% from the previously reported 6.3% rise.

* The pending home sales index, at 80.4, was off 6.7% from its year-earlier reading of 86.2. That leaves the index at its lowest level on record. The data goes back to 2001.

* Geographically, pendings fell in three out of four regions -- by 9.3% in the Midwest, 11.9% in the South, and 12.7% in the Northeast. Pendings climbed 2.5% in the West.

Another day, another dismal housing report. That's the verdict on the January pending home sales data from the National Association of Realtors. Pendings fell by a much larger than expected margin in January, leaving the index at a record low. The West region was the only bright spot, with a slight increase in sales. But that was more than offset by dramatic declines everywhere else.

As I've been saying for a while here, it really does all come back to the job market. And the latest evidence suggests we're seeing little relief on that front. Jobless claims are rising sharply and layoff announcements are coming fast and furious. The dramatic decline in consumer confidence doesn't help, either. Nor does the deflationary psychology that haunts home buyer's dreams these days. Those forces are offsetting any positive benefit from rising affordability.

Behold the TALF ...

The long-awaited details on the Term Asset-Backed Securities Loan Facility (TALF) were just released. More from the Fed below ...

"In carrying out the Financial Stability Plan, the Department of the Treasury and the Federal Reserve Board are announcing the launch of the Term Asset-Backed Securities Loan Facility (TALF), a component of the Consumer and Business Lending Initiative (CBLI). The TALF has the potential to generate up to $1 trillion of lending for businesses and households.

"The TALF is designed to catalyze the securitization markets by providing financing to investors to support their purchases of certain AAA-rated asset-backed securities (ABS). These markets have historically been a critical component of lending in our financial system, but they have been virtually shuttered since the worsening of the financial crisis in October. By reopening these markets, the TALF will assist lenders in meeting the borrowing needs of consumers and small businesses, helping to stimulate the broader economy.

"Under today’s announcement, the Federal Reserve Bank of New York will lend up to $200 billion to eligible owners of certain AAA-rated ABS backed by newly and recently originated auto loans, credit card loans, student loans, and SBA-guaranteed small business loans. Issuers and investors in the private sector are expected to begin arranging and marketing new securitizations of recently generated loans, and subscriptions for funding in March will be accepted on March 17, 2009. On March 25, 2009, those new securitizations will be funded by the program, creating new lending capacity for additional future loans.

"The program will hold monthly fundings through December 2009 or longer if the Federal Reserve Board chooses to extend the facility.

"Today the Board also released revised terms and conditions for the facility and a revised set of frequently asked questions. The revisions include a reduction in the interest rates and collateral haircuts for loans secured by asset-backed securities guaranteed by the Small Business Administration or backed by government-guaranteed student loans. The modifications are warranted by the minimal credit risk on these assets owing to the government guarantees, and, by making the terms of the TALF loans more attractive, they should encourage greater flows of credit to small businesses and students.

"Additional details of the TALF and the CBLI can be found at Further information on the Federal Reserve’s credit and liquidity programs is available at The Treasury Department also released a new white paper outlining efforts to unlock credit markets. On February 10, 2009, the Board and Treasury announced an expansion of TALF to include new asset categories that could generate up to $1 trillion in new lending. Teams from the Treasury Department and Federal Reserve are analyzing the appropriate terms and conditions for accepting commercial mortgage-backed securities (CMBS) and are evaluating a number of other types of AAA-rated newly issued ABS for possible acceptance under the expanded program. The expanded program will remain focused on securities that will have the greatest macroeconomic impact and can most efficiently be added to the TALF at a low and manageable risk to the government.

"The Federal Reserve and Treasury currently anticipate that ABS backed by rental, commercial, and government vehicle fleet leases, and ABS backed by small ticket equipment, heavy equipment, and agricultural equipment loans and leases will be eligible for the April funding of the TALF. Other types of securities under consideration include private-label residential mortgage-backed securities, collateralized loan and debt obligations, and other ABS not included in the initial rollout such as ABS backed by non-auto floorplan loans and ABS backed by mortgage-servicer advances. As is the case for the current categories of newly originated loans, the TALF will combine public financing with private capital to encourage the private securitization of loans in the asset classes eligible in the expanded program.

"Increased TALF lending and other actions to stabilize the financial system have the potential to greatly expand the Federal Reserve’s balance sheet. In order for the Federal Reserve to conduct monetary policy over time in a way consistent with maximum sustainable employment and price stability, it must be able to manage its balance sheet, and in particular, to control the amount of reserves that the Federal Reserve provides to the banking system. The amount of reserves is the key determinant of the interest rate that the Federal Reserve uses to pursue its monetary policy objectives. Treasury and the Federal Reserve will seek legislation to give the Federal Reserve the additional tools it will need to enable it to manage the level of reserves while providing the funding necessary for the TALF and for other key credit-easing programs.

You can find more details on the particulars of the TALF at the Fed's website.

Citigroup's new mortgage plan: No job, no problem

One reason so many of today's loan modification programs are failing is that the problem is no longer just the structure of borrower loans, it's the broad economy. It's relatively easy to modify a loan and keep a borrower in his home if, say, his only problem is that he can make the start payment on an ARM, but couldn't do so if the ARM rate and payment adjusted higher. The solution is pretty straightforward there: You just freeze the rate and payment at the start rate and get on with your life.

But if that same borrower loses his job, and can't find a new one, then you've got a much bigger problem. Now, he can't just not make the higher post-start-rate payment. He can't make the start payment. That makes it pretty hard to come up with a modification that works. But according to the Wall Street Journal, Citigroup is going to try. More below:

"Citigroup Inc. announced Tuesday a new program aimed at addressing the latest challenge facing the mortgage industry: unemployed homeowners.

"Under the program, Citigroup will temporarily lower mortgage payments to an average of $500 a month for certain borrowers who have recently lost their jobs and are at least 60 days behind on their mortgage payments. Borrowers will be allowed to make the lower payments for three months. Citigroup will waive interest and penalties during this period.

"Citigroup's announcement comes days before the Obama administration is expected to announce guidelines for its massive loan-modification program, a cornerstone of its effort to fight the housing crisis. The bank's new initiative takes aim at one of the hardest groups of borrowers to assist: those who have seen their income fall sharply.

"We expect that there will be thousands of people we can help," said Sanjiv Das, chief executive of CitiMortgage, who called rising unemployment "the single biggest issue facing mortgage servicers." Although the novel program will help just a small fraction of troubled borrowers, Mr. Das said he hopes it will be copied by others in the industry.

"To qualify for the program, borrowers must live in the home and have a mortgage that is owned and serviced by CitiMortgage. The program applies only to loans of $417,500 or lower. Citigroup holds 1.4 million mortgages on its books. It also services another four million loans for others, but those don't qualify for the program."

Monday, March 02, 2009

Income & spending up ... ISM employment hits lowest level in six decades ... and construction spending tanks

We got a trifecta of economic reports this morning, the details of which can be found below:

* First, January personal income and spending both came in stronger than expected. Personal income gained 0.4% (the forecast called for a 0.2% decline), while personal spending rose 0.6%, against an average forecast of 0.4%. The increase in spending was the first in seven months. Unfortunately, it appears that one-off developments were responsible for some of the strength. Government pay increases and cost-of-living adjustments to various federal payments pushed income higher; core salaries and wages dropped 0.2% -- the third decline in a row.

* Second, construction spending plunged 3.3% in January. That was far worse than the 1.5% decline that was expected, and the December reading was revised down to -2.4% from the originally reported -1.4%. Private residential spending dropped 2.9%, while private nonresidential spending tanked 4.3%. That was the biggest decline in the private nonresi business since January 1994 (-7.1%).

This fits with my thesis, stated many many times in the past year, that commercial construction would follow residential over the cliff. The largest declines were in religious construction (-10.2%), power (-11.6%) and communication (-7.9%).

* Third, the ISM Manufacturing index was essentially unchanged -- coming in at 35.8 in February compared with 35.6 in January. That was marginally better than the 33.8 reading that economists were looking for. The subindex that measures production popped to 36.3 from 32.1, while the subindex covering new orders was flat -- 33.1 vs. 33.2 a month prior. The employment index fell to 26.1 from 29.9. That is the lowest level EVER for this indicator, which dates back to 1948.

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