Profits are still tanking, we now have Commerce Bank and Harley Davidson way down, and I see Harley as a real bellwether of a recession.
When middle aged guys don’t feel secure enough to buy their toys, it’s game over.
And we have another insurance downgrade, this time Security Capital is downgraded by Fitch.
And we have Nobel winning economist Joseph Stiglitz warning that we may sliding into a 1930s type ‘liquidity trap’.
I don’t know his name, but the person known as “the Scanner” is one of them.
He has an ingenious proposal for dealing with the issue of bailing out financial institutions that are drowning in the “Big Sh%$pile”.
Here’s my proposal. I offer it at no charge to any member of Congress, presidential candidate or editorial writer willing to bear the calvary of getting the stink-eye next time at Harry Cipriani. If it becomes necessary to bail out the monoliners to prevent a depression, there will be terms. For once, the highly-paid beneficiaries of a taxpayer-financed bailout will not get off scot-free.
Congress shall specify that no bailout will take place unless and until (a) every bailed out monoliner and (b) every financial institution holding a bailed-out policy certifies that its employees have voluntarily agreed to accept a 25% federal income tax surcharge on every dollar earned above $200,000 for a period of 5 years. A young hotshot earning $300,000 would see $25,000 added to his tax bill. An elder pulling down $1 million would owe an extra $200,000. Since some of the biggest Wall Street multinationals are policyholders, and since this would apply to every one of their employees over $200,000, we could be talking about a lot of people and a lot of money. It could even go some way towards making the bailout pay for itself.
Politically, it’s a winner. Fiscally, it’s sound. It’s extraordinarily well-targeted to precisely the assholes who got us into this mess in the first place. John Edwards: Have your staff contact me through the comments box.
My only difference would be that I would go for a higher surcharge, perhaps something like 50%.
Martin Wolf, a columnist and editor for the Financial Times, is calling for regulations regarding the remuneration of banking executives.
Basically, he sees the current pay structures of banking, with enormous bonuses for short term results, as being a major factor in the current banking/credit crisis.
Further, he sees banking as an industry with an amazing talent for, “privatising gains and socialising losses.”
He says, “My attitude to the banking industry is not a prejudice. It is a ‘postjudice’.”, or to be translated into more prosaic language, he learns from the mistakes he observes, and prior behavior colors his attitude towards the industry.
It is the nature of limited liability businesses to create conflicts of interest – between management and shareholders, between management and other employees, between the business and customers and between the business and regulators. Yet the conflicts of interest created by large financial institutions are far harder to manage than in any other industry.
That is so for three fundamental reasons: first, these are virtually the only businesses able to devastate entire economies; second, in no other industry is uncertainty so pervasive; and, finally, in no other industry is it as hard for outsiders to judge the quality of decision-making, at least in the short run. This industry is, in consequence, exceptional in the extent of both regulation and subsidisation. Yet this combination can hardly be deemed a success. The present crisis in the world’s most sophisticated financial system demonstrates that.
Basically, he is saying that these institutions are immature and short sighted in outlook, but they possess the ability to destroy the output of the most of the rest of society, and so they need aggressive regulation.
Word up.
Deal Reached on Tax Rebates for Stimulus – washingtonpost.com
High points:
Low Points:
If the Democrats had any guts, they would have held out for better, but I guess that guts is just ,”not on the table”.
I won’t do the Pelosi pic again.
It appears that the the markets are expecting another 75 basis point rate cut by the Fed at their regular meeting next week. The futures market on the Fed rate cut puts the chance at 81%.
I have no clue what sh$# they are smoking, but I wants some. It’s gotta be some seriously good stuff.
Could someone please explain to me how this is not making book over the telephone and internet, and hence illegal?
Then we have George Soros warning that he is seeing a possibility of “systemic failure” in the markets. He expects that at the end of the US Dollar as the sole world reserve currency, which has been obvious for years, and that the era of “superleverage” is over, and that, “”I question how far the Fed can go, given the reluctance of people to hold dollars”, and, “We need a new sheriff, not Washington consensus.”
Basically, he’s saying that we are in 1930, and we need the restoration of FDR market regulations. I agree, but, of course, I didn’t break the Bank of England because I understood world currency markets better than the English Ministry of the Exchequer, and he has, so his opinion carries more weight.
In real estate, we have Credit Suisse predicting losses of $16 billion for Fannie Mae and Freddie Mac, and we have a year over year price drop of 6% in the US, and that median sale prices in 2007 was 1.3% lower than 2006, the first yearly drop ever.
And in employment and automotive, Ford is reported to be offering buyouts to all of its 54,000 hourly employees.
Every salesman, every buyer, every secretary, every engineer, etc.
According to “reliable sources”, Ben Bernanke thinks that the downturn will be very severe, and that’s why there was the very large, unscheduled rate cuts.
Additionally, as reported by Calculated risk the market is expecting another 50 basis point rate cut at the regular meeting next week.
This would leave the Fed at a 3% discount rate, and I think that beyond that point, they are pushing on a string. Monetary controls of the economy are pretty much at their limits now.
In the real estate world, Merrill Lynch is saying that nationwide U.S. home prices could decline 25% to 30% over the next three years.
I think that they are optimistic.
Then we have student loan giant Sallie Mae reporting a $1.6 billion quarterly loss, which raises the obvious question, “How the hell do you lose money on GSLs?” These are government guaranteed loans, and the fact that borrowing costs have shot up so much that they cannot profit on them is …ominous.
There are indications that Bank of America’s deal to buy Countrywide may be getting into trouble. At least that what the market is saying, literally. BoA is offering the equivalent of $7.1058, but Countrywide is trading at $5.54.
This spread is a measure of the market’s opinion that the deal won’t actually be consummated, this spread implies that “there is roughly a 77.9 percent consensus among Wall Street’s risk arb desks and their hedge fund brethren that the deal goes through at the agreed upon terms. That also means that more than 22 percent of risk arbitrageurs don’t think the deal will go through”.
You also have Capital One taking a major earnings hit, both from the closing of its GreenPoint Mortgage arm, and from higher credit card losses.
Finally, you have talks between New York Insurance Superintendent Eric Dinallo and major US banks about a bailout of bond insurers. There is an implication that there will be some sort of government involvement, if not outright government sponsorship of such a bailout.
First, of course, the Fed cut it’s Federal Funds Rate by 75 basis points, the biggest cut since 1984, and it did so a week before its regular meeting, which it hasn’t done since 911.
The US markets recovered after the rate cut, but still they were down by over 1% for the day.
I think that Paul Krugman’s analysis of this is accurate, Bernanke used to be the head of his department at Princeton, so I would assume that he knows him pretty well.
Basically, Bernanke is concerned about the Japanese slow down of the 1990s, when monetary tools simply stopped working:
What was so disturbing about Japan was the way monetary policy became ineffective; by the later 1990s the short-term interest rate was up against the ZLB — the “zero lower bound.” This is alternatively known as the “liquidity trap.” And once you’re there, conventional monetary policy can do no more, because interest rates can’t go below zero.
There was a lot of discussion of various unconventional monetary things you could do. But the best answer was not to get there in the first place. A 2004 paper co-authored by Bernanke argued that the ZLB could and should be avoided by “maintaining a sufficient inflation buffer and easing preemptively as necessary”.
In terms of corporate profits, Bank of America took a major hit, with profits dropping 95% as a result of $5 billion dollar writedown, and its, “tier 1 capital ratio – a key measure of its ability to absorb losses – stood at 6.87 percent at the end of the year, down from 8.22 percent in the previous quarter, due to its purchase of LaSalle Bank and lower net income during the second half of last year.”
Wachovia took an 89% hit on profits, “due to a $1.7 billion reduction in the value of certain portfolios and $1.5 billion set aside to cover bad loans”.
More real estate and derivatives.
And while we are on the topic of real estate and derivatives, bond insurer Ambac is looking for a buyer. If they take monopoly money, I’m game, but only if it’s less than one whole game.
Otherwise, the deal just does not make financial sense.
Of course, the one thing that we can be sure of is that if George W. Bush speaks, the market will tank, so, of course, they are talking again, and saying that they are looking at increasing the stimulus package beyond the $150 billion originally proposed.
My guess is that there is a “Bush Ranger” out there who wants a special tax break just for him.
Of course, we are already beginning to see the allocation of blame, aka “blamestorming”, with EU Economic and Monetary Affairs Commissioner Joaquin Almunia saying that this problem is a result of excessive US trade deficit…..Ummmm…Well Duh!!!!…Though that whole deregulation of markets thing isn’t working either.
And on the housing front, California loan defaults reach have reached a 15-year high in Q4 2007, up 114% from the same time in 2006. Foreclosures are up 421.2% from 2006.
Though, of course, the author, Justin Lahart, hedges about whether we will actually have a recession (My take is that we’ve been in one for some time, and that we have been experiencing a recession like living standards, based on percentage of population employed, since 2001)
His Article uses terms like, “on track to be at least as bad as the five most catastrophic financial crises to hit industrialized countries since World War II”, and makes reference to Japan’s “lost decade” in the mid 1990s.
The idea that this is going to be a bad one is hitting the mainstream.
As the good doctor Roubini says, there is a difference between an illiquidity crisis, and an insolvency crisis.
A corollary is that dealing with insolvency as illiquidity simply throws good money after bad*, and the extensions that are being granted to ACA Bond Holdings to “unwind” its credit swaps, is an attempt to deal with insolvency as illiquidity.
ACA has lost 97% of its market cap over the past year, it’s been downgraded to CCC last month (12 steps all at once), and it’s currently being run by its regulator, the Maryland Insurance Administration, which, “extended an agreement that waives collateral requirements, policy claims and termination rights until Feb. 19, the New York-based company said in a statement on Business Wire late yesterday.”
It’s hit an ice berg, and it’s going down. Delaying this in the hope of finding stupid investors is going to help no one in the long term.
*To quote Roubini on the difference, “But the current market turmoil is much worse than the liquidity crisis experienced by the US and the global economy in the 1998 LTCM episode. Let me explain why. Economists distinguish between liquidity crises and insolvency/debt crises. An agent (household, firm, financial corporation, country) can experience distress either because it is illiquid or because it is insolvent; of course insolvent agents are – in most cases – also illiquid, i.e. they cannot roll over their debts. Illiquidity occurs when the agent is solvent – i.e. it could pay its debts over time as long as such debts can be refinanced or rolled over – but he/she experiences a sudden liquidity crisis, i.e. its creditors are unwilling to roll over or refinance its claims. An insolvent debtor does not only face a liquidity problem (large amounts of debts coming to maturity, little stock of liquid reserves and no ability to refinance). It is also insolvent as it could not pay its claim over time even if there was no liquidity problem; thus, debt crises are more severe than illiquidity crises as they imply that the debtor is insolvent, i.e. bankrupt, and its debt claims will be defaulted and reduced. In emerging market crises of the last decade, we had liquidity crises (i.e. a solvent but illiquid sovereign) in Mexico, Korea, Brazil, Turkey; we had debt/insolvency crises (a sovereign that was both illiquid and insolvent) in Russia, Ecuador, Argentina.”†
†You have to just love this, footnotes almost twice as long as my post.
Well, I mentioned that Fitch had cut its rating on Ambac from AAA to AA, and now, as a result, it has downgraded 420 classes of asset based securities (ABS). Basically, since the bond insurer is near insolvency, the bonds are riskier.
This is a house of cards, and it is in the process of coming down.
H/T Calculated Risk
[on edit]
The lead off news is that the head of the IMF. Dominique Strauss-Kahn, is calling the global economic situation “serious”.
As to what he’s considering, Strauss-Kahn, a Frenchman is meeting with French President Nicolas Sarkozy to see what a the French response must be.
It just feels so good to be rescued by the French, huh?
Well, we don’t have US quotes, because it is a holiday, but there was a lot of blood in the foreign markets, with the FTSE-100 fallint 5.5 percent, the CAC-40 6.8%, and the DAX 30 plummeting 7.2 percent in Europe, and in Asia, the Shanghai Composite fell 5.8%, the (Singapore) Straits Times Index fell 6% (15.8% for the year), and India fell 7.4%.
The “markets” don’t think that the stimulus package, which is to say GW Bush’s “no money for the working poor” package, which tanked the US markets on Friday, Sucks.
For what it’s worth, the US meltdown is beginning to hit Europe, where there is increasing pressure for the ECB to lower interest rates. (My guess is not right now. The ECB is charged with keeping inflation down only, no requirement on employment)
European banks are tightening up lending standards in response to the meltdown, so short term liquidity problems may be coming to Europe too.
We also have the Bank of China, the 2nd largest lender in that country, share price dropping by over 6% because of concerns over their subprime exposure. There are rumors that they will show a net loss in 2007 as a result.
Oil, however seems not to be spiking lately. Recession fears have a way of doing that.
The real estate collapse is moving from the bottom up, and here we have good evidence that it has begun to hit the McMansion set.
We have people in houses well north of $500K at risk of losing their homes,
The balloon has gone up. Fitch cuts Ambac rating to AA from AAA
We’ve just had £2 billion ($4 b) fund in the UK suspend trading because of a panic, but “Aegon UK added that it believes the “underlying fundamentals of the asset class remain healthy”.
Nope, there is an increasing understanding that the last one leaving the room won’t only be without clothes, but that the price of exit will involve selling an organ.
Standard and Poors is now assessing the risk of bond insurer giants MBIA and Ambac in excess of 70% over the next 5 years. If they unwind, a lot more unwinds too.
Sprint is laying off 4000, and closing 125 stores.
Bond insurer ACA is asking for more time to unwind its contracts, basically because it’s out of case. If they go under, “Banks and brokers could suffer billions of dollars of losses from credit protection they bought from ACA.”
I probably should include this in my standard economics update, but Barry Ritholtz’s line (my title) is too good not to give top billing.
He is talking about something called “Counter-Party Risk“, which is the risk that an issuer might default on a payment or go into liquidation. Also known as counter party risk.
Basically, he is continuing his ongoing riff on what will happen if monoline insurers go belly up, as increasingly seems likely.
He expects there to be a lot more “down” there, as do I. There is a lot of leverage, out there. For an MBA, it’s called leverage, for the rest of us, it’s called “being in debt up to our eyeballs”.
In describing the monoliners, MR. Ritholtz is right:
That situation was obviously intolerable. So they brought in the financial engineers. Hey, we should be issuing insurance on Credit Default Swaps (CDS) — the premiums are much much bigger than boring old munis!
Any time you hear words to that effect, you know you are dealing with an idiot of the highest magnitude. Those are the equivalent to “Give me a match, I want to see if there is any gas in the tank.”
The monolines are not in trouble because Municipalities are defaulting on bond payments. (That’s waaaay in the future). The problem is they wrote insurance — taking in that fat premiums — without properly understanding the risk.
….
I’ve said it before, and I’ll repeat it again: To err is human, but it requires an MBA to create total clusterfu#@ . . .
My analogy, that like those people on American Idol whose friends have told them that they can sing. Is nowhere near as clear or as lyrical.
Michael Lewis asks, “What’s odd about the subprime crash is Goldman Sachs Group Inc. A single firm took a position contrary to the rest of Wall Street. Giant Wall Street firms are designed for many things, but not, typically, to express highly idiosyncratic views in the market.”
Basically, what happened was that in 2006, some smart guys at Goldman, as they did at other places, went to senior management, and said that they thought that the Subprime market was soft, and that they should short it.
This probably a bit of advice that any number of brokerages got over that time, but how they handled it was different.
As opposed to reviewing the data, coming to a decision, and issuing guidance to the subprime traders based on that decision, Goldman Sachs has some different management structures. They
The only difference between Goldman and everyone else was that Goldman had, in effect, an entirely separate enterprise, sitting on top of the firm, with the power to reverse the judgment of its own supposed experts in various markets. They were able to do this, apparently, without ever saying a word about it to their own traders. Instead of telling the fools trading subprime mortgages that they are wrong, and that they should unwind their positions, they simply offset their trades.”
Rolling Heads
All across Wall Street risk managers are being fired, reassigned or hovering under a cloud of contempt and suspicion. Heads must roll, and after the CEO, these guys are the most plausible to guillotine.
But at the same time it’s pretty clear that a lot of these so-called risk managers never really had the power to manage risk. They had to consider the feelings, for example, of the guys who ran subprime mortgages. Morgan Stanley conceded as much when it said recently it was considering changing things around so that the risk manager reported to the CFO, rather than the heads of individual businesses.
But at Goldman there were two intelligences at work: one, the ordinary Wall Street intelligence, which was allowed to get itself in trouble, just as at every other Wall Street firm; the other, more like an extremely smart hedge fund that made its living off the idiocy of big Wall Street firms, including its own people.
(emphasis mine)
There is a frightening corollary to this, that the experts operating in high finance are less like dispassionate experts than they are like those people on American Idol whose friends have told them that they can sing.
I am so not shocked that Jeniffer Wertz is claiming that claiming she was blacklisted last year for providing a housing market forecast that was too gloomy.
In the lawsuit, which was filed a week ago, Wertz says she completed appraisals on two houses in May and then quickly got a call from a WaMu sales manager demanding she change her outlook to “stable” so a loan could be approved.
The WaMu sales manager also demanded Wertz change her appraisal process to produce higher prices for the properties she was evaluating, according to Wertz’s lawyer Stephen Danz. The higher an appraisal comes out, the more likely it is a home loan will get approved.
When Wertz refused to comply, she claims the sales manager threatened to block her from doing future appraisal work for the bank. A month later, Wertz’s suit says, a third-party appraisal request assigner told her WaMu would no longer accept her work.
I have no doubt that this is true, and that this was endemic in the lending industry among most, if not all of the major players.
Andrew Cuomo is alleging that WaMu’s pressure on “title company First American and its appraisal unit, eAppraiseIT” is why they were basically falsifying appriasals, and The Securities and Exchange Commission and the Office of Thrift Supervision has opened an investigation.
I think that it will be more difficult to find a major lender who did not do this than to find one who did.
The risks of default by MBIA and Ambac have gone through the roof, and Ambac is in danger of losing it’s AAA rating, which could hasten a collapse by making capital harder to raise.
As to the significance? Atrios nails it when he says:
Ambac and MBIA are the two Jenga pieces which will pull the whole sh#@pile down. They insure all of the sh#@pile, allowing everyone to pretend that all of the risky stuff they own isn’t risky at all. But that insurance is most likely a complete fantasy as it seems Ambac and MBIA don’t have the cash to pay out claims. I should’ve gotten into the bond insurance business. Lower their ratings, you destroy their businesses. More than that, you wipe out the insurance fantasy, forcing everyone who insured with them to admit they have all this risky stuff on the books. Recognizing, of course, that in this context “risky” is just a euphemism for “sh#@ty.”
Philadelphia-area manufacturing activity lowest just after 911.
Lehman Brothers is downsizing its mortgage arm. I believe that there is an expression, involving the words, “barn”, “door”, and “cow” that would be appropriate here.
It looks like the real estate crash is finally starting to effect rents, with rents increacing by only ½% in 2007 in a sampling of 10 metro areas. (In previous years, it was in the 3% range)
Housing starts and permits plunge to multi-decade lows. Housing starts are the lowest in 27 years, permits the lowest in 33 years. The market is still on the way down.
This analysis predicts 5 years to recover. It’s probably wrong.
Local housing crashes have all taken at around 5 years to recover, and the markets were far less inflated. Additionally, the underlying economic situation is very grim, and the home buyers were less leveraged, meaning that foreclosures will be higher this time.
The Dollar has recovered somewhat against the Euro in response to an inflation hawk on the ECB saying that right now recession is the problem, not inflation
Consumer prices rise by the highest amount since 1990, though it should be noted that the inflation numbers have become far less reflective of reality due to “creative massaging” since then.
H/t to The Big Picture for finding the cartoon.
Bond Insurerer Ambac Cuts Dividend, and declares loss, they are bleeding to death.
[on edit, added the following]
Standard & Poors raises the assumed losses on 2006 subprime bonds from 14% to 19% when it makes ratings on financial instruments, such as CDOs. They are in the process of reviewing their models for all outstanding mortgage backed debt. (The end result won’t be pretty)
Then we have a report from JP Morgan saying that home equity delinquencies are high In fact, they are higher than they would have expected at the bottom of a recession, which implies that the way down is still pretty scary, and their profits fell 34%.
On the good news side, oil prices have fallen below $90/bbl, because traders expect to see a moderation in demand because of an economic slowdown.