The Congressional Budget Office is suggisting that a rescue of Fannie Mae and Freddy Mac is about 50% likely, and could cost $25 billion.
Me, I would put the chance of needing a rescue at over 90%, and multiply by 10, or $¼ trillion for the cost to the tax payers, just based on my gut.
As to secondary costs rippling through the economy? I’m not even going to try to guess at that.
Charles Plosser, President of the Philadelphia Federal Reserve, called for rate hikes to forestall inflation. Not surprisingly, the US dollar has risen as a result.
Meanwhile, the banking meltdown continues aplace, with Wachovia losing $9.9 billion dollars and exiting the wholesale mortgage business, meaning that they will no longer offer mortgages through independent brokers, and WaMu Lost $3.3 billion too.
I would also note that federal examiners auditing the GSE’s books, though this is more a preparation for a US government bailout than it is any concern for wrongdoing.
Considering that U.S. home prices 4.8% from May 2007 to May 2008, I’d count a GSE bailout as likely.
Seeing as how tropical storm Dolly largely missed the offshore oil rigs, it’s not surprising that oil prices have fallen, and it appears that retail gasoline is doing the same.
Still, this is mostly a symptom of a slumping economy, where less oil is needed, much as UPS’s profit slump of 21% is clear evidence of a radically slowing economy.
It’s also old home week at 40 Years in the Desert, because we have some news about another monoliner insurer in trouble, this time, it’s Assured Guaranty, one of the two insurers left with AAA ratings from all three major agencies, that is taking a tumble, because Moody’s is making noises about a downgrade.
Well, it looks like I just beat the Wall Street Journal by 4½ months.
But they have now discovered Penny Pritzker and Superior Bank.
The bank, closed in 2001, basically created the securitization of subprime loans that is at the core of much, though IMNSHO not a majority, of the credit crunch.
And she is now Obama’s national campaign-finance chairwoman.
Well, we’ll be hearing this 24-7 for a while, if just to ignore the latest McCain flip-flops and screw-ups.
The Leading Economic Indicators have now fallen for the 2nd straight month. It’s down 2.1% year over year, putting it in the 2001 recession category.
In a related matter, it appears that Freddie Mac may be trying to unwind its debt exposure a bit, as we have reports that it will be purchasing less mortgage debt from lenders, making getting a home mortgage more difficult.
Oil is back above $130/bbl, largely on concerns about Iran and Tropical storm Dolly, but gasoline prices continue to fall, it’s now about a nickel down from the record.
The dollar is slightly weaker today, but I think that the delta is more a non-movement than a movement.
For some well predicted hilarity, note that Bank of America profit took a 41% hit, in part because the newest member of their stable, Countrywide Financial, lost $2.3 billion this quarter.
I told you so.
I’ve been posting a lot on the insolvency of innovative aircraft diesel manufacture and the conflict with it’s primary customer, Diamond Aircraft.
Well, it appears that their divorce is now final, with Diamond washing its hands of a bid for the engine manufacturer, and hoping for certification of its aircraft diesel in the next few months, followed by swapping out the old Thielert diesels.
Seeing as how much of the purchase price of the Thielert engine included scheduled maintenance, and now that it is in bankruptcy, it’s no longer covered, this is probably the best course of action for Diamond.
Background here.
Well, the Europeans, or at least the Germans promise to be in major freak out mode for a while, as producer prices are increasing at 6.7%, and this means that the Germans, the largest economy in Europe, will be screaming for rate hikes, because it was only 80 years ago that you needed a wheelbarrow or marks to buy a loaf of bread.
Unsurprisingly, this drove the dollar down too, though a contributing factor may be a report published in the financial times that sovereign wealth funds are looking to reduce exposure to the dollar.
There is no stampede, but people are tiptoeing toward the exits on the dollar.
I’m not sure how related it is, sovereign wealth funds hold a big chunk of GSE debt, but Freddie Mac has filed with the SEC to sell stock in order to raise new capital.
In energy, dribbled down a bit* to settle at $128.88/bbl, and retail gasoline fell about a penny.
In investment banking, Merrill Lynch lost $4.9 billion, and Citi lost $2.5 billion, though the latter was better than expected, and Citi will continue paying a dividend, which strikes me as foolish.
In real estate, evidence, in Orange County at least, that commercial real estate is comatose. A 91% drop in building, a 62% increase in vacancy, and a 2.5% decrease in rents.
It’s grim in the UK too, with mortgage lending falling 32% year over year, with near certainty of the central bank increasing rates.
The UK is beginning to look like the San Diego of Europe.
*No Apology for the pun.
Well, the head of the House Financial Services Committee is saying that there limits on executive pay and dividends as a quid pro quo for any deal being done.
He’s talking about inserting language into the bill which would require regulatory approval of senior executive pay, and that any government purchased stock would be first in line for dividend payments.
Additionally, he’s looking at language to explicitly tie any monies involved in the bailout to the Federal Debt limit, which is responsible thing to to.
I think that Frank is one of the 10 best congresscritters out there.
We no know, as a result of a computer technician selling data he downloaded, about a large number of using Lichtenstein bank secrecy laws to evade taxes.
While Liechtensteiner banking secrecy laws are actually more opaque than those of Switzerland, it has always been Swiss banks that have captured the public imagination when it came to the rich laundering money, and we are now seeing revelations regard Swiss banking giant UBS was helping its clients launder money, though this time it appears the discovery happened the old fashioned way, employees have been caught, and they are flipping to prosecutors for consideration on sentences.
Senator Carl Levin is now calling for regulators to revoke the banking license UBS American operations.
His call may have little bite, as UBS has revealed that it intends to wind down its US private banking operations.
It intends to stop taking new customers immediately, and wind down the rest of its services over time.
Wachovia Securities, until last October A.G. Edwards, was raided by regulators from Missouri, Illinois, Massachusetts, New Jersey, Pennsylvania and a, “sixth state that asked not to be identified”, today. In addition, some number more than a dozen employees of the firm were subpoenaed.
It appears that they had some questions about the collapse of the auction rate securities market, and Wachovia refused to respond to queries.
I expect to see a lot more of this as the markets swirl down the drain.
Merrill Lynch’s is saying that the US is fast approaching a point where foreigners will no longer be willing to keep funding our budget and trade deficits.
Well, duh!
That’s why interest rates are going to have to go up in the medium (5 year) term a lot, to keep attracting foreign capital.
That’s what Alan Schwartz, who was head of Bear Stearns when it imploded is asking whether Goldman Sachs was aggressively shorting and talking down Bear Stearns to generate a quick profit.
I would not be surprised. The same was alleged regarding the collapse of hedge fund Long Term Capital Management in the late 1990s.
Wall Street is a cesspool, and it needs to be drained.
This is actually fairly complex. It starts with he fact that there is a possibility that the GSEs may reduce or suspend dividends because of their losses, which is pretty straightforward: No profit, no dividend.
However, it ends up creating some complex tax and cash flow issues for traders that could have triggered rampant short selling of the stocks.
In order to to a normal “non-naked” short sale, you have to borrow a stock, pay a fee to the owner, and you sell that stock now with the promise that you will buy later and return to the lender.
Most of the shares so lent are held in brokerage margin accounts where the original purchaser of the stock would borrow money from the brokerage to cover some of the purchase price of the shares, which increases the upside and downside possibilities of the stock (if you put 25% down on purchasing a stock, and the stock makes 25%, you make 100% profit, as opposed to 25% if you paid 100% down).
However, dividends create an incentive not to keep stocks in margin accounts. The buyer does not get dividends, but instead gets payments-in-lieu of dividends, which are treated as ordinary income, and taxed more heavily.
So as an corporation cuts, or eliminates, its dividend, as Fannie Mae and Freddy Mac seem likely to do (see first ‘graph), people are more likely to put their shares in margin accounts, which makes more shares available for people to short, and hence, makes it easier more people to short the stock.
The SEC does not want this to cascade into a death-spiral for the 2nd and 3rd largest borrowers in the world, so they issued an emergency rule to restrict short selling.
Everything clear?
Good. Because I’m still confused as hell.
The Consumer Price Index CPI, just
jumped 1.1% in June. For the past 12 months, it’s been 5.5%.
Considering how bogus the CPI stats have become, I’d be inclined to at at least 3% to both numbers, but but I’m an engineer, not an economist, dammit!*
On the other hand, oil is now down about $11 over two days, which would explain why the dollar is holding steady for now, though we are not seeing any good news at the pump, as we hit a new record again.
Industrial production in June was up by 0.05%, which beat expectations, though part of that number was a rebound from the strike at American Axle in May.
Mortgage applications were up 1.7% last week, though I’m not sure how much of this is low rates, and worry about rising rates, and noise.
Let me finish that I will have a separate post on the GSE’s and how their possible reduction/elimination of dividends may have led to the SEC’s restrictions on naked shorting.
*I LOVE IT when I get to go all Doctor McCoy!!!
The SEC has just issued an emergency against naked short selling (Wiki has a good summary of what naked short selling is.)
It’s in response to the plummeting Fannie Mae and Freddie Mac stock price, but it actually probably had very little to do with that drop, there are simply too many shares of the GSEs, though it can be devastating to small and micro cap companies.
They take effect October 1, 2009, and require lenders to verify ability to pay, shorten the prepayment penalty period on expensive loans, and require escrow accounts for property taxes and homeowner’s insurance (this one cuts in a year later).
We have a whole bunch of people talking about what should be done with Fannie Mae and Freddie Mac, starting with the Wall Street Journal editorial page, which suggests that Treasury Secretary Paulson put the GSE’s in receivership.
Of course, the WSJ has always hated Fannie and Freddie, because they are sort of public, which, by the standards of their Neanderthal sensibilities, is evil, so this position is far from a surprise.
Of more significance are the statements of William Ackman, who manages a hedge fund, and made big bucks short selling the monoliner insurance companies.
He’s betting against the GSEs:
Ackman, 42, has his own plan that would see Fannie Mae raise about $86 billion in capital by giving investors in $750 billion of senior unsecured notes 90 cents on the dollar in debt of a new company, with the balance in equity. Investors in Fannie Mae’s $11 billion of junior debt would get warrants, while common and preferred shareholders would get nothing, according to Ackman.
Not surprisingly, when talk like this is coming from Wall Street bigfoots, Moody’s cut the financial strength ratings of both GSEs to B-, and not surprisingly, their stock dropped by double digits today.
In my humble opinion, the upper management and stock holders need to lose, and lose big, or we will be back here in a few years.
Protecting share holders and upper management should not be a part of any bailout.
First, let’s look at the analysis of the shrill one, Paul Krugman in the New York Times. He notes that they will almost certainly need some level of bailout, as they are simply too large to be allowed to fail, and that most of the post 2000 craziness in the real estate market was as the GSE’s as bystanders, since regulators hold them back.
Atrios disagrees with the idea that thay are too large to fail, and says that they should fail, at least from the perspective of their shareholders, that these organizations can be reconstituted as fully government entities, as Fannie was until the late 1960s.
The support of (re)nationally is the general opinion of the blogosphere cognoscenti turns out to be pro-nationalization too, and, on the Marketplace radio today, I heard wingnut “economist” Amity Shlaes suggest the same thing, only she suggested that the “healthy” parts be re-privatized, leaving the taxpayers holding the bag for the bad parts.
It turns out that there is actually no disagreement, as Krugman endorses nationalization too in this blog post. It just did not make the cut in the limited space in his Times OP/ED.
He also notes that as the housing market inflated, the GSE’s became a smaller part of the market (chart pr0n):
In any case, it’s clear that the statements by the Fed and the Treasury Department have stabilized things, at least for now, as Freddie Mac, clearly the weaker of the two GSEs, just successfully sold $3 billion in short term debt, $2 billion for three-months at 2.309% and $1 billion six-monthsat 2.496%. the company said.
On the other hand, we have a number of investors saying that they are basically insolvent, including George Soros and Jim Rogers, and Goldman Sachs is predicting at least another 35% stock decline.
As a bit of interesting historical information, the Washington Post has a nice article about how the GSE’s built, and used, their lobbying clout to prevent restrictions and capital requirements from being increased.
Well, they got what they wished for, much to their unhappiness.
Here’s am interesting take on the financial health of Citigroup.
The new CEO says that shrinking its $2.2 trillion balance sheet is a priority. By this he means that he wants to minimize potential liabilities, but he neglects to mention an additional $1.1 trillion in entities that are off the balance sheet, in things like trusts, financing vehicles, and CDOs.
The US system needs a major clean up and some sunlight, but companies like Citi resemble vampires, or at least some suffering from severe porphyria.
Showing the light of day to these financial concerns will kill many of them.
It looks like they are going to fix some things, particularly pre-payment penalties on abusive loans, requiring escrowing taxes, etc.
It’s not much, but it’s a start.
While writing on the impending bailouts of the GSEs he notes that:
The reality is that the U.S. has invested too much – especially in the last eight years – in building its stock of wasteful housing capital (whose effect on the productivity of labor is zero) and has not invested enough in the accumulation of productive physical capital (equipment, machinery, etc.) that leads to an increase in the productivity of labor and increases long run economic growth.
This is exactly the problem.
In fact the problem is more general. Our economy is no longer producing goods and service of value as a means of activity. Instead it is moving towards arbitrage, and at some point, there will be too many balls in the air for it to continue.
For all I know, it may already have happened.