Paul Kedrosky finds an article in a Swiss paper on a study by the 2nd largest hedge fund in the world, Bridgewater, that estimates the final hit on the credit crunch at $1.6 trillion.
Yes, that’s trillion with a T, and my guess is that the number is too low.
Why, because even the most bearish of bears, Noriel Roubini, has admitted that he underestimated the size of the bubble and the resulting size of the collapse.
Freddie Mac fell 18 percent and Fannie Mae 16 percent after a Lehman Brothers analysts said that they would have to raise more than $75 billion.
They are both down more than 60% so far this year.
Normally, I don’t follow stock, but if they do indeed need to raise capital to stay solvent, then they will have…you got it…sell stock for said capital.
The rule, FAS 140, is intended to make sure that companies don’t keep “under performing assets “(translation: worthless crap) in “off-balance sheet entities” (translation: embezzlement and fraud).
The $ 30 billion in assets that the Federal Reserve took ownership of as a result of the Bear Stearns bailout now have a fair market value of only $28.9 billion as of June 26.
That’s about 3% of value in about 3 months. Anybody wonder why I call it crap for cash?
The deal to take Penn National private just foundered on the shoals of the credit crunch.
In case you are wondering about inflation, retail gasoline just hit a new high, breaking $4.10/gallon, even thoughoil prices backed off a little bit.
FWIW, it’s not just oil. BHP Billiton and China’s Baosteel just negotiated a 96.5%rate hike.
The currency markets are predicting that the ECB won’t raise rates again, so the dollar strengthened a bit.
Finally, in real estate, we are seeing soaring home equity line of credit delinquencies.
I’ve mentioned that banks now see that they need to deleverage, that is reduce the ratio of their assets to the money that they have borrowed, and now we are seeing the first steps, cheap sales of assets to generate needed cash.
I think that this is only the beginning.
As expected, today was a busy day, we had the ECB raising its benchmark interest rate 25 basis points to 4.25%, though investors were heartened that the accompanying statement appeared to make further hikes less likely.
We also had 62,000 jobs lost in the US, though the statistical witches brew known as the official unemployment rate stayed at 5.5%.
Of course, the “adjustment” for April and May added another 52K lost jobs.
Once again, I have to point you to Barry Ritholtz, who notes that the adjustments to that number are sick:
June 2008 was 177k versus June 2007 155k
Construction Gains +29k
Professional & Business Services +22k
Leisure and Hospitality +86k
Construction gained workers? Leisure and hospitality picked up 86K jobs? When the number of people traveling is dropping?
We need a truth and reconciliation commission for our economic stats generating agencies.
I would also note, as Mr. Ritholtz does, that the number of new unemployment claims jumped to 404,000, which does not include those people who will now get an additional 13 weeks.
What’s more, the SM nonmanufacturing index fell to 48.2% from 51.7%, indicating the service sector is taking it on the chin too.
It appears, however, that investors expected worse, as the dollar actually strengthened after all this.
Behold the power of low expectations.
However, despite the dollar strengthening, oil hit a new record, hitting $145.85/bbl mid day, and retail gasoline hit a new record too.
In real estate, we are seeing home mortgage rates down for the first time in 3 weeks, and we have demand for office space shrinking.
Chart pr0n:
Economist and former Clinton deputy assistant secretary of the U.S. Treasury Brad Delong asks, “Is the Federal Reserve too volatile and hair-trigger? Or is the ECB too sluggish?“
I think that a more accurate answer is that Alan “Bubbles” Greenspan is an idiot, you will notice that the volitility, except for the steep decline at the end, is all under his watch, and “Helicopter Ben” throwing money out the window is as a result of Greenspan’s disastrous policies.
I would also note that the ECB is not charged with maintaining employment, just keeping inflation down, so they would naturally be slower to reduce rates. They have no balance to keep for them.
It appears that the FDIC is taking exception some bank policies that are becoming more frequent, blanket suspension of home equity lines of credit (HELOC), and management of real estate owned (REO) properties.
In the first, the FDIC is saying that, “under Regulation Z [of the truth in lending laws], lenders can reduce an applicable credit limit only in the event of “significant decline” to the value of an individual property (a “material change” in the borrower’s financial condition — such as the loss of a job — qualifies as well),” so it must be handled on a case by case basis
In the second, the FDIC has issued instructions on proper management of REO properties, because, “some banks are choosing not to pay taxes on certain low-value REO properties in hard-hit neighborhoods, in the hopes that local municipalities will take the property to a tax sale rather than force the lender to carry the property on its books.”
Neither of these notes suggest that housing is heading for a recovery.
We are now 20% below the October, 2007 high.
For reasons unclear to me, a20% drop is the line for a bear market.
For the first time in 30 years, there were no initial public offerings for firms backed venture capital.
The market is froze up.
Specifically, regulators in Massachusetts have obtained emails showing that UBS was pushing auction rate securities even as it believed that the market was in trouble.
They were aggressively selling these to individual consumers, even while their corporate clients were bailing, because they did not want to be left hold the bag.
It’s called, “putting lipstick on a pig”:
This e-mail was released as part of a civil suit brought against UBS by William Galvin, secretary of the Commonwealth of Massachusetts. He says UBS misled investors by saying that auction-rate securities were as safe as cash in order to keep these arcane bonds off their own books. Among the other e-mails uncovered:
From Joel P. Aresco, chief risk officer for the Americas, Nov. 15: “What measures are being taken to reduce this exposure? [to auction rate securities”
From David Shulman, Dec. 11: “I am pushing every angle here to move product.”
I hope that someone is going to go to jail over this.
I believe that I’ve covered it before in passing, but this is, I believe, the first court case in which a court has canceled a loan for deceptive practices.
They plaintiffs thought that they had gotten a loan that was fixed for the first 5 years, but rates went up after the first year:
The Andrews filed the case seeking class action status; and in early 2007, U.S. District Judge Lynn Adelman ruled that the bank had violated the Truth in Lending Act, or TILA, and that thousands of other Chevy Chase borrowers could join them as plaintiffs.
The judge transformed the case from a run-of-the-mill class action to a potential nightmare for the U.S. banking industry by also finding that the borrowers could force the bank to cancel, or rescind, their loans. That decision was stayed pending an appeal to the 7th U.S. Circuit Court of Appeals, which is expected to rule any day.
The lawsuits filed by attorneys general in California, Florida, and Illinois use much the same theory.
It’s based on the 1968 Truth in Lending Act, which requires clear disclosures of terms, and allows for, “rescission, or termination, of a loan and the return of all interest and fees when a lender is found in violation.”
Needless to say, the banks are freaking, though I would ask why any ethical mortgage banker would have anything to fear.
This one’s going to the Supreme Court, where I expect them to rule in a 5-4 split, that only little people have to follow the law.
It appears that they paid $2.5 billion, not the originally agreed to $4 billion.
This was not driving a hard bargain. It’s just that the buy was a stock swap, and BoA’s stock has slumped recently as a result of worries about the deal.
I still say that there is a lot of pain to come in the deal.
Rich Toscano, talking about mortgage rates, gives us this little bit of chart fun:
If you take a look, you will notice that the 30 year fixed and 1 year ARM rates change very little relative to the Federal Funds rate as charged set by the Federal Reserve.
It comes down to the fact that the lenders are interested in how interest rates effect them, and even if the rates are low today, they may be higher tomorrow.
If interest rates are 9%, and you have a 30 year fixed mortgage at 6%, you will not be a happy camper.
Thus, you don’t cut all that much when the Fed sets rates really low, because you have to look forward many years.
The 1 year ARM is a bit more amenable to the interest rate cuts, but only a little, since they typically have a limit to how much the rates will go up over time, and you can end up behind the same 8-ball.
This is why the drastic rates cuts instituted by Bernanke aren’t working. People do not believe this to be a long term sustainable solution, so they are not willing to issue cheaper loans.
Hence the term pushing on a string.
So, it appears that the financial services industry is now objecting to pricing assets on their balance sheets at market value, because it makes their balance sheets look pretty sick.
Let’s be clear on this: these companies bought a bunch of highly complex financial instruments, ones that they themselves did not understand, and now no one is willing to buy this toxic waste at anything even remotely near to face value.
Stephen Schwarzman, the co-founder of the Blackstone Group, thinks that the accounting rule, FAS 157, which requires that you place your investments on the books at fair market value, is too high a standard, and that,”the rule is accentuating and amplifying potential losses.”
What is amplifying the rule is traders and senior executives dealing in pixie dust, because they got a commission for doing so.
Note that SOME companies have been doing mark to market for a long time:
But Goldman Sachs proved why FAS 157 works: Goldman has been marking its books to market for years, and as a result, its risk officers were able to hold back its go-go traders from making bad bets when everyone else was throwing their chips last year into the subprime game.
Will no one rid me of these turbulent brokers?
The state is filing suit against the lending giant, alleging predatory lending.
Heck of a purchase, Bank of America.
You now have California, Florida, and Illinois suing you, so that’s probably already double digits of their market share under legal attack.
The major banks are deleveraging, reducing their debt to asset ratio.
They are worried that in the event or a run, they could go into Bear Stearns style meltdown, and that if Congress of the SEC start increasing margin requirements, that they will be caught flat-footed.
Additionally, the leverage that they retain is being moved to longer term loans, which insulates them from a panic, at the cost of higher interest rates.
We still have a way to go down as this all unwinds, but one consequence will be higher interest rates, as the availability of money decreases, and supply and demand drives the price higher.
Alt-A loans are technically prime loans, though they are low quality prime loans that bridge the gap between sub-prime and regular prime loans, and their performance tanked in May, with delinquencies greater than 60 days, roll rates*, and loss severity all rising.
There never was a sub-prime crisis. There is a housing crash.
*Roll rates capture the number of loans moving from current to delinquent each month.
It turns out that a lot of banks, particularly smaller ones, look likely to get hammered by construction loans that allow developers to delay making payments.
They are called interest reserve loans, and they may be one of the next bubbles to pop:“
In essence, the banks pay themselves until the loan becomes due or the property generates cash flow.”
That’s a scary quote, and what it means is that a loan can continue to be reported as a “performing” loan, even though payments are not being made and the underlying property is not selling.
Sounds awfully familiar. A financial instrument predicated on the idea that property prices always go up, and never go down.
The good news is that the small banks seem to be a bit more proactive in recognizing and addressing the problem:
More banks are starting to change how they use interest reserves. Integrity Bank has stopped using interest reserves on loans used only for purchasing land without immediate plans for construction and loans on projects that have been delayed or abandoned. David Edwards, who joined Integrity in December as chief credit officer as part of a management shake-up at the bank late last year, said: “There is nothing wrong with the use of interest reserves. It depends on whether the borrower has hard cash [put up front], and whether the project is active or not.”
Towne Bank, of Mesa, Ariz., has eliminated funding interest reserves. “Realistically, you never know whether a borrower can keep the loan current if you are the one who’s making the payment,” Patrick Patrick, who became chief executive of the bank in February.
HomeTown Bank, also ordered to change interest-reserves practices early this year, now is part of SunTrust Banks Inc., of Atlanta. A spokesman declined to comment.