Category: Finance

Barny Frank is Angry

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After raising the limits for loans that purchased by Fannie and Freddie, which carry a lower interest rate, in February, Barney Frank is now looking into why so few of the new “non-jumbo jumbo” loans have been made.

The raising of the cap from $417,000 to $729,750 was intended to help property move in high cost markets, like Frank’s district.

The simple reason that he is not seeing much in the way of these loans is because banks are not lending to anyone.

We are seeing an unprecedented tightening in mortgage lending standards, and so very few loans are being made.

Economics Update

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People are now shocked that Fannie Mae has posted a $2.51 billion loss and cut its dividend. Do I need to quote Claude Raines in Casablanca?

Oil set another new record, $122.73, before settling at $121.84. Any bets on when we hit $130 for the first time?

Finally, we have this tidbit from the Wall Street Journal

And in a more-worrisome trend, borrowing from these retirement plans is surging. At the end of last year, 18% of workers had loans outstanding from their plans, up from 11% in 2006, according to a survey of 2,011 full-time employees released in February by the Transamerica Center for Retirement Studies, a nonprofit corporation funded by Aegon NV’s Transamerica Life Insurance Co. With home prices falling nationwide, the loans may be a sign that cash-strapped consumers are raiding their nest eggs to stay afloat, no longer able to tap their houses for cash and up against their credit-card limits.

This is a foreseeable consequence of defined contribution plans, and notwithstanding the Randroid utopian claims, it has always been the problem with having people make a bet in which, if they die young, they win.

It’s the YOYO (You’re On You’re Own) society.

Fannie and Freddie at Risk

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With all the hooplah over Congressional action to allow Fannie Mae and Freddie Mac to make more and larger loans, the financial press is just starting to notice that maybe it will mean larger, and perhaps a quicker problems for the GSEs.

I said this when they originally expanded their services to some “Jumbo” mortgages that this was ill advised, and with them controlling about 80% of the mortgage loans bought by investors, this is going to get ugly.

Bank of America May not Honor Country Debt Upon Purchase

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BoA has announced in a regulatory filing with the SEC that, “hasn’t decided whether to guarantee Countrywide debt after BofA’s $4 billion takeover of Countrywide, which is supposed to be completed in the 2nd half of the year.

Basically, once it’s bought, if the corporate structure is right, Countrywide could declare bankruptcy and leave the bond holders with nothing, which would mean that it would not BoA’s problem.

Alternatively, BoA could be attempting to spook the bond holders so that they sell to BoA at a discount.

This system of corporations and shell companies is completely out of control.

I’m just saying.

Bank of England Governor Blasts Pay and Benefits in Financial Industry

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We’ve been hearing more and more about how the bonuses for short term profits encouraged leverage and risky investments, and now BOE governor Mervyn King has joined the fray:

Mervyn King yesterday laid the blame for the credit crunch squarely at the door of commercial banks, criticising their excessive pay packages and risky lending.

The Bank of England governor also told the Treasury select committee he was unhappy that excessive pay in the City attracted too many young people away from careers elsewhere.

Speaking as data emerged showing that the credit crunch had hit retail sales, consumer confidence and mortgage lending hard, King said he hoped the banks would learn the lessons from the crisis and rein in their pay structures and be more responsible in their lending.

“Banks have come to realise in the recent crisis that they are paying the price for having designed compensation packages which provide incentives that are not, in the long run, in the interests of the banks themselves, and I would like to think that would change,” King said.

Of course, Alan “Bubbles” Greenspan would argue that the pay schemes were innovation, and a good thing.

I am so glad to see him alive to see his reputation melt away like that of the wicked witch of the west in the Wizard of Oz.

Economics Update

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Well, we just got a jobs report that shows just how screwed up our statistics have gotten, with non farm jobs falling by 20,000 but the unemployment rate went down, which just does not work.

Additionally, the so called birgh death corrections are completely bogus:
+45k construction jobs v 37k April 2007
+8k jobs were added in financial activities versus 1k last April.
+72k in professional/business services versus 48k last April.
+83k in leisure/hospitality (95k last April).

The idea that construction and financial added 53,000 jobs in April comes from somewhere west of the planet Skaro.

The financial press is uncritically applauding, of course.

In energy, oil is upto over $116 for the first time in a few days, but gasoline is down, not hitting a new record for the first time in 17 days.

Meanwhile, the Fed and other central banks are pouring yet more money into the frozen financial system. The Fed is allowing more types of bonds in its trash for cash auctions, but it does not appear to help. The LIBOR, from which much of the adjustable rate loan rates are derived has been largely unmoved.

It’s pushing on a string, as I’ve said before, because it’s a solvency crisis, not a liquidity crisis, as I’ve also said before.

The is still strengthening a bit, but I’m a bear long term, but I’m a bear on everything.

In more pushing on a string news, the US treasury is offering 0% on its inflation protected savings bonds.

A small distinction, mypost of 4 March had was about TIPS, not inflation protected savings bonds, just in case you are wondering if I’m repeating stuff.

Finally, in real estate, 63% of home sales in San Diego are short sales and REOs, which means that either the owner has sold for less than they owe, or it’s been foreclosed on.

Economics Update

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First, initial unemployment insurance claims increase, ba by 35K to 380K. Note that this is an inherently noisy figure, but it’s been bad for over a month, which indicates a trend.

Becasue of the Fed’s signals regarding future rate cuts, as na ga na do it, the dollar has strengthened, and oil has fallen a bit.

That being said, the Euro zone appears to be under increasing stress from the different economic trajectories of its members.

Citi appears to need more money, so it’s raising it through a $4½ billion stock offering, further diluting its stock holders equity.

Seriously, it’s like a dog chasing its own tail…down the drain.

We have a number out of San Diego, with house prices off dropping 19.2% since February 2007.

This means that if someone bought a 30 year fixed mortgage, with 20% down, that they would be under water on the loan if closing and broker costs are included.

Economics Update

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The big news, as it is on any day when the fed meets, is the decision, which was to cut the federal funds rate by 25 basis points. Of note that that they are no signaling no more cuts.

Of course, with the rate at 2%, it’s not like they can really cut much further.

Then we got the GDP numbers for the first quarter of 2008. The number is that U.S.GDP increased at an 0.6% annual pace, though this will likely drop when a final reading is released.

I will provide more detail, but the spin that this is not a contraction is false” initial reading, will fall. Also, we’ve already had 0.6% so far this year, we will likely see 3-4% inflation even with the bogus government data, it would be closer to 10% with honest data, and 0.6%-3%=-2.4% that’s a recession.

I, with the aid of the good doctor Roubini, will provide more detail in a later post.

Oil prices have dropped, which should come as no surprise. The spikes of the past few days were as the result of short term news, though the trend still seems to be up.

In real estate, we have
ortgage application volume falling 11.25% last week, and we have an analysis from Barclays Capital that upwards of half of Alt-A and subprime mortgages will be under water by year’s end, and they are predicting a fair amount of “jingle mail” as a result.

Economics Update

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Well, the consumer confidence index fell to its lowest level in 5 years, what’s more, the Frog consumers are bumming more than they have in 20 years.

Sarkosy is not going to find a lot of support for making the French economy more “Anglo-Saxon” right now.

In real estate, foreclosures jumped 23% in 1Q of 2007, which is on a pace for a 200% increase in foreclosures in 2008, while the Case-Shiller Home Price index fell 13% year over year in February.

This is not over. It’s not close to being over.

In the ever entertaining Countrywide sage, the mortgage lender posted a $893 million first-quarter loss.

I still wonder when some Bank of America investor finally starts screaming about a proxy fight over their purchase of Nationwide. Every day, the deal looks worse and worse.

As to energy, oil is down, but gasoline is up.

Economics Update

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I think that the best indication that we are well into a recession is that unpaid utility bills, as well as service cutoffs, are going through the proverbial roof. People can’t afford the mortgages, or the utilities, or so it seems.

BTW this is a very good pictorial representation of the credit freeze:

Click pic for PDF. (H/t econobrowser)

Oil hit an all time high, less than a dime less than $120/bbl, which means that inflation is still a problem, but don’t tell helicopter Ben, because the markets have already priced in another rate cut from the Fed.

As I’ve said before, it won’t matter, the fed is pushing on a string, but the fact that the Euro zone looks to be in for a round of slow growth and inflation, aka stagflation, with inflation of over 3% (their goal is 2%), so they will likely raise rates, as the ECB does not have maintaining employment as a part of its charter, just controlling inflation.

Rates going up in Europe should push the dollar down, which is why I find it confusing that the done better against the Euro in the past three days than it has since 2005, but I’m not sure how long this will last, as Japanese investors are moving away from US treasuries, which is significant, as they are the largest holders of US treasuries.

In real estate we have a new record for vacant homes in the US, 2.9%, the highest level since record keeping began in 1959.

Note that this does not include rental properties, and it’s pretty grim.

For those of you who are considering picking up something cheap in foreclosure, be warned, trash outs are way up Trashouts, here are stories from Massachusetts and Nevada.

We are talking serious stuff, sinks and bathtubs ripped out, and in some cases, vandalism along the lines of cement down the pipes. Factor that into a sales price.

I would also argue that it’s likely that we may shortly start seeing violence against people who purchase at auction, so do not enter into this likely.

Level 3 Asset Bingo

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Here is an interesting commentary on the rather dubious nature of some of the assets on wall street.

Here’s Rule No. 1 from Wall Street’s public-relations playbook: If the company you run has big losses on hard-to-value assets, scream your head off about the accounting rules.

And what if the squishy values result in huge gains instead, as they have in the not-so-distant past? Rule No. 2: Stay mum about it for as long as the rules allow.

Basically he is noting that the various brokerages are booking a lot of profits on level 3 assets, but level three assets have no regular market to independently determine value, so we are back to smoke and mirror.

Go read, if you dare.

Signs of Sanity Appearing with Regard to the GSEs

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It appears that both the Treasury Department and Congress are bedcoming concerned about the increasing exposure of Fannie Mae and Freddie Mac to a potential meltdown, and are looking at increased regulations to prevent this.

Considering the fact that they are the 2nd and 3rd largest borrowers in the world, after the US government, the effects of their needing a bailout are enormous.

On the other side of this are people who want to bolster the housing market, and tighter GSE regulation goes in the other direction, and the fact that they have been aggressively lobbying Congress for years.

Hopefully, this time the bears win, or we may see a trillion+ dollar bailout.

Economics Update

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Today, since they’ve been off the update for a while, I’d like to welcome back a monoliner insurer, specifically AMBAC which lost even more money than forecast, $3.6 billion.

However, they are looking to turning things around. Specifically, they have their “lawyers and forensic experts”looking at 17 big money losing contracts, targeting (it appears) Bear Stearns and First Franklin. The max losses were originally seen at 10-12%, and now they are staring down the barrels of over 80%, so they may have a good case.

We’ll be seeing a lot more of this, and insurers won’t be paying out in the near term without this sort of teardown of the contract and investment looking for evidence of deception of some sort.

In related news, bondholders recovery on bankruptcy has plunged, with B+ bonds going from around 42¢ on the dollar to less than 10¢.

This is not a liquidity crisis. It is an insolvency crisis.

The Fed, however, is still treating this as a liquidity crisis, because there is no cure for an insolvency crisis but the dissolution of the entities involved, and it will auction another $75 billion in Treasuries in exchange for pieces of the big sh%$pile.

Speaking of the sh%$pile Moody’s just downgraded 1,923 residential mortgage backed securities in the past to days.

It’s likely to get worse. Robert Shiller, who is one of the creators of Case-Shiller housing index, believes that house prices will fall more than 30% from their high, and likens this to the slump associated with the Great Depression.

In terms of the more general economy, we have UPS saying that it’s seeing a dramatic slowing in the U.S. economy, and in its business, and Target’s write offs on its credit card sales are soaring. They are at an annualized rate of 8.1% for March (ouch) up from a rate of 6.8% in February (ouch x2).

In currency, we already know about the Dollar cracking the $1.60 barrier, but now we are seeing a price hike driven by this, with Airbus raising prices on its planes.

We’re going to see a lot more currency driven inflation.