Category: Finance

Economics Update

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It’s official, we’re in a recession, because Bush is denying that we are in a recession – Apr. 22, 2008.

For more direct evidence of a recession, we have American drivers cutting back on driving and gasoline usage. When Americans stop driving, it means that the recession is here…big time.

In energy, oil broke $119/bbl, $110/bbl now appears to be the new $100/bbl

Across the border, Canadian Central Bank cut rates by 50 basis points, but even so, the Canadian dollar is still above parity with the US dollar, but they are definitely seeing the fallout from the US downturn.

In other currency matters, the dollar weakened to above $1.60:€1.00, though it’s now about $1.5992.

At the beginning of the year, it was $1.48 or so.

In things related to banking and real estate, we have to start with the elephant in the room, that GSEs Fannie Mae and Freddie Mac are looking increasingly at risk, and a potential bailout would run to over $1 trillion, which might threaten the US government’s AAA rating.

Generally, bank profits are tanking, so it should come as no surprise that banks are retrenching.

Notably, Bank of America will be ending subprime operations, and tightening generally on mortgage standards, which makes it hard to understand why it’s buying Countrywide.

Citi needs more capital, so it’s offerring $6.2 billion in hybrid bonds, at 8.4%, with an A2 rating.

Hybrid bonds are….are….Ummm, a sort of hybrid between preferred stock and bonds…I’m confused, and they are described as “innovative”. I’ll try to get more information, but in the meantime, run away.

Finally, the Fed bailout of banks continues apace, reaching $360 billion with the sale yesterday.

Economics Update

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Current position of Dollar with Regard to Euro

The rebels in Nigeria’s delta region just bombed an oil pipeline, and in response, oil hit $117/bbl before settling at $116.69.

In addtion to lower levels of employment, hours worked by those still employed are also down, so there are fewer people doing less work to produce goods and services.

Both Citi and AT&T are announcing big layoffs because of losses (Citi), and “increased competitive pressure (AT&T).

It’s a recession already.

The Fed just auctioned off about $25 billion for non-magic beans, as a part of its ongoing Wall St. bailout.

Yesterdya, I talked about new home sales falling, today, it’s existing home sales falling 13%, but north of the Border in Canada, which has generally had a better regulated loan market.

Finally, a picture, courtesy of Paul Krugman showing the increase in the LIBOR-OIS spread since this all started:


The second image is actually a bit scarier, because it shows a longer time frame, and it shows that the spread is completely outside of historical norms.

A Train Wreck in Student Loans is a Good Thing™

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Alfred Lord, the CEO of Sallie Mae*, is saying that Sallie is looking at a potential “train wreck” in student loans, because no one is buying their repackaged debt, and because federal law has reduced the subsides

This is a good thing. The student loan business is a racket. It costs both the student and the taxpayer more than direct loans from the government.

These loans have special protections, they are not dischargeable by bankruptcy, and the juxtaposition of subsidies and government guaranties to the lenders make it a truly parasitic part of the financial system.

I should note that, God help me, I actually agree with David Frum’s position that the student loan/grant process is, and creates unconscionable costs to higher ed, because there is a federally maintained never-never land loan plan, which cushions the effects of inflation.

Where he and I differ is that he suggests, or at least strongly implies support for, ending the program with no replacement†, while I think that the government has sufficient power as lender for student loans to enforce some realistic price controls.‡

*Sallie is not a Government Sponsored Entity (GSE) like Fannie and Freddie. It was, but it found the student loan market so lucrative that it successfully lobbied Congress to privatize in 2004, which is why the name sounds like s GSE’s name.
†Something he would love as a former fellow atthe racist Manhattan institute. It would mean that his children would have a student body much more comfortable to him.
‡Oh yeah, while you are at it, do something about the inflation in college text books too.

Economics Update

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Clickable Image

In terms of economic indicators, we have 4 today, one up, and three down.

FWIW, the Jobless claims are noisy, but overall the numbers are trending up, and the LEI typically does not mean anything until you get three in a row.

The Dollar hit a new low vs. the Euro, $1.5982:€.

As an aside, I spend a fair amount of time on currency, because I believe that it will be the final nail in the proverbial coffin, much like it was in the Asian and Argentine financial crises.

In banking, investment and otherwise, we have
Merrilly Lynch announcing a $6.5 billion write down and massive layoffs.

Across the pond, we have the Bank of England announcing that it had three times as many bids for its cash auction as it was offering, implying that credit is still pretty frozen, and the prospect of massive bank failures in Germany as a result of the subprime crisis, which truth be told extends well into the prime mortgages too.

Finally, in another sign of the apocalypse, my predictions regarding the countrywide sale, that Bank of America was throwing good money after bad, appear to be coming true, as , “Continued credit deterioration at Countrywide Financial Corp. could raise concern among investors about the final sale price of the mortgage lender to Bank of America Corp., a Lehman Brothers analyst said Thursday.”

Economics Update

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First, the Euro just hit an all-time high, $1.5968:€1.0000 (see also here)

I don’t think that it’s going to get better either, because its clear that Bernanke is not going to raise rates any time soon, because Euro zone inflation just hit an all time high of 3.6%, which means that the ECB will raise rates, as their only official duty is to prevent inflation, as opposed to the Feds dual roles of both price and employment stability.

This seems to be reinforced by the statements of Jean-Claude Trichet, the president of the ECB, who is saying that the European Central Bank is still focused in inflation, and that there is, “a strong belief that a solid anchoring of inflation expectations is of the essence”.

US inflation was pretty much in line with forcasts in March, 0.3% for the CPI, and 0.2% for the so called “core rate”

Finally, oil broke the $115/bbl barrier, hitting $115.07/bbl.

OK, This One is Really Bad News if True

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OK, for a while now, I have been talking about how the increasing TED and other spreads indicate that the credit market has not unfrozen.

It now appears that at least one of these numbers, the LIBOR, the London inter-bank offered rate, may actually have been significantly understated, meaning that the spread is higher, which means that people are more timid about lending money than has been previously reported (H/t Paul Krugman)

There are now indications that some banks may be under-reporting both the interest rates on the loans that they are paying, because it would be seen as financial weakness, which might lead to downgrades, and possibly a run on the institution.

Questions about Libor were raised as far back as November, at a Bank of England meeting in which United Kingdom banks, the firms that process bank trades and central bank officials discussed the recent financial turmoil. According to minutes of the meeting, “several group members thought that Libor fixings had been lower than actual traded interbank rates through the period of stress.” In a recent report, two economists at the Bank for International Settlements, a sort of central bank for central bankers, also expressed concerns that banks might report inaccurate rate quotes.

It’s of interest to more than the markets. LIBOR is also what many adjustable rate mortgages use as a benchmark to set their rates.

The financial system really does seem on the verge of collapse. We are getting to the point where there is absolutely no reliable data upon which one can make a decision, whether it is an individual investor, or the Federal Reserve.

Credit Default Swaps: Another Primer

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In 2002, Greenspan discussing the CDS said that, “The use of a growing array of derivatives and the related application of more sophisticated methods for measuring and managing risk are key factors underpinning the enhanced resilience of our largest financial intermediaries.

Now we have $45 TRILLION of potential exposure out there.

Bloomberg has a pretty good primer here, and it’s fairly entertaining, which goes along with the fact that “Frankenstein’s Monster” is in the title.

Maryland Makes Foreclosure More Difficult

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I think that it is a good thing that the Maryland leg, and Governor O’Malley has signed into law, substantial changes in the time lines for foreclosures.

Basic gist of the bill is that the ender cannot file for foreclosure until at least 90 days after default, and there must be 45 days notice of foreclosure, with personal service, meaning a guy handing you papers.

It used to be theoretically possible to foreclose in 15 days.

Fannie and Freddie at Risk?

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Standard and Poors is warning that the GSEs are facing increasing risks as the housing crisis deepens, and so they might at some future time have to downgrade them.

Being the 2nd and 3rd largest borrowers in the world, they are firmly in the “too big to fail” camp, the regulators have reduced the reserve capital requirements for the GSEs (also here), and Congress making noise about increasing their lending limits*, I’m not particularly confident in Fannie Mae and Freddie Mac remaining particularly solvent.

*Shoot me now, I’m agreeing with some puke economist from the Heritage Foundation.

Economics Update

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Real estate is still trending worse. We have the New York Times writing about how the troubles have gone global.*

We also are now seeing discounts up to 60% on the last sale price in bank auctions on properties in South Florida.

And it won’t get better soon, because when pollsters ask about buying a home, respondents reply, “What??? buy a house now??? Are you out of your bloody mind???“.

Energy prices are surging, with oil closing at a new all time high, $111.76/bbl.

Also, it looks like Wachovia is hemorrhaging, and so is cutting dividends and planning to offer stock for much needed capital.

*As an aside, I’m not surprised that Ireland is in this select group. The “Celtic Tiger” has always seemed to me to be closer to Thailand and Indonesia than the rest of the EU with its prosperity being almost completely driven by low wages and real estate, and Spain is a close second on this. This is not to say that they will become 3rd world countries, but that they both may end up far closer to EU members like Poland, Slovakia, Hungary, and Croatia than they had previously imagined.†
†Mass flows of speculative capital always produce a nasty hangover.

Economics Update

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Jobless claims are back below 400,000, down to 357,000. This is a noisy number, and it appears that the Easter holiday may have effected this somehow.

In high finance, we are starting to see some of the sh%$pile being liquidated at steep discounts, with Goldman Sachs selling ½ billion of Chrysler debt at about 63¢ on the dollar, which comes to about a $185 million dollar haircut, and it has been revealed that Lehman liquidated about $1 billion in funds.

You can view this as an orderly unwinding of these highly uncertain financial instruments, or the first steps towards a rush to the exits. I’m not sure which, though the fact that the LIBOR-OIS and the TED spreads are up again.* might indicate that it is a rush to the exits.

Basically, the spread, or difference in interest rates, between what banks demand when they lend to each other is a measure of how skittish people are about debt. The higher the number, the worse fear.

After dropping briefly following the Bear bailout, the spread is heading back up, implying that there are a lot of people who don’t want to buy someone else’s debt.

In international trade, the Dollar hit a record low vs the Euro, $1.5912:€1.0000, and the Yuan strengthened to below 7 to the dollar for the first time ever.

On the brighter side, the trade deficit rose in February, which might indicate that the economy is strengthening somewhat, though it isn’t in the UK apparently, because the Bank of England cuts key British interest rate 25 basis points, to 5 percent.

The continental Europeans appear to be more worried about inflation though, as the European Central Bank left rates unchanged, which will put some more downward pressure on the dollar.

Seriously though, I really can’t make a whole bunch of sense in today’s data, there is too much noise in opposite directions, which is why a fair man is not too hard on economists, who deal with this all the time.

Luckily, I’m not a fair man, so to all you economists, Go away, or I shall taunt you a second time.

*As Paul Krugman puts it, “One is the spread between Libor and Treasuries, the other the spread between Libor and the futures price of the Fed funds rate; I tend to prefer TED spread, because fears of bank defaults should affect Fed funds as well as Libor; but I know that Fed officials prefer OIS. Anyway, both pointing in the same direction.”

An Update on the Citi Debt Sale

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In my economics update, I mentioned that Citi was selling about $12 billion in loans to private equity firms at a loss.

Well, I did nor realize the potential significance, but on the way to pick up a Mama Leah’s pizza* (deep dish), I heard heard listening to the radio, and they were giving high 5s about it on Marketplace.

They think that it might presage an unfreezing of the credit markets, because the banks have finally been able to sell some of that illiquid paper, though in this case it looks like Citi will be getting somewhat less than 90¢ on the dollar.

While Citi took the proverbial haircut on this, that is still better than what it was previously listed at on their balance sheet.

Only on Wall Street is a loss of somewhere in the neighborhood of $1½ billion considered good news.

Personally, I think that mortgage backed paper is still too uncertain, and there are so many balls in the air as a function of the extraordinary levels of leverage that it does not mean much.

But I’m a bear by inclination, and my record on predictions sucks like a thousand Hoovers all going at once.

*Best Kosher ‘Za in Ballmur.

Economics Update

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Well, Citi looks headed for a wild ride, with predictions of $17 billion in write-downs for 1Q 2008, and rumors that it is in talks to sell $12 billion of dubious loans at a significant discount.

They were paper sold as part of LBO activity which they could not resell.

Insurers are sure to take a beating on S&P downgrading 4 of them, MGIC Investment Corp., Old Republic International Corp., PMI Group Inc., and Radian Group Inc.

In energy, oil is trading near an all time high on weak inventories, and in currency, the dollar is down, because the market expects further rate cuts.

Economics Update

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Busy day in real estate, we have:

Of course with any of these situations, you will inevitably find the highly placed moron, and today’s is Morgan Stanley CEO John Mack, who is saying that he thinks that the credit crunch is, “in the final innings”. If you have money in Morgan, get it out now.

Why am I so certain about this? Because the Fed auctioned another $50 billion banks in their “crap for cash” program, which has now “auctioned” $310 billion to banks for their worthless mortgage paper.

If that doesn’t convince you, how about GMAC looking down the barrel of a ratings cut, which means that people who might want to buy a car will find it even more difficult to get a loan to do so.

Of course, Mack thinks that things are looking up because private equity firm TPG just put $7 billion into WaMu, which implies to him that private equity is on its way to a comeback.

Nope….Dead cat bounce. WaMu’s only virtue is that it’s better, and only a bit better, than Countrywide.

For an idea of how badly things are going, note that First Marblehead is at risk of imploding. Note that FM is a student-loan services provider. It should basically be impossible for them to lose money.

This is federally guaranteed, and cannot be discharged through bankruptcy, but given that their insurer, The Education Resources Institute Inc., just filed for bankruptcy, all bets are off.

Economics Update

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In the world of pipe dreams, we have the EU calling for a coordinated response to the credit squeeze.

The Euro-Wimps just don’t get it. This is America. We don’t do joint action based on a deliberate approach to everyone’s long term best interest. We shoot first, and ask questions later, and when the dead guy we shot doesn’t answer, we water board him, and then we bail out the bad actors, like Bear Stearns.

In the ever entertaining world of the monoliners, Fitch has cut MBIA’s rating to AA from AAA, because they are under capitalized (broke).

The disgrace here is that it took so long, though you knew that it was coming when MBIA asked Fitch to stop rating it about 3 weeks ago.

In the no surprise category, bankruptcies jumped 30% over in march 2007 year over year.

And for those of you who think that commercial real estate will be uneffected by the crash, vacancies at malls have skyrocketed.

World Food Crisis Approaching

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Paul Krugman notes that we are in the middle of a major food crisis, with the prices of staples such as wheat, corn, and rice skyrocketing, and he blames, along with weather and energy prices, biofuels.

As he so eloquently states, “People are starving in Africa so that American politicians can court votes in farm states”.

It’s a nice sound bite, but it is incomplete, which may be an unfortunate fact of life when one has only about 800 words to put forth an idea.

Simply put, there is much more to this problem than simply the currently minuscule demand for feed stock for bio-fuels.

First, he misses the very real possibility of worries regarding social unrest, possibly to the level of failed nation states from food riots, that may very result from this, which may be far more lethal the direct starvation deaths.*

Major exporters, such as China, India, Egypt, Vietnam and Cambodia have introduced export restrictions to forestall this, which, of course, worsens the problem for net food importers.

More interisting is a Bloomberg article showing the problems in the market being akin to the current credit crisis. The reporting is mind boggling simple here telling , “Bad countries interfering with the free market by regulating their exports so that poor people don’t starve“, story.

The reality, and it can be teased out from the article, is that there is a lot of arbitrage generating volatility. The quotes are from rice traders, and they are wringing their hands. Let’s look at the various non-producing players in the market that were listed:

  • Pfaffikon, Switzerland-based Mother Earth Investments AG
  • Morgan Stanley Global Wealth Management
  • Singapore-based rice broker Hermes Investments Pte Ltd.
  • Padiberas Nasional Bhd.
  • Global Commodities Ltd. in Adelaide, Australia
  • Diapason Commodities Management SA

To the best of my knowledge, ot one of these companies owns a farm, nor processes the grain, they make their by extracting fees on trades, and while that can be useful to buy a contract for future delivery, the reckless Anglo-Saxon trading model that is at the core of the current credit crunch, where numerous people buy and sell contracts to generate trade profits is making things worse.

In fact, until we move back to depression era regulators to reign in this activity, it will continue to get worse.

*Yes, I’m looking at this cold blooded construct, and realizing that it means for many people the end of the world as they know it.

Economics Update

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First, we have a new peak in Jobless claims, 407,000, the highest level since Katrina hit New Orleans (here and here). Note, as always, that weekly jobless numbers are just a snap shot of a single week, and as such, there is a lot of noise, but this did not stop the dollar from retreating in response.

That being said, the fact that the IMF is predicting a global slowdown ain’t a good sign either.

Given that we have a consumer driven economy, the fact that people are falling behind on their debts at the highest rate in 15 years is a good indicator that we are already in a recession.

In energy, was down a buck, and gasoline hit a new record. Assuming that we are not at peak oil, there might be some moderation as the economy cools.

The markets are seeing a cooling economy too, driving Treasuries higher, because investors are looking for safe havens.

In real estate house prices fell in 21 metro areas, and foreclosures rose to record levels. Same old same old.

Finally, I’m beginning to feel like Keith Olbermann and Bill O’Reilly. I can’t make through a week without some insurer disaster intruding. In this case, it’s Triad Guaranty Inc., which is considering, “a plan to stop writing new business”, called a “run-off” in the insurance. Note that it’s business is mortgage insurance, as opposed to monoliner bond insurance.

Too many people defaulting on mortgages.