it looks like they got a firestorm of criticism, so they have reversed their earlier decision to close the economic stats site.
Category: Finance
Good Point on the Credit Collapse: Actions Taken are Bailing Out Banks, Not Helping Economy
John Cassidy at Portfolio.com details what amounts to an ongoing and growing program of bailouts for the banking industry.
There is, of course, the Fed Auctions of cash where worthless and near worthless securities are being used as collateral for loans, but there is more.
The Federal Home Loan Bank system, which actually dates from the Herbert Hoover administration, has been shoveling cash out the door, with an implicit federal guarantee. It’s government chartered, like Fannie and Freddie, which have now had their lending limits increased.
Cassidy’s recommendation, that the Federal Government buy distressed security at steep discounts, would be a good one, except that any discount would likely still be too much. The assets are illiquid, which means that they have next to no value right now.
The only way that we are getting out of this is by inflating our way out of this.
A lot of 401(k) and IRA accounts are going to be a lot worse off, but the alternative will look like 1932.
Supreme Gives 401(k) Participants Standing for Lawsuits
It was a unanimous decision.
The facts of the case are that James LaRue lost $150K after his 401(k) managers ignored his orders to move his holdings to a different account. The lower courts said that only the plan had standing, but SCOTUS said that the participants do to.
Frankly, I’m surprised. I would have figured that one of the court Neanderthals would have taken the side of the incompetent money managers.
Credit Crash Hits Student Loans
As the credit implosion spreads, getting credit for safe loans is getting harder. Case in point, Student lenders are getting out of the business, because they can no longer get capital on the markets to lend out.
So, this will hit university bottom lines, effecting economics professors.
Karma, neh?
Economics Update
Well, let’s start off with real estate:
First, we have an article asking whether the Federal reserve is refilling the housing bubble. Normally this would not merit comment, but look at the link. Look at the author. Look at the title. It’s Lawrence Yun, chief economist for the National Association of Realtors, and it has the word “bubble” in the title.
When the NAR is calling it a bubble, it’s a bubble.
We also have reports that people are defaulting on subprime loans before they reset, which implies that these people so overbought their houses, that they can’t even afford the “teaser” rates.
We also have single family home starts dropping to a 17 year low, though there has been a pickup in condo and apartment construction (not sure how much is the former, and how much is the latter).
We also have Mortgage applications plummeting 22%, as rates rise in the face of the fed cuts, because no one trust to lend anymore.
The fed is “pushing on a string”.
Finally, we are starting to see Foreclosure tourism, with bus tours of foreclosed homes becoming a regular event in Florida.
It’s an attempt by some realtors and speculators to get the market moving again. Isn’t gonna happen.
In terms of more personal finance, we have an explosion of people tapping their 401(k) accounts for living expenses.
Yep, those private accounts to replace social security sound like such a good idea. As I’ve said before, it’s like eating your seed corn, which is what these folks are doing.
On a more general macroeconomic note, inflation is up, with the CPI rising 4.3% in 2007, and prices rising at a 5% annual rate in January.
On top of all this, the Federal Reserve has cut its forecast for economic growth.
Considering the fact that the official CPI understates inflation, we are probably closer to an 8% inflation rate (prices doubling every 9 years), so I’m calling stagflation, which seems a no brainer, even without oil hitting another record, with it peaking at trading at $101.32/bbl and closing at $100.74/bbl….No…wait….that’s two records.
In terms of the financial establishment recognizing that the problems are far deeper and broader than previously understood, we have Martin Wolf of the financial times saying that, “America’s economy risks mother of all meltdowns“, and we have Portfolio.com wondering if the basic model used to evaluate the complex instruments in the big sh$#pile, or more generally, the prices of options, the Black Scholes Pricing Model, is simply inaccurate, which would render their prices unknown. It’s literally look at the chicken entrails to figure out the prices time.
Basically, the model falls apart, and has always fallen apart:
Good theory. The glitch was discovered only after the fact: When a market is crashing and no one is willing to buy, it’s impossible to sell short. If too many investors are trying to unload stocks as a market falls, they create the very disaster they are seeking to avoid. Their desire to sell drives the market lower, triggering an even greater desire to sell and, ultimately, sending the market into a bottomless free fall. That’s what happened on October 19, 1987, when the sweet logic of Black-Scholes was shown to be irrelevant in the real world of crashes and panics. Even the biggest portfolio insurance firm, Leland O’Brien Rubinstein Associates (co-founded and run by the same finance professors who invented portfolio insurance), tried to sell as the market crashed and couldn’t.
This is what has happened with investment banks and leveraged loans, where they have been left holding the bag on $197 billion in loans to people like private equity buyout specialists that they cannot resell.
In the ever popular world of the bond insurers collapsing, we have Moody’s predicting a $7-$10 billion hit for banks as a result, though I would add at least one zero to that total.
As a result, a unit of private equity firm KKR cannot refinance, and has delayed repaying loans as a result.
Compounding this is the fact that the proposals to split the insurance companies into separate Municipal bond insurance and sh&^pile insurance is making it much more difficult for them to raise the capital they need to stay afloat.
Economics Update
It appears that US banks have borrowed massive amounts of money from the Federal Reserve, over $50 billion, using assets that have very little value in the market right now. They get money for shovels of the big sh&#pile
Credit Suisse will be writing down $2.8 billion because of “pricing errors” of assets (also here), and has suspended the traders involved.
Errors, my ass. If these were “errors” as opposed to fraud and/or bad systems, the net would be closer to $0.
It is now expected that the U.K. government will keep British home mortgage giant Northern Rock nationalized for years, in order to avoid a massive exposure to the taxpayer.
In the increasingly dire world of insurance, we have predictions that bond insurer splits may lead to an explosion of lawsuits, as the separation valuable (municipal) side and the insolvent (big sh$%pile) side involves a lot of loss for the holders of non-municipal paper. Additionally, MBIA’s CEO has stepped down, and has been replaced by his predecessor.
Deck chairs, Titanic.
In the lawsuit category, we have investor activists calling for more accountability in management, which is generally a prelude to shareholder suits and the like.
Finally, we have inflation in China hitting an 11-year high, 7.8%. It’s likely that this will drive interest rates up in China, placing downward pressure on the US dollar.
And if that doesn’t make you think that it will soon be raining brokers in Wall Street, Noriel Roubini is predicting between 10 and 15 million home owners simply walking away from their homes, because they will be underwater with their mortgages, and cannot afford their resetting mortgages.
O’Malley Issues Emergency Foreclosure Regulations – washingtonpost.com
Maryland Governor Martin O’Malley (I still love saying that) is instituting emergency regulations for mortgages and mortgage loan companies, see here and here.
First, they are requiring loan servicers to give advance notice to the state, so that state agencies might be able to help.
Additionally, it looks like administrative action may be taken against what appears to be one of the bad actors in this, Ocwen Financial Corp., which appears to have no one answering the phones.
Economics Update
After not receiving what they considered to be adequate bids, Britain is nationalizing Northern Rock Bank, which was one of the top home mortgage providers in the UK. The bids received, “failed to meet the government’s criteria for protecting taxpayers.”
I think that we will see more of this in the UK, which is suffering from the Anglo-Saxon contagion much as its American counterparts are. We won’t in the US, substituting instead ruinous (for the taxpayer at least) bailouts, because the American body politic will not accept this solution.
In a related note, it appears that there is a lucrative business developing aiding banks in finding people who have skipped out on mortgages. With the costs of foreclosures typically nearing $100K, it makes sense to find and cut a deal with these people, but they leave without providing a forwarding address.
From September 2005 to August 2007, 53 percent of the loans backed by Freddie Mac that went into foreclosure involved borrowers who could not be reached.
As an insight as to just how bad this has gotten, some lenders are allying with ACORN, an organization with a mission that is seriously at odds with those of banks, to find the mortgage holders.
In much higher finance, we have signs of trouble in credit default swaps, a complex derivative whose market is estimated to be twice that of the stock market.
These instruments are largely unregulated, to the degree that the exact size of the market is not known.
Basically, it’s an agreement between two parties. One pays the other a fee, and if something bad happens, such as a default, the second party pays off the default.
How flaky and unregulated is this market?
But during the credit market upheaval in August, 14 percent of trades in these contracts were unconfirmed, meaning one of the parties in the resale transaction was unidentified in trade documents and remained unknown 30 days later. In December, that number stood at 13 percent. Because these trades are unregulated, there is no requirement that all parties to a contract be told when it is sold.
One out of 7 people did not know who owed them money.
Economics Update: Real Estate Edition
Swiss banking giant UBS is looking at a $26.6 billion exposure to toxic mortgates, in addition to whatever hit that they might take on subprime, so these are A and alt-A mortgages. It reported a loss of $11 billion in Q4.
In the Dallas-Ft. Worth Metroplex, foreclosure postings are up 27%, effecting 13,000+ residences, an all time record. The scary quote is, “Out of the homes posted, at least 20 percent are underwater and probably more” .
And everyone’s favorite subprime whipping boy, Countrywide Financial, has had delinquencies rise to 7.47%. That’s about one out of every 14 loans that is delinquent, which is clearly unsustainable.
If banks had to consider this rate of delinquencies as a normal cost of business, mortgage rates would probably be in excess of 12% just to break even.
It now looks like Royal Bank of Scotland is the latest institution in line to see significant losses from mortgage backed securities.
Government Shutting Down Economic Indicators Website
Due to budgetary constraints, the Economic Indicators service (http://www.economicindicators.gov) will be discontinued effective March 1, 2008.
Economic Indicators.gov is brought to you by the Economics and Statistics Administration at the U.S. Department of Commerce. Our mission is to provide timely access to the daily releases of key economic indicators from the Bureau of Economic Analysis and the U.S. Census Bureau.
You may link to the most recent release by clicking on the report name in the table below. You may also subscribe to our *free Subscription Service to have these files emailed or faxed directly to you as soon as they are released.
Barry Ritholtz, of The Big Picture, rightly asks, “WTF? Feds Shutting Down Economic Data Site.”
He then suggests that, much like eliminating the release of the M3 Data, this was done because the data is inconvenient, and I agree.
Best PowerPoint Ever
Technically, it’s Google docs, and I am not the genius who did it.
It explains the entire big sh#$pile debacle in simple and easy to understand terms.
It’s also funny as hell.
Bush Administration is “Predatory Lenders’ Partner in Crime”
Eliot Spitzer, current Governor of, and former Attorney General for, the state of New York, has an editorial today that says just that.
Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.
Let me explain: The administration accomplished this feat through an obscure federal agency called the Office of the Comptroller of the Currency (OCC). The OCC has been in existence since the Civil War. Its mission is to ensure the fiscal soundness of national banks. For 140 years, the OCC examined the books of national banks to make sure they were balanced, an important but uncontroversial function. But a few years ago, for the first time in its history, the OCC was used as a tool against consumers.
In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government’s actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules.
I don’t who care who wins the election in 2008. I want Eliot Spitzer to win the 2012 Presidential election as the Democratic nominee.
Read the whole thing
Economics Update
Note that this has been, for whatever reason, a busy news day, so this does not include news related to real estate or to the bond insurance crisis. Those will be posted later.
We have downward pressure on the dollar, because additional Fed rate cuts are anticipated.
Basically, the thought is that Fed rate cuts lead to lower interest rates, which make the dollar less attractive, because rates of return are less.
If I had the money, I would bet against this, because, as the latest rate cuts have showed, the Fed can no longer move rates down. We are in a Japan style liquidity trap.
We also have a type of investment that I have never heard of before, auction rate securities, which were sold as being as liquid as cash. They work by regularly re-auctioning the securities on a fairly frequent basis, allowing for people to sell easily, and for the rates to adjust to suit market conditions.
These are now becoming increasingly illiquid, with thousands of auctions failing, and Goldman Sachs refusing to let investors withdraw money from their investments when auctions fail to attract buyers.
UBS has notified its 8200 US brokers that it will not support these securities if the auction fails either.
FWIW, Paul Krugman has a very good editorial, even by his own ordinarily high standards, describing what is going wrong, and the consequences of this failure in terms that a layman like me can understand.
Related is the news that Citigroup is suspending withdrawals from its CSO Partners hedge fund.
In terms of the real economy, as opposed to high finance, we have the New York Federal reserve reporting that its Empire State Manufacturing Index fell nearly 21 points, from +9.03 in January to -11.72 in February. It was expected to fall, but only to +5.75.
The Financial Times is reporting that banks are being advised to walk away from the private equity deals that they are funding, because the penalties are far lower than the potential losses.
This would stop private equity buyouts in their tracks.
Economics Update
Well, we have Bernanke and Paulson acknowledging that the economy is in trouble, but denying that there will be a recession in 2008.
The thing is, we are already in a recession. Let’s seem consumer spending is flat, with a false increase being driven by increasing food and fuel prices, and the growth rate is less than the real inflation rate.
In bond insurance, we have NY governor Elliot Spitzer saying that the Monolininers have 4-5 business days to recapitalize, or they will lose their AAA ratings, and regulators will have to, “have to step in and separate bond insurers’ municipal businesses from their more troubled structured finance units”.
Bet that offer from Warren Buffet does not look so awful now.
In mortgage loans, banks are lobbying hard to put off their bad investment choices on the US tax payers, which is not surprising, considering that house prices took their biggest quarterly drop ever, a national median price drop of 5.8% in Q4 of 2007.
Annually, that comes to about 23%/year.
The credit crisis is extending further, with delinqencies in assets backed by auto loans surging.
The Trade deficit fell in 2007, for the first time since the 2001 recession.
Economics Update
First, it appears that the current credit crisis is now being recognized by some media outlets, such as the New York Times, as not being limited to subprime borrowers. Of course the story misses the fact that it’s not just mortgages, and the story that they use to illustrate the problem is a, “a computer engineer at Lockheed Martin who makes a six-figure income and had a stellar credit score in 2004, when he refinanced his home in Northern California to take cash out to pay for his daughter’s college tuition”, who is the last person we should think of bailing out.
He understood the issue, and took the loan anyway.
As to the general, and ongoing, credit meltdown, we have yet another New York Times story, this leading off with Sailfish Capital Partners, a hedge fund that is being liquidated.
The pair, both fixed-income specialists, quickly raised $1 billion for their flagship multi-strategy fixed-income fund, according to investor documents. Assets grew steadily, reaching $1.2 billion by the end of 2005 and $1.5 billion by the end of 2006, when the fund returned more than 12 percent. In July, the fund sat atop almost $2 billion, and exhibited relatively low volatility — a key factor for institutional investors.
But July proved treacherous. As the credit markets seized up, Sailfish owned seemingly safe top-rated investments, including mortgage investments, that suddenly plummeted in value.
Illiquidity will get worse, and this is one of what will be many stories,
And then we have Warren Buffet offering to buy the good assets of the bond inurers and so give them a capital injection (see also Also here).
Basically, he wants to buy the good stuff for pennies, and leave the sh%$pile for the monoliners to deal for later. Buffet ain’t dumb, this is thinking vulture capitalism.
We are starting to see adulatory coverage of the (very boring, but generally safe)municipal bond market, though I wonder what happens to resale value of the bonds if the monoliners go belly up before Jimmy Warren Buffet gets his hands on those assets.
Finally, we have the federal budget deficit more than doubling, which means that we have to borrow even more foreign money and more downward pressure on the dollar.
Financial Meltdown Now Effecting Local Governments
The cost of bond insurance has skyrocketed, in some cases increasing the cost of borrowing by over 100% as a result of the credit crunch.
This means that new roads, sewer systems, schools, etc. are likely to be delayed.
As if falling house values, and hence falling property tax revenues were not enough of a cross for local and state governments to bear.
Economics Update
Consumer confidence sinks lower the RBC Cash Index falls to its lowest level since it was created in 2002, and consumer borrowing tumbles, rising at an annual rate of 2.1%, the lowest rate since April.
On a “beat my own drum” note, it’s nice seeing a real economist warning that the stimulus package is going to damage Fannie Mae and Freddie Mack by increasing the loan limits, and hence exposure. I warned about this yesterday, and it’s nice to see a real economist agree.
In high finance, it looks like there will be significant writedowns on the $160 billion of “pier” loans out in finance land.
Basically, a “pier loan” is a bridge loan for things like a private equity transaction where the banks cannot sell the debt, and hence it’s a “bridge to nowhere”, or a “pier”.
The average price for the most actively traded U.S. loans fell to 88.37 cents on the dollar this week, from 91.14 cents last month, according to S&P’s LCD. Prices have fallen from 100, or face value, last June.
This means that no one is interested in buying the loans, so they have to discount.
Finally, look at these charts on The Financial Ninja, and be very, very afraid.
Warren Buffet Calls Bank Woes, “Poetic Justice”
I tend to agree, but it will take a few million more people down with them.
Economics Update
The Fed Bank of Philidelphia president is making noise about how inflation is poised fore a comeback, which bummed out stock traders.
It looks like the current economic situation is leading bankers to screw their small customers. Of course, were the economic situation reversed, it would be used by bankers to screw their small customers.
At least, there is symmetry.
Foreclosures: Las Vegas is the foreclosure capital of the US. This appears not to be from the economic downturn, it’s a prosperous area, but rather from exotic mortgages.
In a blaze of recognizing the bloody obvious, the NAR is now saying that they expect home prices to decline in 2008.
If you look at regional downturns, we are looking at 5-10 years before a rebound.
The director of the Office of Federal Housing Enterprise Oversight (OFHEO), which regulates Fannie Mae and Freddie Mac, is warning that the GSEs are taking on too much risky debt. He is saying that, “reducing risks in the market, but concentrating mortgage risks on themselves.”
I think that he is suggesting that without tighter regulation, the suggestion of allowing Fannie and Freddie to take on larger mortgages is a very bad idea.
Overseas, the Bank of England cut its benchmark 25 basis points to 5.25%, while the European Central Bank holds kept its rate steady at 4%. The UK appears to be in a real-estate driven downturn, while most of Europe (Spain excepted) did not experience the same sort of speculative real estate bubble.
On Jobs, new applicants for unemployment fell by 22K last week, but the total number of people collecting unemployment continues to rise. (the former is a far noisier number).
In retail, January sales posted their worst performance since records were kept, with same store sales rising only 0.5%, which is a significant drop when inflation is factored in.
And finally, a cartoon for your amusement:
Illiquid
Illiquid sounds like a mile word.
It sounds like maybe the markets are thirsty.
It’s actually MUCH worse than that.
It means that a buyer cannot be found for your asset, so for the time being at least, it is worthless.
It’s like being marooned on a desert island with a pirate chest full of gold doubloons. Technically, you are rich, but you still have no shelter, food or water, and you die all the same.
The Collateralized Debt Obligation (CDO)market is very nearly illiquid, according to Ross Heller of JPMorgan Securities, who is saying, “We’re definitely in a period of very low liquidity at the moment, which has actually been dropping precipitously in the last few weeks.”
Desert Island time.
I’m beginning to wonder if a Honda full of silver is over optimistic, and that instead we should fill it with canned goods and ammunition.