Category: Finance

Cramdown Has Returned

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And it is about bloody time.

Barney Frank has announced plans to reintroduce a bill to give bankrputcy judges the ability to modify mortgages, it appears that the banks got cocky, and promptly forgot promises of voluntary mortgage mods, as the picture (from here) shows.

It appears that members of Congress are shocked that banks are not willing to do mortgage mods, when they:

  • Cost them money.
  • Require them to post the losses to their balance sheets immediately, as opposed to marking them to face value for the next few years.

Campaign contributions and lobbyists are a much better investment than helping people.

Economics Update

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Unemployment Chart Pr0n Courtesy Calculated Risk

Well, we have the initial unemployment claims out now (government link), and it appears to point to improvement. Initial claims were 550,000, a decrease of 26,000 from the revised figure of 576,000 (but the initial figure was 570,000, so the drop is 20K, not 26K apples to apples), the 4 week moving average was 570,000, down from 572,250, and the continuing claims number(seasonally adjusted) was 6,088,000, down 159,000 from last week’s revised level of 6,247,000 (only continuing claims were revised up from 6.23m, so the apples to apples drop is actually 142K, not 159K).

Anyone else knowing a pattern in revision numbers, or is it just me?

BTW, note that the continuing claims number drops as people lose benefits or move to emergency unemployment claims.

In any case, with foreclosures up 18% year over year, and poverty rate hitting an 11 year high, 13.2%, things really don’t indicate a rapid improvement.

The weekly claims number needs to be below 400K before we will start seeing increases in employment.

Additionally, we have a leading indicator in Japan, machinery (capital) orders are in the toilet, with orders being the lowest since the start of the survey in 1987.

I’d also stay out of the stock market, as insiders selling continuing to go crazy, and when people sell their own stocks it’s because they know something, even if this knowledge is not sufficient to trigger an criminal or civil investigation.

In the world of central banking, the Bank of England is leaving its benchmark unchanged, and continuing with bond purchases (quantitative easing).

Bonds did fairly well today, with the yields on mortgage backed bonds and US treasuries prices rising, which means that the yields are falling………Unless, of course, you are talking about Polish government bonds, which look to be heading into the world of hurt that their Baltic Republic neighbors are feeling.

Meanwhile, a week inventory report has pushed crude oil up, and the US dollar was up marginally, though whether this is a turn, or just a breather, is unclear.

Economics Update

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Good news everyone!

I invented a device that makes you read this in your head using my voice!

Well, the Fed’s Beige Book, more formally known as the “Summary of Commentary on Current Economic Conditions”, came out today, and they are seeing signs of improvement (also here).

It seems to me that we are talking about evidence of a bottom, or at least a moderation, as opposed to improvement, but it could be a prelude to a recovery, or a breather on the way down, but either way, it’s good news.

We still have CRE and insurance meltdowns to deal with.

There is also good news from Moody’s, that there is no expectation that they will cut the ratings on sovereign debt for any of the major industrialized nations, so the ratings of, “U.S., U.K., Germany, France. and Spain,” are safe.

Then again, if they are so safe, why did they even have to make this statement?

We also have further evidence of the credit markets thawing, with the 3-month Libor interbank lending rate hitting a record low, and the TED Spread, basically the interest rate spread between public and private debt, falling.

The dropping interest rates, kicked mortgage applications to a 3 month high.

Still, in the real world, single family home prices fell by 0.5% in July, and bankruptcy filings are up 22% in August year over year.

In energy we are now seeing statements from OPEC that there will be no changes to quotas which drove prices up 21¢ to $71.31/bbl, despite increases in inventories.

In currency, the dollar fell to a near 10-month low, despite a slight bump following the release of the Beige Book, to $1.4562:€1.0000 and $1.0000:¥91.61.

The End of the Ratings Agency?

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We are seeing two things going on here.

First, we have a crisis in confidence in the ratings agencies, best exemplified by the decision of state insurance regulators reviewing their reliance on ratings agencies:

State regulators scheduled a hearing to review their reliance on ratings firms in grading insurers’ financial strength and whether changes are needed after the plunge of top-ranked bonds exposed flaws in credit scores.

If people no longer believe in ratings agencies, then they no longer have a business.

They business is quite literally a confidence game.

This, however is a long term problem.

The more immediate problem is that the Courts have finally got a clue, and determined that in the presence of evidence, email messages specifically, that these agencies were “putting lipstick on a pig,” that the ratings agencies can be held liable for fraud, and that these opinions, which they sell not subject to 1st amendment protections.

There are clear indications, emails and the like, that the ratings agencies were deliberately issuing inaccurate ratings in order to boost market share and consulting income.

David Einhorn explains why the recent suit against the ratings agencies is so catastrophic:

Their ratings business is entirely dependent on a lack of legal jeopardy, and they have now lost this.

Doubtless there will be some sort of ratings business, but I expect it to be very tightly regulated, or possibly done by a federal agency.

And then there is this bit of Panglossian crap:

Note the comment at about 6:10,

There has already been a shift. There’s a recognition; there’s potential liability, and any intelligent compliance officer at the investment bank, at the major money managers, are going to say, “We have to do something about this,” and they are in the process of changing their practices.

I would not trust this guy to manage a lemonade stand.

First Comes the Denial

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Case in point, the Federal Housing Administration (FHA), which is now denying that the increasing rates of defaults on the mortgages that it backs will require a bailout.

Next should come a statement of health, then a statement of robust health (or some synonym), and then comes the bailout.

Here is the statement from the FHA commissioner:

We will not comment directly on the FHA’s capital reserve ratio until we receive the annual actuarial study. However, contrary to certain misconceptions, the Congressionally-mandated capital reserve ratio, which the annual actuarial study calculates, measures EXCESS reserves above and beyond projected losses over the next 30 years. Even if that level falls below 2%, FHA continues to hold more than $30 billion in its reserves today, or more than 5% of its insurance in force. Given this reserve level, FHA will not need a congressional subsidy even if the congressional capital reserve ratio falls below 2%. Furthermore, FHA’s full faith and credit insurance means that there is no risk to homeowners or bondholders independent of the congressional capital reserve requirement. New FHA loans being issued today are not only critical to our economic recovery, but in addition, FHA continues to make money for the taxpayer; in fact, we project FHA’s FY 2010 book of business will produce $1.4 billion for the U.S. Treasury.

We believe you…..

Economics Update

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Retail Employment Courtesy of Calculated Risk
Click for full size pic


Temp hire numbers courtesy Bloomberg
Click for full size pic

So, let’s start with employment today, shall we?

We have Manpower’s latest survey of hiring intentions for US companies, which are best described as “sluggish,” with the seasonally adjusted employment outlook for the US being the weakest since Manpower began its survey, in 1962.

On the other side it appears that retail hiring is showing some signs of picking up, but holiday retail employment was pretty beaten down in 2008 anyway. (See top picture)

Also, it appears that US companies are still cutting temporary employees from their payrolls, (bottom pic) and temps tend to be both the first in the door, and the first out the door.*

On Europe, we are getting conflicting signals, with consumer confidence in the U.K. hitting its highest level since May, 2008, but German industrial output falling in July, production rose 0.8% in June, but fell 0.9% in July, against a consensus estimate of a gain of 1.6%….Ouch.

The intersection of banking and consumers in the US ain’t doing well, with U.S. consumer credit falling at a 10% annual rate, or $21.6 billion, and Standard & Poor’s noting that despite a slight improvement in July, it expects credit card write-offs to continue to increase.

Meanwhile if you follow the stock market, perhaps you should listen to Warren Buffett:

Mr. Buffett declined to predict the short-run course of the stock market. But corporate data from Berkshire shows his company was selling more stocks than it was buying by the end of the second quarter, according to Bloomberg News. Its spending on stocks fell to the lowest level in more than five years, although the company is still deftly picking up shares in some companies and buying corporate and government debt.

(emphasis mine)

So he is moving out of stock, and getting completely out of Moody’s. (more on that in another post.)

Meanwhile, we have some gold bug news, with gold topping $1000.00/oz (troy).

In related news, the value of the dollar and gold tend to be inversely related, the dollar fell to its lowest level vs. the Euro this year, $1.4491:€1.0000.

We also saw this pushing up the price of oil today, up 4.5% to $71.10/bbl.

*Something I am all too familiar with, having done contract technical work for the past 17 years.

Economics Update (Yesterdays)

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Not much going on, it was labor day, so most of the markets and regulatory announcements didn’t happen.

That being said, it looks like we may have a couple new candidates for bank failure Fridays, with the Federal Reserve imposing restrictions on two correspondent banks, Nebraska Bankers’ Bank of Lincoln, NE, and Midwest Independent Bank of Jefferson City, MO.

Correspondent banks are “banks for banks”, they provide clearing services, participate in large loans, etc. Silverton Bank was a correspondent bank.

We are also seeing more clouds on the horizon with insurance, with the cost of reinsurance increasing.

Reinsurance is basically insurance of the insurance companies, they sell risk to each other in order to spread the risk, and revenues, around.

As an aside, while I have been ranting about how the next crash is CRE, it might be insurance.

We are seeing more optimism among manufacturers, with the Price Waterhouse Coopers survey showing a 27% improvement, which may mean that people are going to start restocking inventories.

In energy, oil was basically flat at $68.05/bbl, while in currency, the Yen rose against both the Euro and the dollar.

Why Mortgage Workouts are Failing

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Martin Andelman, the founder of the Mortgage Lender Implode-O-Meter, has a pretty good explanation as to what is going on.

Basically, it comes down to the games that bankers play.

With the Federal Accounting Standards Board (FASB) backing down on reality based accounting of banks (here for background), it means that banks are continuing to account for these mortgages at full face value, but would have to write down these assets if they renegotiated the loan:

Why would a bank chose to foreclose and evict when there’s already someone living in the house who would love to buy it. By modifying the loan, the bank won’t have to pay all the associated costs of foreclosure, and then put the property on the market where it might not sell for some time. Selling an REO? Lucky to get 50% in some areas. Why not just write down the loan for the homeowner and save all the trouble? Again, it makes no sense.

Until I went back and thought about the partial suspension of the accounting regulations imposed under FAS 157 & 159, which applies only to banks and only as of last April or May, I believe. That’s when I started feeling queasy.

Under the partial suspension of the FSAB accounting rules, the banks don’t have to write down Level 3 [an asset without a regular market] assets to market value, if they state that the bank has no plans to sell the assets for an extended period. In other words, if the bank says that it’s not going to sell a given house anytime soon, they can keep it on its books at its full fictional value.

If they renegotiate loans, they rapidly become officially insolvent.

Of course, this means that by the standards of the reality based community, they are already insolvent.

As much as it pains me, I think that Andelman is wrong on blaming Timothy “Eddie Haskell” Geithner on this. The FASB set up these rules independently of Treasury, and under pressure from Congress, not from the T-men.

Not Enough Bullets

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Just when you thought that the parasites on Wall Street could not come up with a more repulsive way for them to generate commissions, they have created securitization of dead peasant insurance:

The bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds……

……

Either way, Wall Street would profit by pocketing sizable fees for creating the bonds, reselling them and subsequently trading them……..

Paul Volker was once quoted as saying something like the only financial innovation that has benefited society in the past few decades was the ATM machine.

He’s right.

Financial “innovations” should be treated like the FDA treats (or used to treat, before they started taking pharma money for their tests) drugs. It does not hit the market until proven safe and effective.

Did the FDIC Cave to Private Equity Buccaneers?

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This is a real conundrum, because while the FDIC’s vote to lower Tier 1 capital requirements for private equity purchasers of banks from 15% to 10% appears to be a capitulation, there is a twist in these regulations, in that the regulation does not call for 15% Tier 1 common equity, not just Tier 1 assets:

Under the rule that was adopted, such banks will have to maintain a 10% capital ratio, but the definition of capital isn’t Tier 1, it’s Tier 1 common equity.

Tier 1 common equity is close to tangible common equity, which is a stronger measure of capital than simple Tier 1.

…

Common equity is the best cushion of all because it sits in the first loss position. Preferred equity — which is included when calculating Tier 1 but excluded when calculating Tier 1 common — failed totally last year. Banks had issued a bunch in late ‘07 and early ‘08 in order to boost Tier 1, but because common was nearly overwhelmed with losses, investors higher up the capital structure panicked.

To be sure, the switch to common won’t have any effect on the day-one economics of these deals. Subordinated debt is wiped out when FDIC takes failed banks into receivership.

But this will discourage private equity guys from polluting the capital structure down the line. Hybrid debt issuance that would qualify as capital under Tier 1 won’t qualify under Tier 1 common.

Additionally, they will require that this level of capitalization be maintained for 3 years, and be audited more frequently to ensure that necessary capital is maintained.

I think that it is still an undeserved win for private equity pirate types, but it’s better than it appeared at first glance.

Don’t Let the Door Hit Your Ass on the Way Out

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So, we are now hearing the inevitable stories about how rich hedge fund type folks are fleeing the UK because they don’t like the plans to raise the marginal tax rate. (paid subscription required)

Seriously, let them go.

When all is said and done, when the people at the very top of the pyramid leave, and stop bidding up the prices of essential commodities, like shelter, you end up with a more livable city with a real middle class.

If you have concerns about the tax base, just implement a Tobin tax on financial transactions, and you get the money, with the bonus that you reduce speculative arbitrage.

The financial “masters of the world” do not create wealth, they extract it from the rest of us through fees on our 401(k)s and retirement funds.

The expansion of financial services in the past 30+ years have been parasitism, not improved productivity.

Economics Update

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Employment-population ratio, part time for economic reasons, and hours worked economic graph pr0n courtesy of Calculated Risk

The employment numbers are out, and you can look at the cup as half empty or half full, with non farm payroll falling by 217K, but unemployment (U3) spiking to 9.7%.

Note that the drop was less than the 276K in July (up from 246K following revisions), U6, the broadest measure of unemployment, and the one closest to the Depression era metric,* spiked to 16.8%.

Other than that, there was not a whole bunch of news, priobably because the upcoming Labor Day holiday, though Treasuries fell, and their yields rose, as a result of the job numbers, which also drove oil and the US dollar up, so the markets considered all this generally good news.

Minor, as I write this though, the FDIC bank closing page does not have any closings yet.

Normally, they like to move on 3 day weekends, it gives them more times to get things done.

*Though still more conservative than the 1930s version, so we are getting very close to the 25% rate at the height of the Depression.

How Matt Taibbi Changed Goldman Sachs

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It’s clear that he’s got them rattled, because they are trying to claim that hostility toward them is motivated by antisemitism, and their marionette, Timothy “Eddie Haskell” Geithner, has felt it necessary to deny that Treasury has a tilt toward Goldman.

The idea that either GS or the Treasury would actually feel defensive about this would have been ludicrous just a few months ago, but now everyone has heard of That great vampire squid wrapped around the face of humanity.*

It appears that he has them scared.

*Alas, I cannot claim credit for this bon mot, it was coined by the great Matt Taibbi, in his article on the massive criminal conspiracy investment firm, The Great American Bubble Machine.

Economics Update

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Auto Sales Graph Pr0n Courtesy Calculated Risk

Construction Spending Pron Also Courtesy of Calculated Risk

As is noted by Calculated Risk, light vehicle sales hit a 1¼ year high in August, but that was with the Cash for Clunkers program, which is now over, which begs the question, “What happens in September?”

I think that the trend is generally up, because the sales were so low that the fleet replacement time (fleet size/sales) was approaching 30 years, which is simply unsustainable. (click images for full size)

It should also be noted that for all the claims of recovery, both residential and non-residential construction spending continues to decline.

Additionally, notwithstanding the “green shoots”, the bond market is pricing in some very hard times ahead, with US Treasuries rising in price, which drops their yield.

This sentiment is also serving to drive the Yen and the dollar higher, and crude oil lower, as people look for a safe haven.