It’s still better than nothing, but Ellen Tauscher desperately needs to be primaried.
Category: Finance
Economics Update
Scary Pic of the Day: Upcoming Mortgage Resets Courtesy of Dr. Housingbubble
ADP employment services has released its monthly report, and job cuts are way up with 697,000 jobs lost in February as compared to 614,000 jobs lost in January.
Note that the initial January figure was only 522,000, the the final February figures may very look even worse.
We also have the Institute for Supply Management February non-manufacturing numbers, and they are down from January’s already anemic figures, and the Federal Reserve’s business survey reporting “weaker conditions or declines” in 10 of the 12 regions.
In China, however, the purchasing managers’ index rose in February, to 49, which still shows contraction, but only barely, as 50 is neutral.
In real estate, we have mortgage demand falling last week, largely because borrowers are waiting to see what the Obama mortgage rescue plan is.
In commercial real estate, we have a secondary indicator, with office furniture sales falling sharply.
It’s no wonder that FDIC Chair Sheila Bair is warning that its insurance fund could be insolvent by years end.
Bank failures, ignoring the biggest ones, is on a pace to close 100 banks this year, as compared to the 27 in 2008 or the 3 in 2007.
We are seeing a spike in consumer bankruptcy filings, up 29% year over year in February.
The Chinese economic news drove oil higher, and bad economic news in Japan drove the dollar up.
Geithner and His Evil Minions&trade Go Back to the Bad Bank
Yep, it’s back to bad bank, only this time Geithner has created the fig leaf of private investors to cover up the fact that there will be gross overpayment.
The idea is the government would lend investors the money at sub market rates (ding, subsidy), for non recourse loans (ding, subsidy) to buy the big sh$#pile.
A non recourse loan is, “secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable,” so the if you buy a piece of the big sh$#pile, and it goes bad, you don’t have to pay the loan back.
As a mental exercise, let’s assume that you buy 10 CDOs for $1 million each, and the government loans you 90% of the money to do so. 9 of the 10 are worthless, and you thus lose $900,000.00, with the US government losing $8,100,000.00, but that the 10th, which you bought at 33¢ on the dollar, pays off in full, so your $1million purchase is worth $3,000,000.00, so you pay back the US government, leaving $2,100,000.00, and then split the proceeds, so you and Uncle Sam each get $1,050,000.00.
This means that you cleared $50K on a $1 million investment, and Geithner and His Evil Minions™ just lost $7,050,000.00 of taxpayer money.
Not great, but considering the fact that $10 million was put in, and $7 million of that was lost, it’s pretty good for you.
As Calculated Risk notes it’s another attempt to overpay for bad assets.
Economics Update
Will the last entity leaving making cars in the US please turn off the lights?
Toyota’s U.S. sales are down 39.8% to 109,583 units in February – MarketWatch, Ford and GM fell 48.2% and 51.6%, and Chrysler fell 44%.
In real estate, pending home sales fell, but realtors are hawking “affordability,” because, well, otherwise they would have nothing to hawk at all.
Meanwhile, the Federal Reserve is rolling out its Term Asset-Backed Securities Loan Facility (TALF), a lending facility geared toward business, auto, and consumer loans.
It’s buying more more sh%$pile from desperate people, but they have decided that they will ignore the compensation limits, even though some of the money from the $700 billion dollar bailout fund.
Bastards.
We also have some mixed signals with recession indicators, with a record number of cargo ships idle, but over the road trucking showing a slight bump.
Oil is above $41/bbl, and the dollar is a bit weaker, largely on the fact that Australia has not dropped its rates.
Timothy “Eddit Haskell” Geithner and His Evil Minions&trade Have Lost
James Baker, “chief of staff and Treasury secretary for President Ronald Reagan and secretary of state for President George H.W. Bush,” on his management of the problems of America’s banking giants.
When you have James “Evil Capitalist” Baker saying that you are placing too much faith in private ownership, you have not just jumped the shark, but you have jumped Carcharodon megalodon, and probably an entire school of the prehistoric giant shark….
on a Big Wheel tricycle….
Naked…..
While blowing a slide whistle….
With a clown nose on….
While giving yourself a tattoo…
On your own genitals.
Economics Update
Yeah, I know, I don’t normally do the stock market indices, but the Dow fell to below 7000 today, and closed at 6,763.29, a 12 year low, and you can be sure that this spooks both the markets, and the regulators.
More significant is the fact that personal savings in the US are way up, and as the graph from Calculated Risk shows.
It’s been over a decade since personal savings were that high, and while generally this would be a good thing™, right now the fact that people are deleveraging means that the economy is driven even further down.
It makes sense personally, but in the aggregate, it makes things worse.
Interestingly enough, even with the increase in savings, consumer spending rose in January by 0.6%, which was unexpected, as did incomes, bu 0.4%, which was also a surprise.
I think that it is a one month thing, though it might be the “Obama Effect,” making people more willing to spend now that a Bush and His Evil Minions™ are no longer running things, but in either case the effect is small, and unless we see increases for the next few months, things won’t get better.
We also saw the Institute for Supply Management’s manufacturing index rise to 35.8 from 35.6, beating expectations of a fall to 33.8, but note that this means merely that it’s contracting slightly less implosively than it would otherwise: any number below 50 is a contraction, and this makes 13 straight months of contraction.
The full link to the ISM monthly report is here, and it should be noted that their employment index is at all time (since 1947) low.
In real estate, construction dropped to a 4½ year low.
Meanwhile, the AIG bailout, and the concerns that it raises has driven oil down on concerns of more turmoil in the banking system, and has driven the dollar up in a flight to safety.
Not Just AIG, But the Entire Financial System
Seriously, this New York Times article on AIG, is a quick and layman accessible recounting of what went wrong there, and now that the Taxpayer is laying out another $30 to prop them up, with the approval of the ratings agencies who made this problem possible in the first place, it bears reading.
What we see is a metaphor for the entire rotten “Anglo-Saxon” system of unregulated hyper-capitalism.
AIG does not exist any more, what’s there is a simulacrum of a going business, fueled by zombie juice amounting to over $150 billion of taxpayer dollars, with the promise of more federal support, but that’s not the important part.
The important thing is are not just talking recklessness and incompetence here, we are talk real and deliberate crimes, and even now the authorities don’t have the slightest inclination to prosecute.
What took AIG down was a division that wrote credit default swaps (CDS), lots of them, and then, when they came due, they were bankrupt.
A CDS is a piece of paper that allowed them to insure all sorts of dodgy documents, but lacked the regulation, and the reserve capital requirements, of real insurance.
They wrote them because people were willing to pay them to write them, and people were willing to pay them because it allowed them to “lease” AIG’s AAA rating (see the ratings agencies linked above) for their financial instruments.
The result is that if AIG is allowed to die, instead of remaining in its undead state, everything blows up:
…. Yet the government feels it has no choice: because of A.I.G.’s dubious business practices during the housing bubble it pretty much has the world’s financial system by the throat.
If we let A.I.G. fail, said Seamus P. McMahon, a banking expert at Booz & Company, other institutions, including pension funds and American and European banks “will face their own capital and liquidity crisis, and we could have a domino effect.” A bailout of A.I.G. is really a bailout of its trading partners — which essentially constitutes the entire Western banking system.
I don’t doubt this bit of conventional wisdom; after the calamity that followed the fall of Lehman Brothers, which was far less enmeshed in the global financial system than A.I.G., who would dare allow the world’s biggest insurer to fail? Who would want to take that risk? But that doesn’t mean we should feel resigned about what is happening at A.I.G. In fact, we should be furious. More than even Citi or Merrill, A.I.G. is ground zero for the practices that led the financial system to ruin.
“They were the worst of them all,” said Frank Partnoy, a law professor at the University of San Diego and a derivatives expert. Mr. Vickrey of Gradient Analytics said, “It was extreme hubris, fueled by greed.” Other firms used many of the same shady techniques as A.I.G., but none did them on such a broad scale and with such utter recklessness. And yet — and this is the part that should make your blood boil — the company is being kept alive precisely because it behaved so badly.
They fail because if AIG fails, then their CDS contracts are worthless, and they have to account for their assets at their actual value, and overnight they become insolvent.
So, AIG is Sheriff Bart from Blazing Saddles, holding the gun to his own head, saying, “Hold it! Next man makes a move, the n***** gets it!”
Of course, this isn’t criminality (though it should be), this is Republican economics, privatizing the profits while socializing the losses.
The criminality is further down in the article:
….A.I.G. didn’t specialize in pooling subprime mortgages into securities. Instead, it sold credit-default swaps.
….But it also saw the fees as risk-free money; surely it would never have to actually pay up. Like everyone else on Wall Street, A.I.G. operated on the belief that the underlying assets — housing — could only go up in price.
That foolhardy belief, in turn, led A.I.G. to commit several other stupid mistakes. When a company insures against, say, floods or earthquakes, it has to put money in reserve in case a flood happens. That’s why, as a rule, insurance companies are usually overcapitalized, with low debt ratios. But because credit-default swaps were not regulated, and were not even categorized as a traditional insurance product, A.I.G. didn’t have to put anything aside for losses. And it didn’t. Its leverage was more akin to an investment bank than an insurance company. So when housing prices started falling, and losses started piling up, it had no way to pay them off. Not understanding the real risk, the company grievously mispriced it.
(emphasis mine)
So they sold insurance, and never had any intention on paying off, because if they had, and remember that AIG is (was) at its core an insurance company, even absent regulatory demands, they would have put aside something in the way of capital reserves.
This is the same as selling phony stocks. AIG, or more at least its everyone in a position of responsibility in its financial practices unit in London, where the swaps were written and sold, and everyone involved in supervising these activities, up to and including the CEO, and probably the board of directors, knowingly sold a fraudulent product.
Another Friday, More Banks Shut Down by the FDIC
Security Savings Bank, Henderson, NV
Heritage Community Bank, Glenwood, IL
16 in about 8 weeks.
CDOs: How Bad Will It Get
This is why our banks are insolvent. Even without the increases in leverage that have been created over the past 15 or so years, when you see losses like this:
The real shocker, though, is what has happened after those defaults. JPMorgan estimates that $102bn of CDOs has already been liquidated. The average recovery rate for super-senior tranches of debt – or the stuff that was supposed to be so ultra safe that it always carried a triple A tag – has been 32 per cent for the high grade CDOs. With mezzanine CDO’s, though, recovery rates on those AAA assets have been a mere 5 per cent.
Your bank is toast.
That’s 30¢ on the dollar for the best of the best, and just down from that, it’s 5¢ on the dollar.
This is why the big banks are insolvent.
Economics Update
Well, the revised GDP numbers are in for Q4 of 2008, and they are a horror-show, with GDP declining 6.2%, when the initial numbers had been -3.8%.
With numbers like this it’s no wonder that the FDIC is reporting that the banking industry posted an aggregate net loss for a quarter for the first time since 1990.
If we are expecting real estate to rebound any time soon and save us, I wouldn’t hold my breath with condo developers trying auctions to move properties, and And apartment buyers walking away from deposits….Six and seven figure deposits….in Manhattan.
I would also note that the consumer does not appear to be their either, with the finally tally for the Consumer Confidence Index falling to a 29 year low.
With numbers like this, it’s no surprise that S&P is considering downgrading the ratings on $140 billion of prime jumbo mortgage CDOs, and non-prime mortgage origination hit a 17-year low last year.
Real estate, and hence banking, is in a sad enough condition that the FDIC has instituted a temporary emergency rate hike in order to bolster its reserves.
More generally, we have The Institute for Supply Management’s Chicago Purchasers’ Index showing continued contraction. It rose to 34.2 from 33.3, but anything under 50 means contraction, and the 30s are significant contraction.
The fact that GE cut its dividend to 10 cents from 31 cents indicates that no one is doing well here.
The same is going on overseas, with most of eastern Europe in dire straits, getting emergency loans totaling about $31 billion, and Japanese factory output falling, and new jobs drying up.
Bailouts for Citi and Other Banks
Let’s start with the numbers: City is currently trading at less than $1.50 a share, but the US government is converting its preferred shares to common stock at a price of $3.25/share, that’s around $12½ billion of taxpayer dollars down the hole.
Between the US Government, and various sovereign wealth funds, it means that existing shareholders have gone from 100% of the bank to 26% of the bank….Let’s be clear about it, they are insolvent, that’s the only reason that the management and the shareholders aren’t screaming bloody murder right now.
This is insane.
NY Times OP/Ed Comes Out for Nationalization Pre-Privatization
I think htat it’s been clear that this is the best solution for some times, but the fact that The New York Times editorial board has endorsed this action, recognizing that there are Zombie banks, even if Ben Bernanke denies this, is significant.
The conventional wisdom is moving, and one hopes that mssrs Bernanke and Geithner will recognize this and act in a prompt manner.
Another Moron
Ben Bernanke, who is saying that there is no such thing as a US Zombie bank:
They all have substantial franchise value. They are all lending — all active. All have substantial international franchises.
Between him and Timothy “Eddie Haskell” Geithner, we are fracking doomed.
Because the Blue Dogs and the New Democrats are the Suck
It looks like the corporate whore Blue Dog and New Democrat caucuses are doing their level best to kill the ability of bankruptcy judges to rewrite mortgages on primary residences. (Cram-downs)
Chairman of the New Democrat Caucus, Ellen Tauscher, that it’s not fair to people not in bankruptcy who are being screwed by their banks, which is complete bullsh$#.
If people have the stick of cram-downs to wave at the banks, it makes those banks much more likely to renegotiate loans.
What’s more, it only applies to loans already made, not those going forward, and, depending on draft, may only be limited to sub-prime mortgages…..It is very weak tea to begin with.
This is “I want donations from the banks” crap, and Ellen Tauscher is in a very safe Dem district, having won each election with more than 65% of the vote since redistricting.
She needs to be primaried, but according to Act Blue, she does not have a primary opponent right now…..Damn.
John Thain, Ken Lewis, and A Subpoena
Well, it appears that Thain has told investigators that Bank of America CEO Ken Lewis knew of the bonuses that he rushed through just before the merger, but he was prohibited from discussing it any further by BoA, absent a subpoena, so New York Attorney General Cuomo accommodate him, and got a court order.
So now Thain has provided details on all Merrill Lynch bonuses, though this information is still under seal with the court, ostensibly to deal with confidentiality issues.
I understand where Thain is coming from. If he testifies under the compulsion of a subpoena, then he is not liable for anything that he says, he is indemnified, even if would otherwise violate a NDA or other severence package.
It appears, though it is by no means certain, that Lewis, or his agents instructed Thain not to talk, which would appear to be obstruction of justice.
This should get interesting, as Cuomo has subpoenaed Lewis as well, and given that Thain’s testimony is under seal, significant discrepancies might lead to legal problems for him.
But I’m an engineer, not a lawyer, dammit!*
*I LOVE IT when I get to go all Doctor McCoy!!!
Looks Like We Will Have the Zombie Banks Around for a While
Because when you look at the Treasury’s terms of their Capital Assistance Program, (Treasury link)it’s clear that they are propping up Citi, the weakest of the Zombie banks, because it’s purchasing preferred stock, and “These shares can convert at the firm’s discretion (with the approval of their regulator) into common equity if needed to preserve lending in worse-than-expected economic environment at a conversion price set at a 10% discount from the prevailing level of the institution’s stock price as of February 9, 2009.”
Why February 9, 2009? Because that’s the day before Citi’s common share price fell off a cliff.
If they go back any further, it makes it transparently clear that Citi is insolvent, and Timothy “Eddie Haskell” Geithner is trying to avoid placing it into receivership…So….More zombie banks.
If you want any confirmation that they won’t nationalize pre-privatize the big banks ever, you need only look at Bernanke lobbying for a weakening of the mark to market rules, so that they can call the valueless sh^% on their books a pony.
It appears that everyone is doing their level best to duplicate the mistakes of the Japanese in the early 1990s.
Citi is trading at less than $3/share. BoA ain’t doing much better. Their shareholders are already wiped out. This is about letting senior management keep their jobs, even after they mismanaged our finance system out of existence.
Being Batsh%$ Insane is a Reason to Fire a CEO
Case in point, Bank of America CEO Kenneth Lewis, who is now saying that Merrill-Lynch and Countrywide Financial are, or will be “stars” this year:
Bank of America Corp. Chief Executive Officer Kenneth Lewis said Merrill Lynch & Co. and Countrywide Financial Corp., the two acquisitions that some analysts say helped push down the bank’s share price, have been “stars” so far this year.
Lewis, speaking today in a Bloomberg Television interview from his Charlotte, North Carolina, headquarters, said Merrill will be “a thing of beauty” over the long term. Merrill, the New York-based securities firm, lost $15.8 billion in the fourth quarter.
Ummm….This guy is ready for the rubber room….Seriously.
Economics Update
More brutal numbers on home sales, with sales of existing homes falling to a 12 year low.
Note also that existing home sales are becoming a bigger part of home sales in general, as foreclosures and other distressed sales make up a bigger part of the market.
Of course this can’t compare to the financial putrescence that is AIG, which just failed on an asset sale.
It wanted to use the proceeds to pay down some of its debt to the US government, but could not because of a lack of bidders. No one wants their crap.
BTW, Ken Lewis’s gift keeps on giving to Bank of America, because Merrill-Lynch lost $15.84 billion in Q4, about $500 million more than predicted.
There was an unexpected decline in gasoline stocks that drove oil higher today, while the poor housing news and the declines in the stock market have driven the dollar up as people look for safe havens.
Scary Pictures, Bear Market Edition
So, Barry Ritholtz shows us this graph of comparisons between bear markets, and the current one is now the 2nd worst in history.
Obviously, this is for the Dow which is (at best) a rather imperfect market indicator, but we are now in the worst downturn since the Great Depression.
Economics Update
Well, the Conference Board’s consumer confidence report came out and it is starkly grim, dropping to a record low of 25, lower than had been predicted.
BTW, it’s not just us, German business confidence has fallen, and Standard & Poor’s lowered Latvia’s debt rating to junk.
This means that German businesses have no confidence in the new future, and no one has any confidence in Latvia.
Even the New York Stock Exchange is getting in the act, looking at temporarily suspending a requirement of a $1/share price in order to avoid delisting….I call it a Citi Special, though the two most prominent companies at risk of delisting right now are AIG and Ford.
The fact that the Case-Shiller numbers for the top 20 real estate markets show a price decline of 18.5% year over year, has a lot to do with that.
In currency, the dollar fell a bit, while in energy, oil rose.