by Calculated Risk on 12/13/2007 11:48:00 AM

From Jonathan Weil at Bloomberg: CIBC's Big Subprime Secret Might Cost Billions (hat tip Justin)

CIBC last week [said some company] is insuring $3.47 billion, or about a third, of the collateralized- debt obligations it holds that are tied to U.S. subprime mortgages.

The [insurer]'s identity matters because the bank said these hedged CDOs were worth just $1.76 billion at Oct. 31, down almost half from their face amount. If the guarantor goes poof, CIBC loses its hedge on these derivative contracts. And the Toronto-based bank would have to recognize the loss, which is growing.

If ACA is the insurer, this would be bad for CIBC ... ACA Financial ... had $425.5 million of statutory capital at Sept. 30 and $1.1 billion of so-called claims-paying resources to back its guarantees -- for all its customers. That's not enough to cover the CDOs in question at CIBC.

Weil is speculating that ACA is the counterparty to CIBC, but it does seem likely.

I've also been told that on the Lehman conference call this morning, a Lehman executive said (paraphrased by source) that they "don’t have visibility into--and can’t count on--some counterparties so they have bought CDS’s to hedge that exposure."

by Calculated Risk on 12/13/2007 11:33:00 AM

From Financial News: HBOS pain takes UK bank writedowns to £2bn in a week (hat tip Barley)

HBOS has become the fourth UK lender in a week to announce a multi-million pound writedown on the back of the turmoil in global credit markets, taking the total written off by UK banks in the last seven days to almost £2bn (€4bn).

The bank this morning said it wrote down £520m on its investments, three days after Lloyds TSB revealed a £200m hit on its own portfolio and a week after Royal Bank of Scotland reduced the value of its assets by £950m as a result of its exposure to US sub-prime.

Northern Rock continued to add to the woes of the UK banking sector, saying this morning it had written down its collateralised debt obligation portfolio by £281m.

And the beat goes on ...

by Calculated Risk on 12/13/2007 11:00:00 AM

Click on graph for larger image.

Office vacancy rates have spiked in California's Inland Empire and Orange County according to the USC Lusk Center’s Casden Real Estate Economics Forecast.

Jeff Collins at the O.C. Register reports: USC sees vacancies chilling O.C. office rents in ‘08

Construction of new office buildings and layoffs in the financial services and mortgage industries will keep office vacancies high in Orange County through 2008, halting the upward spiral of lease rates, according to the USC Lusk Center’s Casden Real Estate Economics Forecast.

But despite a slight slowdown in sales and rent increases, industrial real estate should remain strong next year, with continued low vacancies, added Delores Conway, director of the Casden Forecast.

Tighter credit, almost no job growth, and falling consumer confidence is leading to a lot of uncertainty, Conway explained. But the slowdown will amount to “a short-term adjustment,” even in the office sector.

Note that the Casden Forecast doesn’t expect a recession next year.

by Calculated Risk on 12/13/2007 09:15:00 AM

From CoStar: TROUBLE IN TEXAS: Huge Multifamily Owner Nears Collapse (hat tip Nick)

MBS Cos., one of the largest multifamily property owners in the country, is delinquent, in default or in danger of becoming so, on more than $900 million in loans.

... if MBS defaults, it ... will ... generate a huge spike up in CMBS delinquencies, expected to be reported this week or next.

PNC Financial Services Group originated almost all of the loans made to MBS Cos., about 90% of MBS's total loan exposure. Most of those loans are no longer on PNC's books because they were off-loaded into commercial mortgage backed securities (CMBS) ...

As of last month, Smuck-affiliated companies had as many as 65 other loans totaling more than $900 million spread across 36 CMBS deals. Most of the loans were taken out since 2000, some as recently as this year. Nearly two-thirds of those were reported to be at least 30 or more days delinquent ...

by Calculated Risk on 12/13/2007 09:05:00 AM

From MarketWatch: Retail sales rise across the board in November

U.S. retail sales rose sharply in November, pushed higher by rising gasoline prices, the Commerce Department reported Thursday.

The early Thanksgiving holiday, which allowed for more Christmas shopping, may have played a role in the strong showing.

Auto sales were the only area of weakness in November.

Retail sales rose 1.2% in November after rising 0.2% in October. This is the strongest sales pace since May. Retail sales are up 6.3% in the past 12 months.
...
In a separate report, the Labor Department said producer prices jumped 3.2% in October, the largest since 1973 and the core rate rose 0.4%. See full story.

by Calculated Risk on 12/12/2007 07:55:00 PM

Here are the Kennedy-Greenspan estimates (NSA - not seasonally adjusted) of home equity extraction for Q3 2007, provided by Jim Kennedy based on the mortgage system presented in "Estimates of Home Mortgage Originations, Repayments, and Debt On One-to-Four-Family Residences," Alan Greenspan and James Kennedy, Federal Reserve Board FEDS working paper no. 2005-41.

Click on graph for larger image.
For Q3 2007, Dr. Kennedy has calculated Net Equity Extraction as $133.0 billion, or 5.2% of Disposable Personal Income (DPI). Note that net equity extraction for Q2 2007 has been revised upwards to $159.2 billion.

This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, both in billions of dollars quarterly (not annual rate), and as a percent of personal disposable income. MEW was still strong in Q3 2007, even with tighter lending standards.

As homeowner equity declines sharply in the coming quarters - household real estate equity declined $128 Billion in Q3 - combined with tighter lending standards, equity extraction should decline significantly and impact consumer spending.

by Calculated Risk on 12/12/2007 05:22:00 PM

From Bloomberg: Security Capital's AAA Rating May Be Cut by Fitch (hat tip Brian)

Security Capital Assurance Ltd. may lose its AAA credit rating at Fitch Ratings ...

The company's capital is at least $2 billion below what it needs to retain the AAA, Fitch said. SCA has four to six weeks to come up with ``firm capital commitments'' to meet the guidelines, or the rating will fall two levels to AA, Fitch said.
...
Security Capital is among seven AAA rated bond insurers that have been probed by Moody's Investors Service, Standard & Poor's and Fitch Ratings for the past month after declines in the credit quality of the securities they guarantee.

by Calculated Risk on 12/12/2007 02:55:00 PM

This morning, Tanta mentioned that the House was considering Cram Downs.

Now from the AP: House Panel Approves Bankruptcy Bill (hat tip Branden)

... House lawmakers on Wednesday advanced legislation that would enable homeowners to shrink their mortgages in bankruptcy court.

The bill ... was passed by the House Judiciary Committee 17 to 15 ...

House leaders appeared unlikely to bring the bill up for a vote before year-end. ...

Mortgage-industry leaders argue that giving judges this power, which they term a "cramdown," would force lenders to charge higher rates to offset any unpaid loan balances that would be reduced in court.

by Calculated Risk on 12/12/2007 02:36:00 PM

Back in June, Tanta celebrated some good news (with obvious sarcasm): The Drag Stops Here:

The worst U.S. housing slump in 16 years will begin to ease in the next month or two, and job growth will lift home prices and spur construction early next year, Bank of America Corp. Chief Executive Officer Kenneth Lewis said.

``The drag stops in the next few months,'' Lewis said in an interview yesterday in New York. ``It's just about to be over. We're seeing the worst of it.''

Now from Bloomberg: Bank of America's Lewis Muffs Housing Market Forecast

Six months after saying the slowdown in U.S. housing sales was ``just about to be over,'' Lewis said today at an industry conference in New York that fourth-quarter profit will be ``quite disappointing'' and predicted a `challenging'' 2008 with higher writedowns for securities tied to the mortgage market.

Oops. Re-cork the Champagne!

Lewis did get something right in May: Bank of America's Lewis Calls for Lending `Sanity'

``We are close to a time when we'll look back and say we did some stupid things,'' Lewis said, speaking at a lunch at the Swiss-American Chamber of Commerce in Zurich. ``We need a little more sanity in a period in which everyone feels invincible and thinks this is different.''

And he wasn't talking about "stupid things" in housing:

The chief executive said that while the bank has turned down some corporate customers as too risky, ``the deals we've turned down have been taken up quickly by others.''
...
Lewis, 60, said ``We need a deal to go bad, as long as we're not in it.''

Just remember he wasn't worried about housing - although he should have been - his concern was for corporate loans. Hmmm ... Chrysler?

by Calculated Risk on 12/12/2007 11:50:00 AM

From Greg Ip at the WSJ: Fed Joins Other Banks in Measures To Inject More Funds Into Markets

The Federal Reserve has joined with four other major central banks to announce a series of measures designed to inject added cash into global money markets in hopes of thawing a credit freeze that threatens their economies.

The Fed said today it would create a new "term auction facility" under which it would lend at least $40 billion and potentially far more, in four separate auctions starting this week. The loans would be at rates far below the rate charged on direct loans from the Fed to banks from its so-called "discount window." But the new loans can still be secured by the same, broad variety of collateral available that banks pledge for discount window loans.
...
The Fed also said it had created reciprocal "swap" lines with the European Central Bank, for $20 billion, and the Swiss National Bank, for $4 billion. These will enable the ECB and SNB to make dollar loans to banks in their jurisdiction, in hopes of putting downward pressure on interbank dollar rates in the offshore markets, principally the London Interbank Offered Rate, or Libor, market. The inability of foreign central banks to inject funds in anything other than their own currency has been a factor creating the squeeze on bank funding in those markets.
...
The new "term auction facility" overcomes the principal obstacles the Fed has faced using its two main tools for injecting liquidity. Open market operations can be used to inject cash at the federal funds rate, which is relatively cheap, but only against a limited range of collateral. The discount rate, on the other hand, is half a point higher than the federal funds rate and banks are reluctant to access it for fear of the stigma of being seen to be desperate for funds.

The new loans will be auctioned off with a minimum rate linked to the expected actual federal funds rate over the duration of the loan. Since the federal funds rate is expected to decline over the next two months, when the loans will be outstanding, the loan rate could end up being close to or even below the current federal funds rate.

So much for discouraging future risk taking. Here is what the BofE's Mervyn King said in September:

The path ahead is uncertain. There are strong private incentives to market players to recognise early and transparently their exposures to off-balance sheet entities and to accelerate the re-pricing of asset-backed securities. Policy actions must be supportive of this process. Injections of liquidity in normal money market operations against high quality collateral are unlikely by themselves to bring down the LIBOR spreads that reflect a need for banks collectively to finance the expansion of their balance sheets. To do that, general injections of liquidity against a wider range of collateral would be necessary. But unless they were made available at an appropriate penalty rate, they would encourage in future the very risk-taking that has led us to where we are. All central banks are aware that there are circumstances in which action might be necessary to prevent a major shock to the system as a whole. Balancing these considerations will pose considerable challenges, and in present circumstances judging that balance is something we do almost daily.

The key objectives remain, first, the continuous pursuit of the inflation target to maintain economic stability and, second, ensuring that the financial system continues to function effectively, including the proper pricing of risk. If risk continues to be under-priced, the next period of turmoil will be on an even bigger scale. The current turmoil, which has at its heart the earlier under-pricing of risk, has disturbed the unusual serenity of recent years, but, managed properly, it should not threaten our long-run economic stability.
emphasis added

The idea of lending “quickly, freely and readily” during a crisis, but at a penalty rate, and only on good collateral, comes from Walter Bagehot's 1873 “Lombard Street”.

UPDATE: Floyd Norris smells Fear at the Fed