by Calculated Risk on 1/28/2008 04:38:00 PM

From American Express:

"... we saw clear signs of a weakening economy and business environment in December,”
Kenneth I. Chenault, chairman and CEO.

And from CNBC:

The company also set aside $440 million in the quarter to cover loans that it expects won't be repaid.

Consumers are cutting back on their spending because of many factors that include higher energy and food prices, in addition to weakness in the credit and housing markets.

by Calculated Risk on 1/28/2008 03:22:00 PM

From the WSJ: New York Hires Perella To Advise on Bond Insurers

The New York State Insurance Department has hired the Wall Street firm Perella Weinberg Partners for advice on the financial health of bond insurers.
...
The Perella Weinberg assignment focuses on protecting policy holders who are customers of so-called monoline insurers, which include Ambac Financial Group Inc. and MBIA Inc., according to people familiar with the assignment.

A line of credit or capital infusion from the insured to the insurer is not an answer. I'm not sure how you can protect the policy holders if the insurer can't pay.

by Calculated Risk on 1/28/2008 11:22:00 AM

Click on graph for larger image.

This graph shows New Home Sales vs. recessions for the last 45 years. New Home sales were falling prior to every recession, with the exception of the business investment led recession of 2001.

Note that the escalation of the Vietnam War in the '60s kept the economy out of recession, even though New Home sales were falling.

This is what we call Cliff Diving!

And this shows why so many economists are concerned about a possible consumer led recession - possibly starting in December (as shown on graph).

by Calculated Risk on 1/28/2008 10:00:00 AM

According to the Census Bureau report, New Home Sales in December were at a seasonally adjusted annual rate of 604 thousand. Sales for November were revised down to 634 thousand, from 647 thousand, and numbers for October were revised up slightly.

	Click on Graph for larger image. Sales of new one-family houses in December 2007 were at a seasonally adjusted annual rate of 604,000 ... This is 4.7 percent below the revised November rate of 634,000 and is 40.7 percent below the December 2006 estimate of 1,019,000.
	The Not Seasonally Adjusted monthly rate was 42,000 New Homes sold. There were 71,000 New Homes sold in December 2006. December '07 sales were the lowest December since 1994 (40,000).
	The median and average sales prices are generally declining. Caution should be used when analyzing monthly price changes since prices are heavily revised and do not include builder incentives. The median sales price of new houses sold in December 2007 was $219,200; the average sales price was $267,300.
	The seasonally adjusted estimate of new houses for sale at the end of December was 495,000. The 495,000 units of inventory is slightly below the levels of the last year. Inventory numbers from the Census Bureau do not include cancellations - and cancellations are once again at record levels. Actual New Home inventories are probably much higher than reported - my estimate is about 100K higher.
	This represents a supply of 9.6 months at the current sales rate.

This is another VERY weak report for New Home sales. Most revisions continue to be down. This is the fifth report after the start of the credit turmoil, and, as expected, the sales numbers are very poor.

I expect these numbers to be revised down too. More later today on New Home Sales.

by Calculated Risk on 1/28/2008 09:29:00 AM

From the WSJ: ADS Says Blackstone Deal Unlikely

Alliance Data Systems Corp. ... Blackstone ... likely won't go through with its $6.4 billion acquisition ...

... Blackstone told the data processor and marketing firm in a letter late Friday it doesn't expect the deal to get the necessary approvals from OCC and that the regulator is demanding "extraordinary measures" which "represent operational and financial burdens ... that cannot be reasonably assumed."

"Extraordinary measures" are usually doable during better times. This seems like another way to leave your lover (from Paul Simon):

You just slip out the back, Jack
Make a new plan, Stan
You don't need to be coy, Roy
Just get yourself free

by Calculated Risk on 1/27/2008 08:36:00 PM

House of Cards (video): "Steve Kroft reports on how the U.S. sub-prime mortgage meltdown, in which risky loans drove a housing boom that went bust, is now roiling capital markets worldwide."

Here is the foreclosure site mentioned in the story. I live in a neighborhood that is "immune" to the housing bust. Oh yeah, that site shows a number of REOs and preforeclosure homes in my neighborhood.

by Calculated Risk on 1/27/2008 12:23:00 PM

From CBS: New Trend In Sacramento: 'Intentional Foreclosure' (hat tip Shawn)

Linda Caoli helps lots of families on the verge of losing their homes, including a single mom working two jobs to pay her mortgage.

"She says Linda the house across the street, same model, with more upgrades sold in foreclosure for $315,000!" explains Linda.

Her client isn't the only one thinking about ditching her house to buy the better deal across the street. A number of realtors CBS13 talked to say it's already happening.

This is similar to Peter Viles' story in the LA Times: A tipping point? "Foreclose me ... I'll save money".

Wachovia is seeing this too (from their Jan 22nd conference call):

“... people that have otherwise had the capacity to pay, but have basically just decided not to because they feel like they've lost equity ...”

And from BofA CEO Kenneth Lewis in December:

"There's been a change in social attitudes toward default. We're seeing people who are current on their credit cards but are defaulting on their mortgages. I'm astonished that people would walk away from their homes."

This change in social attitudes could lead to a flood of foreclosures. The following is from my post last December: Homeowners With Negative Equity

The following graph shows the number of homeowners with no or negative equity, using the most recent First American data, with several different price declines.

At the end of 2006, there were approximately 3.5 million U.S. homeowners with no or negative equity. (approximately 7% of the 51 million household with mortgages).

By the end of 2007, the number will have risen to about 5.6 million.

If prices decline an additional 10% in 2008, the number of homeowners with no equity will rise to 10.7 million.

The last two categories are based on a 20%, and 30%, peak to trough declines. The 20% decline was suggested by MarketWatch chief economist Irwin Kellner (See How low must housing prices go?) and 30% was suggested by Paul Krugman (see What it takes).

Intentional foreclosure. Jingle Mail. Negative Equity. All terms that could be common in 2008.

by Calculated Risk on 1/26/2008 10:49:00 PM

Jenny Anderson and Vikas Bajaj at the NY Times report: Reviewer of Subprime Loans Agrees to Aid Inquiry (hat tip James)

Clayton Holdings, a company ... that vetted home loans for many investment banks, has agreed to provide important documents and the testimony of its officials to the New York attorney general, Andrew M. Cuomo, in exchange for immunity from civil and criminal prosecution in the state.

... Clayton has told the prosecutors that starting in 2005, it saw a significant deterioration of lending standards and a parallel jump in lending exceptions. In an another sign that the industry was becoming less careful, some investment banks directed Clayton to halve the sample of loans it evaluated in each portfolio, a person familiar with the investigation said.
...
It is unclear how many lending exceptions are contained in the $1 trillion subprime mortgage market, but industry participants cite figures ranging from about 50 percent to 80 percent for some loan portfolios they examined.

It seems the key question here is: Did the investment banks adequately disclose the information from Clayton to the investors in the mortgage securities?

by Calculated Risk on 1/26/2008 06:05:00 PM

The FDIC announced the first bank failure of 2008 last night. To put that into context, here is a graph of bank and thrift failures since the FDIC was created in 1934.

Click on graph for larger image. The huge spike in the '80s was due to the S&L crisis. It's interesting to note that even with the failure of almost 3,000 banks and thrifts during the S&L crisis, the overall economy was healthy.

The second graph includes the 1920s and shows that failures during the S&L crisis were far less than during the '20s (before the FDIC was enacted).

Note how small the S&L crisis appears on this graph!

During the Roaring '20s, 500 bank failures per year was common - even with a booming economy - with depositors typically losing 30% to 40% of their bank deposits in the failed institutions. The number of bank failures soared to 4000 (estimated) in 1933.

It's important to note that the housing bust hasn't hurt most small banks and institutions, because the banks didn't hold many of the residential mortgages they originated. Instead the small to mid-sized institutions focused on commercial real estate (CRE), construction and development (C&D) and other loans.

From the December 2006 FDIC report: Economic Conditions and Emerging Risks in Banking.

Small and mid-size institutions have been increasing their concentrations in riskier assets, such as CRE loans and construction and development (C&D) loans. ... small and mid-size institutions have been ... assuming higher levels of credit risk.

... continued increases in concentrations and reports of loosened underwriting standards at FDIC-insured institutions signal the potential for future credit quality deterioration. In addition, regulators have noted increasing C&D and overall CRE loan concentrations, especially at institutions with total assets between $1 billion and $10 billion. Four of six Regional Risk Committees expressed some level of concern about CRE lending, in part due to continuing increases in concentrations.

Now credit standards are being tightened, and many of these small and mid-sized institutions are seeing rising defaults on their CRE and C&D loans. So 2008 is when we would expect to see more of these small and mid-sized institutions start to fail, but the number of failures will probably be small as compared to the '80s.

Update: Here is an addition from the Atlantic corrected Atlanta Business Chronicle: Banks' bad loans hit level of S&L Crisis

Atlanta's residential bust is rapidly becoming a financial disaster on a par with the Savings and Loan Crisis of the 1980s.

The article (subscription) reports that at the peak of the S&L crisis, the non-performing loans reached 4.4% for Altanta based banks (compared to 2.2% at the end of Q3 2007). However the article quotes several bankers and industry analysts that believe the percent of non-performing loans increased significantly in Q4, and will rise sharply in 2008.

by Tanta on 1/26/2008 04:08:00 PM

CR and I have discussed going to some kind of registration-based commenting software. There are many good reasons to do that.

The biggest problem I personally have with that is this being a business kind of blog, a lot of our readers are working in offices and cannot access commenting windows other than Haloscan because of network filters and blocks. I am not here to debate the wisdom of employers in the financial, housing, and regulatory sectors keeping their employees from using our blog as a resource. Of course that's stupid. You try telling them that.

But it gets to a point where, if the comment threads get stupid and pointless and Yahooified enough, our employed readers will not want to read them, so there goes that problem. With a registration/moderation system, we could at least assure our loyal employed readers of having something worth reading at night and on the weekends when they have access from home.

I cannot make anyone stop responding to pointless or nuisance comments. You have to want to restrain yourself, because you understand that the only way to get rid of them is to fail to give them the attention they want. A "troll" is not just someone whose comments you disagree with, or even just a nasty or badly-worded comment. A troll is someone who does not, under any possible set of circumstances, care what you think about him or his comments. He merely wants attention. Negative attention will do. The more you disagree with him, the more he is able to tell himself that he is persecuted and victimized or the only voice of reason or one of the elite few who has the God's-eye view of the world or whatever his current delusion is. If he isn't merely a narcissist who thrives on feeling attacked, he's just some putz who enjoys irritating other people. Therefore, you "feed" the troll by paying any attention to him at all. It does not matter what you say in response. Any response to a troll just encourages the troll.

Besides classic trolls, we have a few resident long-winded bores who believe that the rest of us have never been exposed to some trite, shallow, bombastic rant they just heard on the radio or read in Reader's Digest or saw in a vision, and feel compelled to share with the rest of us. These people lack any possible sense of context or audience; they are incapable of noticing that the bulk of our commenting community has been exposed to the world for a while now and is not interested in any comment that starts "there is one simple answer to this the rest of you aren't getting." It does you no good to respond to this type either; they'll just re-write the same comment again, at the same length, saying the same thing, until you "get it." They are bores with no self-awareness. The cool thing about the internet is that you can just scroll down to the next comment without being "rude." So take advantage of the medium.

Absolutely none of this is to say or imply that you are not invited to debate with each other or to correct misstatements of fact. You are also still allowed to make jokes and ramble occasionally and even from time to time introduce a new topic that is relevant. Most of you are grownups who understand intuitively where the line is, and if you cross it now and again you catch yourself and go on mostly behaving yourself. A few of you are those problem children who are not capable of taking only one cookie or talking quietly in the library or waiting until it's your turn and you ruin all group experiences for everyone else. You goad the authorities into instituting draconian rules for everybody in order to prevent you from getting out of control. You are probably going to be like this for the rest of your life, since such behavior patterns that persist past puberty usually don't go away. All I can say to you is that you really will get nowhere asking me personally to validate your feelings or demands. If you worked for me, I would foist you off on another department or just fire you immediately. I learned a long time ago that I can't fix you and I can't function with you and you need me a whole hell of lot more than I need you. Of course you don't recognize yourself in this description. That'd be your big problem. I'm really just writing this to once again remind your fellows that I am not trying to inhibit anyone having a good time in the comments. I am trying to inhibit those of you with no judgment and no ability to control yourselves.

So you tell me, folks. Do we need to ditch Haloscan and go to controlled comments, or is the sane majority willing to help me keep the comment threads readable by starving the trolls?