by Calculated Risk on 7/09/2008 09:20:00 PM

A conversation with Jamie Dimon (Part I): (hat tip Dave)

Note: this is long but worth the time.



A continued conversation with Jamie Dimon (Part II) NOTE: Dimon starts at 43+ minutes into the 2nd video:

by Calculated Risk on 7/09/2008 06:42:00 PM

Yesterday we focused on strip malls, and the probable impact on malls of the imminent Steve & Barry's BK (now official). For more on the impacts on malls, see this story from MarketWatch: Steve & Barry bankruptcy further pressures malls

Lets look at lodging today. A Goldman Sachs research note out this afternoon mentioned that the average US hotel occupancy rate over the last four weeks was 65.9%, down three percentage points from the same period one year ago. Goldman further noted that YoY comparisons of vacancy rates have been deteriorating all year.

This is more bad news for commercial real estate construction. Based on the recent building boom, lodging was even more of a bubble than multimerchandise shopping!

Click on graph for larger image in new window.

This graph shows the investment in office buildings, multimerchandise shopping, and lodging over the last ten years (as a percent of GDP). Note: data from the BEA. The BEA started breaking out office and multimerchandise shopping in 1997.

Lodging and multimerchandise shopping saw the largest percentage booms, while office space was less than the office boom in the late '90s. These are the three categories of commercial construction that are probably the most overbuilt - and will probably see the biggest declines in investment.

This data fits with the forecast from American Institute of Architects chief economist Kermit Baker:

"On the commercial side, best I can tell the problems are in all of it - offices, retail, hotels. I think we will see a prolonged decline."
Kermit Baker, CNNMoney May 17, 2008

"[W]e’ve seen a dramatic contraction in design activity in recent months. ... This weakness in design activity can be expected to produce a contraction in [commercial and multifamily] construction sectors later this year and into 2009.”Kermit Baker, June 18, 2008

by Calculated Risk on 7/09/2008 04:52:00 PM

From Fortune: The Fannie and Freddie doomsday scenario

Here's a scary, and relevant, question to ponder as the housing market continues to slide: What would it take for the government to step in and help Fannie Mae and Freddie Mac, and how would a rescue affect you, the taxpayer?

Although S&P argues it is unlikely that either Fannie or Freddie will fail, one thing is pretty certain - there is no way politically that Fannie and Freddie would be allowed to fail.

So what might it look like if the government had to lend a hand? Outright nationalization is an unlikely option given that neither the current administration nor the presidential candidates could afford to support such a move in an election year.

More likely, the Treasury Department or the Federal Reserve would come in and provide a liquidity backstop, in the form of a loan or guarantee to bondholders that they will be paid.

Some investors apparently don't think the government will guarantee Fannie and Freddie debt since the (link fixed) spreads to treasuries on Fannie two year notes are at record levels. An explicit loan guarantee would reduce the borrowing costs for Fannie and Freddie, and reduce mortgage rates. Of course this would probably mean the end of the dividend (both companies pay hefty dividends) until the loan guarantees are lifted, possibly a change in management, and would still require raising more dilutive capital. No wonder Fannie and Freddie equity investors are scared.

Mish argues that the Nationalization of Fannie and Freddie is unavoidable.

by Calculated Risk on 7/09/2008 03:56:00 PM

I think she is still too optimistic on pricing, but her comments are interesting. Here is the story: Why This Housing Bust Is Worst Ever: The American Dream Ends

by Calculated Risk on 7/09/2008 02:59:00 PM

From the LA Times: For opportunists, IndyMac CD yields are a bonanza

[T]he troubled Pasadena-based thrift isn’t just edging competitors on yield -- it’s trouncing them.
...
For a six-month CD with a $5,000 minimum deposit, IndyMac’s website on Tuesday was offering an annualized yield of 4.10% as an online "special."

The next-highest-paying bank in the nation for six-month CDs was Corus Bank of Chicago, with a 3.7% annualized yield, according to bankrate.com.

Most 6 month CDs are paying in the 3.0 to 3.2% range (annualized). According to Indymac, the FDIC has banned them from accepting brokered deposits, but they can still accept individual deposits:

A consequence of falling below well-capitalized is that we are no longer permitted to accept new brokered deposits or renew or roll over existing ones, unless we get a waiver from the FDIC.

This is a classic hazard of insurance - Indymac needs deposits to stay in business (there is somewhat of a run on the bank right now), and to attract deposits they have to pay a higher than industry interest rate. The FDIC is well aware of this problem:

Concerns about Moral Hazard. In the insurance context, the term "moral hazard" refers to the tendency of insured parties to take on more risk than they would if they had not been indemnified against losses. The argument is that deposit insurance reassures depositors that their money is safe and removes the incentive for depositors to critically evaluate the condition of their bank. With deposit insurance, unsound banks typically have little difficulty obtaining funds, and riskier banks can obtain funds at costs that are not commensurate with their levels of risk. Unless deposit insurance is properly priced to reflect risk, banks gain if they take on more risk because they need not pay creditors a fair risk–adjusted return. A truly risk–based assessment discourages such risky behavior. The moral hazard problem is particularly acute for insured depository institutions that are at or near insolvency but are allowed to operate freely because any losses are passed on to the insurer, whereas profits accrue to the owners. Thus problem institutions have an incentive to take excessive risks with insured deposits in the hope of returning to profitability.
emphasis added

by Calculated Risk on 7/09/2008 11:32:00 AM

Video: Roubini on CNBC

From Roubini: Interview on CNBC and Rising Estimates of Credit Losses from the Financial Crisis Now Up to $1.6 Trillion

[B]race yourself for a severe recession in the US and other advanced economies, a serious global growth slowdown and a systemic financial crisis. The worst is ahead of us rather than behind us ...

[T]he temporary drug of a $160 billion fiscal package including $100 billion of tax rebates will boost Q2 growth into positive territory (1% to 1.5% growth in Q2). But that boost is deceptive as it is entirely driven by such temporary tax rebates. The effects of those rebates on consumption are temporary while a half a dozen more persistent shock will lead to a consumption reduction – by late summer –once the effect of the rebates fizzle out. Persistent headwinds hitting consumers on a more protracted basis are: falling home prices, falling home equity withdrawal, falling stock prices, rising oil and food prices, rising debt servicing ratios, falling consumer confidence, falling employment and income generation.

BTW, Goldman Sachs had a research note out this week on "The Sorry State of US Consumer Fundamentals".

[W]e [focus] on five key indicators of consumers’ financial well-being: job creation, changes in real wages, changes in home prices, changes in equity prices, and access to credit. Together, these indicators cover major movements in the income statement and balance sheet of the US household sector.

Goldman analysts then present evidence that all five factors are negative for consumer spending.

The bottom line: none does very well; the [household] balance sheet looks especially fragile.

by Calculated Risk on 7/09/2008 10:32:00 AM

From the MBA: Mortgage Applications Increase In Latest MBA Weekly Survey

The MBA Purchase Index is probably not useful in predicting future housing activity because the index is not corrected for multiple applications. HousingWire has more on this issue: Mortgage Applications Continue to Paint Mixed Picture

A separate index maintained by Mortgage Maxx LLC, a company that provides prepayment data to Wall Street researchers, reached a much different conclusion earlier in the week: the company’s Max index found that applications actually fell slightly, off 0.2 percent from the week before.
...
“The MBA index gives us overall applications, which may or may not translate into demand,” said one source, an ABS analyst that asked not to be named. “The reason is simple: when you control for the applicant’s address, we’re seeing a very different picture that’s more in line with the Max.”

But the MBA survey does provide information about mortgage rates, and rates moved back up again:

The average contract interest rate for 30-year fixed-rate mortgages increased to 6.43 percent from 6.33 percent...

by Calculated Risk on 7/08/2008 09:00:00 PM

From the WSJ: Steve & Barry's Nears Bankruptcy

Fast-growing retailer Steve & Barry's is expected to file for Chapter 11 bankruptcy protection as early as Wednesday ... A filing would be devastating to mall owners across the country, who ponied up hundreds of millions of dollars to attract Steve and Barry's into huge, empty spaces often as large as 100,000 square feet. Potentially all of those 275 stores could close ...

Steve & Barry's was the retailer we discussed a few weeks that was using up-front fees from mall owners to fuel their rapid expansion:

People close to the company's finances say most of the retailer's earnings came in the form of one-time so-called "tenant improvement" payments from landlords of $2 million to $7 million per store.

This is another major blow to already reeling mall owners. Just today Reis announced that the strip mall vacancy rate climbed to 8.2% in Q2 2008, the highest vacancy rate since 1995.

And just like for residential, there was substantial overbuilding in multimerchandise shopping space in recent years (graph repeated from earlier post).

Note that multimerchandise investment peaked at $32 billion SAAR (seasonally adjust annual rate) in Q4 2007, compared to $800 billion for residential investment (SAAR) in Q1 2006. So the scale of the problem is much smaller.

Click on graph for larger image in new window.

This graph shows investment in multimerchandise shopping space starting in 1997 in current dollars (inflation adjusted Q1 2008). The circle shows the probable period of overinvestment.

It appears that $20 billion per year or so would be a normal level of investment. However, with the recent over investment, non-residential investment in multimerchandise shopping structures will probably fall below $20 billion per year (in 2000 dollars) for a few years.

by Tanta on 7/08/2008 07:44:00 PM

July 8, 2008, via Housing Wire:

According to a press statement released late Tuesday, Northbrook, Ill.-based Prospect Mortgage has signed an agreement to acquire more than 60 branch offices nationwide and 750 of Indymac’s retail employees, including loan officers. Terms of the deal were not disclosed.

The employees will become Prospect mortgage employees, with the branches being renamed, the company said; it’s unclear if the company intends to cut staff in the wake of the planned acquisition.

Both John Johnston and Ron Bergum will remain in their leadership roles with the retail branch group and report to Mark Filler, CEO of Prospect Mortgage; both Johnston and Bergum were senior retail banking executives at now-bankrupt American Home Mortgage Co. before joining Indymac.

August 29, 2007 via Bloomberg:

One mortgage lender announced that it was hiring yesterday as it tried to take advantage of the turmoil in the market, while another said it was cutting jobs.

IndyMac Bancorp said it had hired more than 600 former employees of the American Home Mortgage Investment Corporation and might hire 250 more.

IndyMac will also assume the leases on more than 90 offices where the employees worked.

Last month, IndyMac eliminated 400 back-office processing jobs, about 4 percent of the work force.

This year’s surge in missed loan payments reduced the profitability of home lending, forcing more than 100 mortgage companies to close, declare bankruptcy or put themselves up for sale. IndyMac joins Countrywide Financial and Merrill Lynch’s First Franklin unit in trying to benefit from the shake-out by hiring displaced workers.

Hope Prospect Mortgage's business cards are handled on a print-on-demand basis. I'm not sure I'd stock up.

by Calculated Risk on 7/08/2008 05:25:00 PM

From the BBC: Recession 'looming' for UK firms

The UK is facing a serious risk of recession within months, the findings of a survey of almost 5,000 small, medium and large businesses suggest.

The British Chambers of Commerce's (BCC) quarterly report found the credit crunch and rising costs had dented the most important sectors of the economy.
...
Firms in the manufacturing and services sector said domestic sales and orders had slowed over the past three months, said the BCC, which added that firms were also experiencing serious cash-flow problems.

Its economic adviser, David Kern, said the survey showed a "menacing deterioration" in UK prospects.

"We are now facing serious risks of recession," he said.

"The outlook is grim and we believe that the correction period is likely to be longer and nastier than expected."

Here is a video of Director General of the British Chamber of Commerce David Frost on economic downturn.