by Calculated Risk on 1/26/2009 01:30:00 AM

From the NY Times: Nationalization Gets a New, Serious Look

[M]ost members of the Obama economic team concede that the rapid deterioration of the country’s biggest banks, notably Bank of America and Citigroup, is bound to require far larger investments of taxpayer money, atop the more than $300 billion of taxpayer money already poured into those two financial institutions and hundreds of others.

But if hundreds of billions of dollars of new investment is needed ... what do taxpayers get in return?

Does this mean "Nationalization"?

So far, President Obama’s top aides have steered clear of the word entirely, and they are still actively discussing other alternatives, including creating a “bad bank” that would nationalize the worst nonperforming loans by taking them off the hands of financial institutions without actually taking ownership of the banks. Others talk of de facto nationalization, in which the government owns a sizeable chunk of the banks but not a majority...

That has already happened ...

I say to-may-to, you say to-mah-to.

by Calculated Risk on 1/25/2009 08:02:00 PM

For a few months it seemed Sunday had become the new Monday for news. I'm happy for a slow news day!

But this week will be busy: existing home sales on Monday, Case-Shiller house price index on Tuesday, the FOMC meeting on Wednesday, New Home sales on Thursday, and Q4 GDP (the big news) on Friday ... and much more.

The consensus is for a real GDP decline of 5.5% annualized in Q4. Should be interesting ...

Best to all.

by Calculated Risk on 1/25/2009 03:35:00 PM

From Bloomberg: Summers Says Economy Entering a ‘Difficult’ Time

“The next few months are, no question, going to be very, very difficult and it may be longer than that,” said Summers, appearing on NBC’s “Meet the Press.”
...
Summers said Obama plans to overhaul the $700 billion Troubled Asset Relief Program enacted in October. Obama’s bank rescue plan, using the remaining $350 billion in TARP, will be “very different” than it was under George W. Bush’s administration, Summers said.
...
“Secretary-designate Geithner ... will be laying out the plans and principles behind our approach,” said Summers ...

"Very different" doesn't tell us much.

by Calculated Risk on 1/25/2009 10:30:00 AM

Bloomberg has an update on Manhattan’s largest apartment complex: Tishman’s Stuyvesant Town Fund May Run Dry This Year (hat tip Brian)

Tishman Speyer Properties LP and BlackRock Realty ... are relying on a reserve fund to pay debt on the property and have only six months of money left before it runs out, Fitch Ratings said in a report. ... The fund for the Stuyvesant Town and Peter Cooper Village apartments has declined to $127.7 million as of Jan. 15, from $400 million when it was established.

This property was purchased in 2006 and has obviously not met income projections. When the reserve fund runs dry, the owner will need to put in more cash or possibly default on the loan.

This is a common problem for office, retail and apartment properties that were purchased in 2005 or 2006, at prices that were based on overly optimistic pro forma income projections. A reserve fund was used to pay interest until the rents increased, a scenario that is now unlikely with a recession and declining rents. Many of these deals will blow up when the interest reserve is depleted - probably this year or in 2010.

by Calculated Risk on 1/24/2009 10:07:00 PM

From the NY Times: Obama Plans Fast Action to Tighten Financial Rules

Officials say they will make wide-ranging changes, including stricter federal rules for hedge funds, credit rating agencies and mortgage brokers, and greater oversight of the complex financial instruments that contributed to the economic crisis.
...
Officials said they want rules to eliminate conflicts of interest at credit rating agencies ...

Aides said they would propose new federal standards for mortgage brokers ... They are considering proposals to have the S.E.C. become more involved in supervising the underwriting standards of securities that are backed by mortgages.
...
The administration is also preparing to require that derivatives like credit default swaps ... be traded through a central clearinghouse and possibly on one or more exchanges.

It sounds like the Obama administration will propose the stimulus plan, the new bank bailout, and significant regulatory changes for financial system all in short order.

by Calculated Risk on 1/24/2009 08:06:00 PM

“President Obama — backed by the conclusions of a broad range of economists — believes that China is manipulating its currency.”
Treasury Secretary nominee Tim Geithner, Jan 22, 2009

I'm just thinking about some trades issues, and here a few graphs that might be helpful:

Click on graph for larger image.

The first graph shows the monthly U.S. exports and imports in dollars through November 2008 (most recent data). The recent rapid decline in foreign trade is clear. Note that a large portion of the decline in imports is related to the fall in oil prices.

Looking at port traffic data, exports and imports collapsed further in December.

The second graph shows the U.S. trade deficit / surplus as a percent of GDP since 1960 through Q3 2008.

The trade deficit as a percent of GDP started declining in 2006, even with the rapid increase in oil prices. Now, with oil prices falling rapidly, the trade deficit as a percent of GDP will decline sharply in Q4 2008 and Q1 2009.

The third graph shows the U.S. trade deficit, both with and without petroleum through November.

The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.

So, excluding petroleum, the trade deficit has been falling since early 2006.

This graph compares monthly U.S. spot oil prices from the Energy Information Administration (EIA) with import oil prices from the Census Bureau trade report.

Obviously the two price series track very well. This implies that import oil prices will drop sharply in the December and January reports, from $67 per barrel in November to around $37 per barrel in January.

Based on this decline in oil prices, and looking back at the third graph, the oil deficit will probably fall from around $19 billion in November to close to $10 billion in January (the actual decline depends on volumes in addition to price). All else being equal, this would push the trade deficit down to $30 billion in January.

And this brings us back to the quote at the top from Geithner. The trade deficit with China was $23 billion in November alone, and even with declining imports from China, the deficit with China will probably account for well over half of the U.S. trade deficit in January.

Just some thoughts ... For some excellent discussion of trade issues (especially with China) see Brad Setser's blog: Follow the Money

by Calculated Risk on 1/24/2009 06:42:00 PM

From The Times: RBS to purge directors in big shake-up

The Sunday Times can reveal RBS is preparing to place £50 billion to £100 billion of loans into the government’s new bank-insurance scheme ... designed to protect RBS from significant further losses and allow it to restart lending to British companies.

The move comes as [new chief executive Stephen] Hester puts the finishing touches to a radical restructuring. As many as 30,000 jobs, out of 170,000, could go in the next three to five years ...

RBS, which has more than £2 trillion of assets, is being used as a guinea pig for the government’s loss insurance rescue scheme.

This is similar to the insurance plan the U.S. provided for Citigroup and Bank of America. RBS will take the first 10% of losses on the loans and the U.K. taxpayers are on the hook for any additional losses.

by Calculated Risk on 1/24/2009 04:19:00 PM

From the Seattle Times: More layoffs expected at Starbucks

Another big round of layoffs is expected at Starbucks, possibly 1,000 people — a third of its headquarters employees — and some district managers and field employees, according to an e-mail sent to a stock brokerage's customers Friday.

"The cuts might be next week or in February," wrote Diane Daggatt, a managing director at McAdams Wright Ragen in Seattle.

The story doesn't mention any more store closings - although apparently no "barista jobs are in jeopardy".

by Calculated Risk on 1/24/2009 09:24:00 AM

From Professor Roubini: Is the U.K. an Iceland 2? No but there are serious financing risks ahead. Also: BBC News TV and Radio Interviews.

... [I]s the risk that the UK will be Iceland 2? Let us discuss next this issue in more detail:

In many ways the UK looks more like the US than Iceland: a housing and mortgage boom that got out of control; excessive borrowing (mortgage debt, credit cards, auto loans, etc.) and low savings by households; a large and rising current account deficit driven by the consumption boom (and private savings fall) and the real estate investment boom; an overvalued exchange rate; an over-bloated financial system that took excessive risks; a light-touch regulation and supervision system that failed to control the financial excesses; and now an ugly financial and economic crisis as the housing and credit boom turns into a bust. This will be the worst financial crisis and recession in the UK in the last few decades.

Iceland had the same macro and financial imbalances as the US and the UK but the Icelandic banks were both too big to fail and too big to be saved as their losses were much larger than the government capacity to bail them out. Thus, in Iceland you have a solvency crisis for the banks, for the government and for the country too leading to a currency crisis, systemic banking crisis and near sovereign debt crisis.

The US has also a busted banking system and an insolvent household sector (or part of it) but so far the sovereign has the willingness and ability to socialize such private losses via a vast increase in public debt.

This week in the UK investors started to worry that the UK government looks more like the Iceland one than the US: having banks that are too big to be saved given the fiscal/financial resources of the country.

But in principle the UK looks more like the US: the public debt to GDP is relatively low (in the 40s % range) and thus the sovereign should be able to absorb fiscal bailout costs and additional fiscal stimulus costs that may eventually increase that debt ratio by as high as 20% of GDP. Note that during WWII the UK public debt to GDP ratio peaked well above 150% and the UK government remained solvent.

... at best, the UK faces an economic and financial crisis that will be as bad as the US one: a severe and protracted recession that could last two years with very weak growth recovery once it is over; a near insolvent financial system, most of which will be formally or informally nationalized; a large fiscal costs of budget deficits surging because of the recession and the bailout of financial institutions; a weakening currency that may risk a hard landing if the crisis is not properly managed. A more dramatic run on the cross-border liabilities of banks, a run on the government debt and a hard landing of the pound can be prevented by coherent and forceful policy action.

I agree with Roubini that the U.K. will probably not be the next Iceland, but the U.K. clearly has some serious problems.

by Calculated Risk on 1/24/2009 12:24:00 AM

Earlier this week I noted that the Intrade method of calculating a depression was flawed.

I found out today that James Kwak at RGEMonitor noticed it before me: Betting on a “Depression” Kudos to James!

Now Intrade has added some more depression bets, including a 10% decline in nomimal GDP by the end of 2009. Jay Hancock, who blogs at the Baltimore Sun, points out these are flawed too: Intrade modifies depression bet, messes up again

[T]here are new depression bets, which Intrade couches in terms of absolute change in GDP dollar value rather than the rates that tripped it up before. ... But the rules are still problematic. In the new bet, Intrade will trace changes in nominal GDP instead of real, inflation-adjusted GDP. Nobody measures business cycles this way.

I guess they can't figure out how to explain a 10% real decline in GDP, so the bet is based on nominal GDP instead. Interesting - at least to nerds like me - is that the GDP price deflator could be negative in 2009, and therefore a 10% nominal decline in GDP could actually be less likely than a 10% decline in real GDP!