by Calculated Risk on 2/12/2009 03:27:00 PM

From Reuters: Obama eyes home loan subsidies in rescue plan: sources

The Obama administration is hammering out a program to subsidize mortgage payments for troubled homeowners who have gone through a standardized re-appraisal and affordability test ... Under the plan being mulled, homeowners would have to make a case of hardship to qualify for new loan terms.
...
Housing policymakers weighed but have for now shelved one plan that would have seen the government stand behind low-cost mortgages of between 4 and 4.5 percent, sources said.

I need more details on the subsidies, but at least the dumb idea of buying down mortgage rates has apparently been shelved.

by Calculated Risk on 2/12/2009 01:31:00 PM

For those who haven't seen it, here is the letter Re: Merrill Lynch 2008 Bonuses (pdf)

The letter breaks down the timing and amounts of the bonuses.

"One disturbing question that must be answered is whether Merrill Lynch and Bank of America timed the bonuses in such a way as to force taxpayers to pay for them through the deal funding. We plan to require top officials at both Merrill Lynch and Bank of America to answer this question and to provide justifications for the massive bonuses they paid ahead of their massive losses....

What my Office has learned thus far concerning the allocation of the nearly $4 billion in Merrill Lynch bonuses is nothing short of staggering. Some analysts have wrongly claimed that individual bonuses were actually quite modest and thus legitimate because dividing the $3.6 billion over thousands upon thousands of employees results in relatively small amounts estimated at approximately $91,000 per employee. In fact, Merrill chose to do the opposite. While more than 39 thousand Merrill employees received bonuses from the pool, the vast majority of these funds were disproportionately distributed to a small number of individuals.
...
[T]hese payments and their curious timing raise serious questions as to whether the Merrill Lynch and Bank of America Boards of Directors were derelict in their duties and violated their fiduciary obligations. We will also continue to examine whether senior officials at both companies violated their own fiduciary obligations to shareholders. If they did, this raises additional serious issues with regard to the inappropriate use of taxpayer funds."

New York Attorney General Andrew Cuomo, Feb 10, 2009

by Calculated Risk on 2/12/2009 11:16:00 AM

Here is an interesting economic commentary from Cleveland Fed researchers O. Emre Ergungor and Kent Cherny: Effective Practices in Crisis Resolution and the Case of Sweden A few excerpt:

We maintain that the goal of any resolution strategy should be to transfer assets from failed financial institutions to institutions that can put the assets to their most efficient use, and at the least possible short and long-term costs to the taxpayer. As in most things, this is easier said than done. When faced with financial markets and institutions that appear to be spiraling out of control, regulators and policymakers often resort to blanket guarantees of uninsured deposits and other liabilities by providing unlimited liquidity to financial markets until the crisis dissipates.

While blanket guarantees might be policymakers’ best choice given the urgency of bringing some calm to markets, history shows that such guarantees have their dangers: they bail out investors who should have done a better job at evaluating and managing their risks and disciplining financial institutions that were mismanaging their money.
...
Most important, according to Ergungor and Thomson, is that successful crisis resolutions have been characterized by transparency. When officials move to contain a financial crisis, their primary task is to identify which institutions are viable and which assets are good, and conversely which institutions are insolvent and which assets are bad. This triage and full disclosure of associated losses clears the uncertainty surrounding the financial institutions and makes it possible for the viable institutions to raise new funds from private investors or from the government if private sources are not available. Failing to acknowledge the true value of assets or the condition of troubled banks early on makes it easy for them to live on as propped up “zombies” (as happened in Japan during the 1990s)—healthy on paper but economically insolvent. Initial full disclosure avoids these situations, and improves efficiency during industry restructuring.
emphasis added

This is why the stress test must be completed quickly (30 days is probably sufficient), and the results should be made public. Last night I listed the three probable categories for the banks: 1) no assistance needed, 2) additional capital needed, and 3) Nationalization needed. I believe this should be fully disclosed and announced publicly in mid-March.

There is much more in the paper.

One of the questions is how big was the Swedish bubble?

Click on graph for larger image in new window.

This graph (from the Cleveland Fed paper) shows that real estate prices more than doubled in the 1980s and then declined sharply in the bust. The price-to-rent ratio increased by about 40% before returning to normal.

And how does this compare to the U.S. housing bubble?

This graph shows the Case-Shiller National price index through Q3 2008 (most recent data, Q4 to be released later this month). This shows that prices double in the U.S. during the recent housing bubble.

This graph is in nominal terms as is the Swedish graph (not inflation adjusted). Note that prices in Sweden declined, but didn't fall to earlier levels.

Real prices, price-to-rent and price-to-income measures all probably provide better estimates of how far prices will fall.

On price-to-rent, here is a similar graph through Q3 2008 using the Case-Shiller National Home Price Index:

This graph shows the price to rent ratio (Q1 1997 = 1.0) for the Case-Shiller national Home Price Index. For rents, the national Owners' Equivalent Rent from the BLS is used.

Looking at the price-to-rent ratio based on the Case-Shiller index, the price-to-rent increased more in the U.S. than in Sweden, and the ratio still has to decline further (although we don't have the data yet, this ratio definitely declined further in Q4 2008).

Just to repeat, the key lesson in crisis resolution is transparency. I hope the results of the bank stress test will be made public, and the zombie banks clearly identified.

by Calculated Risk on 2/12/2009 10:44:00 AM

From the National Association of Realtors (NAR): 4th Quarter Metro Area Home Prices Down as Buyers Purchase Distressed Property

Distressed sales – foreclosures and short sales – accounted for 45 percent of transactions in the fourth quarter, dragging down the national median existing single-family price to $180,100, which is 12.4 percent below the fourth quarter of 2007 when conditions were more balanced; the median is where half sold for more and half sold for less.

Median home prices are a poor measure of house price changes, especially right now since the mix of homes has shifted significantly to the low end. Repeat sales indexes are better measures of price changes.

The largest sales gain in the fourth quarter from a year earlier was in Nevada, up 133.7 percent, followed by California which rose 84.7 percent, Arizona, up 42.6 percent, and Florida with a 12.5 percent increase.

“Once again, we see a pattern of strong sales gains, particularly in lower price homes, in areas with price declines resulting from foreclosures,” Yun said. “... in California and Florida ... distressed sales accounted for roughly two-third of all sales ...”

Distressed sales are the market in many areas of California, Florida, Nevada and other bubble states.

by Calculated Risk on 2/12/2009 08:31:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending Feb. 7, the advance figure for seasonally adjusted initial claims was 623,000, a decrease of 8,000 from the previous week's revised figure of 631,000. The 4-week moving average was 607,500, an increase of 24,000 from the previous week's revised average of 583,500.
...
The advance number for seasonally adjusted insured unemployment during the week ending Jan. 31 was 4,810,000, an increase of 11,000 from the preceding week's revised level of 4,799,000. The 4-week moving average was 4,745,250, an increase of 73,750 from the preceding week's revised average of 4,671,500.

Click on graph for larger image in new window.

The first graph shows weekly claims and continued claims since 1971.

The four week moving average is at 607,500, the highest since 1982.

Continued claims are now at 4.81 million - another new record - above the previous all time peak of 4.71 million in 1982.

The second graph shows the 4-week average of initial weekly unemployment claims (blue, right scale), and total insured unemployed (red, left scale), both as a percent of covered employment.

This normalizes the data for changes in insured employment.

Another weak unemployment claims report ...

by Calculated Risk on 2/12/2009 08:30:00 AM

On a monthly basis, retail sales increased slightly from December to January (seasonally adjusted), but sales are off 10.6% from January 2008 (retail and food services decreased 9.7%).

The following graph shows the year-over-year change in nominal and real retail sales since 1993.

Click on graph for larger image in new window.

To calculate the real change, the monthly PCE price index from the BEA was used (January PCE prices were estimated as the same as December).

Although the Census Bureau reported that nominal retail sales decreased 10.6% year-over-year (retail and food services decreased 9.7%), real retail sales declined by 10.9% (on a YoY basis). The YoY change decreased slightly from last month.

There is the Census Bureau report:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for January, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $344.6 billion, an increase of 1.0 percent (±0.5%) from the previous month, but 9.7 percent (±0.7%) below January 2008. Total sales for the November 2008 through January 2009 period were down 9.5 percent (±0.5%) from the same period a year ago. The November to December 2008 percent change was revised from –2.7 percent (±0.5%) to –3.0 percent (±0.2%).

One month does not make a trend change, and January retail sales are still over 2% below sales in Q4 - suggesting a further decline in Q1 PCE.

by Calculated Risk on 2/12/2009 12:01:00 AM

From Eric Dash at the NY Times: Bank Test May Expand U.S. Regulators’ Role

Nearly 100 federal banking regulators descended on Citigroup in New York on Wednesday morning. Dozens more fanned out through Bank of America, JPMorgan Chase and other big banks across the nation.
...
[E]xams for 18 or so of the biggest banks are set to begin immediately, and the first results could arrive within weeks. They are not expected to be made public for every institution.
...
Regulators plan to assess the potential losses a bank could face over the next two years, rather than the typical one year ... They are also expected to look at banks’ exposure to derivatives and other assets normally carried off their balance sheets ... Their assumptions will be guided on a “worst case” basis.

It sounds like the stress tests could be completed within "weeks" at some banks, and I think 30 days is sufficient for all 18 or so banks with $100 billion in assets.

The banks will probably fall into one of three categories:

1) No additional assistance required. These banks will definitely want this publicized!

2) The banks in between that will need additional capital. This is where the Capital Assistance Program comes in:

Capital Assistance Program: While banks will be encouraged to access private markets to raise any additional capital needed to establish this buffer, a financial institution that has undergone a comprehensive “stress test” will have access to a Treasury provided “capital buffer” to help absorb losses and serve as a bridge to receiving increased private capital. ... Firms will receive a preferred security investment from Treasury in convertible securities that they can convert into common equity if needed to preserve lending in a worse-than-expected economic environment. This convertible preferred security will carry a dividend to be specified later and a conversion price set at a modest discount from the prevailing level of the institution’s stock price as of February 9, 2009.
emphasis added

3) Banks that will need to be nationalized or sold.

The NY Times article suggests that the results will not be made public for every institution, but that will just lead to rumors and speculation. It would be better to announce the category of all 18+ banks at the same time (in 30 days or so). At that time announce the capital infusions for the category 2 banks, and the nationalization of the category 3 banks.

The sooner the better, although March 12th works for me (30 days from Geithner's speech)! (update: I was just making up a date for fun - this isn't an announced date)

by Calculated Risk on 2/11/2009 08:24:00 PM

I know a number of readers couldn't access the blog today. Please accept my apology for the inconvenience. This happened for anyone who was using the old blogspot address as a bookmark or an older link from another site.

Google is supposed to redirect that address to the new URL www.calculatedriskblog.com. The RSS feed also wasn't updating. That should all be fixed now too.

We had another display of pettifogging Congressmen today, but at least they provided some entertainment! Here is Congressman Mike Capuano venting (hat tip Nemo):

by Calculated Risk on 2/11/2009 07:04:00 PM

More good news on the stimulus bill.

From the WSJ: Big Business Loses Out on Tax Break Under Stimulus Deal

A tax break sought by businesses that would allow unprofitable firms to recoup taxes paid in the past five years has been sharply curtailed ...

Sen. Baucus (D., Mont.) said House and Senate negotiators have agreed to limit the tax break to small businesses only. That means large manufacturers, retailers and homebuilders that lobbied for the provision would be shut out under a deal reached earlier today.
...
Congressional tax estimators said it would have delivered as much as $67.5 billion in tax benefits to businesses this year and next. The provision would have allowed firms to convert 2009 and 2010 losses into tax refunds by carrying those losses back for five years to offset tax liability.

I lobbied hard against both the homebuyer tax credit and the homebuilder tax break, and it looks like both provisions were scaled back sharply.

by Calculated Risk on 2/11/2009 04:50:00 PM

From Bloomberg: U.S. Lawmakers Agree on $789 Billion Stimulus Plan

Asked what a proposed $15,000 tax credit for homebuyers looks like in the compromise plan, Baucus laughed and said, “not much.” He said that proposal has largely been dropped, though he didn’t provide details.

We still need the details on what "not much" means, but this is a little bit of good news.

Note: I'm still working on some Google technical issues. This includes the feed not working. Sorry for the inconvenience.