by Calculated Risk on 2/13/2009 01:14:00 PM

"We believe three weeks is adequate time for the Treasury to announce – and for us to implement – a new plan."
Jamie Dimon, CEO JPMorgan in letter to Congress

From CNBC: Three Big Banks Are Halting Foreclosures for Now

Citigroup, JPMorgan Chase and Morgan Stanley said they had placed a moratorium on foreclosing on some home loans to give the government time to launch a $50 billion mortgage relief program.
...
The Obama plan under consideration would seek to help homeowners before they fall into arrears on their loans. ... Under the evolving plan, homes would undergo a standardized reappraisal and homeowners would face a uniform eligibility test ...

Another "evolving plan". I think they will discover that there is no easy method for successful loan modifications (as FDIC Chairwoman Sheila Bair discovered when they took over IndyMac). I guess the plan is to buy down loans with the $50 billion - or pay a portion of the monthly payment.

The details will be interesting. I'm curious - how do you measure success when the borrowers aren't already in default?

by Calculated Risk on 2/13/2009 12:52:00 PM

"This ... will be the first quarter ever of negative earnings"
Howard Silverblatt, senior index analyst, at Standard & Poor's.

From MarketWatch: S&P heads to first quarter ever of negative earnings

[N]early 400 of the S&P's 500 companies have weighed in and reported a collective loss -- even excluding financials.
...
A sixth quarter of negative growth ties the prior record set when Harry Truman was president, and ran from the first quarter of 1951 to the second quarter of 1952.

"And next quarter we're expected a new record of seven quarters of negative growth," Silverblatt said.

As of the close of business Thursday, Silverblatt calculates S&P earnings-per-share, on a reported basis, at a loss of $10.44 for the quarter. If financials were taken out of the equation, that EPS deficit would drop to $2.35.

What is the P/E for that?

by Calculated Risk on 2/13/2009 11:13:00 AM

From The Times: Lloyds dives on HBOS £10bn black hole

Lloyds Banking Group shares plunged 40 per cent this afternoon after it revealed a £10 billion black hole at HBOS, the struggling bank that it rescued last year.

Lloyds Banking Group ... [made] a surprise announcement ... that trading at HBOS had worsened in December, driving its losses up by a further £1.6 billion to £10 billion.
...
"It is no secret that the UK economy continued to decline in December, and this was reflected in today's numbers.” [Lloyds said in a statement]
...
Lloyds Banking Group said that the huge losses at HBOS owe to a £4 billion "impact of market dislocation" and about £7 billion of impairments in the HBOS corporate division.

A billion pounds here, a billion pounds there ...

by Calculated Risk on 2/13/2009 08:53:00 AM

From Jerry Hirsch at the LA Times: Cost-conscious customers wreaking havoc on ailing restaurants

From the corner diner to elegant Westside eateries, restaurants in Southern California are shrinking portions, slashing wine prices, cutting employee hours and reducing staff. Some chain restaurants and fast-food purveyors are shutting unprofitable branches, and experts say some may not survive.

Many large dinner-house chains are reporting some of the largest drops in same-store sales -- an important measure of a retailer's financial health -- in recent history.

After the stock market closed Thursday, Southern California chains Cheesecake Factory Inc. and California Pizza Kitchen Inc. both reported plunging same-store sales and profits.

"It is a very tough environment out there," said Richard Rosenfield, co-chief executive of CPK
...
Cheesecake Factory said ... Same-store sales decreased 7.1% ... CPK said ... Same-store sales slid 7.2%.

Dining out is a discretionary expense, and it no suprise that many restaurants are getting hit hard. We can see this in the Restaurant Performance Index from the National Restaurant Association (NRA). Low end chains however might do OK as consumers move to inferior goods; McDonald's same-store sales rose 7.1% in January!

The WSJ has an article too: Consumers Cut Food Spending Sharply

Consumers have cut back sharply on food spending, shunning restaurants, opting for generic products over brand names, trading in lattes for home-brewed coffee and shopping for bargains. That is hurting sales and profits at many food processors, grocery chains and restaurants.
...
In 2008's fourth quarter, consumer spending on food fell at an inflation-adjusted 3.7% from the third quarter, according to data from the Commerce Department's Bureau of Economic Analysis. That is the steepest decline in the 62 years the government has compiled the figure.

More cliff diving.

by Calculated Risk on 2/13/2009 01:30:00 AM

Part I: (hat tip Firedoglake)

Part II: Rogoff starts off Part II with some pretty harsh comments:

by Calculated Risk on 2/12/2009 10:59:00 PM

Reader Hoopajoops writes:

[A] huge number of law firms laid off attorneys today. This is an unprecedented bloodbath. DLA Piper laid off 140 people in the UK on Tuesday and today cut another 80 lawyers and 100 staff in the US, Holland & Knight laid off 243, including 70 lawyers, Epstein Becker lays off 23 attorneys and 30 staff, Bryan Cave cut 58 attorneys and 76 staffers, Luce Forward laid off 27 attorneys on Monday and today cancelled their entire 2009 summer program, Faegre & Benson cuts 29 attorneys, Cadwalader laid off 3 attorneys in london, a small count but Cad is one of the big names, Cozen O'Connor laid off 55 secretaries and 6 paralegals, all in all an incredible day.

Abovethelaw.com, a legal gossip rag, is keeping track of the layoffs ...

I've been hearing rumors of legal layoffs ...

The WSJ Law Blog: The Darkest Day Ever for Big Law Firms?

from Hoopajoops (Author unknown):
Black Thursday

On a windy Manhattan winter day
With the economy tanking under skies of gray
Associates and staff met an unkind end
As PPP's continued to descend

Dechert released nineteen by noon
And greater losses would be announced soon
Next came news from Bryan Cave
Where fifty-eight young careers went to the grave

Goodwin Proctor continued the act
Wheen seventy-four employees were promptly sacked
Then fell the ax at Holland & Knight
The steady paychecks of hundreds vanished from sight

An industry leader in expanding too fast
DLA Piper added scores more to the unemployed caste
Then a large cull from the North Star state
As twenty-nine associates met a cruel fate

Cadwalader sent sixteen Londoners to redundancy consultation
But a week without Cadwalader layoffs would be quite the aberration
The final cut of the day came at a mid-size shop
Where more than fifty felt the ax drop

Our sorrow is deep for our colleagues fired en masse
But do keep in mind that this too shall pass
We share in your pain, your shame, your dismay
On this darkest of dark, this Black Thursday

by Calculated Risk on 2/12/2009 07:28:00 PM

From MarketWatch: Office of Thrift Supervision chairman steps down

Office of Thrift Supervision Chairman John Reich on Thursday announced his resignation from the agency.
...
Reich's resignation also changes the make up of the FDIC board, which has five members. In addition to Reich, Bair, Office of Comptroller of the Currency chairman John Dugan and two others sit on the division's board.

This is too kind. Remember this photo?

This photo from 2003 shows two regulators: John Reich (2nd from right, then Vice Chairman of the FDIC and later at the OTS) and James Gilleran of the Office of Thrift Supervision (with the chainsaw) and representatives of three banker trade associations: James McLaughlin of the American Bankers Association, Harry Doherty of America's Community Bankers, and Ken Guenther of the Independent Community Bankers of America.

The WaPo had an excellent article on the OTS last year: Banking Regulator Played Advocate Over Enforcer. The article discussed how the OTS dragged their feet when new lending guidelines were proposed by the Office of the Comptroller of the Currency in 2005 and 2006:

In 2006, at the peak of the boom, lenders made $255 billion in option ARMs ... Most option ARMs were originated by OTS-regulated banks.

Concerns about the product were first raised in late 2005 by another federal regulator, the Office of the Comptroller of the Currency. The agency pushed other regulators to issue a joint proposal that lenders should make sure borrowers could afford their full monthly payments. "Too many consumers have been attracted to products by the seductive prospect of low minimum payments that delay the day of reckoning," Comptroller of the Currency John C. Dugan said in a speech advocating the proposal.

OTS was hesitant to sign on ... [John] Reich, the new director of OTS, warned against excessive intervention. He cautioned that the government should not interfere with lending by thrifts "who have demonstrated that they have the know-how to manage these products through all kinds of economic cycles."

John Dugan at the OCC was trying hard to reign in the excessive lending (he started in 2005 too), but Reich was resisting those efforts.

Back in 2005 I posted frequently on the progress of the proposed new guidance. I spoke with a number of regulators in 2005 and 2006 who were involved in the process, and a number of them expressed frustration with both the Fed and the OTS.

by Calculated Risk on 2/12/2009 05:42:00 PM

Brad Setser asks: Can the improvement in the US trade balance continue?

The US trade deficit — which is a good proxy for the current account balance (the income surplus offsets a transfers deficit) — is now around $40b a month. At its peak it was more like around $60b a month. That implies, if nothing changes, the 2009 current account deficit would be around $500b, down from a peak of $700b.

In fact, if nothing changes the trade balance balance might improve a bit more. ...

Remember this the next time someone argues that the US will be borrowing more from the rest of the world to finance its fiscal deficit: the total amount the US borrows from the world is defined by the current account deficit and the current account deficit clearly went down in the fourth quarter even as the US fiscal deficit (and the Treasury’s borrowing need) soared. That is because the rise in government borrowing offset a contraction in private investment and a rise in private savings.

That is an important point, but I'd like to focus on another comment from Brad:

Forecasts that the US deficit will fall to 2.5% to 3% of GDP strike me as optimistic.

The net result: I expect a slowing global economy to take a toll on US exports and do not expect much additional improvement in the US current account balance. I’ll be watching closely to see if the markets are willing to finance a growing deficit …. and, for that matter, if China is willing to finance a growing US deficit and add to its already considerable exposure.

Back in 2005, I argued that the trade deficit would start to decline as a percent of GDP - but I haven't forecast how much further the deficit would decline.

Click on graph for larger image.

This graph shows the U.S. trade deficit / surplus as a percent of GDP since 1960 through Q4 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 declining sharply, the trade deficit has plunged to 3.7% of GDP in Q4.

The oil deficit will fall further in January, and if all else stays the same, the trade deficit might fall close to $30 billion per month in Q1 2009. At that pace, the deficit as a percent of GDP would be in the 2.5% to 3.0% range.

So although I agree with Brad that I'd prefer the rebalancing was because of "strong growth abroad not a collapse in private US demand", I think the deficit will fall to 3% of GDP sometime in 2009.

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