by Calculated Risk on 2/22/2009 08:41:00 PM

From the WSJ: U.S. Eyes Large Stake in Citi

Citigroup Inc. is in talks with federal officials that could result in the U.S. government substantially expanding its ownership of the struggling bank ... the government could wind up holding as much as 40% of Citigroup's common stock.
...
Under the scenario being considered, a substantial chunk of the $45 billion in preferred shares held by the government would convert into common stock ... The move wouldn't cost taxpayers additional money, but other Citigroup shareholders would see their shares diluted.

Citi's market cap is around $10 billion, so it seems the government is getting a poor deal if the $45 billion in preferred is converted into only 40% of Citi's common stock.

The article also mentions an important shift:

[B]ank regulators this week will start performing their battery of stress tests at the nation's largest banks as part of the Obama administration's industry-bailout plan. As part of those tests, the Fed is expected to dwell on the ["tangible common equity"] TCE measurement as a gauge of bank health ...

... TCE has been one of the less prominent ways of gauging a bank's vigor. Bankers and regulators generally prefer to use what is known as "Tier 1" ratio as the measurement.

According to their Tier 1 measurements, most big banks, including Citigroup, appear healthy. By contrast, most banks' TCE ratios indicate severe weakness. Citigroup's TCE ratio, for example, stood at about 1.5% of assets at Dec. 31, well below the 3% level that investors regard as safe.

UPDATE: Here is another take from the Financial Times: Citi presses officials to take 40% stake

by Calculated Risk on 2/22/2009 06:28:00 PM

Krugman and Roubini participated in a roundtable discussion on ABC This Week. Here is the video.

The panelists discuss nationalization of the banks, stress tests, the housing bailout, and the proposed Obama budget.

I haven't seen a transcript yet, but the general agreement is no one wants to nationalize the banks long term - just to preprivatize the zombie banks. Krugman:

"People have actually proposed calling it preprivatization."

Krugman suggests that maybe the stress tests will help Geithner reach a Claude Rains / Captain Renault moment:

'I'm shocked, shocked to discover that Citibank and BofA need massive public aid', and they put them into receivership.

In the discussion on the deficit, Roubini cautions that long term large deficits could lead to a downgrade of the U.S. credit rating. However, in the short term, the deficit isn't a problem. Krugman also notes that there is currently a lot of capital available to borrow because the private sector is not borrowing for investment, but when the private sector is ready to invest again, the deficit must be scaled back.

I haven't been able to find a transcript yet.

by Calculated Risk on 2/22/2009 03:14:00 PM

From CNBC: Crafting a Bank Plan...No 'Lehman Weekends'

On the Stress Test:

New details on the so-called bank stress test could be made available as soon as tomorrow, officials say. ... Details on [the worst-case economic] scenarios are likely to be made public on Wednesday.

On Preprivatization:

If the banks end up in government hands, officials say, the intent would be to get them into private hands quickly and do so in a way that is not much different from how the Federal Deposit Insurance Corp. currently resolves bank insolvencies ...

CNBC's Steve Liesman quoting an anonymous high level official:

“I think the market is missing that the whole intent of this process is to show that the banks have enough capital for even worse outcomes than we currently envision and to show there’s a program in place to give banks access to that capital if they need it.”

Isn't the point of the exercise to find out if the banks have enough capital, as opposed to "show that" they have enough capital?

As least the government, according to CNBC, will outline their view of the worst-case economic scenarios on Wednesday. That is a start.

by Calculated Risk on 2/22/2009 12:19:00 PM

Click on ad for larger image in new window.

Here is an ad, from the Albany Times Union, trumpeting a rent reduction. (ht Justin)

I've heard stories of rent reductions all across the country and most recent apartment Market Tightness Index is showing significant weakness.

Even though there has been a significant shift from ownership to renting - and the homeownership rate has fallen sharply - there are other factors impacting supply and demand.

For demand, some households are doubling up during the recession, with people moving in with friends or relatives. And the supply has increased because many REO sales are to cash flow investors (who rent the properties), and also because of condo "reconversions", flippers becoming landlords, and homeowners renting their previous homes instead of selling.

The result is falling rents.

And declining rents puts more pressure on house prices (the rent vs. buy decision), and this should also start to impact CPI since Owners' equivalent rent (OER) makes up about 25% of CPI. Even though rents are now falling, the OER increased in the January inflation report by about 3.2% annualized. I expect the OER to start to decline as rents continue to fall.

by Calculated Risk on 2/22/2009 09:54:00 AM

From The Times: Radical revamp splits RBS in two

The Royal Bank of Scotland (RBS) is to be split into a “good bank” and “bad bank” in a dramatic rescue restructuring in which assets worth several hundred billion pounds will be put up for sale.

Stephen Hester, RBS chief executive, will outline the plans this week as he unveils Britain’s biggest-ever corporate loss of up to £28 billion. He will cut costs by more than £1 billion a year, a move expected to lead to the loss of about 20,000 jobs ...

RBS will also place at least of toxic assets into the government’s asset-protection scheme, a controversial insurance scheme designed to protect banks against further losses.
...
This week’s results are expected to confirm a loss of between £7 billion and £8 billion, and a further write-down of up to £20 billion on its acquisition of the Dutch bank ABN Amro.

These losses and job cuts have been reported earlier. The "bad bank" insurance scheme is similar to the insurance plan the U.S. provided for Citigroup and Bank of America - although in the U.S. the banks didn't split in two.

Originally RBS planned on putting £50 billion to £100 billion of loans into the bank-insurance scheme - now the number has grown to "at least £200 billion". 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 2/22/2009 12:05:00 AM

Michelle Singletary at the WaPo does an excellent job of explaining how the new Federal home buyer tax credit works: You Can Benefit, but Don't Get Caught by Details

There are now two breaks in the tax code for first-time homeowners. Which credit you can take depends on when you purchased your home.

If you're a first-time home buyer and you purchased your home on or after April 8, 2008, and by Dec. 31, 2008, you do not qualify for the $8,000 first-time homebuyer's credit recently signed into law.

But you can still take the $7,500 tax credit -- though you have to pay it back because it's not really a credit. It's a 15-year, interest-free loan from the IRS.

The $8,000 tax credit is available for qualifying home purchases from Jan. 1, 2009, until Dec. 1, 2009. Did you notice I wrote Dec. 1? That's how it's worded in the law.

Singletary has more details.

The California home buyer tax credit is still a little unclear, but Jim Wasserman at the Sacramento Bee has some details: California home builders publicize new state tax credit

The $10,000 tax credit ... gives anyone who buys a new house between March 1, 2009, and March 1, 2010, up to $3,333 off their taxes for each of the first three years after buying.

... the California version offers breaks for both first-time and move-up buyers. It also sets no limits on income, meaning even the most expensive homes qualify.
...
The state Franchise Tax Board will set rules to implement the tax credit program, including whether it applies to a sales contract signed after March 1 or an escrow that closes after the date.

"We're still waiting for the (bill) language. Once we get that we'll have an ability to do an analysis for taxpayers," said Franchise Tax Board spokeswoman Brenda Voet on Friday.

Note that the California credit isn't limited to first time buyers and can be used by anyone buying a new home. Apparently the maximum total credit is $100 million (not mentioned in the article) or about 10 thousand new homes at the full credit.

by Calculated Risk on 2/21/2009 10:06:00 PM

Click image for video. Volcker Says U.S. Economy May Suffer for a `Long Time’ February 20 (Bloomberg) -- Former Federal Reserve Chairman Paul Volcker speaks in New York about the impact of the financial crisis on the U.S. economy. (Source: Bloomberg)

by Calculated Risk on 2/21/2009 06:02:00 PM

From CNBC: Regulators Will Soon Begin Bank Stress Tests

U.S. financial regulators will soon launch a series of "stress tests" to determine which of the largest U.S. banks may need additional capital cushions in the event of a deeper recession, a person familiar with Obama administration plans said Saturday.
...
Banks are expected to receive additional information about the tests in the coming week from regulators.

I'm surprised that these tests haven't already started. Hopefully Secretary Geithner will provide more details on the stress tests this week.

by Calculated Risk on 2/21/2009 04:07:00 PM

From the WaPo: Obama to Unveil an Ambitious Budget Plan

Even before Congress approved the stimulus package earlier this month, this year's deficit was projected by Congressional budget analysts to approach $1.2 trillion, or 8.3 percent of the overall economy, the highest since World War II. With the stimulus and other expenses, some analysts say the annual gap between federal spending and income could approach $2 trillion when the fiscal year ends in September.

Obama proposes to dramatically reduce those numbers by the end of his first term, cutting the deficit he inherited in half, said administration officials, speaking on condition of anonymity because the budget has yet to be released. His budget plan would keep the deficit hovering near $1 trillion in 2010 and 2011, but shows it dropping to $533 billion in 2013 -- still high in dollar terms, but a more manageable 3 percent of the overall economy.

To get there, Obama proposes to cut spending and raise taxes. The savings would come primarily from "winding down the war" in Iraq, ... Obama also seeks to increase tax collections, primarily by making good on his promise to eliminate the temporary tax cuts enacted in 2001 and 2003 for wealthy taxpayers ...

Obama also proposes to maintain the tax on estates worth more than $3.5 million, instead of letting it expire next year.

For several years I've complained about the Bush structural budget deficit, and the lack of fiscal flexibility once the inevitable housing bust arrived. Now that the bust is here, we are seeing the full impact of that flawed fiscal policy. Ouch.

A $2 trillion annual budget deficit is possible. And even after the U.S. economy bottoms (it will happen someday), the recovery will probably be very sluggish, keeping the deficit extremely high for years. I doubt that the the budget deficit will be cut to $533 billion in fiscal 2013.

by Calculated Risk on 2/21/2009 11:46:00 AM

From the LA Times: Gold fever sweeps suburbia

Gold is hot. The precious metal soared $25.70 an ounce Friday to $1,001.80, topping the $1,000 mark for the first time in nearly a year. South African Krugerrands, American Eagles and other gold coins are in demand as people seek safe investment havens in uncertain times.

That has people digging through their drawers and jewelry boxes looking for watchbands, cuff links, chains and bracelets that can be sold to jewelers, pawnshops and other brokers to be melted down to feed the growing demand for gold coins.

The party Geivet attended at the Aliso Viejo home of Mary-Margaret Fincher is a twist on the old suburban Tupperware party. Here, however, it's the guests who do the selling.
...
There were earrings from ex-boyfriends, ring settings with missing stones and chain bracelets from sorority sisters. One woman brought in her husband's wedding ring -- from a previous marriage.

I don't follow gold, but back in the late '70s I was long the silver market. I closed my positions when housewives started selling the family silver - and eventually shorted the market. Of course that market was being manipulated by the Hunt brothers, but this story reminded of early 1980.

Note: not intended as advice. Besides I don't follow gold. This was just a short trip down amnesia lane.