by Calculated Risk on 2/26/2009 08:37:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending Feb. 21, the advance figure for seasonally adjusted initial claims was 667,000, an increase of 36,000 from the previous week's revised figure of 631,000. The 4-week moving average was 639,000, an increase of 19,000 from the previous week's revised average of 620,000.
...
The advance number for seasonally adjusted insured unemployment during the week ending Feb. 14 was 5,112,000, an increase of 114,000 from the preceding week's revised level of 4,998,000.

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 639,000 the highest since 1982.

Continued claims are now at 5.11 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 2/26/2009 01:09:00 AM

From the Financial Times: AIG considers break-up in bid to stay afloat

AIG and the US authorities are in advanced discussions over a radical restructuring that would split the stricken insurer into at least three government-controlled divisions in an attempt to keep it afloat...

Under the plan, the government would swap its current 80 per cent holding in the insurer for large stakes in three units – AIG’s Asian operations, its international life insurance business and the US personal lines business. A fourth unit, comprised of AIG’s other businesses and troubled assets, could also be formed.

In return, the authorities would relax the terms, or even cancel a large portion, of a $60bn five-year loan to AIG and convert $40bn-worth of preferred stock into shares...

AIG was on track to announce the overhaul on Monday, when it is expected to report a $60bn loss with its fourth-quarter results. The board is due to meet on Sunday.

Citi and AIG are keeping us waiting.

by Calculated Risk on 2/25/2009 11:06:00 PM

Another summary post and open thread (for discussion).

Existing home sales in January 2009 (4.49 million SAAR) were 5.4% lower than last month, and were 8.6% lower than January 2008 (4.91 million SAAR). See link for graphs of sales and inventory.

The Treasury announced the Capital Assistance Program today. The detail can be found on the Treasury site: http://www.financialstability.gov/. This included the stress test economic scenarios. Here is the table of the scenarios and graphs of what this means in terms of house prices.

Bernanke testified before the House Financial Services Committee today. Basically he repeated his Senate testimony, but he did argue that progress has been made. Here are some Credit Crisis indicators that suggest that is correct.

And oh yeah, the WSJ is reporting the Citi Deal Is Imminent.

by Calculated Risk on 2/25/2009 08:49:00 PM

Here is our daily "Citi deal is imminent" story.

From the WSJ: Citi Is Near Deal to Boost U.S.'s Stake by Up to 40%

Citigroup Inc. is closing in on an agreement to boost the federal government's stake in the company to as much as 40%, according to people familiar with the situation. A deal could be announced as soon as Thursday.

This could raise some interesting problems in foreign countries:

For example, a Mexican law bars any institution that is more than 10%-owned by a foreign government from running a bank in that country. As a result, some Citigroup executives are worried that an increased U.S. stake might subject the bank to pressure to relinquish some or all of its ownership of Grupo Financiero Banamex ...

UPDATE: This happened twice today. One government release says one thing, another says something different. I noted that the Treasury White Paper on the Capital Assistance Program said:

These shares can convert at the firm’s discretion (with the approval of their regulator) into common equity if needed to preserve lending in worse-than-expected economic environment at a conversion price set at a 10% discount from the prevailing level of the institution’s stock price as of February 9, 2009.

Nemo notes that the Term Sheet says:

Conversion price is 90% of the average closing price for the common stock for the 20 trading day period ending February 9, 2009, subject to customary anti-dilution adjustments.

One release from the FDIC called the program the "Capital Assessment Program" (and I labeled a couple of charts with that name), but the real name is the "Capital Assistance Program".

by Calculated Risk on 2/25/2009 06:15:00 PM

Form Bloomberg: Lewis Says Merrill, Countrywide Are ‘Stars’ This Year

Bank of America Corp. Chief Executive Officer Kenneth Lewis said Merrill Lynch & Co. and Countrywide Financial Corp., the acquisitions that some analysts say helped push down the bank’s share price, have been “stars” so far this year.

At first glance this seems absurd. One analyst is quoted in the story saying "I almost fell off my chair". However if you separate the acquired toxic assets from the ongoing performance, I can understand Lewis' comments. Countrywide is benefiting from the refinance boom. Most (if not all) of these loans are being sold to Fannie and Freddie (or guaranteed by them).

The key question is how toxic are the toxic assets BofA acquired with Merrill and Countrywide? Oh well, the Capital Assistance Program is here to help.

by Calculated Risk on 2/25/2009 03:59:00 PM

Here are a couple of graphs to illustrate the Capital Assistance Program house price scenarios. (see previous post) Note: the FDIC called it Capital Assessment Program (so the graph titles are incorrect!)

Click on graph for larger image in new window.

For whatever reason the Treasury is using the Case-Shiller Composite 10 index (I'd prefer the National Index). This graph shows nominal house prices under the two scenarios: baseline, and more severe.

Under the baseline scenario, nominal prices in the Composite 10 cities would return to mid-2002 prices. Under the more severe scenario, prices would return to early 2001 prices.

The second graph shows what this would mean for the price-to-rent ratio.

Note: this is price-to-rent for the Composite 10 index and Jan 2000 is set to 1.0.

This assumes rents stay flat for the next two years (recent reports suggest rents are falling - and that would mean prices would have to fall further).

This metric suggests that the severe price declines would bring the price-to-rent ratio below the normal range. Note: this requires the above assumption on rents.

NOTE: This is based on the Composite 10 index, and that index will most likely decline more than the national index. Even in these 10 cities, some areas will probably see larger price declines (as an example areas with significant Option ARM loans) and other areas less.

Repeating this table of the scenarios:

by Calculated Risk on 2/25/2009 02:42:00 PM

According to the Supervisory Capital Assessment Program FAQs, the Stress Tests will be completed "as soon as possible" but no later than the end of April.

Here are the economic scenarios for the stress tests:

Click on table for larger image in new window.

The more severe case is a 22% decline in house prices in 2009 and a 7% decline in 2010 (using the Case-Shiller Composite 10). I'll put up a graph with these projections soon.

by Calculated Risk on 2/25/2009 02:18:00 PM

From the U.S. Treasury: Terms of Capital Assistance Program

To view the White Paper, Term Sheet and FAQ, visit www.FinancialStability.gov.

Terms

Capital provided under the CAP will be in the form of a preferred security that is convertible into common equity at a 10 percent discount to the price prevailing prior to February 9th.

CAP securities will carry a 9 percent dividend yield and would be convertible at the issuer's option (subject to the approval of their regulator).

After 7 years, the security would automatically convert into common equity if not redeemed or converted before that date.

The instrument is designed to give banks the incentive to replace USG-provided capital with private capital or to redeem the USG capital when conditions permit.

With supervisory approval, banks will be able to request capital under the CAP in addition to their existing CPP preferred stock.

With supervisory approval, banks will also be allowed to apply to exchange the existing CPP preferred stock for the new CAP instrument.

Conditions

Recipients of capital under the CAP will be subject to the executive compensation requirements in line with the Emergency Economic Stabilization Act of 2008, as recently amended. The Treasury will shortly be releasing rules to implement these amendments.

As part of the application process, banks must submit a plan for how they intend to use this capital to preserve and strengthen their lending capacity – specifically, to increase lending above levels relative to what would have been possible without government support. The Treasury Department will make these plans public when the bank receives the capital under the CAP.

Taxpayers will be able to monitor the performance of banks receiving capital under the CAP. Banks receiving capital will be required to submit to Treasury monthly reports on their lending broken out by category. These will be posted on www.FinancialStability.gov.

Recipients will also be subject to restrictions on paying quarterly common stock dividends, repurchasing shares, and pursuing cash acquisitions.

Update: From the Treasury White Paper on Capital Assistance Program (see previous post):

These shares can convert at the firm’s discretion (with the approval of their regulator) into common equity if needed to preserve lending in worse-than-expected economic environment at a conversion price set at a 10% discount from the prevailing level of the institution’s stock price as of February 9, 2009.

Guess the date Citi's stock price peaked in February (closed at $3.95 on Feb 9th)

by Calculated Risk on 2/25/2009 01:10:00 PM

Real Time Economics at the WSJ excerpts some analyst comments about the existing home sales report: Economists React: ‘So Much for Signs of Stability’ in Housing. A few comments from analysts:

"So much for signs of stability."

"The drop back in the number of existing U.S. home sales in January dashes hopes that housing activity had found a floor."

"Overall, the longer housing activity remains in the doldrums, the less likely it is that the economy will see a decent recovery in 2010 as Fed Chairman Ben Bernanke hopes."

"The rate of decline in existing home sales over the last three months suggests that the market has not yet entered a bottoming phase and housing remains under considerable pressure."

I wouldn't look at existing home sales for signs of stability.

A large percentage of existing home sales (45% according to the NAR) are distressed sales: REO sales (foreclosure resales) or short sales. This has created a gap between new and existing sales as shown in the following graph that I've jokingly labeled the "Distressing" gap.

Click on graph for larger image in new window.

This graph shows existing home sales (left axis through January) and new home sales (right axis through December).

Update (Feb 26, 2009): The graph is updated through January now (and right axis label corrected).

For a number of years the ratio between new and existing home sales was pretty steady. After activity in the housing market peaked in 2005, the ratio changed. This change was caused by distressed sales - in many areas home builders cannot compete with REO sales, and this has pushed down new home sales while keeping existing home sales activity elevated.

If we are looking for the first "signs of stability" in the housing market, I think we should look for declining inventory, a bottom in new home sales, and the gap between new and existing home sales closing.

Note: Existing home inventory might be declining, see the 5th graph here. However this might be misleading (see caveats in post).

by Calculated Risk on 2/25/2009 12:23:00 PM

As Bernanke said today, some progress has been made ...

The yield on 3 month treasuries has risen to 0.30%. Better than zero!

The three month LIBOR has increased to 1.25%. The three-month LIBOR rate peaked (for this cycle) at 4.81875% on Oct. 10. Although this has increased recently, this is still very positive for all those adjusted rate mortgage loans tied to the LIBOR (or treasuries).

The TED spread is at 0.96. Although a normal spread is around 0.5, this is still a significant improvement.

The A2P2 spread as at 1.02.

This is a significant improvement from the high of 5.86 after Thanksgiving. The A2P2 spread is at the lowest level since the latest wave of the crisis started in Sept 2008. However this is still fairly high - look at those previous small peaks - those were considered serious at the time.

Note: This is the spread between high and low quality 30 day nonfinancial commercial paper.

Federal Reserve Assets

The Federal Reserve released the Factors Affecting Reserve Balances last Thursday. Total assets increased $72.2 billion to $1.92 trillion. The increase was mostly due to the Federal Reserve buying $57.9 billion in mortgage-backed securities (MBS) guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae.

After spiking last year to $2.31 trillion the week of Dec 18th, the Federal Reserve assets have declined somewhat. Now it looks like the Federal Reserve is starting to expand their balance sheet again.

Note: the graph shows Total Factors Supplying Federal Reserve Funds and is an available series that is close to assets.

These indicators do indicate some progress ...