by Calculated Risk on 3/10/2009 08:56:00 AM

From the WSJ: U.S. Weighs Further Steps for Citi

Barely a week after the third rescue of Citigroup Inc., U.S. officials are examining what fresh steps they might need to take to stabilize the bank if its problems mount ...

Citi executives said they haven't detected signs of corporate clients or trading partners withdrawing their business ...

Banking regulators and Treasury officials called Citigroup executives over the weekend ... the talks were geared toward future planning and that no new rescue was imminent. ... The discussions include the Treasury Department, Office of the Comptroller of the Currency, Federal Reserve and Federal Deposit Insurance Corp.

From MarketWatch: Citigroup's shares rise as CEO plugs performance

... Chief Executive Vikram Pandit said the hard-hit provider of financial services firm was profitable during the first two months of the year and called its capital position "strong."

Here is a memo from Pandit to employees.

by Calculated Risk on 3/10/2009 12:26:00 AM

From the WaPo: Detox for Troubled Assets

The government's plan to strip banks of troubled assets could force some firms to record large losses, but the painful purge would help restore confidence in the banking system, according to Sheila C. Bair, chairman of the Federal Deposit Insurance Corp.

Bair said yesterday that the effort might require more money than the $700 billion Congress has approved to aid the financial industry ...

This is an interesting interview. It it not clear that Sheila Bair understands that the "public-private investment funds" will overpay for toxic assets because they are receiving low interest non-recourse loans with limited downside risk (a direct subsidy from taxpayers to the banks). She thinks that

"The government, by providing low-cost funding, it will help to tease out that liquidity premium from the pricing and hopefully get the pricing a little higher."

And even at these above market prices, selling these assets will still leave a huge hole in the banks' balance sheets. However Bair sees this as a positive:

Bair emphasized that banks forced to take large losses might not need more government money because, newly cleansed, they would be in position to raise money from private investors. She said the size of the write-downs actually could be a positive, by establishing that banks are free of their problems.

Insolvency is success.

by Calculated Risk on 3/09/2009 10:37:00 PM

From the WSJ: S&P Puts Mortgage-Backed Securities on Downgrade Watch (ht Bob_in_MA)

Standard & Poor's Ratings Service on Monday placed its ratings on $552.8 billion worth of U.S. first-lien Alt-A residential mortgage-backed securities issued between 2005 and 2007 on watch for downgrade, saying it sees an increase in losses from the transactions issued in those years.
...
S&P said it believes continued foreclosures, distressed sales, an increase in carrying costs for properties in inventory and more declines in home sales will further depress prices and lead to higher losses.

The beat goes on.

by Calculated Risk on 3/09/2009 09:00:00 PM

Teams from the Treasury Department and Federal Reserve are analyzing the appropriate terms and conditions for accepting commercial mortgage-backed securities (CMBS) and are evaluating a number of other types of AAA-rated newly issued ABS for possible acceptance under the expanded program.
Federal Reserve, TALF, March 3, 2009

From the Christian Science Monitor: Real estate woes seep into malls, office towers

By April, the federal government expects to have a plan to refinance office towers and shopping centers in danger of defaulting. The scale is likely to be massive...

For now, commercial delinquencies are few. But office vacancy rates are heading toward record levels, according to one estimate, and banks are exposed, with $1.72 trillion in commercial real estate loans outstanding as of Feb. 18.

Just as significant, many insurance companies and pension funds have invested in real estate, putting them at risk, as well.
...
This year some $300 billion in loans to developers are due to be refinanced by commercial banks. Given the decline in the economy, many real estate ventures might not be able to survive if they are not able to refinance their loans on better terms more reflective of today’s economic conditions. But banks are largely refusing to refinance as the properties drop in value.

Last year there was some discussion of a bailout for CRE investors, and that didn't make any sense. This article seems to suggest that the Fed will be helping with a solvency problem because of rising vacancy rates and falling property values. I don't think that is the Fed's intention.

The Fed is considering a program to provide liquidity for newly issued AAA-rated CMBS. That won't help investors who bought at the top, but it will help property owners with strong cash flow positions to refinance. The Fed's role is liquidity, not solvency.

No Pop-up comments.

by Calculated Risk on 3/09/2009 06:23:00 PM

The FDIC allowed 60 Minutes to follow along on the seizing of Heritage Community Bank in Glenwood, Illinois on Feb 27th. This segment provides glimpses of the process. (ht Jon)

Note: If the comments don't work, try clicking here.

by Calculated Risk on 3/09/2009 04:04:00 PM

Another down day ... and that means another link to the four Grizzly Bears (not including foreign markets and the Naz)

DOW off 1.2%

S&P 500 off 1.0%, off 56.8% from the high, lowest since Sept 12, 1996.

NASDAQ off 1.9%

Click on graph for larger image in new window.

This graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".

This is the 2nd worst S&P 500 / DOW bear market in the U.S. in 100 years. At this point - 17 months into the bear market - this is the worst ever (lower than the Great Depression bear after 17 months).

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

The low in 1996 was 598.48.

Another 78 points or so to get back to 1995 prices.

by Calculated Risk on 3/09/2009 03:28:00 PM

From Bloomberg: AIG Told U.S. Failure May Cripple Banks, Money Funds

American International Group Inc. appealed for its fourth U.S. rescue by telling regulators the company’s collapse could cripple money-market funds, force European banks to raise capital, cause competing life insurers to fail and wipe out the taxpayers’ stake in the firm.

AIG needed immediate help from the Federal Reserve and Treasury to prevent a “catastrophic” collapse that would be worse for markets than the demise last year of Lehman Brothers Holdings Inc., according to a 21-page draft AIG presentation dated Feb. 26, labeled as “strictly confidential” and circulated among federal and state regulators.

Here is the “strictly confidential” document.

by Calculated Risk on 3/09/2009 03:08:00 PM

From CNBC: Roubini: US Recession Could Last Up to 36 Months. A few excerpts and video:

"We could end up ... with a 36-month recession, that could be "L-shaped stagnation, or near depression," Roubini said. He puts the chance of a severe U-shaped recession at 66.7 percent, and a less severe L-shaped recession at 33.3 percent.
...
"We are in the 15th month of a recession," said Nouriel Roubini, a professor at New York University's Stern School of Business, told CNBC in a live interview. "Growth is going to be close to zero and unemployment rate well above 10 percent into next year."

Echoing a speech he made earlier in the day, Roubini said he sees "no hope for the recession ending in 2009 and will more than likely last into 2010."
...
"The market friendly view for the banks is nationalization," said Roubini. "Temporarily take over the banks, clean them up and get them working again."
...
Among his solutions: fix the housing market by breaking "every mortgage contract."

by Calculated Risk on 3/09/2009 01:02:00 PM

Branden suggests Buffett is looking at the Merrill Lynch Corporate Master Index OAS (Option adjusted spread).

Click on table for larger image in new window.

This graph shows the OAS for the index for the last 2 years.

This is a broad index of investment grade corporate debt:

The Merrill Lynch US Corporate Index tracks the performance of US dollar denominated investment grade corporate debt publicly issued in the US domestic market.

This does show widening spreads.

by Calculated Risk on 3/09/2009 11:05:00 AM

On CNBC this morning, Warren Buffett mentioned that credit conditions are tightening again. Here is a look at a few indicators:

Click on table for larger image in new window.

The first graph shows the spread between 30 year Moody's Aaa and Baa rated bonds and the 30 year treasury.

There has been some increase in the spread the last couple of weeks, but the spread is still way below the recent peak. The spreads are still very high, even for higher rated paper, but especially for lower rated paper.

The Moody's data is from the St. Louis Fed:

Moody's tries to include bonds with remaining maturities as close as possible to 30 years. Moody's drops bonds if the remaining life falls below 20 years, if the bond is susceptible to redemption, or if the rating changes.

There has been improvement in the A2P2 spread. This has declined to 0.90 - under 1.0 for the first time since September 2008. This is far below the record (for this cycle) of 5.86 after Thanksgiving, but still above the normal spread.

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

Meanwhile the TED spread has increased a little, and is now at 1.09 - after being slightly below 1.0 for most of February. This is the difference between the interbank rate for three month loans and the three month Treasury. The peak was 4.63 on Oct 10th and a normal spread is around 0.5.

By these indicators the credit markets might be tightening a little, but nothing like the end of 2008.