by Calculated Risk on 3/15/2009 08:53:00 PM

AIG released a list of Counterparties to CDS, GIA and Securities Lending Transactions (PDF) (ht David)

And from the Financial Times: AIG publishes counterparty list (ht Dwight)

AIG caved in to political pressure Sunday and released a list of some of the financial counterparties that benefited from its $160bn US government rescue, including some of Europe’s largest banks.
...
IG paid out $22.4bn of collateral related to credit default swaps, $27.1bn to help cancel swaps and another $43.7bn to satisfy the obligations of its securities lending operation. The payments were made between September 16 and the end of last year.

Goldman Sachs, which has also accepted US government support, received payments worth $12.9bn. Three European banks – France’s Société Générale, Germany’s Deutsche Bank and the UK’s Barclays – were paid the next-largest amounts. SocGen received $11.9bn; Deutsche $11.8bn; and Barclays $7.9bn.

by Calculated Risk on 3/15/2009 07:48:00 PM

Fed Chairman Ben Bernanke was interviewed on 60 Minutes tonight.

Here is a picture of Bernanke from his college days ... his forecasting skills weren't much better then (Ok, slightly edited!)

From CBS 60 Minutes: Ben Bernanke's Greatest Challenge

"Mr. Chairman, I'm gonna start with a question that everyone wants me to ask: when does this end?" 60 Minutes correspondent Scott Pelley asked Bernanke.

"It depends a lot on the financial system," he replied. "The lesson of history is that you do not get a sustained economic recovery as long as the financial system is in crisis. We've seen some progress in the financial markets, absolutely. But until we get that stabilized and working normally, we're not gonna see recovery. But we do have a plan. We're working on it. And I do think that we will get it stabilized, and we'll see the recession coming to an end probably this year. We'll see recovery beginning next year. And it will pick up steam over time."

The transcript is available at 60 minutes.

Here is the interview:

by Calculated Risk on 3/15/2009 06:10:00 PM

Professor Hamilton provides a number of graphs on the temporal order of a recovery: What will recovery look like?

This adds to my post: Business Cycle: Temporal Order

Here is the table I provided of a simplified temporal order for emerging from a recession. The table shows when each area typically starts to recovery relative to the end of the recession.

During Recession	Lags End of Recession	Significantly Lags End of Recession
Residential Investment	Investment, Equipment & Software	Investment, non-residential Structures
PCE	Unemployment(1)

And this graph from Professor Hamilton shows the average pattern for all the recessions since 1947.

Credit: Professor Hamilton Econbrowser

Average cumulative change in 100 times the natural log of real GDP or its respective component beginning from the business cycle peak for the 10 recessions between 1947 and 2001. Horizontal axis denotes quarters after the peak.

And here is what the current recession looks like. The record slump in RI has changed the scale of the graph, but the order appears the same.

Credit: Professor Hamilton Econbrowser

Cumulative change in 100 times the natural log of real GDP or its respective component beginning in 2007:Q4. Horizontal axis denotes quarters after 2007:Q4.

For recovery, we know what to watch: Residential Investment (RI) and PCE. The increasingly severe slump in CRE / non-residential investment in structures will be interesting, but that is a lagging indicator for the economy.

Unfortunately there are reasons that RI (excess supply) and PCE (too much debt) won't rebound quickly, but they are still the areas to watch.

And here is an excerpt from a research note by Jan Hatzius, Chief Economist at Goldman Sachs, sent out this afternoon:

"Although we still think real GDP will fall by about 7% annualized in Q1 and the labor market numbers remain awful, the good news is that the weakness is shifting from more leading to more lagging sectors."

(1) In recent recessions, unemployment significantly lagged the end of the recession. That is very likely this time too.

by Calculated Risk on 3/15/2009 12:18:00 PM

Here is another area of domestic non-residential investment that will slump in 2009.

From the NY Times: As Oil and Gas Prices Plunge, Drilling Frenzy Ends

The great American drilling boom is over.

The number of oil and gas rigs deployed to tap new energy supplies across the country has plunged to less than 1,200 from 2,400 last summer, and energy executives say the drop is accelerating further.

The following graph compares real domestic investment in petroleum and natural gas with real gasoline prices.

Click on graph for larger image in new window.

After the oil shock of 1973, oil exploration investment (real dollars) has tracked real gasoline prices pretty closely.

This graph shows oil investment in 2000 dollars. Investment in 2008 was $138 billion in nominal dollars.

The recent rapid decline in gasoline prices suggests investment in petroleum and natural gas exploration and wells could decline by 1/3 or more in 2009 from the $138 billion invested in 2008. This is another area of non-residential structure investment that will decline sharply in 2009 - along with investment in offices, malls and hotels.

Note: Real gasoline prices are annual prior to 1980. The gasoline data is from the EIA.

by Calculated Risk on 3/15/2009 10:22:00 AM

From The Times: Lord Turner demands global crackdown on bank excess

A BLUEPRINT for international financial regulation will be unveiled this week, leading the way for a global crackdown on the shadow banking system and high-risk trading strategies.

Lord Turner, chairman of the Financial Services Authority (FSA), will publish a paper on Wednesday outlining the regulator’s responses to the global financial crisis.

The proposals are expected to form the cornerstone of international efforts to overhaul the global regulatory system ... [Turner] wants more co-ordination between regulators and central banks to spot signs that economies are overheating.

He will launch a clampdown on the shadow-banking system — including the off-balance-sheet funding vehicles set up by banks in tax havens.

Further regulation of hedge funds is expected ...

Banks that offer big bonuses to traders who deal in risky assets could be obliged to hold more capital. Retail banks, which hold savers’ money, could also face restrictions on the investments they make through their treasury operations.
...
“You are going to see a massive change in the supervisory system. It’s going to include tax havens and institutions where it didn’t before,” [Prime Minister Gordon Brown] said.

by Calculated Risk on 3/14/2009 09:45:00 PM

The linked post is very long ... long even by Roubini standards! This is actually a short excerpt ...

From Nouriel Roubini: Reflections on the latest dead cat bounce or bear market sucker’s rally

It is déjà vu all over again. We have already seen this Groundhog Day movie at least six times over and over again in the last year or so: the market starts to rally – this time around about 8% in a week - and the chorus of optimists starts to say that this is the bottom of the economic and financial crisis and that we are at the beginning of a sustained stock market rally that signals the true end of this bear market.

Next Roubini outlines what he sees as the arguments of the optimists:

[H]ere are the arguments of the optimists:

1. While the first derivative of economic activity is still negative the second derivative is becoming positive around the world: i.e. output, employment, demand etc. are still contracting but they are – or will soon be - contracting at a slower rate than in Q4 of 2008. As long as the second derivative is positive rather than negative economic activity will bottom out some time in H2 of 2009 and the recession will be over sooner rather than later.

2. The policy stimulus, both monetary but especially fiscal, in the US, China and the rest of the world is starting to have traction and will contribution to the slowdown in the rate of economic decline and eventually –sooner rather than later – contribute to the economic recovery

3. Stock markets have already fallen in the US and globally by over 50% and are now way oversold. Earnings have fallen a lot but will recover soon as economic activity will soon stabilize. And since stock markets are forward looking and bottom out 6 to 9 months before the end of the recession we must be now at the bottom if the economy will recover by H2 or, at the latest, by year end.

4. Banks and financial stocks are way oversold; Citi, JP Morgan, Bank of America and other banks are now saying that they will be profitable this year and that they will not need any further injection of capital by the government. The financial system is solvent and the undershooting of banks’ equity prices was way too excessive.

Let us explain again – as we discussed most of these points here before – and flesh out in more detail why each of these optimistic arguments is incorrect or, at least, too early and exaggerated.

My main interest is in point #1 - economic activity - and Roubini quotes a post he wrote on March 2nd. (See Roubini's post for his discussion of the other 3 points.

"For those who argue that the second derivative of economic activity is turning positive (i.e. economies are contracting but a slower rate than in Q4 of 2008) the latest data don’t confirm this relative optimism. In Q4 of 2008 GDP fell by about 6% in the US, 6% in the Eurozone, by 8% in Germany, by 12% in Japan, by 16% in Singapore and by 20% in South Korea. So things are even more awful in Europe and Asia than the US ...

First, note that most indicators suggest that the second derivative of economic activity is still sharply negative in Europe and Japan and close to negative in the US and China: some signals that the second derivative was turning positive for US and China (a stabilizing ISM and PMI, credit growing in January in China, commodity prices stabilizing, retail sales up in the US in January) turned out to be fake starts. For the US, the Empire State and Philly Fed index of manufacturing are still in free fall; initial claims for unemployment benefits are up to scary levels suggesting accelerating job losses; the sales increases in January is a fluke (more of a rebound from a very depressed December after aggressive post-holiday sales than a sustainable recovery).

For China the growth of credit in China is only driven by firms borrowing cheap to invest in higher returning deposits not to invest; and steel prices in China have resumed their sharp fall. The more scary data are those for trade flows in Asia with exports falling by about 40 to 50% in Japan, Taiwan, Korea for example. Even correcting for the effect of the new Chinese Year exports and imports are sharply down in China with imports falling (-40%) more than exports. This is a scary signal as Chinese imports are mostly raw materials and intermediate inputs; so while Chinese exports have fallen so far less than the rest of Asia they may fall much more sharply in the months ahead as signaled by the free fall in imports.

With economic activity contracting in Q1 at the same rate as in Q4 a nasty U-shaped recession could turn into a more severe L-shaped near-depression (or stag-deflation) as I argued for a while (most recently in my Sunday New York Times op-ed). The scale and speed of syncronized global economic contraction is really unprecedented (at least since the Great Depression) with a free fall of GDP, income, consumption, industrial production, employment, exports, imports, residential investment and, more ominously, capex spending around the world. And now many emerging market economies – as argued here for a while- are on the verge of a fully fledged financial crisis starting with Emerging Europe."

As usual Professor Roubini makes some strong arguments. And I agree that economic activity is contracting in Q1 2009 at about the same pace as in Q4 2008. However, I think the composition of the contraction is different in Q1 (and following the normal business cycle). Most of the real GDP decline in Q1 will be from slumping investment and an inventory correction, whereas in Q4, declines in personal consumption (PCE) were an important contributor to the economic slump.

Maybe PCE will start cliff diving again, but so far the recession (no matter how severe) is still following the normal temporal pattern. Note: Even the Great Depression followed the normal pattern - just more so! Although there are still severe economic problems ahead, I think the shift in the composition is a potential positive. (See: Business Cycle: Temporal Order)

It is still way to early to call the bottom - and even after the economy bottoms, I think the recovery will be very sluggish for some time - but I am watching for the signs (see Looking for the Sun). Roubini concludes:

So, in conclusion and caveat emptor for investors: Dear investors, do enjoy this dead cat bounce and bear market sucker’s rally ... don’t wait too long until you jump ship while the financial Titanic hits the next financial iceberg: you may get squeezed and crashed in the rush to the lifeboats.

by Calculated Risk on 3/14/2009 05:35:00 PM

The recent data suggests there is a significant inventory correction in progress.

Click on graph for larger image in new window.

This graph is based on the Manufacturing and Trade Inventories and Sales report from the Census Bureau.

This shows the 3 month change (annualized) in manufacturers’ and trade inventories. The inventory correction was slow to start in this recession, but inventories are now declining sharply.

This change in inventories will probably have a significant impact on GDP for the next few quarters. This is common in a recession. The contribution of changes in inventory to GDP have been pretty wild at times - in the early '80s there were a few quarters where the change in inventory subtracted more than 5% from GDP (annualized) in just one quarter! Something like that could happen in Q1 or Q2 too - and this is difficult to predict - and that could contribute to a horrible GDP number in Q1.

This inventory correction is probably also impacting imports and could be part of the reason import traffic has fallen off a cliff (see LA Port Import Traffic Collapses in February)

The good news is a significant inventory correction will help with GDP later in the year. Even with some evidence of stabilization in personal consumption, I expect a horrible GDP number for Q1 due to this inventory correction and also because of the sharp decline in all categories of investment (especially non-residential investment).

by Calculated Risk on 3/14/2009 03:22:00 PM

Here is the G20 statement. Excerpt:

Our key priority now is to restore lending by tackling, where needed, problems in the financial system head on, through continued liquidity support, bank recapitalisation and dealing with impaired assets, through a common framework (attached). We reaffirm our commitment to take all necessary actions to ensure the soundness of systemically important institutions.

And from the "common framework":

We, the G20 Finance Ministers and Central Bank Governors, agreed the need to continue working together to maintain and support lending in our financial systems. We are committed to taking decisive action, where needed, and to use all available tools to restore the full functioning of financial markets, and in particular to underpin the flow of credit, both domestically and globally.

Actions to achieve this may include where necessary:

providing liquidity support, including through government guarantees to financial institutions’ liabilities;

injecting capital into financial institutions;

protecting savings and deposits; and,

strengthening banks’ balance sheets, including through dealing with impaired assets.

Our key priority now is to address the uncertainties around the value of assets held on banks’ balance sheets, which are significantly constraining banks’ lending. This uncertainty, and the extent to which banks are holding capital to protect themselves from further potential extreme losses, is preventing them from restoring lending to business and households, with damaging consequences to our economies.
emphasis added

The rest is general, but it keeps coming back to how to value the toxic assets on the banks' balance sheets.

by Calculated Risk on 3/14/2009 09:15:00 AM

From the WSJ: G-20 Won't Call for More Stimulus

Finance ministers and central bank heads from the group of 20 leading economies won't make a joint call for further fiscal stimulus at the end of their two-day meeting here ...

Separately, officials will lay out a set of principles on how to address the toxic assets weighing on banks' balance sheets ... The person said the principles will likely be included in an annex to the communique officials will release after today's meeting.

The U.S. plans to release details of its plan to use public and private money to ease the burden of toxic assets in the coming weeks, but European governments are likely to want more detail even sooner ...

The G-20 Finance Ministers are meeting today in preparation for the April 2nd summit of national leaders in London. Geithner is expected to hold a briefing around mid-day ET after the G-20 talks.

It doesn't sound like there will be a coordinated fiscal stimulus policy as some had hoped for.

by Calculated Risk on 3/13/2009 09:19:00 PM

I guess the FDIC needed a break!

David Letterman: Andy Kindler visits with Maria Bartiromo and Paul Krugman

Enjoy the evening ...