by Calculated Risk on 12/06/2009 09:18:00 PM

From Lucian Bebchuk, Alma Cohen, and Holger Spamann in the Financial Times: Bankers had cashed in before the music stopped

According to the standard narrative, the meltdown of Bear Stearns and Lehman Brothers largely wiped out the wealth of their top executives. ... That standard narrative, however, turns out to be incorrect. ... our analysis ... shows the banks’ top five executives had cashed out such large amounts since the beginning of this decade that, even after the losses, their net pay-offs during this period were substantially positive.
excerpted with permission

It appears these executives were incentivized to gamble.

Mark Thoma has more excerpts Did Bank Executives Lose Enough to Learn their Lesson?

by Calculated Risk on 12/06/2009 04:52:00 PM

Based on the recent trend in the employment report, the U.S. economy might start adding net payroll jobs soon. This post looks at payroll employment vs. the change in real GDP, and estimates the unemployment rate in 12 months for several growth scenarios.

Credit: This idea is from a recent research note by Jan Hatzius.

Note: This is similar to Okun's relationship between GDP and unemployment.

Click on graph for larger image.

The first graph shows the four quarter change in real GDP and the four quarter change in employment, as a percent of payroll employment (to normalize for changes in payroll over time).

The second graph shows the same data in a scatter graph.

There is a clear relationship - the higher the change in the real GDP, the larger the increase in payroll employment.

This shows that real GDP has to grow at a sustained rate of about 1% just to keep the net change in payroll jobs at zero.

A 3% increase in real GDP (over a year) would lead to about a 1.5% increase in payroll employment. With approximately 131 million payroll jobs, a 1.5% increase in payroll employment would be just under 2 million jobs over the next year - and the unemployment rate would probably remain close to 10%.

The following table summarizes several growth scenarios. The unemployment rate is from the household survey and depends on the number of people in the work force - so it cannot be calculated directly. The table uses a range of unemployment rates based on 1.6 to 2.1 million people entering the workforce over the next 12 months (a combination of population growth and discouraged workers reentering the work force).

Real GDP Growth	Percent Payroll Growth	Annual Payroll Growth (000s)	Monthly Payroll Growth (000s)	Approximate Unemployment Rate in One Year
6.0%	3.5%	4,563	380	8.0% to 8.3%
5.0%	2.8%	3,684	307	8.6% to 8.9%
4.0%	2.1%	2,806	234	9.1% to 9.4%
3.0%	1.5%	1,928	161	9.7% to 10.0%
2.0%	0.8%	1,049	87	10.3% to 10.6%
1.0%	0.1%	171	14	10.8% to 11.1%

I expect a sluggish recovery in 2010, and I think the unemployment rate will stay near 10% for the next year. Those expecting a sharp drop in the unemployment rate are clearly expecting real GDP growth of 5% or more.

Obviously higher growth rates would mean an even quicker decline in the unemployment rate, and a decline in real GDP would mean much higher unemployment rates.

by Calculated Risk on 12/06/2009 12:00:00 PM

Scheduled data for the coming week include the trade report (Thursday) and retail sales (Friday). Also the Treasury is expect to release the Making Home Affordable Program data for November this week and include additional metrics such as the number of permanent modifications and the number of failed trial modifications.

The number of permanent modifications is expected to be in the 10s of thousand.

Also, the Federal Reserve will release the Q3 Flow of Funds report on Thursday.

And a summary ...

Employment Report (a few selected graphs)

The employment report showed a decline of 11,000 payroll jobs in November and a decline in the unemployment rate to 10.0% (from 10.2%). The smaller number of payroll jobs lost was surprising because other indicators (like the ADP report, weekly initial unemployment claims, ISM reports) suggested a larger number of job losses.

From Employment Report: 11K Jobs Lost, 10% Unemployment Rate.

Click on graph for larger image.

This graph shows the job losses from the start of the employment recession, in percentage terms (as opposed to the number of jobs lost).

For the current recession, employment peaked in December 2007, and this recession is the worst recession since WWII in percentage terms, and 2nd worst in terms of the unemployment rate (only early '80s recession with a peak of 10.8 percent was worse).

Note: The total number of jobs lost does not include the preliminary benchmark payroll revision of minus 824,000 jobs. (This is the preliminary estimate of the annual revision that will be announced early in 2010).

From Seasonal Retail Hiring, Employment-Population Ratio, Part Time Workers

Retailers are hiring seasonal workers at slightly above the pace of last year ...

Typically retail companies start hiring for the holiday season in October, and really increase hiring in November. Here is a graph that shows the historical net retail jobs added for October, November and December by year.

Retailers only hired 54.2 thousand workers (NSA) net in October. This was essentially the same as in 2008 (59.1 thousand NSA). However retailers hired 321.3 thousand workers in November (NSA), an increase from the 233.7 thousand last year. This suggests retailers are a little more optimistic than last year.

From Unemployment: Record number Unemployed over 26 Weeks, Diffusion Index

The blue line is the number of workers unemployed for 27 weeks or more. The red line is the same data as a percent of the civilian workforce.

According to the BLS, there are a record 5.887 million workers who have been unemployed for more than 26 weeks (and still want a job). This is a record 3.8% of the civilian workforce. (note: records started in 1948)

Other Employment posts:
If the Economy lost Jobs, why did the Unemployment Rate decline?

Temporary Help

ISM Reports

Manufacturing showed slower expansion: From the Institute for Supply Management: November 2009 Manufacturing ISM Report On Business®

Economic activity in the manufacturing sector expanded in November for the fourth consecutive month ...

Services showed contraction: From the Institute for Supply Management: November 2009 Non-Manufacturing ISM Report On Business®

Economic activity in the non-manufacturing sector contracted in November after two consecutive months of expansion ...

Construction Spending Flat in October

This graph shows private residential and nonresidential construction spending since 1993. Note: nominal dollars, not inflation adjusted.

Residential construction spending increased in October, and nonresidential spending continued to decline.

Private residential construction spending is now 63% below the peak of early 2006.

Private non-residential construction spending is 20.6% below the peak of last October.

Auto Sales at 10.9 Million SAAR in November

This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for November (red, light vehicle sales of 10.93 million SAAR from AutoData Corp).

Obviously sales were boosted significantly by the "Cash-for-clunkers" program in August and some in July.

Excluding July and August, this was the strongest month since October 2008 (12.5 million SAAR) before sales fell off the final cliff.

The current level of sales are still very low, and are below the lowest point for the '90/'91 recession (even with a larger population).

Other Economic Stories ...

From the American Bankruptcy Institute: November Consumer Bankruptcy Filings Drop 18 Percent from Previous Month

HUD's Donovan: "Next Steps" for FHA

Fed's Beige Book: Economy "improved modestly"

Restaurant Index Shows Contraction in October

Hotel RevPAR off 8.4 Percent

Unofficial Problem Bank List, Dec 4, 2009

Best wishes to all.

by Calculated Risk on 12/06/2009 09:12:00 AM

Tom Abate writes in the San Francisco Chronicle: In economic woes, firms count on temp workers

A surge in temporary employment was one of the encouraging aspects of a Labor Department report issued Friday.

Click on graph for larger image.

This graph shows temporary help services (seasonally adjusted) and the unemployment rate. Unfortunately the data on temporary help services only goes back to 1990, but it does appear temporary help and the unemployment rate have been inversely correlated.

The thinking is that before companies hire permanent employees following a recession, employers will first increase the hours worked of current employees and also hire temporary employees. Since the number of temporary workers increased sharply, some people think this might be signaling the beginning of an employment recovery.

Tom Abate adds some caution:

BLS economist Amar Mann said an analysis by the San Francisco office suggests that employers are getting more sophisticated about using temp hiring as a clutch to downshift into recessions and upshift into recoveries.

Mann said temp jobs started down a month after overall employment dropped during the 1990-91 recession. But by the 2001 downturn, employers started cutting temps about five months before they started issuing pink slips to the general workforce.

In the current recession, he said, companies began shedding temps 12 months before they started cutting permanent payrolls.

A similar pattern prevailed in the two prior recoveries, Mann said. Temp jobs came back at the same time as overall employment after the 1991 recovery. Temporary employment rebounded five months before the general job market turned positive following the 2001 dip.

If that pattern holds, it could be next summer before general payrolls start to grow.

Mann refused to speculate about the timing, but said temps are playing an increasing role in the job cycle.

"Employers are getting more savvy about using just-in-time labor on the way down and on the way up," he said.

So use the increase in temporary help with caution.

by Calculated Risk on 12/06/2009 01:22:00 AM

From The Times: Banks face fresh Dubai debt fears

FEARS are growing among western banks that Dubai Holding, the personal investment vehicle of the emirate’s ruler, Sheikh Mohammed bin Rashid al-Maktoum, will be the next state-owned Dubai company to default.

The conglomerate went on a debt-fuelled spending spree in the past decade, borrowing $12 billion (£7.3 billion) to fund ambitious projects ...

Together, Dubai World and Dubai Holding are thought to account for 60% to 70% of Dubai’s total debt. Research from Bank of America Merrill Lynch indicates that Dubai Holding has $1.8 billion due for repayment next year.

Just more potential losses for the Royal Bank of Scotland and HSBC.

by Calculated Risk on 12/05/2009 09:09:00 PM

From the WSJ: Soured Loans Put Lenders on the Hook

As home loans sour at a rapid clip, mortgage finance giants Fannie Mae and Freddie Mac are aggressively bouncing back defectively underwritten loans to lenders. The result: higher loan-loss reserves for the lenders and new headwind for banks trying to escape the housing downturn.

For lenders such as Wells Fargo & Co., Bank of America Corp., J.P. Morgan Chase & Co. and Citigroup Inc., which are among the largest sellers of mortgages to Fannie and Freddie, this could mean buying back souring loans at a loss.
...
Through Sept. 30, Freddie Mac put back about $2.7 billion of single-family mortgages to lenders, more than double the $1.2 billion of a year earlier.
...
In 2008, Fannie Mae bounced back roughly a quarter of the loans on 94,652 real-estate owned properties, or REOs, properties that have been reclaimed by Fannie after foreclosure. Through Sept. 30, Fannie Mae REO properties totaled 98,428. Many of these loans are plain-vanilla prime 30-year fixed-rate mortgages ...

It is a small number, but it is a start. These are mostly prime loans too - most of the subprime and Alt-A loans were securitized by Wall Street, not the GSEs.

by Calculated Risk on 12/05/2009 06:29:00 PM

We've looked at this resource from Google before: Domestic Trends. Google is tracking search trends for several specific sectors of the economy.

As an example, below is a screen capture of the Auto Buyers Index.

Click on graph for larger image in new window.

This shows the seasonality of car buying, plus the Cash-for-clunkers surge in searches. Click on link for interactive graph - you can also plot the data YoY.

The YoY data for autos has recently turned slightly negative.

I also recommend real estate, rental and unemployment.

The YoY rental index has just turned positive, and the unemployment index has turned up again.

by Calculated Risk on 12/05/2009 03:06:00 PM

Jim asks: "Wouldn't it be something if the builders end up beating the banks to the buyers? The banks are satisfied to drip them out - so the builders end up flooding the market and soak up all the buyers."

by Calculated Risk on 12/05/2009 10:28:00 AM

From HousingWire: Moody’s Links Option ARM, Subprime Performance

Click on graph for larger image in new window.

Via: Housing Wire

"The total count of Option ARMs outstanding are highly concentrated among a few states. (source: Moody's)"

From the article:

[The Option ARM] sector shows “dismal” performance, with more than 40% of borrowers 60 or more days past due on payments. And many of these loans have yet to experience a recast event, when initial minimum monthly payments jump as much as 60%, according to sources interviewed by HousingWire for an upcoming issue.

“Even though borrowers with Option ARM loans have the option to make monthly payments typically lower than the accruing interest on the loan, many borrowers are choosing a different option–not making any payment at all.”
...
Negative equity is a key driver of weak performance — as well as a more predictive measure of default than unemployment — particularly among Option ARMs.
...
“There is little hope that most of these [delinquent] borrowers will start making payments again if no principal is forgiven,” Moody’s said. “Forbearance does not eliminate the obligation to repay the loan principal, it only delays it. And many delinquent borrowers are potentially so far underwater that it would take close to a decade for them to attain any positive equity in their home.”

For their borrowers, modifications that lower the interest or extend the term, just delay the inevitable - and really makes the borrowers into renters.

by Calculated Risk on 12/05/2009 08:39:00 AM

The FDIC closed six more banks on Friday, with the largest - AmTrust Bank - estimated to cost the Deposit Insurance Fund $2 billion. That brings the total FDIC bank failures to 130 in 2009.

From the Plain Dealer on AmTrust: AmTrust Bank fails, bought by New York bank

While the closure is not surprising -- given the parent company's bankruptcy filing this week -- it is still stunning to the bank's 280,000 local customers, 1,400 local employees and a community that had watched the sleepy thrift become a national powerhouse and an important philanthropic force across Northeast Ohio.
...
While depositors aren't losing anything, the FDIC fund is taking an estimated $2 billion hit, [FDIC spokesman David Barr] said. The FDIC entered into an agreement to cap New York Community Bank's potential losses on the loans it's buying. NYCB agreed to buy about $9 billion in AmTrust assets. The FDIC will keep the remaining $3 billion in loans to sell later.

Among the nation's 8,100 banks, AmTrust was the 92nd largest as of June 30. At its height, it was the 68th largest in 2006 and 2007. In the last two years it's lost nearly 40 percent of its assets and deposits as its loans lost value, CDs matured and customers left. AmTrust was simply into mortgage lending too deep, much of it risky or in markets that were about to implode.

The following graph shows bank failures by week in 2009.

Click on graph for larger image in new window.

Note: Week 1 on graph ends Jan 9th.

The bank failures seem to come in bunches, and with 3 weeks to go it seems 140+ bank failures is likely this year.

The second graph shows the cumulative estimated losses to the FDIC Deposit Insurance Fund (DIF) and the quarterly assets of the DIF (as reported by the FDIC). Note that the FDIC takes reserves against future losses in the DIF, and collects fees and special assessments - so you can't just subtract estimated losses from assets to determine the assets remaining in the DIF.

The cumulative estimated losses for the DIF, since early 2007, is now over $52.4 billion.