by Calculated Risk on 12/15/2009 09:15:00 AM

From the Fed: Industrial production and Capacity Utilization

Industrial production increased 0.8 percent in November after having been unchanged in October. Manufacturing production advanced 1.1 percent, with broad-based gains among both durables and nondurables. ... At 99.4 percent of its 2002 average, total industrial production was 5.1 percent below its level of a year earlier. Capacity utilization for total industry moved up 0.7 percentage point to 71.3 percent, a rate 9.6 percentage points below its average for the period from 1972 through 2008.

Click on graph for larger image in new window.

This graph shows Capacity Utilization. This series is up from the record low set in June (the series starts in 1967), and still well below the level of last year.

Note: y-axis doesn't start at zero to better show the change.

by Calculated Risk on 12/15/2009 08:34:00 AM

From the NY Fed: Empire State Manufacturing Survey

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers leveled off in December, following four months of improvement. The general business conditions index fell 21 points, to 2.6. The indexes for new orders and shipments posted somewhat more moderate declines but also moved close to zero. Input prices picked up a bit, as the prices paid index rebounded to roughly its November level; however, the prices received index moved further into negative territory, suggesting that price increases are not being passed along. Current employment indexes slipped back into negative territory.

Here is the general business conditions index. Note that the data only goes back to July 2001 (chart to Jan 2002). Any reading above zero is expansion, so this index shows manufacturing was expanding since August. (chart from NY Fed)

by Calculated Risk on 12/14/2009 09:56:00 PM

There seems to be a sense that the banks are rushing to repay the TARP funds so they can pay bonuses. I think it is more likely that are just taking advantage of the opportunity to raise capital.

From Eric Dash and Andrew Martin at the NY Times: Wells Fargo to Repay U.S., a Coda to the Bailout Era

Wells joins Citigroup, Bank of America and JPMorgan Chase, its largest rivals, in shedding the stigma of taxpayer support and the restrictions on compensation that came with it.
...
[David H. Ellison, a portfolio manager at FBR Funds] said banks appeared to be “rushing in” to pay back the government, so they can offer bigger bonuses to their executives and get lawmakers off their backs.

But the prospect of huge losses on mortgages and commercial real estate loans early next year might also be causing the repayment stampede, he said.

“It may be as much about raising capital as it is paying off TARP,” he said.

Exactly.

What has made this doable now is the massive support for asset prices by the Government (and taxpayers). This includes the Fed's MBS purchase program, the loose lending by the FHA, the FTHB tax credit, the HAMP, and more. These programs have limited the losses at the financial firms. Maybe this will work - as I noted last year, house prices in low end bubble areas might have bottomed - although prices are clearly still too high in many mid-to-high end bubble areas and eventually will decline (at least in real terms) to more supportable levels. And that probably means more losses for the banks.

Also in the article, Dash and Martin write that some financial experts think "If the economy takes a turn for the worse ... these same large banks will return to the government for a new round of aid." I don't think so.

I doubt there will be a TARP II. If any of these banks get in trouble again, they will probably be dissolved, management fired, and the shareholders wiped out. Isn't that implicit in paying back the TARP? Isn't that a key component of financial reform?

by Calculated Risk on 12/14/2009 06:19:00 PM

From the WSJ: Wells Fargo to repay entire $25 billion in bailout aid, use proceeds from $10.4 billion stock sale.

The last of the big banks ...

Press Release from Wells Fargo: Wells Fargo to Repay Entire $25 Billion TARP Investment; Announces $10.4 Billion Common Stock Offering

Wells Fargo & Company announced today that, pursuant to terms approved by U.S. banking regulators and the U.S. Treasury, it will redeem the $25 billion of series D preferred stock issued to the U.S. Treasury in October 2008 under the government’s Troubled Asset Relief Program (TARP), upon successful completion of a $10.4 billion common stock offering.

“TARP stabilized our country’s financial system when confidence in financial markets around the world was being tested unlike any other period in our history. Its success also generated financial returns for taxpayers, including $1.4 billion in dividends paid to the U.S. Treasury by Wells Fargo,” said Wells Fargo President and CEO John Stumpf. “Now we’re ready to fully repay TARP in a way that serves the interests of the U.S. taxpayer, as well as our customers, team members and investors.”

by Calculated Risk on 12/14/2009 02:23:00 PM

Just an update on the status of the Fed's MBS purchase program.

From the Atlanta Fed weekly Financial Highlights:

From the Atlanta Fed:

The Fed purchased a net total of $16 billion of agency-backed MBS in each of the last three weeks, with the last one through December 2. This purchase brings its total purchases up to $1.058 trillion, and by the end of the first quarter 2010 the Fed will have purchased $1.25 trillion (thus, it is 85% complete).

In the last two months, the average weekly amount of MBS purchased has been smaller, averaging $17 billion over the last 10 weeks versus the average of $23.4 billion before that period.

The Fed purchased an additional $16 billion net in MBS over the last week.

And on the Fed balance sheet:

The balance sheet shrank slightly between November 26 and December 2 to $2.24 trillion.

Note that the Fed balance sheet is mostly Agency & MBS and Tresuries now.

by Calculated Risk on 12/14/2009 12:03:00 PM

On Saturday I wrote that I'd take the "over" - more bank failures in 2010 than 2009. This is primarily because many FDIC insured banks are overly exposed to Construction & Development (C&D) and Commercial Real Estate (CRE) loans.

FDIC Chairwoman Sheila Bair is also taking the "over".

From CNBC: Worst of Bank Failures Isn't Over Yet: FDIC's Bair

Bank failures will continue to accelerate into next year despite "some encouraging signs" that things are turning around for the battered industry, FDIC Chair Sheila Bair told CNBC.

... Bair did not quantify how bad the failures would get but said the worst isn't over yet for institutions that will suffer even as the economy improves.

"There's a lag generally with bank recovery from the overall economy," she said. "We do think bank failures will continue to go up next year but will peak. Even at higher levels than we have this year, it's still far below where we were during the S&L days."
...
"Even though the insured depository institutions are having their share of problems, it's really much lower than it was during the S&L days simply because most of this occurred outside the insured banks," Bair said.

Amid the problems for the industry, Bair said the Federal Deposit Insurance Corp's financial standing remains solid. She said the FDIC will head into 2010 with about $60 billion in cash reserves.

A industry contact told me this weekend that they expect 400 bank failures in 2010.

by Calculated Risk on 12/14/2009 10:35:00 AM

The Mortgage Bankers Association's (MBA) current forecast for refinance activity in 2010 is $693 billion, and falling further in 2011 to $591 billion. The MBA is currently estimating 2009 refinance originations will be $1,246 billion - so they expect activity to fall almost in half.

This gives me an excuse for a graph or two (as if I need one).

Click on graph for larger image in new window.

Refinance activity picks up when mortgage rates fall (for obvious reasons), and this graph shows the monthly refinance activity (MBA refinance index) and the Freddie Mac 30 year fixed mortgage rate and one year adjustable mortgage rate - and the Fed Funds target rate since Jan 1990.

Mortgage rates would have to fall further in 2010 to get another increase in refinance activity, and with the Fed MBS purchase program scheduled to end by the end of Q1, it seems unlike that rates will fall - unless the program is extended or the economy weakens significantly.

Notice that following the '90/'91 and '01 recessions, the Fed kept lowering the Fed Funds rate because of high unemployment rates. This spurred refinance activity.

The second graph shows the weekly MBA refinance activity, and the Ten Year Treasury yield.

Every time the 10 year yield drops sharply, refinance activity picks up. But notice what happened at the end of 1995. The Ten Year yield dropped, but the increase in refinance activity was muted. This was because mortgage rates didn't fall below the rates of a couple years earlier - and many people had already refinanced at those lower rates. The same thing will happen in 2010 and 2011 - there will only be a surge in refinance activity if rates fall below the rates of 2009.

by Calculated Risk on 12/14/2009 08:13:00 AM

Press Release from Citigroup: Citigroup, U.S. Government and Regulators Agree to TARP Repayment

Citi to Issue $17 Billion of Common Stock and $3.5 Billion of Tangible Equity Units

Citi to Repay $20 Billion of TARP Trust Preferred Securities

Agreement with the U.S. Government and Regulators to Terminate Loss-Sharing Agreement

U.S. Treasury to Sell Up To $5 Billion of its Common Shares via Concurrent Secondary Offering; Plans Orderly Exit

From the NY Times: Citigroup Says It Has Reached a Deal to Repay Bailout Funds

by Calculated Risk on 12/14/2009 12:33:00 AM

From the WSJ: Abu Dhabi Supplies $10 Billion to Dubai

Dubai's government Monday said it received $10 billion in financing from Abu Dhabi, which will pay part of the debt held by conglomerate Dubai World and its property unit Nakheel.

From the NY Times: Citigroup Nears Deal to Return Billions in Bailout Funds

Citigroup was close to a deal on Sunday night to be the last of the big Wall Street banks to exit the government’s bailout program, after trying to persuade regulators that it was sound enough to stand on its own.

And on CRE:

by Calculated Risk on 12/13/2009 10:06:00 PM

A couple more articles on the impact of the housing bust on mobility ...

From Patrick Coolican at the Las Vegas Sun: Mobility bust bad for Vegas

“Vegas is going to be disproportionately affected by the absolute crashing halt of interstate migration,” said Michael Hicks, director of the Center for Business and Economic Research at Ball State University.

About 4.7 million Americans moved from one state to another in 2007 and 2008, according to the Census Bureau. That’s just 55 percent of the total in 1999 and 2000. Geographers and economists think the number will plummet further this year.
...
“People are underwater on their homes and that affects mobility,” said Isabel Sawhill, a Brookings Institution economist.
...
Geographic mobility is what economists call “countercyclical.” When a recession hits, people usually move to where the jobs are. Job-related stasis — staying put in one’s job versus hitting the road in search of a better one — is unique to this recession.

And a personal tale from Brian Fitzgerald at the WSJ: Confessions of an Underwater Homeowner

We never considered purposefully defaulting ... Although, if I were laid off and unemployed for more than a few months we might have to. ... if I was offered a job in another city, we wouldn't be able to sell.

There is much more in Fitzgerald's story, but this bit on mobility is important - he can't sell, and he can't move to change jobs - and just like most Americans trapped underwater, he is trying to stick it out and hoping for the best.

Worker mobility has always been a significant positive for the U.S. economy, and this decline in mobility is one of the long lasting tragedies of the bubble. As I wrote almost two years ago:

Less worker mobility [due to negative equity] is kind of like arteriosclerosis of the economy. It lowers the overall growth potential.

Perhaps as many as 15 to 20 million households will be saddled with negative equity by 2009. Even if most of these homeowners don't "walk away", there might still be a negative impact on the economy due to less worker mobility.