by Calculated Risk on 2/23/2009 01:07:00 PM

CNBC Headline: Deal to Increase Government Stake In Citigroup May Be Reached As Early As Today, Sources Tell CNBC.

UPDATE: From CNBC: Citigroup: Government Could Get Higher Stake Today

A deal for the government to hike its stake in Citigroup could be announced today or tomorrow, sources close to the company have told CNBC.

This is a followup to the WSJ story last night: U.S. Eyes Large Stake in Citi

by Calculated Risk on 2/23/2009 11:32:00 AM

Last weekend I spoke with a few builders and land developers. Talk about a depressing group. In many areas of California the builders can't compete with lender REOs, since the lenders are selling REOs below replacement costs (including construction and all entitlements).

As one developer said: "We can't compete even if the land is free!"

And on the stock market, it was just last Thursday that I wrote:

The DOW closed at 7,465.95; a six year low. The low in 2002 was 7286.27, if the market breaks that level, the DOW will be back to 1997 levels. That would mean more than a lost decade for DOW investors (not counting dividends).

As an aside, Greenspan made the "irrational exuberance" comment in a speech on December 5, 1996 with the DOW at 6,437. Not a prediction, but we are getting close to that level over 12 years later!

Also note that the closing low last November for the S&P 500 was 752.44. That could be broken today. Best to all.

by Calculated Risk on 2/23/2009 09:58:00 AM

From the Chicago Fed: Index shows economic activity remained low in January (ht Misha)

The Chicago Fed National Activity Index was –3.45 in January, up slightly from –3.65 in December. All four broad categories of indicators made negative contributions to the index in January.

The three-month moving average, CFNAI-MA3, decreased to –3.41 in January from –2.70 in the previous month, reaching its lowest level since 1975. ... The production and income category of indicators made a large negative contribution of –1.35 to the index in January after contributing –1.53 in December. Total industrial production decreased 1.8 percent in January after declining 2.4 percent in the previous month. In particular, manufacturing production of durable goods declined 4.8 percent in January, marking its largest one-month decline since December 1974.

Click on table for larger image in new window.

This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967. According to the Chicago Fed: "When the CFNAI-MA3 value moves below –0.70 following a period of economic expansion, there is an increasing likelihood that a recession has begun."

This is the lowest level since 1975. Just more cliff diving ...

by Calculated Risk on 2/23/2009 09:03:00 AM

Here is a joint statement by the Treasury, FDIC, OCC, OTS and the Federal Reserve:

The U.S. government stands firmly behind the banking system during this period of financial strain to ensure it will be able to perform its key function of providing credit to households and businesses. ... we reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments.

"We announced on February 10, 2009, a Capital Assistance Program to ensure that our banking institutions are appropriately capitalized, with high-quality capital. Under this program, which will be initiated on February 25, the capital needs of the major U.S. banking institutions will be evaluated under a more challenging economic environment. Should that assessment indicate that an additional capital buffer is warranted, institutions will have an opportunity to turn first to private sources of capital. Otherwise, the temporary capital buffer will be made available from the government. This additional capital does not imply a new capital standard and it is not expected to be maintained on an ongoing basis. ...

"Currently, the major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized. ... Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Program is that banks should remain in private hands."

I'm reminded of this statement from last year:

"Both [Fannie and Freddie] are adequately capitalized, which is our highest criteria."
James Lockhart, director of the Office of Federal Housing Enterprise on CNBC July 8, 2008

Of course both Fannie and Freddie were put into conservatorship (edit) in September.

by Calculated Risk on 2/23/2009 02:40:00 AM

From Edmund Andrews at the NY Times: As Doubts Grow, U.S. Will Judge Banks’ Stability

The Obama administration will begin taking a hard look at the financial condition of the country’s 20 biggest banks this week to judge whether they could hold up even if the downturn worsens further than policy makers already expect.

These reviews of the banks’ books, known as “stress tests,” are heightening a dilemma for Obama aides about how candid they should be about the health of banks like Citigroup and Bank of America. The tests are expected to take several weeks.
...
The stress tests will use computer-run “what if” situations to estimate what would happen to each bank under Depression-like conditions, with unemployment surging to 10 or 12 percent, for example, or home prices dropping 20 percent further, Treasury and Federal Reserve officials said.

Fed officials emphasized that these hypothetical events were “highly unlikely” to occur.

The Treasury is expected to release more details this week on the stress tests, but unfortunately it still appears they do not plan on releasing the results of the tests - a serious mistake that will probably lead to more rumors and market turmoil.

And from Paul Krugman: Banking on the Brink

The real question is why the Obama administration keeps coming up with proposals that sound like possible alternatives to nationalization, but turn out to involve huge handouts to bank stockholders.

For example, the administration initially floated the idea of offering banks guarantees against losses on troubled assets. This would have been a great deal for bank stockholders, not so much for the rest of us: heads they win, tails taxpayers lose.

Now the administration is talking about a “public-private partnership” to buy troubled assets from the banks, with the government lending money to private investors for that purpose. This would offer investors a one-way bet: if the assets rise in price, investors win; if they fall substantially, investors walk away and leave the government holding the bag. Again, heads they win, tails we lose.

Why not just go ahead and nationalize? Remember, the longer we live with zombie banks, the harder it will be to end the economic crisis.

How would nationalization take place? All the administration has to do is take its own planned “stress test” for major banks seriously, and not hide the results when a bank fails the test, making a takeover necessary. Yes, the whole thing would have a Claude Rains feel to it, as a government that has been propping up banks for months declares itself shocked, shocked at the miserable state of their balance sheets.

For the banks that pass the stress tests, releasing the results will be a huge boost to confidence, and for the banks that fail, this gives the administration an out - they will be "shocked, shocked" to find that certain banks are insolvent. And then they can be preprivatized ...

by Calculated Risk on 2/22/2009 11:42:00 PM

Although I'm away for a bit, here is a thread for market discussion. I haven't heard any rumors - unless you count the WSJ / FT stories about Citi (see previous post)!

Here are the Bloomberg Futures.

Barchart.com (active contract has a time, not a date)

CBOT mini-sized Dow

And the Asian markets.

by Calculated Risk on 2/22/2009 08:41:00 PM

From the WSJ: U.S. Eyes Large Stake in Citi

Citigroup Inc. is in talks with federal officials that could result in the U.S. government substantially expanding its ownership of the struggling bank ... the government could wind up holding as much as 40% of Citigroup's common stock.
...
Under the scenario being considered, a substantial chunk of the $45 billion in preferred shares held by the government would convert into common stock ... The move wouldn't cost taxpayers additional money, but other Citigroup shareholders would see their shares diluted.

Citi's market cap is around $10 billion, so it seems the government is getting a poor deal if the $45 billion in preferred is converted into only 40% of Citi's common stock.

The article also mentions an important shift:

[B]ank regulators this week will start performing their battery of stress tests at the nation's largest banks as part of the Obama administration's industry-bailout plan. As part of those tests, the Fed is expected to dwell on the ["tangible common equity"] TCE measurement as a gauge of bank health ...

... TCE has been one of the less prominent ways of gauging a bank's vigor. Bankers and regulators generally prefer to use what is known as "Tier 1" ratio as the measurement.

According to their Tier 1 measurements, most big banks, including Citigroup, appear healthy. By contrast, most banks' TCE ratios indicate severe weakness. Citigroup's TCE ratio, for example, stood at about 1.5% of assets at Dec. 31, well below the 3% level that investors regard as safe.

UPDATE: Here is another take from the Financial Times: Citi presses officials to take 40% stake

by Calculated Risk on 2/22/2009 06:28:00 PM

Krugman and Roubini participated in a roundtable discussion on ABC This Week. Here is the video.

The panelists discuss nationalization of the banks, stress tests, the housing bailout, and the proposed Obama budget.

I haven't seen a transcript yet, but the general agreement is no one wants to nationalize the banks long term - just to preprivatize the zombie banks. Krugman:

"People have actually proposed calling it preprivatization."

Krugman suggests that maybe the stress tests will help Geithner reach a Claude Rains / Captain Renault moment:

'I'm shocked, shocked to discover that Citibank and BofA need massive public aid', and they put them into receivership.

In the discussion on the deficit, Roubini cautions that long term large deficits could lead to a downgrade of the U.S. credit rating. However, in the short term, the deficit isn't a problem. Krugman also notes that there is currently a lot of capital available to borrow because the private sector is not borrowing for investment, but when the private sector is ready to invest again, the deficit must be scaled back.

I haven't been able to find a transcript yet.

by Calculated Risk on 2/22/2009 03:14:00 PM

From CNBC: Crafting a Bank Plan...No 'Lehman Weekends'

On the Stress Test:

New details on the so-called bank stress test could be made available as soon as tomorrow, officials say. ... Details on [the worst-case economic] scenarios are likely to be made public on Wednesday.

On Preprivatization:

If the banks end up in government hands, officials say, the intent would be to get them into private hands quickly and do so in a way that is not much different from how the Federal Deposit Insurance Corp. currently resolves bank insolvencies ...

CNBC's Steve Liesman quoting an anonymous high level official:

“I think the market is missing that the whole intent of this process is to show that the banks have enough capital for even worse outcomes than we currently envision and to show there’s a program in place to give banks access to that capital if they need it.”

Isn't the point of the exercise to find out if the banks have enough capital, as opposed to "show that" they have enough capital?

As least the government, according to CNBC, will outline their view of the worst-case economic scenarios on Wednesday. That is a start.

by Calculated Risk on 2/22/2009 12:19:00 PM

Click on ad for larger image in new window.

Here is an ad, from the Albany Times Union, trumpeting a rent reduction. (ht Justin)

I've heard stories of rent reductions all across the country and most recent apartment Market Tightness Index is showing significant weakness.

Even though there has been a significant shift from ownership to renting - and the homeownership rate has fallen sharply - there are other factors impacting supply and demand.

For demand, some households are doubling up during the recession, with people moving in with friends or relatives. And the supply has increased because many REO sales are to cash flow investors (who rent the properties), and also because of condo "reconversions", flippers becoming landlords, and homeowners renting their previous homes instead of selling.

The result is falling rents.

And declining rents puts more pressure on house prices (the rent vs. buy decision), and this should also start to impact CPI since Owners' equivalent rent (OER) makes up about 25% of CPI. Even though rents are now falling, the OER increased in the January inflation report by about 3.2% annualized. I expect the OER to start to decline as rents continue to fall.

by Calculated Risk on 2/22/2009 09:54:00 AM

From The Times: Radical revamp splits RBS in two

The Royal Bank of Scotland (RBS) is to be split into a “good bank” and “bad bank” in a dramatic rescue restructuring in which assets worth several hundred billion pounds will be put up for sale.

Stephen Hester, RBS chief executive, will outline the plans this week as he unveils Britain’s biggest-ever corporate loss of up to £28 billion. He will cut costs by more than £1 billion a year, a move expected to lead to the loss of about 20,000 jobs ...

RBS will also place at least of toxic assets into the government’s asset-protection scheme, a controversial insurance scheme designed to protect banks against further losses.
...
This week’s results are expected to confirm a loss of between £7 billion and £8 billion, and a further write-down of up to £20 billion on its acquisition of the Dutch bank ABN Amro.

These losses and job cuts have been reported earlier. The "bad bank" insurance scheme is similar to the insurance plan the U.S. provided for Citigroup and Bank of America - although in the U.S. the banks didn't split in two.

Originally RBS planned on putting £50 billion to £100 billion of loans into the bank-insurance scheme - now the number has grown to "at least £200 billion". RBS will take the first 10% of losses on the loans and the U.K. taxpayers are on the hook for any additional losses.

by Calculated Risk on 2/22/2009 12:05:00 AM

Michelle Singletary at the WaPo does an excellent job of explaining how the new Federal home buyer tax credit works: You Can Benefit, but Don't Get Caught by Details

There are now two breaks in the tax code for first-time homeowners. Which credit you can take depends on when you purchased your home.

If you're a first-time home buyer and you purchased your home on or after April 8, 2008, and by Dec. 31, 2008, you do not qualify for the $8,000 first-time homebuyer's credit recently signed into law.

But you can still take the $7,500 tax credit -- though you have to pay it back because it's not really a credit. It's a 15-year, interest-free loan from the IRS.

The $8,000 tax credit is available for qualifying home purchases from Jan. 1, 2009, until Dec. 1, 2009. Did you notice I wrote Dec. 1? That's how it's worded in the law.

Singletary has more details.

The California home buyer tax credit is still a little unclear, but Jim Wasserman at the Sacramento Bee has some details: California home builders publicize new state tax credit

The $10,000 tax credit ... gives anyone who buys a new house between March 1, 2009, and March 1, 2010, up to $3,333 off their taxes for each of the first three years after buying.

... the California version offers breaks for both first-time and move-up buyers. It also sets no limits on income, meaning even the most expensive homes qualify.
...
The state Franchise Tax Board will set rules to implement the tax credit program, including whether it applies to a sales contract signed after March 1 or an escrow that closes after the date.

"We're still waiting for the (bill) language. Once we get that we'll have an ability to do an analysis for taxpayers," said Franchise Tax Board spokeswoman Brenda Voet on Friday.

Note that the California credit isn't limited to first time buyers and can be used by anyone buying a new home. Apparently the maximum total credit is $100 million (not mentioned in the article) or about 10 thousand new homes at the full credit.

by Calculated Risk on 2/21/2009 10:06:00 PM

Click image for video. Volcker Says U.S. Economy May Suffer for a `Long Time’ February 20 (Bloomberg) -- Former Federal Reserve Chairman Paul Volcker speaks in New York about the impact of the financial crisis on the U.S. economy. (Source: Bloomberg)

by Calculated Risk on 2/21/2009 06:02:00 PM

From CNBC: Regulators Will Soon Begin Bank Stress Tests

U.S. financial regulators will soon launch a series of "stress tests" to determine which of the largest U.S. banks may need additional capital cushions in the event of a deeper recession, a person familiar with Obama administration plans said Saturday.
...
Banks are expected to receive additional information about the tests in the coming week from regulators.

I'm surprised that these tests haven't already started. Hopefully Secretary Geithner will provide more details on the stress tests this week.

by Calculated Risk on 2/21/2009 04:07:00 PM

From the WaPo: Obama to Unveil an Ambitious Budget Plan

Even before Congress approved the stimulus package earlier this month, this year's deficit was projected by Congressional budget analysts to approach $1.2 trillion, or 8.3 percent of the overall economy, the highest since World War II. With the stimulus and other expenses, some analysts say the annual gap between federal spending and income could approach $2 trillion when the fiscal year ends in September.

Obama proposes to dramatically reduce those numbers by the end of his first term, cutting the deficit he inherited in half, said administration officials, speaking on condition of anonymity because the budget has yet to be released. His budget plan would keep the deficit hovering near $1 trillion in 2010 and 2011, but shows it dropping to $533 billion in 2013 -- still high in dollar terms, but a more manageable 3 percent of the overall economy.

To get there, Obama proposes to cut spending and raise taxes. The savings would come primarily from "winding down the war" in Iraq, ... Obama also seeks to increase tax collections, primarily by making good on his promise to eliminate the temporary tax cuts enacted in 2001 and 2003 for wealthy taxpayers ...

Obama also proposes to maintain the tax on estates worth more than $3.5 million, instead of letting it expire next year.

For several years I've complained about the Bush structural budget deficit, and the lack of fiscal flexibility once the inevitable housing bust arrived. Now that the bust is here, we are seeing the full impact of that flawed fiscal policy. Ouch.

A $2 trillion annual budget deficit is possible. And even after the U.S. economy bottoms (it will happen someday), the recovery will probably be very sluggish, keeping the deficit extremely high for years. I doubt that the the budget deficit will be cut to $533 billion in fiscal 2013.

by Calculated Risk on 2/21/2009 11:46:00 AM

From the LA Times: Gold fever sweeps suburbia

Gold is hot. The precious metal soared $25.70 an ounce Friday to $1,001.80, topping the $1,000 mark for the first time in nearly a year. South African Krugerrands, American Eagles and other gold coins are in demand as people seek safe investment havens in uncertain times.

That has people digging through their drawers and jewelry boxes looking for watchbands, cuff links, chains and bracelets that can be sold to jewelers, pawnshops and other brokers to be melted down to feed the growing demand for gold coins.

The party Geivet attended at the Aliso Viejo home of Mary-Margaret Fincher is a twist on the old suburban Tupperware party. Here, however, it's the guests who do the selling.
...
There were earrings from ex-boyfriends, ring settings with missing stones and chain bracelets from sorority sisters. One woman brought in her husband's wedding ring -- from a previous marriage.

I don't follow gold, but back in the late '70s I was long the silver market. I closed my positions when housewives started selling the family silver - and eventually shorted the market. Of course that market was being manipulated by the Hunt brothers, but this story reminded of early 1980.

Note: not intended as advice. Besides I don't follow gold. This was just a short trip down amnesia lane.

by Calculated Risk on 2/20/2009 11:01:00 PM

The Daily Show offers some stimulus ideas ...

by Calculated Risk on 2/20/2009 09:13:00 PM

From the FDIC: Citizens Bank, Corvallis, Oregon, Assumes All of the Deposits of Silver Falls Bank, Silverton, Oregon

Silver Falls Bank, Silverton, Oregon, was closed today by the Oregon Department of Consumer and Business Services, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Citizens Bank, Corvallis, Oregon, to assume all of the deposits of Silver Falls Bank.
...
As of February 9, 2009, Silver Falls Bank had total assets of approximately $131.4 million and total deposits of $116.3 million. Citizens Bank did not pay a premium to acquire the deposits of Silver Falls Bank.
...
The FDIC estimates that the cost to the Deposit Insurance Fund will be $50 million. The Citizens Bank acquisition of all the deposits of Silver Falls Bank was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Silver Falls Bank is the fourteenth bank to fail in the nation this year. The last bank to fail in Oregon was Pinnacle Bank, Beaverton, on February 13, 2009.

It is Friday!

by Calculated Risk on 2/20/2009 07:22:00 PM

Maybe the FDIC is busy in California this week ... but it just doesn't feel like Friday yet.

Next week should be interesting with the Case-Shiller house price index, New and Existing home sales, and probably delinquency rates from the Fed all being released.

Volcker's comments today ... "capitalism will survive":

by Calculated Risk on 2/20/2009 04:42:00 PM

“The dramatic deterioration in the fundamentals of the space market, especially over the last three quarters, has been especially swift and severe.”
Lloyd Lynford, chief executive officer of Reis.

From Bloomberg: U.S. Office Vacancy Rate to Climb to 16.7%, Reis Says

The vacancy rate at U.S. office buildings will rise to 16.7 percent this year and could reach an 18-year high [in 2010] as tenants cut jobs and try to sublet space, property research firm Reis Inc. said.

The net amount of space leased will fall by 47.8 million square feet this year, one of the steepest drops in occupied space on record ... Next year, the vacancy rate for U.S. office properties could rise to 17.6 percent, the highest since 18.7 percent in 1992 during the last major slump in commercial real estate following the savings and loan crisis ...

Click on graph for larger image in new window.

This graph shows the actual office vacancy rates and the Reis forecast for 2009 (assumed steady increase over four quarters for graph). The office vacancy rate was 14.5% in Q4 2008.

The office vacancy rate peaked at 17% in 2003 following the bursting of the stock market bubble, and peaked at 19.1% in 1991 following the S&L crisis (the data series starts in 1991).