by Calculated Risk on 5/21/2009 10:28:00 PM

From the WaPo: U.S. to Steer GM Toward Bankruptcy

The Obama administration is preparing to send General Motors into bankruptcy next week under a plan that would give the automaker tens of billions of dollars more in public financing ...

The move comes as the administration prepares to lift the nation's other faltering car company, Chrysler, from bankruptcy as soon as next week ...

That is fast!

by Calculated Risk on 5/21/2009 08:52:00 PM

From Bloomberg: British Land Has $6.1 Billion Loss on Property Slump (ht Adam)

British Land’s real estate was valued at 5.8 billion pounds on March 31, about 28 percent less than a year earlier, [British Land said in a statement today]. More than half of the properties are retail warehouses and malls, and the rest are office buildings.
...
Most of British Land’s office buildings are in the City of London, where rents are expected to fall back to 1991 levels by the end of this year ... as job losses and a mistimed building boom depress prices.
...
The City of London now has enough empty space to hold two- thirds of Canary Wharf, its rival financial district 1 1/2 miles to the east. About 9 million square feet (855,000 square meters) are available in the City and that may climb to 12 million by the end of 2009, according to CB Richard Ellis Group Inc. Rents that reached a high of 65 pounds per square foot in mid-2007 are forecast to fall to 40 pounds by the end of this year ...

Rents back to 1991. Property values off 28%. Ouch.

by Calculated Risk on 5/21/2009 07:35:00 PM

From Zach Fox at the NC Times: REAL ESTATE: Foreclosures, booming sales make predictions difficult

The case for a bottoming or recovering housing market is strongest along Highway 78 (Escondido, San Marcos, Vista, Oceanside) and Southwest Riverside County, where housing inventory ---- the length of time to sell all active listings ---- has dipped below three months. Six months is considered healthy; three months is screaming hot.
...
However, the numbers flip-flop in high-end areas such as Del Mar and Rancho Santa Fe. Inventory has breached a new stratosphere at anywhere from 25 to 50 months to sell all listings.

Click on graph for larger image in new window.

This graphic from Zach shows both the Notice of Default rate (NOD) and months of inventory by zip code (posted with permission).

In general the lower priced areas are seeing more foreclosure activity than the high prices areas, but the months of inventory is lower.

In a dynamic that is reflected in the divergent inventory numbers, buyers are avoiding the higher end and finding the purchase process on the lower end surprisingly frustrating; real estate agents have reported up to 25 offers on a single house.
...
[S]ome analysts think those red-hot inventory numbers in Escondido, Oceanside and pretty much all of Southwest Riverside County aren't that telling, because it's hard to determine how many foreclosures are actually up for sale.

Lenders and government agencies have embraced foreclosure moratoriums, delaying the process of actually seizing the property and putting it back on the market. Once those foreclosures are put on the market, the inventory number could shoot up in a hurry.

Just some more data showing the divergent markets.

by Calculated Risk on 5/21/2009 05:56:00 PM

Federal ninjas
Swarm the shoguns failed bank
Almost seppuku
by Soylent Green is People
From the FDIC: BankUnited Acquires the Banking Operations of BankUnited, FSB, Coral Gables, Florida

BankUnited, a newly chartered federal savings bank, acquired the banking operations, including all of the nonbrokered deposits, of BankUnited, FSB, Coral Gables, Florida, in a transaction facilitated by the Federal Deposit Insurance Corporation (FDIC). As a result of this transaction, BankUnited, FSB, offices and branches will be operated as BankUnited offices and branches.
...
Bank United, FSB had assets of $12.80 billion and deposits of $8.6 billion as of May 2, 2009. The new BankUnited will assume $12.7 billion in assets and $8.3 billion in nonbrokered deposits. ...

The FDIC facilitated the transaction with John Kanas and a consortium of investors after BankUnited, FSB, was closed today by the Office of Thrift Supervision, which appointed the FDIC as receiver. The FDIC estimates that the cost to its Deposit Insurance Fund will be $4.9 billion. BankUnited's acquisition of all the deposits and assets of BankUnited, FSB was the "least costly" resolution for the DIF compared to alternatives.
...
BankUnited, FSB is the 34th FDIC-insured institution to fail in the nation this year, and the third in Florida. The last bank to be closed in the state was Riverside Bank of the Gulf Coast, Cape Coral on February 13, 2009.

by Calculated Risk on 5/21/2009 04:00:00 PM

Here are a couple of market graphs from Doug (the 2nd one is new - the mega bear quartet in real prices), and an excerpt from CFO Magazine How Healthy Is Your Bank?

There was a significant bond sell-off today - probably because of concerns about the UK (and US) credit ratings.

Click on graph for larger image in new window. The first graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears". Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

The second graph compares four significant bear markets: the Dow during the Great Depression, the NASDAQ, the Nikkei, and the current S&P 500. This is inflation adjusted. See Doug's: "The Mega-Bear Quartet 2000" for a dicussion.

Excerpt from CFO Magazine How Healthy Is Your Bank? (ht jb)

Evaluating a bank's health falls into two parts, says Mark J. Flannery, a finance professor at the University of Florida's Warrington College of Business Administration. One, how well capitalized is the bank — how much loss can it stand without failing? Two, what is the quality of its assets — how much loss risk is the bank exposed to?

In the FDIC's eyes, a well-capitalized bank has a ratio of Tier 1 capital to total risk-weighted assets of at least 6% (analysts prefer to see 8%); a ratio of total capital to total risk-weighted assets of at least 10%; and a Tier 1 leverage ratio of at least 5%. ...

The trouble is, the risk-based capital ratios "don't work very well," says Frederick Cannon, chief equity strategist at Keefe Bruyette Woods, specialists in financial services. That's because the risk weightings that the government uses are out of date. For example, a mortgage-backed security is weighted at 20%, meaning that it requires one-fifth the capital of whole loans. "But some of those securities have declined in value a lot more than the values of whole loans," says Cannon. The option ARM, which "proved to be an absolutely horrible product in terms of performance," is weighted at 50%; "in hindsight it probably should have been weighted at 200%," he says. As for the leverage ratio, "it doesn't pay any attention to the composition of assets and their risk," says Flannery.

Many investors no longer trust the regulatory ratios. ... An officially well-capitalized bank may have a dangerously thin TCE ratio. Take Citigroup. At the end of December, the $1.9 trillion (in assets) bank holding company had a Tier 1 ratio of 11.9%, a total capital ratio of 15.7%, and a leverage ratio of 6.1%. ... But its TCE ratio was just 1.5%. ...

But the TCE ratio is not infallible. Right before Washington Mutual failed, its TCE ratio was 7.8%. For regulators and analysts, TCE is one more metric in the tool kit. That tool kit is typically based on CAMELS, the supervisory rating system that looks at a bank's capital, asset quality, management, earnings, liquidity, and sensitivity to market risk (hence the acronym). Earnings are always important, but "these days it's more about the 'C' and the 'A,'" says Valentin.

The "A" is a growing source of discomfort as the recession drags on. With growth slowing and unemployment rising, a broad swath of consumer and business loans is beginning to sour. "Most of the banks that have failed to date have had significant early credit-cycle exposure — subprime, option-ARM, residential construction loans," says Cannon. "We're starting to see significant deterioration in midcycle credit: prime mortgages, home-equity loans, some nonresidential construction. And there's increasing concern about late-cycle credit instruments such as commercial real-estate mortgages and commercial loans."

It is all about asset quality right now.

by Calculated Risk on 5/21/2009 02:12:00 PM

The tale of two cities continues ...

From DataQuick: Bay Area home sales rise again; median price up slightly over March

Bay Area home sales posted a year-over-year gain for the eighth consecutive month in April, with robust sales in lower-cost inland areas once again compensating for anemic sales on the coast. ...

A total of 7,139 new and resale houses and condos closed escrow in the nine-county Bay Area last month. That was up 12.9 percent from 6,325 in March and up 13.1 percent from 6,310 in April 2008, according to MDA DataQuick of San Diego.

Last month’s sales were the second-lowest for an April since 1995 and were 23.2 percent below the average April sales total back to 1988, when DataQuick’s statistics begin.

Foreclosure resales – homes sold in April that had been foreclosed on in the prior 12 months – accounted for 47.4 percent of Bay Area resales. That was down from 50.2 percent in March and 52.0 percent in February. Last month’s figure was the lowest since foreclosure resales were 46.8 percent of existing home sales last November.

A lower concentration of discounted foreclosure resales in the statistics is one reason the median sale price has recently begun to more or less flatten, or at least erode more slowly, in many markets.
...
Home sales in many high-end areas, especially on the coast, remain at record or near-record-low levels.

In lower-cost communities, first-time buyers have turned to government-insured FHA mortgages, which represented a record 26 percent of all Bay Area home purchase loans in April, up from 3.2 percent a year ago. The combination of FHA financing, steep home price declines and low mortgage rates have fueled record or near-record-high sales this spring in many of the Bay Area’s most affordable, foreclosure-heavy communities.
...
Foreclosure activity remains at historically high levels ...
emphasis added

Key points (worth repeating):

Ignore median price. The mix changes the median price too much.

Sales at the low end are "robust". Record or near record sales in the "affordable, foreclosure-heavy" communities.

Sales at the high end are "anemic". Record or near-record-low sales in the high end areas. Note: This will change once prices start to fall (See House Price Puzzle: Mid-to-High End)

Foreclosures are still at "historically high" levels - and will probably hit records again now that the moratorium is over. Foreclosure resales accounted for 47.4 percent of all resales last month. Remember the Distressing Gap!

by Calculated Risk on 5/21/2009 11:38:00 AM

Note: HotelNewsNow has a free hotel related newsletter available here. This week they have an update on the Yellowstone Club vs. Credit Suisse case.

And on occupancy and RevPAR from HotelNewsNow.com: STR reports U.S. data for week ending 16 May

In year-over-year measurements, the industry’s occupancy fell 12.6 percent to end the week at 57.8 percent. Average daily rate dropped 10.0 percent to finish the week at US$98.33. Revenue per available room for the week decreased 21.4 percent to finish at US$56.84.

Click on graph for larger image in new window.

This graph shows the YoY change in the occupancy rate (3 week trailing average).

The three week average is off 11.3% from the same period in 2008.

The average daily rate is down 10.0%, so RevPAR is off 21.4% from the same week last year.

Data Source: Smith Travel Research, Courtesy of HotelNewsNow.com

by Calculated Risk on 5/21/2009 10:00:00 AM

Here is the Philadelphia Fed Index released today: Business Outlook Survey.

The region's manufacturing sector continued to show weakness in May ... Although the indexes for general activity, shipments, and employment improved, the index for new orders declined slightly. ... Most of the survey's broad indicators of future activity improved notably again this month, suggesting that the region's manufacturing executives are more optimistic that a recovery will occur over the next six months.

The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, increased from -24.4 in April to -22.6 this month. Although an indication of continued overall decline, this reading is the index's highest since last September; it has now edged higher for three consecutive months. Still, the index has been negative for 17 of the past 18 months, a span that corresponds to the current recession.
...
Broad indicators of future activity showed improvement again this month. The future general activity index remained positive for the fifth consecutive month and increased 11 points, from 36.2 in April to 47.5. The index has now increased 33 points in the past two months (see Chart).

Click on graph for larger image in new window.

This graph shows the Philly index for the last 40 years.

"The index has been negative for 17 of the past 18 months, a span that corresponds to the current recession."

by Calculated Risk on 5/21/2009 08:34:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending May 16, the advance figure for seasonally adjusted initial claims was 631,000, a decrease of 12,000 from the previous week's revised figure of 643,000. The 4-week moving average was 628,500, a decrease of 3,500 from the previous week's revised average of 632,000.
...
The advance number for seasonally adjusted insured unemployment during the week ending May 9 was 6,662,000, an increase of 75,000 from the preceding week's revised level of 6,587,000.

Click on graph for larger image in new window.

The first graph shows weekly claims and continued claims since 1971.

The four-week moving average is at 628,500, off 30,250 from the peak 6 weeks ago.

Continued claims are now at 6.66 million - an all time record.

Typically the four-week average peaks near the end of a recession. There is a reasonable chance that claims have peaked for this cycle, but it is still too early to be sure, and if so, continued claims should peak soon.

The level of initial claims (631 thousand) is still very high, indicating significant weakness in the job market.

by Calculated Risk on 5/20/2009 11:46:00 PM

From the Financial Times: BofA seeks to repay $45bn by end of year

Bank of America wants to pay back $45bn in bail-out funds by the end of the year, in a faster-than-expected move made possible by an accelerated programme to raise capital.

BofA is on track to raise more than $35bn in capital by the end of September...

People familiar with the bank’s plans say negotiations to sell some of BofA’s non-core assets are under way and, if the asset sales occur in the next few months, the bank will be able to fulfil its stress-test obligations and pay back Tarp funds from its $173bn cash reserves.

Stop laughing!

Plenty of info today:

New Mortgage Loan Reset / Recast Chart

Architecture Billings Index Steady in April

U.S. Vehicle Miles off 1.2% YoY in March

Pension Benefit Guaranty Corporation Deficit Increases - and more problems coming from the automakers.

Residential Rental Market and Inflation

best to all.

by Calculated Risk on 5/20/2009 08:15:00 PM

Goldman Sachs tracks the rents at a large number of apartment REITs - and rents are now falling (excerpted from research report with permission):

REITs tend to adjust more rapidly to changing market conditions than the typical landlord, so changes in their behavior are useful signals of turns in the market ... Public REITs typically report the rent increases they have achieved on a year-over-year, comparable-unit basis with each quarterly filing. ... [the tracked] REITS managed 300,000 units that were comparable to the year-before period in the first quarter of 2009 ... In the first quarter of 2009, the major REITs collectively reported an outright decline in rents for the first time since 2004.

Goldman notes that declining rents for REITS typically lead declines in the CPI measures of rent: Owners' equivalent rent of primary residence (OER) and Rent of primary residence.

The following graph shows the year-over-year (YoY) in the REIT rents (from Goldman), Owners' equivalent rent of primary residence and Rent of primary residence (both from the BLS). The Apartment Tightness Index from the National Multi Housing Council is on the right Y-axis.

Click on graph for larger image in new window.

This graph shows that the Apartment Tightness Index leads REIT rents, and that the BLS measures of rent follow.

This suggests further declines in the YoY REIT rents, and future disinflation for the BLS measures of rent.

This is important for house prices too. With falling rents, house prices need to fall further to bring the house price-to-rent ratio back to historical levels.

by Calculated Risk on 5/20/2009 06:28:00 PM

From Eric Lipton at the NY Times: Bankruptcies Swell Deficit at Pension Agency to $33.5 Billion

The deficit at the federal agency that guarantees pensions for 44 million Americans more than doubled in the last six months to a record high, reaching $33.5 billion ...

The Pension Benefit Guaranty Corporation, as of October, had faced a shortfall of $11 billion. But the combined effect of lower interest rates, losses on its investment portfolio and the increase in the number of companies filing for bankruptcy protection resulted in a deepening of its estimated deficit, officials said Wednesday.
...
With the bankruptcy of Chrysler and a possible similar move by General Motors, the agency is facing a record surge in demand. The new deficit estimate takes into account both pensions it has taken over in the last six months, and others it believes it will have to assume control of soon.

Here is the PBGC statement: PBGC Deficit Climbs to $33.5 Billion at Mid-Year, Snowbarger to Tell Senate Panel

The $22.5 billion deficit increase was due primarily to about $11 billion in completed and probable pension plan terminations; about $7 billion resulting from a decrease in the interest factor used to value liabilities; about $3 billion in investment losses; and about $2 billion in actuarial charges.

Snowbarger notes that as of April 30, the PBGC’s investment portfolio consisted of 30 percent equities, 68 percent bonds, and less than 2 percent alternatives, such as private equity and real estate. All the agency’s alternative investments have been inherited from failed pension plans.

Last year the PBGC voted to allow equity investments, but luckily the entire portfolio wasn't moved into equities - and they only lost $3 billion on their $56 billion asset portfolio.

Unfortunately there is much more to come:

The PBGC is closely monitoring companies in the auto manufacturing and auto supply industries. According to PBGC estimates, auto sector pensions are underfunded by about $77 billion, of which $42 billion would be guaranteed in the event of plan termination. The pension insurer also faces increased exposure from weak companies across all sectors of the economy, including retail, financial services and health care.

With companies moving away from defined benefit plans, there will be fewer companies paying for insurance in the future - so the PBGC will probably have to be bailed out.

by Calculated Risk on 5/20/2009 04:00:00 PM

By popular demand ...

Click on graph for larger image in new window. The first graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears". Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

The second graph compares four significant bear markets: the Dow during the Great Depression, the NASDAQ, the Nikkei, and the current S&P 500. See Doug's: "The Mega-Bear Quartet and L-Shaped Recoveries".

The third graph shows the S&P 500 since 1990. The dashed line is the closing price today. The market is only off 42% from the peak.

CNBC's Jeff Macke's head explodes...

by Calculated Risk on 5/20/2009 02:01:00 PM

From the Fed: Minutes of the Federal Open Market Committee April 28-29, 2009

Some FOMC members suggested buying more Treasury securities:

Members also agreed that it would be appropriate to continue making purchases in accordance with the amounts that had previously been announced—that is, up to $1.25 trillion of agency MBS and up to $200 billion of agency debt by the end of this year, and up to $300 billion of Treasury securities by autumn. Some members noted that a further increase in the total amount of purchases might well be warranted at some point to spur a more rapid pace of recovery; all members concurred with waiting to see how the economy and financial conditions respond to the policy actions already in train before deciding whether to adjust the size or timing of asset purchases. The Committee reaffirmed the need to monitor carefully the size and composition of the Federal Reserve’s balance sheet in light of economic and financial developments.
emphasis added

The economic projections are near the end. Although the Fed lowered their economic outlook (compared to January), they are still fairly optimistic. As an example, the central tendency for GDP growth in 2010 is 2% to 3%, not far below trend growth, and above trend growth in 2011 (3.5% to 4.8% central tendency of projections). The Fed is also optimistic about the unemployment rate peaking below 10% later this year or in early 2010. In January, the members saw unemployment peaking in 2009, and the central tendency for unemployment was 8.5% to 8.8% in 2009 - we are already at 8.9% in April!

by Calculated Risk on 5/20/2009 01:32:00 PM

The Dept of Transportation reports on U.S. Traffic Volume Trends:

Travel on all roads and streets changed by -1.2% (-3.1 billion vehicle miles) for March 2009 as compared with March 2008. Travel for the month is estimated to be 245.1 billion vehicle miles.

Click on graph for larger image in new window.

The first graph shows the annual change in the rolling 12 month average of U.S. vehicles miles driven. Note: the rolling 12 month average is used to remove noise and seasonality.

By this measure, vehicle miles driven are off 3.3% Year-over-year (YoY); the decline in miles driven was worse than during the early '70s and 1979-1980 oil crisis. However miles driven - compared to the same month of 2008 - has only been off about 1% for the last couple months.

The second graph shows the comparison of month to the same month in the previous year as reported by the DOT.

As the DOT noted, miles driven in March 2009 were 1.2% less than in March 2008.

Year-over-year miles driven started to decline in December 2007, and really fell off a cliff in March 2008. Although this data isn't seasonally adjusted, it appears that miles driven has stabilized.

by Calculated Risk on 5/20/2009 11:42:00 AM

From Bloomberg: Geithner Says Toxic-Asset Plan to Start in Six Weeks

Treasury Secretary Timothy Geithner said he expects a pair of government programs to help banks remove their distressed assets will start by early July ...

The Treasury’s Public-Private Investment Program will use $75 billion to $100 billion of government funds to finance sales of as much as $1 trillion in distressed mortgage-backed securities and other assets.

Here is Geithner's prepared statement.

by Calculated Risk on 5/20/2009 09:44:00 AM

Matt Padilla at the O.C. Register presents a new reset / recast chart from Credit Suisse: Loan reset threat looms till 2012

Credit Suisse is using recast dates for Option ARMs and reset dates for all other loans.

As Tanta noted: "Reset" refers to a rate change. "Recast" refers to a payment change.

Resets are not a huge problem as long as interest rates stay low, but recasts could be significant.

Note that Wells Fargo expects only a small percentage of their $115 billion "pick-a-pay" Option ARM portfolio they acquired via Wachovia (originally from World Savings / Golden West) to recast by 2012 (because Golden West had very generous NegAM terms). I'm not sure how that fits with this chart.

by Calculated Risk on 5/20/2009 09:00:00 AM

From the AIA: Architecture Billings Index Points to Possible Economic Improvement

After an eight-point jump in March, the Architecture Billings Index (ABI) fell less than a full point in April. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the April ABI rating was 42.8, down from the 43.7 mark in March. This was the first time since August and September 2008 that the index was above 40 for consecutive months, but the score still indicates an overall decline in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry score was 56.8.

“The most encouraging part of this news is that this is the second month with very strong inquiries for new projects. A growing number of architecture firms report potential projects arising from federal stimulus funds,” said AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “Still, too many architects are continuing to report difficult conditions to feel confident that the economic landscape for the construction industry will improve very quickly. What these figures mean is that we could be seeing things turn around over a period of several months.”

Click on graph for larger image in new window.

This graph shows the Architecture Billings Index since 1996. The index is still below 50 indicating falling demand.

Historically there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on commercial real estate (CRE). So there will probably be further dramatic declines in CRE investment later this year.

Back in 2005, Kermit Baker and Diego Saltes of the American Institute of
Architects wrote a white paper: Architecture Billings as a Leading Indicator of Construction

The following graph is an update from their paper.

This graph compares the Architecture Billings Index and year-over-year change in non-residential construction spending from the Census Bureau.

This graph suggests the non-residential construction collapse will be very sharp, and although there isn't enough data to know if this is predictive of the percentage decline in spending, it does suggest a possible year-over-year decline of perhaps 20% to 30% in non-residential construction spending.

by Calculated Risk on 5/20/2009 08:32:00 AM

From the Detroit News: Feds to inject $7.5B more into GMAC (ht jb)

The Treasury Department is preparing to announce as early as today that it will invest an additional $7.5 billion in GMAC LLC in a deal that could allow the U.S. government to hold a majority stake in the Detroit-based auto finance company.

The Stress Test results showed GMAC needs another $11.5 billion in capital, so there is probably more coming.

by Calculated Risk on 5/19/2009 11:11:00 PM

From Bloomberg: Japan’s Economy Shrank Record 15.2% Last Quarter (ht creditcriminalslovetarp, Angry Saver, and others)

Japan’s economy shrank at a record 15.2 percent annual pace last quarter as exports collapsed and consumers and businesses cut spending.

The contraction followed a revised fourth-quarter drop of 14.4 percent ...

Exports plunged an unprecedented 26 percent last quarter ...