by Calculated Risk on 2/17/2009 12:04:00 PM

From the SEC: SEC Charges R. Allen Stanford, Stanford International Bank for Multi-Billion Dollar Investment Scheme

Stanford's companies include Antiguan-based Stanford International Bank (SIB), Houston-based broker-dealer and investment adviser Stanford Group Company (SGC), and investment adviser Stanford Capital Management. The SEC also charged SIB chief financial officer James Davis as well as Laura Pendergest-Holt, chief investment officer of Stanford Financial Group (SFG), in the enforcement action.

Pursuant to the SEC's request for emergency relief for the benefit of defrauded investors, U.S. District Judge Reed O'Connor entered a temporary restraining order, froze the defendants' assets, and appointed a receiver to marshal those assets.

"As we allege in our complaint, Stanford and the close circle of family and friends with whom he runs his businesses perpetrated a massive fraud based on false promises and fabricated historical return data to prey on investors," said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement. "We are moving quickly and decisively in this enforcement action to stop this fraudulent conduct and preserve assets for investors."

Rose Romero, Regional Director of the SEC's Fort Worth Regional Office, added, "We are alleging a fraud of shocking magnitude that has spread its tentacles throughout the world."

The SEC's complaint, filed in federal court in Dallas, alleges that acting through a network of SGC financial advisers, SIB has sold approximately $8 billion of so-called "certificates of deposit" to investors by promising improbable and unsubstantiated high interest rates. These rates were supposedly earned through SIB's unique investment strategy, which purportedly allowed the bank to achieve double-digit returns on its investments for the past 15 years.

According to the SEC's complaint, the defendants have misrepresented to CD purchasers that their deposits are safe, falsely claiming that the bank re-invests client funds primarily in "liquid" financial instruments (the portfolio); monitors the portfolio through a team of 20-plus analysts; and is subject to yearly audits by Antiguan regulators. Recently, as the market absorbed the news of Bernard Madoff's massive Ponzi scheme, SIB attempted to calm its own investors by falsely claiming the bank has no "direct or indirect" exposure to the Madoff scheme.

by Calculated Risk on 2/17/2009 10:51:00 AM

Tanta used to joke "It's not a real estate bust until a mortgage insurer goes down". Of course Triad went down last year ...

From the WSJ: Moody's Slashes Ratings on Mortgage Insurers (ht Shnaps)

Ratings on MGIC Investment Corp. and Radian Group Inc. were cut Friday several notches to junk status because of what Moody's called deterioration in their franchise value, the likelihood of sustained losses for several years and substantially limited access to capital.

Moody's said MGIC's losses in the past year are putting "meaningful capital strain" on the company, which could breach maximum statutory risk to capital guidelines in the next 12 to 18 months without additional capital injections.

It downgraded the insurance-financial-strength ratings of MGIC units seven notches to Ba2, or slightly speculative, and MGIC's senior-debt ratings seven notches to B2, or speculative.
...
The rating agency also cut the insurance-financial-strength ratings of Radian's mortgage-insurance units seven notches to Ba3 and the insurance unit's insurance-financial-strength rating six notches to B1.

The mortgage insurers were cut out of the worst deals (lucky for them!), because Wall Street happily securitized 100% financing with 2nds and no MI. But the losses are still piling up.

by Calculated Risk on 2/17/2009 08:56:00 AM

From the NY Fed: Empire State Manufacturing Survey

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers deteriorated significantly in February. The general business conditions index fell to a new low of -34.7. The new orders index also fell to a new low, the unfilled orders index stayed close to its recent record low, and the shipments index—despite a slight improvement—remained negative. The indexes for both prices paid and prices received held below zero, with the latter dropping sharply. Employment indexes remained deep in negative territory; the average workweek index slipped to a record low. The future general business conditions index was negative for a second consecutive month as many of the forward-looking indexes remained close to recent lows. The future index for number of employees fell particularly sharply, eclipsing last month’s record low.

How many times did they use the phrase "new" or "record" low?

Here is the general business conditions index. Note that the data only goes back to July 2001 (chart to Jan 2002), so all these record lows aren't that significant.

by Calculated Risk on 2/16/2009 11:19:00 PM

Just a late night open thread (ht FFDIC):

I've heard some rumors tonight (nothing worth posting) ... but no cliff diving in the futures or overseas equity markets.

For those interested, here are the Bloomberg Futures.

CBOT mini-sized Dow

And the Asian markets.

by Calculated Risk on 2/16/2009 10:20:00 PM

From the LA Times: Governor prepares to send out 20,000 pink slips

In an apparent effort to increase pressure on lawmakers negotiating an end to California's fiscal crisis, Gov. Arnold Schwarzenegger is preparing to send pink slips to 20,000 state workers.
...
With his layoff plan, Schwarzenegger hopes to eliminate 10,000 jobs, but is sending out more notices in case the state meets with obstacles, legal or otherwise, in laying off certain workers.

Layoffs can take about six months to implement, because of union contracts and other required steps. ...

Also today, the administration announced that on Tuesday it will shut down the final 276 public works projects that had been allowed to continue operating during the state's cash crisis.

Arnie, you're doing a heck of a job!

by Calculated Risk on 2/16/2009 08:04:00 PM

This could be worth watching, although this will feel kind of like a home movie for all of us!

Tuesday, February 17, 2009, at 9 P.M. ET on PBS. On TV and on the internet. Here is the website.

Sneak Preview,Part I:

Sneak Preview,Part II:

by Calculated Risk on 2/16/2009 06:42:00 PM

From the WSJ: California Legislators Reconsider Plan to Close $42 Billion Budget Gap (ht Dwight)

California legislators met Monday to reconsider a proposal to close the state's $42 billion deficit after aborting a vote late Sunday ... that would raise taxes and cut spending. ...

The budget put up to vote during the long-weekend session outlined spending for the next 17 months. In addition to the revenue increases, it proposed cutting $15 billion in spending, including $8.6 billion from education and $1.4 billion from payroll costs, to be achieved in part by furloughing 200,000 state workers at least one day a month.
...
The impasse has revolved around a bill, out of the nearly 30 in the budget proposal, that would generate $14 billion in revenue by temporarily raising the sales tax by one percentage point, by increasing the gasoline tax by 12 cents a gallon and by adding a surcharge of up to 5% on income taxes, among other steps.

And from the AP: Kan. suspends income tax refunds, may miss payroll (ht Mark)

Kansas has suspended income tax refunds and may not be able to pay employees on time, the state's budget director said Monday.

The state doesn't have enough money in its main bank account to pay its bills, prompting Democratic Gov. Kathleen Sebelius to suggest transferring $225 million from other accounts throughout state government. But the move required approval from legislative leaders, and the GOP refused Monday.

There are just 2 of 46 states that the Center on Budget and Policy Priorities is facing a shortfall (of course California has the largest shortfall): State Budget Troubles Worsen

States are facing a great fiscal crisis. At least 46 states faced or are facing shortfalls in their budgets for this and/or next year, and severe fiscal problems are highly likely to continue into the following year as well. ...

States are currently at the mid-point of fiscal year 2009 — which started July 1 in most states — and are in the process of preparing their budgets for the next year. Over half the states had already cut spending, used reserves, or raised revenues in order to adopt a balanced budget for the current fiscal year — which started July 1 in most states. Now, their budgets have fallen out of balance again. New gaps of $51 billion (over 10% of state budgets) have opened up in the budgets of at least 42 states plus the District of Columbia.

by Calculated Risk on 2/16/2009 04:40:00 PM

From Smith Travel Research (STR): Hotel industry recession reaches 15 months

The Hotel Industry’s Pulse index declined 1.9-percent in January to bring the index to a reading of 90.8, according to a report from economic research firm e-forecasting.com in conjunction with Smith Travel Research.

The index measures the likelihood of a recession for the U.S. hotel industry. It was set to equal 100 in 2000. January’s 1.9-percent decline followed a drop of 1.2 percent in December.

HIP’s six-month growth rate, which historically has signaled turning points in U.S. hotel business activity, decreased by an annual rate of 16.1 percent in January, building on December’s 14.5 percent decline.
...
“According to HIP, the hotel industry entered its 15th month in the current recession in January,” said Chad Church from Smith Travel Research.

The previous two industry recessions, in 1991 and 2001, lasted 17 months each. “If HIP continues to decline for a few more months, the current recession in the hotel industry may outpace the longest hotel recession on record that occurred in 1981 and lasted 20 months,” Simos added.

Click on graph for larger image in new window.

This graph from e-forecasting.com and Smith Travel Research shows the hotel recessions based on the Hotel Industry’s Pulse index and the NBER's business cycle dating methodology.

In general, hotel recessions correspond to general economic recessions, although they last longer. There was a double dip recession for hotels following the 2001 recession.

The second graph shows investment in lodging (based on data from the BEA) as a percent of GDP. In general investment in lodging starts to decline during a hotel recession, however the recent boom in lodging investment has been stunning. Lodging investment is now at 0.34% of GDP - an all time high. However, with the hotel industry in recession, it appears likely that investment in lodging will decline sharply in 2009.

Note: prior to 1997, the BEA included Lodging in a category with a few other buildings. This earlier data was normalized using 1997 data, and is an approximation.

by Calculated Risk on 2/16/2009 02:24:00 PM

"The money is going to sit on the sidelines until [regulators] announce they’re going to do something with these [big banks]. Nobody is going to put fresh capital into the banking business when your major competitor is going to be continuously bailed out by the United States government with more and more money.”
Rusty Cloutier, the president and CEO of MidSouth Bank

From Diana Golobay at Housing Wire: Break Up Big Banks, Says Community Banker

Rusty Cloutier, the president and CEO of MidSouth Bank, recently told major news outlets that “[c]oncentration is a bad thing” and called for the feds to break up the “miserable eight” largest banks that, he said, control 60 to 64 percent of the country’s assets, restoring competition to the banking industry and restoring investor confidence in the system.

This is an excellent point. Most of the big banks can't raise capital because investors are afraid of nationalization preprivatization. And small banks can't raise capital because investors are concerned that their competitors (the large banks) will be continuously bailed out by the government.

by Calculated Risk on 2/16/2009 12:25:00 PM

Comedian Jim the Realtor tells the story of Dictionary Hill ... (2 min 49 sec). You have to wait until the end ...

For a couple of ugly McMansions in foreclosure, see this Chula Vista video. This is foreclosure alley in a higher price range. And yes, even homes that original sold for over one million dollars are sometimes destroyed by the owners:

by Calculated Risk on 2/16/2009 10:12:00 AM

From MarketWatch: Japan's economy shrinks 12.7% annualized

Japan's economy contracted ...12.7% on an annualized basis in the October-to-December period ...

The decline was the biggest since a 13.1% annualized contraction in the January-to-March period in 1974.

From CNBC:

"Given a rise in inventory and a decline in final demand, output adjustments will continue in January-March, paving the way for another big contraction in the first quarter," said Tatsushi Shikano, senior economist at Mitsubishi UFJ Securities.

"As the U.S. stimulus package will have its effect on Japanese exports, Japan's economy may start picking up from April-June onwards, but it will be a very weak recovery amid a lingering recession. The economy can't avoid a second straight year of contraction in the fiscal year starting in April."

The Japanese economy is very dependent on exports, especially to China and the U.S. They are hoping the stimulus packages in China and the U.S. will also provide a boost to their economy.

by Calculated Risk on 2/16/2009 12:05:00 AM

The North County Times has a feature called "Deal of the Week". This week the deal is interesting for several reasons: See: Deal of the Week: 73% Off (sorry, wrong link initially)

The featured property is a one-bedroom, one-bath, 700-square-foot condominium in Escondido (inland north county San Diego).

In 2006, during the bubble, the unit sold for $191,000, and in December 2008 - after foreclosure, the unit sold for $52,000. That is almost 73% off the peak price!

A few key points:

In 2006, the unit was bought with no money down. Two months ago the buyer paid all cash. From no money down to all cash; near the opposite extremes of financing!

Note: "near" because during the bubble, some buyers actually received cash out at closing with financing of 105% LTV or greater.

These units currently rent for close to $900+ per month (although I suspect rents will decline in this area). Even figuring in HOA fees, taxes, maintenance, insurance, vacancy and other expenses, this unit has to be generating a nice return for the investor.

The unit sold for $45,900 in 1979 (Yes, 1979). I checked with Zach from the NC Times, and he said he confirmed the 1979 price with the assessor's office. Zach told me other units in the building sold for $40,500 in 1984, so maybe the '79 price was a little high (that was near the peak of a housing bubble too, so a 10% decline from '79 to '84 might be reasonable).

Over almost 30 years (1979 to Dec 2008) the price increased 13%. Annualize that return!

by Calculated Risk on 2/15/2009 10:50:00 PM

"Some clever advocates of nationalization have come up some alternative names, Dan. Some of them include government receivership, and my favorite is preprivatization."
John Hendren, ABC News, Feb 15, 2009

(ht to all)

See video ...

My favorite too. Best to all.

by Calculated Risk on 2/15/2009 07:01:00 PM

Four banks were closed by the FDIC Friday, for a total of 13 banks so far in 2009. To put those failures into perspective, here are two graphs: the first shows the number of bank failures by year since the FDIC was founded, and the second graph shows the size of the assets and deposits (in current dollars).

Click on graph for larger image in new window.

Back in the '80s, there was some minor multiple counting ... as an example, when First City of Texas failed on Oct 30, 1992 there were 18 different banks closed by the FDIC. This multiple counting was minor, and there were far more bank failures in the late '80s and early '90s than this year.

Note: there are currently 8,384 FDIC insured banks.

The second graph (ht Kurt) shows the bank failures by total assets and deposits per year starting in 1934 (in current dollars adjusted with CPI).

WaMu accounted for a vast majority of the assets and deposits of failed banks in 2008, and it is important to remember that WaMu was closed by the FDIC, and sold to JPMorgan Chase Bank, at no cost to the Deposit Insurance Fund (DIF).

There are many more bank failures to come over the next couple of years, mostly because of losses related to Construction & Development (C&D) and Commercial Real Estate (CRE) loans, but so far, especially excluding WaMu, the total assets and deposits of failed FDIC insured banks is much smaller than in the '80s and early '90s.

by Calculated Risk on 2/15/2009 03:04:00 PM

From the WSJ: Axelrod: Obama Has 'Solid' Housing Plan

Speaking on "Fox News Sunday," senior adviser David Axelrod said the plan that President Barack Obama plans to announce on Wednesday will aim to provide immediate help to homeowners who are "right on the edge" of foreclosure, and ultimately help in "raising home values that have been plummeting."

Mr. Obama plans to unveil his housing plan during a visit to Phoenix. As part of his swing through western states, he is set to top in Denver Tuesday, when he will sign the $787 billion economic-stimulus plan just passed by Congress.

Mr. Axelrod provided few details of the housing plan, but said a government investment of $50 billion to $100 billion to fund foreclosure prevention "is obviously a necessary part." He promised that the plan would contain "a lot of aspects."

I hope "a lot of aspects" includes "a lot of details".

by Calculated Risk on 2/15/2009 10:55:00 AM

From the Times: £30 billion loss at RBS prompts savage job cuts (ht Jan)

ROYAL BANK OF SCOTLAND boss Stephen Hester is to unveil a brutal cost-cutting exercise, alongside record losses of close to £30 billion, that are expected to lead to a further 10,000 to 20,000 job cuts.
...
The bank has already axed 13,000 jobs internationally since last April, including 3,000 in its investment-banking business.

And the beat goes on ...

by Calculated Risk on 2/14/2009 08:01:00 PM

To new readers, please see In Memoriam: Doris "Tanta" Dungey

From Tanta's sister Cathy on some new items:

They say “Tanta Vive” on the embroidery instead of the mortgage pig. Some of us who “sport the pig” already get looks from people and I’m sure this will just add to that but we encourage the questions. To find them in EBay you search on “ Tanta ” and you’ll see them all. I’m switching all future donations to the OCRF. [Ovarian Cancer Research Fund (www.ocrf.org)]

Here is the link for Mortgage Pig Gear - the Tanta Vive items are the bottom.

These items are produced as they are ordered and we do apologize about the size and color confusion. The best method is to enter this information in the PayPal message box when completing the order.

We will accept check orders outside of Ebay but that will slow things down. Please EMAIL: rwstick AT yahoo DOT com (Dick) with the item, size and color and we will return the cost with shipping. Once the check is received with shipping instructions we will process the order.

Note from CR: I have a few items - my favorite is the Hooded Sweatshirt! Thanks for everyone who bought gear - and helped with this great cause - and thanks to those who donated to the Doris "Tanta" Dungey Endowed Scholarship Fund too.

And now, from Tanta last year: Happy Valentines Day

From Mortgage Pig™. (click on Pig for larger image)

by Calculated Risk on 2/14/2009 04:22:00 PM

Bill Moyers interviews Simon Johnson (ht Nemo)

Former chief economist of the International Monetary Fund (IMF), MIT Sloan School of Management professor and senior fellow at the Peterson Institute for International Economics, Simon Johnson examines President Obama's plan for economic recovery.

And Joe Nocera writes in the NY Times: A Stress Test for the Latest Bailout Plan (ht MrM)

Matthew Richardson and Nouriel Roubini write the WaPo: Nationalize the Banks! We're all Swedes Now

First -- and this is by far the toughest step -- determine which banks are insolvent. Geithner's stress test would be helpful here. The government should start with the big banks that have outside debt, and it should determine which are solvent and which aren't in one fell swoop, to avoid panic. Otherwise, bringing down one big bank will start an immediate run on the equity and long-term debt of the others. It will be a rough ride, but the regulators must stay strong.

Second, immediately nationalize insolvent institutions. The equity holders will be wiped out, and long-term debt holders will have claims only after the depositors and other short-term creditors are paid off.

Third, once an institution is taken over, separate its assets into good ones and bad ones. The bad assets would be valued at current (albeit depressed) values. Again, as in Geithner's plan, private capital could purchase a fraction of those bad assets. As for the good assets, they would go private again, either through an IPO or a sale to a strategic buyer.

The proceeds from both these bad and good assets would first go to depositors and then to debt-holders, with some possible sharing with the government to cover administrative costs. If the depositors are paid off in full, then the government actually breaks even.

Fourth, merge all the remaining bad assets into one enterprise. The assets could be held to maturity or eventually sold off with the gains and risks accruing to the taxpayers.

The eventual outcome would be a healthy financial system with many new banks capitalized by good assets. Insolvent, too-big-to-fail banks would be broken up into smaller pieces less likely to threaten the whole financial system. Regulatory reforms would also be instituted to reduce the chances of costly future crises.

And they conclude: We're all Swedes now!

by Calculated Risk on 2/14/2009 01:52:00 PM

“I’m really scared of what could happen, because I bought property here. If I can’t pay it off, I was told I could end up in debtors’ prison.”
Sofia, a 34-year-old expatriate.

Last week I posted a story on "skips" in Dubai - expatriates fleeing home rather than risk jail for defaulting on loans. Below is another story on Dubai from the NY Times.

First, here is a video on the Dubai real estate crash (hat tip James):



From the NY Times: Laid-Off Foreigners Flee as Dubai Spirals Down

With Dubai’s economy in free fall, newspapers have reported that more than 3,000 cars sit abandoned in the parking lot at the Dubai Airport, left by fleeing, debt-ridden foreigners (who could in fact be imprisoned if they failed to pay their bills).
...
No one knows how bad things have become, though it is clear that tens of thousands have left, real estate prices have crashed and scores of Dubai’s major construction projects have been suspended or canceled. But with the government unwilling to provide data, rumors are bound to flourish, damaging confidence and further undermining the economy.

Instead of moving toward greater transparency, the emirates seem to be moving in the other direction. A new draft media law would make it a crime to damage the country’s reputation or economy, punishable by fines of up to 1 million dirhams (about $272,000). Some say it is already having a chilling effect on reporting about the crisis.
...
[M]any expatriates here talk about Dubai as though it were a con game all along. Lurid rumors spread quickly: the Palm Jumeira, an artificial island that is one of this city’s trademark developments, is said to be sinking, and when you turn the faucets in the hotels built atop it, only cockroaches come out.

It could be worse, at least the U.S. allows reporters (and bloggers!) to report on the crisis. And imagine a debtors' prison ... it would be filling up pretty quickly now. Maybe building all those prisons would add a little stimulus to the economy (just kidding of course).

by Calculated Risk on 2/14/2009 01:00:00 PM

From Eric Dash at the NY Times: Disposing of Assets of Failed Banks Tests F.D.I.C.

... The F.D.I.C. faces tough choices ... every day as it struggles to manage $15 billion worth of loans and property left from failed banks. If still-to-be-sold assets from IndyMac Bancorp of California, whose demise last year was the fourth-largest bank failure, are included, the number jumps to $40 billion.

The F.D.I.C. inherited the collection of loans and property after the failure of 25 banks in 2008, compared to just three in 2007. Thirteen more have failed this year, including four on Friday night, and no one doubts that more are on the way. The F.D.I.C., which insures bank deposits and ultimately has responsibility for liquidating failed banks, is selling hundreds of millions of dollars worth of loans through eBay-like auction sites.

DebtX of Boston and First Financial Network of Oklahoma City, for instance, sell loans at auction to investors who typically pay 5 cents to 85 cents for each dollar of outstanding principal, according to Bliss A, Morris, First Financial’s president. It is unloading hundreds of houses across the country at bargain basement prices. In November, Lula Smith, 86, of Kansas City, Mo., bought a two-bedroom house across the street from her home for $4,000, one-tenth of its value two years ago.

There is much more in the article ... and many more failures coming.