by Calculated Risk on 10/05/2009 10:48:00 PM

From Vanity Fair: Wall Street’s Near-Death Experience (ht jb)

The Vanity Fair piece is an excerpt from Andrew Ross Sorkin's "Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System---and Themselves" to be released on October 20th.

Sunday, September 21, 2008: The Last Stand
...
Upstairs, [Morgan Stanley CEO John] Mack was on the phone with Mitsubishi’s chief executive, Nobuo Kuroyanagi, and a translator trying to nail down the letter of intent. His assistant interrupted him, whispering, “Tim Geithner is on the phone—he has to talk to you.”

Cupping the receiver, Mack said, “Tell him I can’t speak now. I’ll call him back.”

Five minutes later, Paulson called. “I can’t. I’m on with the Japanese. I’ll call him when I’m off,” he told his assistant.

Two minutes later, Geithner was back on the line. “He says he has to talk to you and it’s important,” Mack’s assistant reported helplessly.

Mack was minutes away from reaching an agreement. He looked at Ji-Yeun Lee, who was standing in his office helping with the deal, and told her, “Cover your ears.”

“Tell him to get fucked,” Mack said of Geithner. “I’m trying to save my firm.”

The Vanity Fair excerpt is a page-turner.

by Calculated Risk on 10/05/2009 08:00:00 PM

From NY Fed President William Dudley: A Bit Better, But Very Far From Best

... My assessment of where things stand today is mixed. On the positive side, the financial markets are performing better and the economy is now recovering. ...

On the negative side, the unemployment rate is much too high and it seems likely that the recovery will be less robust than desired. This means that the economy has significant excess slack and implies that we face meaningful downside risks to inflation over the next year or two. ...

... I also suspect that the recovery will turn out to be moderate by historical standards. This is a disappointing outcome in that growth will likely not be strong enough to bring the unemployment rate—currently 9.8 percent —down quickly.

I see three major forces restraining the pace of this recovery. First, households are unlikely to have fully adjusted to the net wealth shock that has been generated by the housing price decline and the weakness in share prices. ...

The shock to household net worth seems likely to have several important implications for household behavior. The shock creates a risk that the household saving rate could increase further. For example, during the period from 1990 to 1992, the household saving rate averaged about 7 percent of disposable personal income, considerably higher than the 4.3 percent average rate during the first half of this year. If the household saving rate were to rise, then consumption would rise more slowly than income, making it more difficult for the economy to develop strong forward momentum. ...

The second force that could restrain the recovery is the fiscal outlook. The fiscal stimulus that is currently providing support to economic activity is temporary rather than permanent. This has to be the case if we are to ensure that fiscal policy is on a sustainable path over the long-run. This means that the positive impulse from fiscal stimulus will abate over the next year.

The third, and perhaps most important factor, is that the banking system has still not fully recovered. Bank credit losses lag the business cycle and are still climbing. ...

The commercial real estate sector is under particular pressure because the fundamentals of the sector have deteriorated sharply and because the sector is highly dependent upon bank lending. In terms of the fundamentals, there are two problems. First, the capitalization rate—the ratio of income to valuation—has climbed sharply. At the peak, capitalization rates for prime properties were in the range of 5 percent. ... Today, the capitalization rate appears to have risen to about 8 percent. ... Second, the income generated by commercial real estate has generally been falling. ...

The decline in commercial real estate valuations has created a significant amount of “rollover risk” when commercial real estate loans and mortgages mature and need to be refinanced. ... This means that more pain likely lies ahead for this sector and for those banks with heavy commercial real estate exposures.

For small business borrowers, there are three problems. First, the fundamentals of their businesses have often deteriorated because of the length and severity of the recession—making many less creditworthy. Second, some sources of funding for small businesses—credit card borrowing and home equity loans—have dried up as banks have responded to rising credit losses in these areas by tightening credit standards. Third, small businesses have few alternative sources of funds. ...

All of these factors will tend to inhibit the pace of the economic recovery. Given that the recovery is starting with an abnormally large amount of slack, and the pace of recovery is not likely to be robust, this means the economy is likely to have significant excess resources for some time to come. As a result, the balance of risks to inflation lies on the downside, not the upside, at least for the next year or two.
...
In summary, I believe the current balance of risks around the inflation outlook lie to the downside due to the very low level of resource utilization and the fact that long-run inflation expectations remain stable. This balance of risks is problematic because the current level of inflation is already so low—the core PCE (personal consumption expenditures) deflator has increased only 1.3 percent over the past 12 months. Thus, we would not need much of a decline in inflation to run the risk of an outright deflation. Outright deflation, in turn, would be a dangerous development because it would drive up real debt burdens and make it much more difficult for households and businesses to deleverage.
emphasis added

There is much more in the speech about resource slack and the Fed's tools "to exit smoothly from the very low federal funds rate".

by Calculated Risk on 10/05/2009 05:59:00 PM

Press Release: CityCenter Announces Residential Price Reductions (ht Charlie)

CityCenter ... on the Las Vegas Strip, has announced that a 30 percent price reduction will be offered at closing to the existing buyers of CityCenter's three luxury residential offerings: The Residences at Mandarin Oriental, Las Vegas, Veer Towers and Vdara Condo Hotel.

"We believe that in this economic climate this price reduction is an appropriate step to take on behalf of our buyers so as to provide them greater flexibility in closing on their residences," said Bobby Baldwin, president and CEO of CityCenter.

This is a price concession to existing buyers; those buyers who originally signed contracts starting in January 2007. This is an attempt to get those buyers to close escrow and not walk away from their deposits.

Click on graph for larger image in new window.

This graph shows the Case-Shiller house price index for Las Vegas.

The CityCenter condos were first offered for sale in January 2007 (almost at the price peak), and prices in Las Vegas have fallen 55% since then according to Case-Shiller.

The Case-Shiller index suggests these buyers will still be far underwater.

by Calculated Risk on 10/05/2009 02:05:00 PM

From Bloomberg: New York Income Tax Revenue Falls 36% in Year, Paterson Says (ht Mike In Long Island)

New York State’s income tax revenue has dropped 36 percent from the same period in 2008 ...

“We added personal income tax, which we thought would make the falloff 10 percent to 15 percent,” Paterson ... referring to $5.2 billion in new or increased taxes. “This is what is so frustrating. It’s still 36 percent, meaning our revenues fell more in 2009 than they did in 2008.”
...
Besides boosting taxes for the fiscal year that began April 1, lawmakers made $5.1 billion in spending cuts. The plan also includes $6.2 billion in federal stimulus money and $1.1 billion in one-time revenue ...

And in Massachusetts from Reuters: Massachusetts government to announce emergency budget cuts

Massachusetts officials have begun identifying emergency cuts to make to the fiscal year 2010 budget after the state's September tax revenue collections missed their target, Governor Deval Patrick said on Friday.

"Our cabinet has effectively managed through a $7 billion gap already" with spending cuts, layoffs and other measures, Patrick said. "But today's news means we have more to do."

September's monthly tax collection totaled $1.766 billion, an estimated $243 million below its target, highlighting the state's struggling finances in the midst of the recession.

And this will lead to cuts in state and local employment (tend to lag private sector cuts).

by Calculated Risk on 10/05/2009 11:38:00 AM

Senators John Cornyn and Charles Schumer appeared on ABC's 'This Week' with George Stephanopoulos and commented on the housing market: (CQ Transcript)

Sen. John Cornyn , R-Texas: [Senator] Johnny Isakson of Georgia has been championing the -- the tax credit for home purchases. Now it’s getting ready to expire, and it’s limited to $8,000 for first-time purchasers. His argument is, and I think he’s right, is that the housing inventories, or excess housing inventories are what are dampening the recovery. And I think he’s right.

A key problem for housing and the economy is that there are too many housing units compared to the number of households. However it is important to note that the two key categories of housing inventory are owner occupied units and rental units.

The so-called "first-time" homebuyer tax credit just moves people from renting to owning, and doesn't reduce the overall number of excess housing units. As I've noted before, the tax credit policy will push the rental vacancy rate above 11% soon.

And how will that impact all the "accidental landlords"? From Shahien Nasiripour at the HuffPost: Unable To Sell Their Houses, Millions Of Homeowners Are Turning Into Landlords:

[A] growing number of homeowners ... have become landlords, often reluctantly, as they struggle to sell during one of the worst housing markets in recent memory. The most prominent example may be U.S. Treasury Secretary Timothy Geithner, who after failing to sell his $1.6 million home in a New York City suburb found tenants instead.

By just shuffling housholds from renting to owning, the tax credit will force some of these accidental landlords into foreclosure.

And although a higher vacancy rate and lower rents is good news for renters, this will also lead to more apartment defaults, higher default rates for apartment CMBS, and more losses for small and regional banks.

Since the tax credit is poorly targeted and inefficient, it might be hurting the economy more than helping. And it does nothing to reduce the excess inventory problem.

And from Senator Schumer:

Sen. Charles E. Schumer , D-N.Y. : ... I’d be for extending the housing tax credit, which has helped get the housing market out of the severe depression it was in.

The new home market is definitely in a depression, and will not recover until the excess housing inventory is reduced. However most of the tax credit was aimed at the existing home market - and existing home sales are at about a normal level (not depressed), although the mix is skewed toward the lower end and distressed sales (not a healthy market).

Note: no one should expect the new home market to recover to the level of the boom years (I wrote about the new home housing market his weekend: The Impact of the Declining Homeownership Rate)

And finally from the host:

George Stephanopoulos: So we have agreement: extend unemployment benefits, extend health care benefits for people who are unemployed, and extend the housing tax credit.

I don't think there is agreement. The Obama administration is talking about "extending the safety net", and no one can argue the tax credit is part of the safety net.

If Senators Cornyn and Isakson want additional stimulus, then providing more aid to the unemployed (13 weeks won't last long), or aid to the states, would be far more effective use of money than the homebuyer tax credit. More jobs will create more households - and more households is the key to the housing market.