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  • Sat, Nov 15 2008
  • 12:34 PM » Mirabile Dictu! Congress is Mad at Paulson for Lying!
    Published Sat, Nov 15 2008 12:34 PM by Google News
    It is remarkable (and admittedly late, but late is better than never) that Congress is developing a spine and pushing back at Hank Paulson's unprecedented land grab. Even better they got mad at something that made your humble blogger nuts. Trust me, I am highly confident that no Congressional aide picked up on the issue via this blog, but you did have to be paying attention to catch Paulson's dishonesty, and to their credit, they took notice. Of course, this is all part of a larger Kabuki drama. Paulson is insisting that Congress release the remaining $350 billion of the now-misnamed Troubled Assets Repurchase Program so he can hand out more cash to his industry buddies. Congress will be damned if it gives Treasury any more money, given that the funds have so clearly been dispensed with no controls to favored parties. But since they don't dare say the taxpayer has been ripped off (that would call their judgment into question for acquiescing to the hastily drafted and aggressively sold TARP), they will pound on Treasury as many ways as they can. But this is a central issue. Paulson was brazen enough to say that he had misrepresented his intentions while the bill was still being renegotiated. From our earlier post, "." And that means Congress can say they were sold a bill of goods: From the (boldface ours): During the two weeks that Congress considered the legislation, market conditions worsened considerably. It was clear to me by the time the bill was signed on October 3rd that we needed to act quickly and forcefully, and that purchasing troubled assets—our initial focus—would take time to implement and would not be sufficient given the severity of the problem . In consultation with the Federal Reserve, I determined that the most timely, effective step to improve credit market conditions was to strengthen bank balance sheets quickly through direct purchases of equity in banks. Either way you cut this, it's a lie. Either Paulson let his intentions...
  • Fri, Nov 14 2008
  • 5:20 PM » Hartford hopes to become S&L, access TARP
    Published Fri, Nov 14 2008 5:20 PM by Calculated Risk Blog
    From the WSJ: Struggling insurer Hartford Financial Services Group Inc. announced it has applied to convert to savings-and-loan status and said it will buy Federal Trust Corp. for $10 million. The move, which also involves Hartford applying to be part of the Treasury Department's $250 billion capital-injection effort, marks the company's biggest attempt to stem the crisis of confidence afflicting it and other life insurers. ... Hartford estimated it would be eligible for a $1.1 billion to $3.4 billion investment from Treasury if its application is accepted. Can a city become a bank too? From the WSJ: In a letter to Treasury Secretary Henry Paulson Friday, the mayors of Philadelphia, Phoenix and Atlanta asked for the creation of a $50 billion fund to spur infrastructure investments as well as for loans to cover unfunded pension liabilities and to address cash flow crunches amidst tight credit markets. ... The mayors envision funds to fulfill their requests coming from the government’s $700 billion Troubled Asset Relief Program. Philadelphia: a Bank?
    Click Here to Read the Full Article

    Source: Calculated Risk Blog
  • 4:17 PM » Paulson: We have "humiliated ourselves as a nation"
    Published Fri, Nov 14 2008 4:17 PM by Calculated Risk Blog
    From CNBC: "By the time the process with Congress was completed, it was clear that we were facing a much more severe situation than we had envisioned earlier on," Paulson said in a live interview. "We have this limited pool of resources—big, but limited, $700 billion—and how do we use that, and get the maximum impact, and it's by putting capital in (banks)." And from Reuters: "We have in many ways humiliated ourselves as a nation with some of the problems that have taken place here," Paulson said in an interview with CNBC television. Speak for yourself Mr. Paulson. Update: Looks like Kashkari had fun today (a 36 second video):
    Click Here to Read the Full Article

    Source: Calculated Risk Blog
  • 4:17 PM » Mortgage Mess
    Published Fri, Nov 14 2008 4:17 PM by The Big Picture
    Once again we’re closing the barn door after the horse is out and gone. In Washington, the Federal Reserve has finally acted to stop some of the predatory lending that exploited people’s need for money. And like Rip Van Winkle, Congress is finally waking up from a long doze under the warm sun of free market economics. But it’s waking to a nightmare. Meanwhile, the Feds’ clamp-down on predatory lending has come too late for millions of Americans who have already lost their homes. The pain for them is real. They’re hurting badly, and so are their communities. You can see the whole picture in one neighborhood in Cleveland, Ohio. Producer Peter Meryash and correspondent Rick Karr take us there. > click for video > Source: Bill Moyers PBS, July 18, 2008
    Click Here to Read the Full Article

    Source: The Big Picture
  • 2:43 PM » The deflation debate continues
    Published Fri, Nov 14 2008 2:43 PM by
    In what continues to be one of the biggest wastes of breath and digital ink in recent memory, the debate over "deflation" continued this week with Eric Janszen of iTulip contributing one of the more stinging attacks against the "deflationistas" in some time. Maybe someone should lock Eric and Mike Shedlock in a room together until they finally come around to realize that the only thing they disagree on are definitions and timing. After listening to this from just a few months ago, I'm not even sure that Mish deserves the label "deflationista", loosely defined as those who think we are about to sink into a 1930s-style deflationary depression from which, if things go according to plan, we will all emerge sometime around 2020. [And, while I'm at it, stop stealing my - I've been doing for over a year now.] That outcome is apparently preordained, even though there is no gold standard this time around and, as a consequence, virtually no limit to what central banks and governments can do in an attempt to "paper over" the basic problems we now face in the global economy. For that group, which includes most of the folks at Elliot Wave, I have these thoughts: The fundamental problem with "deflationistas" is that they transfer their own apocalyptic view of the world onto the two groups who will ultimately determine whether we sink into a deflationary abyss: a. Central banks and governments who, with a pure fiat money system, have the ability to create money and credit out of thin air with virtually no limit; b. Ordinary consumers in the West who are innately optimistic about the world and more than willing to borrow and spend when presented with favorable terms as well as new consumers in emerging economies around the world who aspire to be as profligate as those of us in the West This probably doesn't add anything to the debate, one that, as noted above, probably isn't worth conducting anyway. Nonetheless, it...
    Click Here to Read the Full Article

  • 1:41 PM » FDIC Loan Modification Proposal Estimated to Cost $24.4 Billion
    Published Fri, Nov 14 2008 1:41 PM by Calculated Risk Blog
    From the FDIC: Although foreclosures are costly to lenders, borrowers and communities, the pace of loan modifications continues to be extremely slow (around 4 percent of seriously delinquent loans each month). It is imperative to provide incentives to achieve a sufficient scale in loan modifications to stem the reductions in housing prices and rising foreclosures. Modifications should be provided using a systematic and sustainable process. The FDIC has initiated a systematic loan modification program at IndyMac Federal Bank to reduce first lien mortgage payments to as low as 31% of monthly income. Modifications are based on interest rate reductions, extension of term, and principal forbearance. A loss share guarantee on redefaults of modified mortgages can provide the necessary incentive to modify mortgages on a sufficient scale, while leveraging available government funds to affect more mortgages than outright purchases or specific incentives for every modification. The FDIC would be prepared to serve as contractor for Treasury and already has extensive experience in the IndyMac modification process. Basic Structure and Scope of Proposal This proposal is designed to promote wider adoption of such a systematic loan modification program: by paying servicers $1,000 to cover expenses for each loan modified according to the required standards; and sharing up to 50% of losses incurred if a modified loan should subsequently re-default We envision that the program can be applied to the estimated 1.4 million non-GSE mortgage loans that were 60 days or more past due as of June 2008, plus an additional 3 million non-GSE loans that are projected to become delinquent by year-end 2009. Of this total of approximately 4.4 million problem loans, we expect that about half can be modified, resulting in some 2.2 million loan modifications under the plan. There are more details in the press release, and the following table provides a summary:
    Click Here to Read the Full Article

    Source: Calculated Risk Blog
  • 1:41 PM » Billion Dollar Player Emerging - NetMore reports $100 million October fundings
    Published Fri, Nov 14 2008 1:41 PM by
    A Washington-based lender is becoming a $1 billion player. Business is generated through mortgage brokers and net branches. NetMore America Inc. today reported approximately $100 million in loan originations during October. Production has soared from just $14 million for all of 2007. Two-thirds of the business was FHA and one-third was conforming conventional. If this is just October, then it is pretty impressive they could generate this kind of volume without SFDPA. Of course, FHA now extends well over $600,000 in high cost areas.
    Click Here to Read the Full Article

  • 12:38 PM » Is the Federal Home Loan Bank System Hiding Risk ?
    Published Fri, Nov 14 2008 12:38 PM by
    The Federal Home Loan Bank (FHLB) system was established in 1932 to fill the need for a stable funding source for residential mortgages created by the undermining of the American banking system during the Great Depression. Today, the 12 and their members are the largest source of residential mortgage financing in the country. Yet until this year, no one had taken a hard look at how membership in the FHLB system affected commercial bank risk. “Although our findings suggest that the cumulative impact of FHLB membership and advances on bank risk is modest, we caution that our sample period was one of robust economic growth, and that serious moral-hazard problems could arise in bank leverage ratios revert to historical norms,” explains Tim Yeager, associate professor of finance at the university of Arkansas’ Sam M. Walton College of Business and co-author of the study which was published in the . “The increasing reliance on these advances is a potential safety and soundness concern because access to them can undermine market discipline, and the FDIC [Federal Deposit Insurance Corp.] cannot raise premiums sufficiently to deter risk-taking.” Yeager and his colleagues, Dusan Stojanovic at the Federal Reserve Bank of Chicago and Mark Vaughn at the Federal Reserve Bank of Richmond, VA, found that liquidity and leverage risk were modestly higher for FLB members than for non-members. Credit risk and overall risk of bank failure were unaffected byFHLB membership. FHLB members were exposed to less interest rate risk, which measures the effect of variable interest rates on bank earnings or equity, than non-members. “Although the evidence fails to produce a ’smoking gun’ the worrisome incentives embedded in FHLB advances should give policymakers pause,” Yeager said. “We argue that bank supervisors should remian vigilant, and only careful monitoring by state and federal supervisors can prevent distressed banks from responding to the moral-hazard incentives associated with FHLB funding...
    Click Here to Read the Full Article

  • 11:04 AM » Freddie Mac Asks Government for $13.8 Billion
    Published Fri, Nov 14 2008 11:04 AM by Calculated Risk Blog
    From Reuters: Freddie Mac reported a $25.3 billion quarterly loss on Friday as the housing slump worsened, forcing the second-largest provider of U.S. home loan funding to draw on a $100 billion Treasury Department lifeline. The company attributed much of the record loss to a write down of tax-related assets ... Freddie Mac said ... [housing market] conditions worsened "dramatically" during July through September. The companies' regulator has submitted a request for the Treasury Department to provide $13.8 billion for Freddie Mac to erase the shareholder equity deficit. Remember Fannie and Freddie have much lower default rates than the loans packaged by Wall Street. If conditions worsened dramatically for Freddie and Fannie, imagine how bad it is for Wall Street MBS and loans held by lenders like Wachovia (Wells Fargo) and WaMu (JPMorgan Chase).
    Click Here to Read the Full Article

    Source: Calculated Risk Blog
  • 11:04 AM » Consumer mood up on "stunning" price drop: U of Michigan
    Published Fri, Nov 14 2008 11:04 AM by Reuters
    NEW YORK (Reuters) - Consumer confidence rose unexpectedly in November, rebounding from a record drop the previous month as tumbling gasoline prices offset worries about unemployment and recession, a survey showed on Friday.
  • 11:04 AM » Citigroup slashing jobs, raising card rates: report
    Published Fri, Nov 14 2008 11:04 AM by Market Watch
    Citigroup has begun big layoffs and is expected to cut at least 10,000 jobs around the globe, a published report said Friday.
  • 10:18 AM » Washington Post on the Quiet Windfall for U.S. Banks - For Shame!
    Published Fri, Nov 14 2008 10:18 AM by Seeking Alpha
    submits: Ever get that pit in your stomach when you see something so very wrong? I wanted to give and co. some little benefit of the doubt, which is difficult for me but after what sort of fleecing is being down, and outright lies (we want transparency! we love transparency!) - it's just a ridiculous banana republic we are creating. The Washington Post has on a little known tax provision that was thrown into the TARP plan in the midst of the crisis. What a crock; this shows you who was being looked after while we were treated to the dog and pony show on TV. The fact that many of these banks were the bad actors that either originated or enabled most of the chicanery infiltrating the entire US system, makes it that much more offensive. Again, you cannot create fiction like this - no one would believe you it is so over the top. This picture actually shows the reality of the situation; who is really the boss? Foxes run the henhouse - again.
    Click Here to Read the Full Article

    Source: Seeking Alpha
  • 9:46 AM » Freddie Mac posts $25.3 billion loss
    Published Fri, Nov 14 2008 9:46 AM by Reuters
    NEW YORK (Reuters) - Freddie Mac, the second-largest provider of funding for U.S. residential mortgages, said on Friday it lost $25.3 billion in the third quarter as it wrote down a tax-related asset that had buoyed its capital and the housing slump took a significant turn for the worse.
  • 9:46 AM » FDIC's Bair pushes aggressive mortgage plan
    Published Fri, Nov 14 2008 9:46 AM by CNN
    In a surprise move, FDIC Chairwoman Sheila Bair Friday unveiled details of her plan to have the government help delinquent homeowners.
  • 9:30 AM » Banks Say Plan to Guarantee Their Debt is Flawed, Ask For a Better Deal
    Published Fri, Nov 14 2008 9:30 AM by Google News
    In the wake of the Treasury Department foisting equity infusions onto nine banks, not all of which wanted or needed them, the industry has decided to get in front of these initiatives. The latest bright idea. of guarantees of bank debt, gets a thumbs down from the intended beneficiaries. But sadly, it isn't the general concept they object to, but the particular version on the table. Predictably, they want to pay less and get more. One wonders if the government bond guarantee program was designed with intent so as not to be used, but be ready in sketch form to be sweetened if conditions deteriorated further (note this plan is under the aegis of the FDIC, and Shiela Bair appears to be straightforward, but the concept was likely cooked up at the Treasury and the details negotiated with the FDIC). From : JPMorgan Chase & Co., Bank of America Corp. and Goldman Sachs Group Inc. are among banks that told the government its program to back their bonds is flawed because it doesn't have a strong enough guarantee. The Federal Deposit Insurance Corp. guarantee for repayments in default needs to be clearer, fees are too high and banks need more freedom on whether to opt in, according to a letter from law firm Sullivan & Cromwell LLP posted on the agency's Web site on behalf of nine banks.... The comments shed light on why almost a month after the government placed its guarantee behind new bank bonds, no U.S. company has yet tested the market. By contrast, under a similar program in the U.K., banks have issued the equivalent of 13.9 billion pounds ($20.6 billion) of government-guaranteed bonds..... The letter cited the U.K. program as a model because it offers ``an unconditional guarantee'' of principal and interest when due. Without a similar guarantee, U.S. banks will be ``at a significant disadvantage'' to their U.K. and European counterparts because their government-backed debt will be more expensive for borrowers and less attractive to investors...
  • 9:30 AM » Strange Case of Falling International Reserves Explored
    Published Fri, Nov 14 2008 9:30 AM by
    Inquiring minds are pondering a chart from the . As of August 2008, as you can see from the graph, International Reserves were growing at the explosive annual rate of 26.5%. Suddenly, since August, Reserves have stopped growing. .... I’ll leave you with this question: what is the significance of the drastic change in the growth-trend of International Reserves, from explosive growth, to the sudden beginning of a contraction? Hot Money Inflows The enormous growth of reserves in China are a direct consequence of billions of US dollars invested in China and deposited in Chinese banks by US supranational firms. These US firms are using Chinese contract manufacturers or US subsidiaries to produce cheap goods for the US market and elsewhere. This requires the People's Bank of China (PBOC) to buy US securities as reserves against US firms' massive bank deposits in country. Bernanke's Savings Glut In an attempt to keep its export machine humming, China is printing massive amounts of Renminbi (RMB, frequently called Yuan) to exchange for dollars so as to suppress the value of the RMB. Printing RMB to buy dollars hardly constitutes "savings". Yet amazingly in June, 2008 in China and emerging markets. Diversification Calls Revisited Most do not understand that the PBOC needs to hold US$ reserves against the massive amount of US firms' deposits due to the lack of direct convertibility of the Renminbi. The Chinese banking system is too immature/fragile to deal with the scale of direct hot money flows that would otherwise occur were the Chinese currency directly convertible. It is arguable that the banking system has not done well with backdoor money flows via Hong Kong and elsewhere, which was the primary driver of the recent Shanghai bubble and crash. Remember all those calls for China to diversify out of the dollar into Euros, Australian dollars, Swiss Francs, Canadian Loonies, New Zealand dollars etc? The reason China didn't is because it knew that...
    Click Here to Read the Full Article

  • 9:17 AM » Paulson Defends Federal Financial Rescue Effort
    Published Fri, Nov 14 2008 9:17 AM by The Big Picture
    Treasury Secretary Henry Paulson defended the changes made to the $700 billion rescue plan aimed at helping consumers. He told the NewsHour he never expected it to lead to a quick recovery of bank lending. click for video > Source : U.S. TREASURY DEPARTMENT THURSDAY, NOVEMBER 13, 2008
    Click Here to Read the Full Article

    Source: The Big Picture
  • 9:16 AM » FDIC Guarantee: More Toxic Than the Target Itself
    Published Fri, Nov 14 2008 9:16 AM by Seeking Alpha
    submits: If you are figuring out why a good thirty days after the US government officials announced bank debt guarantees no issuer has tapped the marketplace, the Federal Deposit Insurance Corporation's Interim Rule (posted on the agency's website) is a self-explanatory document. By all accounts, at least ten major financial institutions are not going to engage the FDIC any time soon. Earlier this week, General Electric (GE) revealed that it had reached an insurance arrangement with the FDIC for $139 billion of short-term and longer-term debt; but GE may want to scrutinize the Interim Rule once again from the perspective of objections raised by Credit Suisse (CS) and by a law firm representing nine financial institutions (Sullivan & Cromwell letter, FDIC website).
    Click Here to Read the Full Article

    Source: Seeking Alpha
  • 9:15 AM » Portfolio Cover: After the Fall
    Published Fri, Nov 14 2008 9:15 AM by The Big Picture
    There is a long-but-worth it article () in Portfolio by Michael Lewis, who traces the arc from Liar’s Poker to the End of Wall Street. Before you turn in fear of yet another Magazine Cover Indicator, be aware of one thing: The prostrate bull on the cover of the magazine does not represent,a s you may have guessed, the stock market. What Lewis is declaring dead is the old way Wall Street used to do business. When I published my book, the 1980s were supposed to be ending. I received a lot of undeserved credit for my timing. The social disruption caused by the collapse of the savings-and-loan industry and the rise of hostile takeovers and leveraged buyouts had given way to a brief period of recriminations. Just as most students at Ohio State read Liar’s Poker as a manual, most TV and radio interviewers regarded me as a whistleblower. (The big exception was Geraldo Rivera. He put me on a show called “People Who Succeed Too Early in Life” along with some child actors who’d gone on to become drug addicts.) Anti-Wall Street feeling ran high—high enough for Rudy Giuliani to float a political career on it—but the result felt more like a witch hunt than an honest reappraisal of the financial order. The public lynchings of Gutfreund and junk-bond king Michael Milken were excuses not to deal with the disturbing forces underpinning their rise. Ditto the cleaning up of Wall Street’s trading culture. The surface rippled, but down below, in the depths, the bonus pool remained undisturbed. Wall Street firms would soon be frowning upon profanity, firing traders for so much as glancing at a stripper, and forcing male employees to treat women almost as equals. Lehman Brothers circa 2008 more closely resembled a normal corporation with solid American values than did any Wall Street firm circa 1985. Here’s the cover: > > Source : Michael Lewis Portfolio, Nov 11 2008
    Click Here to Read the Full Article

    Source: The Big Picture
  • 9:15 AM » Eleven Step Financial Reform Proposal
    Published Fri, Nov 14 2008 9:15 AM by Google News
    Heizo Takenaka, who held various posts in Junichiro Koizumi's cabinet and is now director of the Global Security Research Institute at Keio University, provides a far reaching list of financial reforms. One can quibble with his count (he describes them as 11, but items one and four are two approaches to the same issue) and some of the particulars (he suggests that regulators spend more time in the private sector, which might work in Japan, where government service is prestigious, but could simply increase regulatory capture in the US, particularly since most corporate officers would see a stint in government as a means to other ends). Nevertheless, this is a good basis for departure. From the : World leaders gather on Saturday to address the global financial meltdown. They will discuss fiscal stimulus and monetary policy, and rightly so. But Japan’s bitter experience in the 1990s proves that fiscal and monetary policies are not enough. Just as important are microeconomic incentives such as rules for accounting, disclosure and compensation. Unless the micro incentives are right, the macro outcome will be wrong. In my opinion, the global financial meltdown had less to do with macro economic errors – although such errors occurred – than with distorted and in compatible micro incentives. Here are 11 reforms that will damp the tendency of financial markets to stampede. First, adjust capital adequacy ratios to restrain the lending cycle. For example, the 4 per cent target for the tier one capital ratio for banks might be raised to 8 per cent in booms but lowered to 3 per cent in recessions. Cycle-dependent capital ratios would reduce the tendency of banks to lend too generously in booms and too timidly in recessions. Second, design performance benchmarks that discourage herd behaviour. Benchmarks usually reward fund managers for their performance against a reference index. Such benchmarks can trigger bubbles or stampedes. If a stock is included in the reference index and...
  • 9:15 AM » Krugman: Return of Depression Economics
    Published Fri, Nov 14 2008 9:15 AM by Calculated Risk Blog
    From Professor Krugman: . A few excerpts: I don’t expect another Great Depression ... [but] We are ... well into the realm of what I call depression economics. By that I mean a state of affairs like that of the 1930s in which the usual tools of economic policy — above all, the Federal Reserve’s ability to pump up the economy by cutting interest rates — have lost all traction. When depression economics prevails, the usual rules of economic policy no longer apply: virtue becomes vice, caution is risky and prudence is folly. To see what I’m talking about, consider the implications of the latest piece of terrible economic news: Thursday’s report on new claims for unemployment insurance, which have now passed the half-million mark. Bad as this report was, viewed in isolation it might not seem catastrophic. After all, it was in the same ballpark as numbers reached during the 2001 recession and the 1990-1991 recession, both of which ended up being relatively mild by historical standards (although in each case it took a long time before the job market recovered). But on both of these earlier occasions the standard policy response to a weak economy — a cut in the federal funds rate, the interest rate most directly affected by Fed policy — was still available. Today, it isn’t: the effective federal funds rate (as opposed to the official target, which for technical reasons has become meaningless) has averaged less than 0.3 percent in recent days. Basically, there’s nothing left to cut. Krugman suggests a huge fiscal stimulus package on the order of $600 billion.
    Click Here to Read the Full Article

    Source: Calculated Risk Blog
  • Thu, Nov 13 2008
  • 6:36 PM » Charlie Rose: A conversation with Bill Ackman
    Published Thu, Nov 13 2008 6:36 PM by Calculated Risk Blog
    A half hour converstion with Bill Ackman of Pershing Square Capital Management:
    Click Here to Read the Full Article

    Source: Calculated Risk Blog
  • 5:33 PM » Federal Reserve Assets Increase $139 Billion this Week
    Published Thu, Nov 13 2008 5:33 PM by Calculated Risk Blog
    Some day the Fed's balance sheet will shrink ... hopefully ... but for now the assets are increasing rapidly. The assets on the Fed's balance sheet have more than doubled from under $1 trillion at the beginning of 2008 to about $2.214 trillion now. Dallas Fed President Richard Fisher last month that he expects the assets to grow to $3 trillion by the end of this year. "I would not be surprised to see them aggregate to $3 trillion—roughly 20 percent of GDP—by the time we ring in the New Year." Here is the Federal Reserve released today. Click on graph for larger image in new window. The Federal Reserve assets increased $139 billion this week to $2.214 trillion. Note: the graph shows Total Factors Supplying Federal Reserve Funds and is an available series that is close to assets. So far the graph shows Federal Reserve assets are still increasing rapidly. Fisher may be right - $3 trillion by the end of the year. The good news is the Fed marked up the value of the Bear Stearns assets to $26,949 from $26,863 million last week - an increase of $86 million!
    Click Here to Read the Full Article

    Source: Calculated Risk Blog
  • 4:46 PM » The Consumption Path under Certain Assumptions: Back of the Envelope Calculations
    Published Thu, Nov 13 2008 4:46 PM by
    Suppose by 2009Q4, GDP is 0.13% below 2008Q3 levels, real equity wealth is 35.2% below end-June levels, and real nonequity wealth is 6% below end-June levels. Further assume that the real Fed Funds rate remains at 2008Q3 levels (-2.45%). Then, the conditional estimate of 2009Q4 consumption will be 2.16% below 2008Q3 levels. This implies a 3% y/y decline in consumption by 09Q3; the only comparable instance of such a decline is 1951Q3, when consumption declined y/y by 2.3% (all percent calculations in log terms). Figure 1 depicts the path of consumption under these assumptions, and using error correction models for durables and nondurables consumption, and a AR in first differences for services consumption. Figure 1: Log real total consumption (blue) and log sum of forecasted consumption components (red), in Ch.2000$, SAAR. NBER defined recession dates shaded gray. Dashed line indicates beginning of forecast period. Source: BEA, NIPA release of 30 October, NBER, and author's calculations. Note that I have taken the expedient of adding together the chained spending series (in Chained 2000$) even though chained series do not obey additivity constraints (see ). This shortcut does not appear to do too much violence to the data, as illustrated by the small gap between the blue and red lines. Here are the disaggregated real consumption levels, in Ch.2000$. Figure 2: Real durables consumption (dark blue) nondurables consumption (pink) and services consumption (dark green), in Ch.2000$, SAAR. NBER defined recession dates shaded gray. Dashed line indicates beginning of forecast period. Source: BEA, NIPA release of 30 October, NBER, and author's calculations. The assumptions I've made for the explanatory variables are shown below. Figure 3: Log real GDP (dark blue), log real non-equity wealth (pink), and log real equity wealth (black), and alternate log real equity wealth (teal), in Ch.2000$, SAAR. NBER defined recession dates shaded gray. Dashed line indicates beginning...
    Click Here to Read the Full Article

  • 2:41 PM » Bailout Efforts Shift To Consumer Debt
    Published Thu, Nov 13 2008 2:41 PM by
    A guest post from Frank Shump. Frank is a veteran from the financial services industry, and currently authors a blog called , which documents his thoughts on money matters and his adventures in self employment. From its inception, the primary focus of the $700 billion bailout package was on businesses or, more importantly, banks and financial institutions. The plan was aimed at providing financial support to a system that had ceased to function properly, with credit markets freezing up and firms gasping for the additional capital they needed with no one willing to give it to them. Of course once the government gave them that capital it’s been . Still, it appears that and provide assistance to an entirely new demographic: Consumer debt. Treasury Secretary Henry Paulson came out today to let us know that Uncle Sam would not only be bailing out banks and other troubled lenders, but is going to (attempt) some rescuing of consumer debt firms as well. This “second stage” of the bailout, as it’s being called, officials are hoping to bring in some private money as well, which would give the bailout efforts more weight. In a surprising change in focus, Paulson said that the government will no longer be planning to buy troubled mortgage assets, which was its original intention, but will continue to examine ways to help homeowners so that they can somehow stem the tsunami of foreclosures that’s appeared in recent months to be gaining momentum. Paulson noted that “Although the financial system has stabilized, both banks and non-banks may well need more capital given their troubled asset holdings, projections for continued high rates of foreclosures and stagnant U.S. and world economic conditions, “Second, the important markets for securitizing credit outside of the banking system also need support,” he said. “Approximately 40 percent of U.S. consumer credit is provided through securitization of credit card receivables, auto loans and student loans and similar products. This market...
    Click Here to Read the Full Article

  • 2:25 PM » Keepin’ It Real Estate: Housing Crash to Reach NYC
    Published Thu, Nov 13 2008 2:25 PM by
    Constrained supply continuous demand and wealth beyond imagining: There’s a reason New York City real estate is the most expensive in the country. Easy lending a weak dollar and gobs of Wall Street money pushed already sky-high Manhattan property values into the stratosphere during the housing boom. Now finally after the rest of the country has succumbed to the housing crisis the city that never sleeps could be facing a real-estate crash of its own. According to Bloomberg commercial real-estate transactions plummeted more than 60% this year; lending has dried up and buyers have backed off. Despite all the fundamental ...
    Click Here to Read the Full Article

  • 2:25 PM » Va. Businessman Pleads Guilty to $33M Mortgage Fraud
    Published Thu, Nov 13 2008 2:25 PM by Washington Post
    A prominent Northern Virginia businessman pleaded guilty today in a case that prosecutors are calling one of the largest in a wave of nationwide mortgage frauds triggered by the decline in the housing market.
    Click Here to Read the Full Article

    Source: Washington Post
  • 12:17 PM » Campbell Survey: Home Sales to Fall Sharply in October
    Published Thu, Nov 13 2008 12:17 PM by Calculated Risk Blog
    From Campbell Surveys: Survey of Real Estate Agents Shows 19% Drop In Home Sales From September to October (no link) Stresses in the real estate market caused U.S. home sales to fall sharply between September and October, according to a national survey of more than 2,500 real estate agents conducted November 1-8. According to the survey firm, Campbell Communications, buy-side agents responding to the survey indicated a 19% drop in completed transactions between the months of September and October. Declines were especially severe for sales of non-distressed properties in states where home prices have fallen rapidly during the past year, agents indicated. For example, buy-side agents indicated a 22% decline in non-distressed sales in Florida, a 32% drop in California, and a 51% drop in Michigan. The most recent from the NAR indicated a decline in pending sales in September, but this survey suggests pending sales fell off a cliff in October.
    Click Here to Read the Full Article

    Source: Calculated Risk Blog
  • 12:17 PM » ABX Clean Sweep All-Time Lows
    Published Thu, Nov 13 2008 12:17 PM by
    You don’t hear much about the ABX and CMBX indices any longer. The last ruckus over these came about six months ago when the spinners tried to tell us that they really did not portray the true value of the market bla bla bla. Well, it looks as though Markit was accurate after all. To be honest, I don’t track these every day but do go in once a week or so. I used to post ABX prices regularly because they seemed to be a leading indicator to credit market disruptions. So I went back and reviewed this yesterday to see if Paulson’s speech yesterday abandoning the buying of distressed assets for now had any impact. Why, yes it did. The ABX made a clean sweep low yesterday. This surely does not look like a market about to be bought anytime soon. Asset prices are continuing to tumble and this market continuing its downward trajectory. All of these prices are simply amazing. -Best, Mr Mortgage Below are two charts of the above data. The top is second half 2007 AAA highest grade paper at 41.83 cents and and the second is BBB- lowest grade at 4.27. Source: More Mr Mortgage Research Posted on November 11, 2008 6:35 PM Posted on November 11, 2008 3:23 PM Posted on November 11, 2008 12:26 PM Posted on November 10, 2008 6:44 PM
    Click Here to Read the Full Article

  • 12:17 PM » AIG's Latest PR Masterpiece
    Published Thu, Nov 13 2008 12:17 PM by
    Note to the geniuses burning taxpayer dollars at American International Group (AIG): Cameras are everywhere.In AIG's latest pratfall top executives were caught slinking around a fancy resort in Phoenix despite apparent efforts to hide their presence by removing the company's logo from the conference room. Hidden poolside cameras nailed 'em as the company begged Uncle Sam for another $40 billion in loans. The resort's employees were instructed not to spill the beans by uttering the now dreaded letters: A-I-G.Suggested code word for future company junkets on the public's dime: A-S-S.AIG's muckety-mucks clearly have no sense of shame but you'd ...
    Click Here to Read the Full Article

  • 10:00 AM » Trade Deficit Declines to $56.5 Billion in September
    Published Thu, Nov 13 2008 10:00 AM by Calculated Risk Blog
    A few points from the trade report: Both imports and exports are declining. The oil trade deficit is falling sharply, and will fall much further. The petroleum deficit was just over $32 billion in September, and that was based on average oil prices of $107.58 per barrel for the month. With oil now trading in the $50s, the petroleum deficit will decline sharply in coming months. The trade deficit with China was a record $27.8 billion. The Census Bureau : [T]otal September exports of $155.4 billion and imports of $211.9 billion resulted in a goods and services deficit of $56.5 billion, down from $59.1 billion in August, revised. September exports were $9.9 billion less than August exports of $165.3 billion. September imports were $12.5 billion less than August imports of $224.4 billion. Click on table for larger image in new window. This graph from the Census Bureau shows that both imports and exports are declining. Although the trade deficit is declining - and will decline more in coming months because of the decline in oil prices - growth in export related business will probably no longer be a positive for the U.S. economy as the global economy slides into recession too. This graph shows the U.S. trade deficit through September. The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products. The current recession is marked on the graph. The oil deficits is starting to decline and will decline much further in October and November. Note that the trade deficit ex-petroleum is really a China problem now (the trade deficit with China was a record $27.8 billion in September).
    Click Here to Read the Full Article

    Source: Calculated Risk Blog
  • 9:59 AM » Bush and Obama Diss the G20 Financial Summit
    Published Thu, Nov 13 2008 9:59 AM by Google News
    The latest back-handed insult may be yet another variant of the Bush "we don't do multilateralism" syndrome. Unfortunately, as various pundits writing at the Financial Times have pointed out, the US's stranglehold on power is slipping. Even Obama in the campaign repeatedly said that a country cannot maintain military dominance if it is not a dominant economic player (the implication being the days of US as sole superpower are waning). So to recap: Bush almost offhandedly agreed volunteered to host a summit to discuss the state of the financial world, a very out-of-character gesture. The most convincing explanation was that it was in response to a request by Nicolas Sarkozy, who has been very keen to strengthen international regulation, and has also been particularly helpful to the US president. Since the time Bush picked (November 15) was after the elections, it was a bizarre gesture. Was this to pressure a new Administration into formulating views before they were ready (Bush had made it clear that the President elect would participate). China, separately, started saber-rattling to include the currency regime in the discussions, which was not part of the original game plan (and note further that the noises out of China on the dollar have been schizophrenic, which suggests, at best, that opposed camps are in a major power struggle, or at worst, China has badly conflicted objectives, as in they want to keep the yuan weak but are uncomfortable with buying more dollar assets, which is precisely what they have to do to pursue that strategy). So the US's face saving expedient is to downgrade the summit. Obama is sending representatives who are clearly peripheral players; Paulson is now effectively saying that this session will not accomplish much: This weekend provides an opportunity for nations to take an important step, but only one step, on the necessary path to reform. That sounds like the MOST they get to do is agree on the agenda for future meetings...
  • 9:58 AM » "Financial System May Need $1 Trillion"
    Published Thu, Nov 13 2008 9:58 AM by Google News
    Last night, we posted a on the unraveling of Iceland that (among other things) said that the problem was that the financial sector had gotten so large that the government could not possibly rescue it. The author made a comment in passing that indicated he thought this was not a problem shared by other European countries; several alert readers said that both Switzerland and Germany have disproportionately large financial sectors. And the numbers needed for rescues just keep getting bigger and bigger. The latest estimate comes . And this is just for a US rescue. This does not count the cost of bank salvage operations in other countries, nor does it allow for the cost to the US of lending assistance (unlimited dollar swap lines, rescuing AIG, which has among other things, provided guarantees to European banks that allowed them to circumvent minimum capital requirements): The U.S. government's $700 billion bailout fund is unlikely to be enough, with the financial system needing more than $1 trillion to get through the crisis, two of Wall Street's top dealmakers said on Wednesday. The global crisis appears to have passed its most intense phase, seen around the time of the collapse of Lehman Brothers Holdings Inc in September, but financial institutions still face losses in the fourth quarter and early next year as the economy and credit quality deteriorate, said Gary Parr, deputy chairman of investment bank Lazard Ltd. Parr was speaking on a panel along with H. Rodgin Cohen, chairman of law firm Sullivan & Cromwell, at The Deal's M&A Outlook 2009 conference in New York. "You saw the problems of the financial services industry start to play over into the broader economy," Cohen said. "Now, we are going to see the reverse trend, with the broader problems in the broader economy moving back into the financial services industry." Parr said the financial system had run out of a cushion to deal with further losses. "The government's...
  • 9:57 AM » Everything is Deflating, Not Just House Prices
    Published Thu, Nov 13 2008 9:57 AM by
    Another guest post from MG Dungan who went from Wharton to Wall St. to real estate to Blown Mortgage. There is considerable discussion as to whether we are in, or entering into, a period of inflation or deflation. It’s important to know which one it is and why, to be able to plan effectively. It’s deflation, and we’re already in it. The simplest working definition of inflation and deflation is an expansion of the supply of money and credit in the case of inflation. Deflation is the opposite, a contraction of money and credit. Despite recent price surges in food and oil, prices are declining across the board, and even those two headline-inflation items are down from recent highs. An interesting explanation of how this happens is on : If the price of a good goes up (in the absence of an increase in the money supply), consumption must be reduced on some other good. This sounds more like common sense than economic theory, especially after the recent run up in gasoline prices. The rule of thumb in deflationary environments is cash is king. This is no time for major purchases or unnecessary expenditures. Why buy today when the price will be lower tomorrow? Stock Markets Here’s what’s been happening in the Dow for the trailing 12 months. This performance has had dire consequences throughout the economy. As one example, at the beginning of October, retirement plans had lost as much as $2 trillion — or about 20% — over a15 month period, according to Congress’s top budget analyst .“The upheaval that has engulfed the financial industry and sent the stock market plummeting is devastating workers’ savings, forcing people to hold off on major purchases and consider delaying their retirement,” said Peter Orszag, the head of the Congressional Budget Office. Savings across the board, even Harvard’s endowment, have taken a hit. The US markets haven’t been the worst performers. “World equity markets lost an estimated $5.79 trillion during October, the biggest monthly loss ever,” according...
    Click Here to Read the Full Article

  • 9:56 AM » Prosecutors Going after Fraudulent Mortgage Borrowers
    Published Thu, Nov 13 2008 9:56 AM by Seeking Alpha
    submits: From Inside Mortgage Finance: While lenders are coming under increased pressure to help borrowers avoid foreclosure, the U.S. Attorney in San Francisco has launched an effort to pursue fraud cases against subprime borrowers who lied on their loan application.
    Click Here to Read the Full Article

    Source: Seeking Alpha
  • 9:56 AM » Behind BofA's Countrywide cleanup
    Published Thu, Nov 13 2008 9:56 AM by CNN
    Talk about being where the action is: Ground zero for today's financial crisis is the business of home mortgages, and Bank of America's Barbara Desoer oversees the biggest collection held by any financial institution in the U.S.
  • 9:56 AM » BlackRock CEO says sees some healing in credit markets: report
    Published Thu, Nov 13 2008 9:56 AM by Reuters
    (Reuters) - BlackRock Inc CEO Fink said on Thursday "we are starting to see some healing in the credit markets," in an interview on CNBC. Highlights:
  • Wed, Nov 12 2008
  • 6:20 PM » Whitehead: "Worse than the Depression"
    Published Wed, Nov 12 2008 6:20 PM by Calculated Risk Blog
    Upping the ante on JPMorgan's CEO Dimon and Merrill's CEO Thain (see previous post), former Goldman Sachs chairman John Whitehead is quoted as saying the current slump will be worse than the Great Depression! From Reuters: (hat tip Rex Nutting) The economy faces a slump deeper than the Great Depression and a growing deficit threatens the credit of the United States itself, former Goldman Sachs chairman John Whitehead ... "I think it would be worse than the depression," Whitehead said. "We're talking about reducing the credit of the United States of America, which is the backbone of the economic system. ... I see nothing but large increases in the deficit, all of which are serving to decrease the credit standing of America. ... I just want to get people thinking about this, and to realize this is a road to disaster. I've always been a positive person and optimistic, but I don't see a solution here." So far most of the Great Depression discussions have been phrased in terms of "worst since". Whitehead has taken the next step - however I think "worse than" is extremely unlikely.
    Click Here to Read the Full Article

    Source: Calculated Risk Blog
  • 4:55 PM » Cramer: Why It's Important to Watch Wells Fargo
    Published Wed, Nov 12 2008 4:55 PM by CNBC
  • 3:45 PM » Frank Vs. Paulson: Just Who Has It Right On Mortgage Defaults?
    Published Wed, Nov 12 2008 3:45 PM by CNBC
    Posted By: So here I am on Capitol Hill covering a hearing at the House Financial Services Committee (starring Chairman Barney Frank D-MA), entitled Private Sector Cooperation with Mortgage Modifications—Ensuring That Investors, Servicers, and Lenders Provide Real Help for Troubled Homeowners. Topics: | | | | | Sectors: | MEDIA: |
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