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A New York Nightmare

Wall Streeters and New Yorkers, you may want to skip reading the following post if you don’t want to ruin a good day. Reuters’ Joan Gralla reported Monday:

New York Gov. David Paterson on Monday said Wall Street might lay off 40,000 workers in a worst-case scenario following Lehman Brother’s bankruptcy filing and problems at other big financial firms…

New York’s banks and brokerages generate one of every five tax dollars in the state. The state’s budget is already suffering from declines on Wall Street, and Paterson last month had said that tax revenues would be hurt by declines in Wall Street bonuses.

Paterson, who got lawmakers to cut the state’s budget by more than $400 million in August in an emergency session, on Monday said he might have to recall lawmakers again, saying he would not be surprised if the deficit spiraled back up.

In addition to job cuts on Wall Street, Paterson said as many as 120,000 jobs might be cut if positions in service industries that rely on Wall Street are included…

Financial sector jobs help create as many as four other positions in services ranging from legal to sales, according to Ross DeVol, director of regional economics, for the Santa Monica, California-based Milken Institute.

Gralla also noted that:

Bankers, brokers and traders earned an average salary and bonus of $340,312 a year in 2006, according to James Brown, a labor market analyst with the state Labor Department…

Wall Street’s job force totaled 181,000 in July, which was down 11,000 from July 2007, Brown said. Employment on Wall Street peaked at 200,300 in December 2000.

Sounds like there’ll be a lot of used Maseratis for sale soon…

For Sale (model not included)

Source:

“NY gov sees Wall St losing up to 40,000 jobs”
Joan Gralla
Reuters, September 15, 2008

New York State Faces Worst Economic Hardship Since Great Depression

New York Governor David Paterson appeared on CNBC earlier today and warned that the state of New York is facing its worst economic hardship since the Great Depression. As a result of the crisis, New York state lawmakers were gathering for an emergency session. According to Governor Paterson:

• The state of New York is forecasting that Wall Street bonuses will be slashed 20% and capital gain losses will amount to 24% for the year.
• Governor Paterson’s “personal fear” is that investment bank and brokerage bonuses will be slashed by up to 40%, and capital gains reduced by the same amount.
• Wall Street supplies New York with one out of every five tax dollars.
• The state of New York could potentially lose $1.7 billion from slumping profits on Wall Street.

The New York governor told CNBC:

This is a combination of events. I wouldn’t compare it to the Great Depression, but I can’t cite a time since that period where we have had this amount of stress on our economy.

Paterson pointed out just how bad the financial situation is:

In June 2007, the sixteen banks that pay the most taxes on their corporate earnings remitted $173 million dollars to the New York state treasury. This June, those same sixteen banks paid $5 million. That’s a 97% decrease over last year. I don’t know if people really are getting how severe this problem is in New York and the ancillary effect it will have on the rest of the states, and even our federal economy.

You can view the 8 minute 33 second interview here.

Even Worse Than King Kong

Source:

“NY State’s Economic Emergency”
CNBC, August 20, 2008

Credit Crisis Far From Over For Financial Sector

Bank and securities firm write-downs since the beginning of 2007 now total $503 billion. And yet, a number of analysts are saying that the carnage is far from being done. Bloomberg’s Jeff Kearns wrote earlier today:

The credit crisis is “broad, deep, and global” and “far from over” for financial companies even after they reported $500 billion in writedowns and credit losses, Merrill Lynch & Co.’s chief investment strategist said.

“Investors are significantly underestimating both the scope and the extent of the credit bubble and the consequences of its subsequent deflation,” Richard Bernstein wrote in a note to clients. “The problems are not confined to large institutions that are overexposed to U.S. subprime loans.”

The lingering effects of the crisis mean banks and brokerages need “massive” consolidation because of the glut of lending worldwide, Bernstein said.

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Sources:

“Bank Debt Risk Rises as Writedowns, Losses Exceed $500 Billion”
Shannon D. Harrington and Abigail Moses
Bloomberg, August 13, 2008

“Credit Crisis Still ‘Far From Over,’ Merrill’s Bernstein Says”
Jeff Kearns
Bloomberg, August 13, 2008

Write-Downs Approach $500 Billion, With More To Come

According to Bloomberg today, the world’s biggest banks and brokerages have reported $497 billion of write-downs since the start of 2007.

And the end is nowhere in sight, according to CNN Money’s Paul R. La Monica. The editor-at-large wrote this morning:

Make no mistake: The worst probably is not over for financial firms. Not by a long shot.

Many bank stocks have bounced sharply from their panic-induced lows of mid-July on hopes that the bleak second-quarter results represented the bottom.

But the bigger-than-expected losses reported by Freddie Mac and Fannie Mae this week, accompanied by dismal forecasts for the housing market, are strong indicators that there are likely more credit-related woes to come.

“The banks are still at the mercy of writedowns. I don’t think the worst is over for financials yet,” said Liz Ann Sonders, chief investment strategist with Charles Schwab & Co.

The International Monetary Fund forecasts that global losses tied to the credit crisis will be $945 billion. It’s a widely used number, but Sonders thinks it’s “potentially very conservative.”

So how high could losses go? Sonders points to the $1.6 trillion forecast from hedge fund firm Bridgewater Associates or even the $2 trillion number from Nouriel Roubini, the highly-respected professor of economics at NYU’s Stern School of Business.

And based on the losses already reported, we’re not even halfway through the crisis.

Source:

“$1 trillion in losses? Bank on More”
Paul R. La Monica
CNN Money, August 8, 2008

Top Credit Analysts Say Housing Decline Could Amount To $4 Trillion In Lost Capital

So far, credit crunch talk has revolved mainly around losses in the billions of dollars. No more. Reuters’ Walden Siew wrote today:

No one knows when the credit crisis will end.

But when it does, U.S home prices may have lost a third of their value, high-yield bond valuations will hit levels close to those seen during the last recession, and what may amount to $1 trillion of Wall Street losses may translate into almost $4 trillion of lost access to capital.

That’s the view of top credit analysts, who say a U.S. housing decline, sparked last year by subprime mortgage debt defaults, will likely last another two years as a wider group of consumers, including prime borrowers, feel the pinch from a tightening of credit.

Siew interviewed Peter Acciavatti, a credit analyst and managing director at JP Morgan Securities Inc. The analyst informed him that:

• Wall Street write-downs and losses totaling at least $325 billion to date may ultimately mean $3.9 trillion in tighter credit conditions
• U.S. home prices may keep on falling until 2010, declining as much as 30% from their 2006 peak
• Further drops in subprime mortgage debt markets are expected
• High-yield corporate bond default rates, now at 0.75% from 0.34% at the beginning of 2008, may climb to 2.25% later this year and jump to 6.5% in 2009

Glenn Costello, a Fitch Ratings managing director, also said that there will be more defaults and delinquencies for U.S. home mortgages, with the highest default rates coming from mortgages originating in the last few years. The senior analyst warned:

There are a lot more mortgage defaults to come. We see an ongoing high level of default.

Source:

“Home price drop means $4 trillion in lost capital”
Walden Siew
Reuters, June 11, 2008

Write Downs, Credit Losses Approach $400 Billion Mark

From Bloomberg yesterday:

The biggest banks and securities firms have booked about $387 billion of writedowns and credit losses since the beginning of last year, as the collapse of the U.S. housing market led to losses on securities tied to the value of home prices.

Source:

“Wachovia’s Thompson Joins Prince, O’Neal Toppled by Subprime”
Peter Robison
Bloomberg, June 3, 2008

Wall Street Strategists Warn Of ‘Credit Recession’ Lasting More Than Two Years

Earlier today, some Wall Street strategists sounded the alarm over a “credit recession” which may last more than two years and result in a massive consolidation of the U.S. financial sector. Reuters’ Jennifer Ablan, Dena Aubin, and Walden Siew reported:

The fallout from deteriorating subprime mortgages and the broader housing and credit crisis will eventually lead to a healthier market, but not until after a prolonged purging process, Jack Malvey, Lehman Brothers Holdings Inc’s chief global fixed-income strategist, said in New York.

“We’re going through a tough spell with regard to credit,” Malvey said at a Securities Industry and Financial Markets Association conference.

The “subprime debacle” due to years of excess and easy credit will be followed by years of tight credit, Malvey said…

“This is the biggest blowup that we’ve had,” the strategist said.

Richard Bernstein, chief investment strategist at Merrill Lynch, told Reuters that in the last market cycle downturn, about 25% of financial firms (including brokers, banks, and asset managers) “went away,” referring to bankruptcies or mergers and acquisitions. To date, only 7% of financial firms have suffered this fate. He was also critical of proposed remedies for the housing crisis. From the Reuters piece:

Bernstein also faulted U.S. government proposals to broadly modify U.S. mortgages, which may create a “moral hazard” that encourages future risky behavior, he said.

“Washington is misguided in focusing on mortgages,” Bernstein said. The federal government should focus on “job creation and people keeping their jobs,” Bernstein said. “That is the key to rectifying this situation.”

Source:

“U.S. subprime debacle may spark 2-year credit recession”
Jennifer Ablan, Dena Aubin, Walden Siew
Reuters (India), June 4, 2008

Damage Report: $232 Billion In Credit Losses And Write-Downs

According to Bloomberg’s Shamim Adam today, the damage from credit losses and write-downs in the financial sector has now surpassed $200 billion. Adam wrote:

The world’s biggest financial companies have reported about $232 billion in credit losses and writedowns since the start of 2007, data compiled by Bloomberg show. UBS AG said yesterday it will have $19 billion more writedowns on assets related to mortgage assets, and Deutsche Bank AG reported $3.9 billion of further value reductions.

That’s prompting banks to stop lending to all but the safest borrower, undermining consumer spending and business investment.

And now, home equity loans may be the next culprit in the ongoing U.S. financial crisis. Riley McDermid of MarketWatch Pulse wrote on the FOXBusiness website today:

Analysts for Deutsche Bank said Wednesday that they expect six large U.S. brokers and banks to lose as much as $50 billion in the first six months of 2008 because of rising problems related to home equity loans. Analysts slashed estimates for Merrill Lynch, Lehman Bros., Fifth Third Bancorp, National City, KeyCorp and Suntrust Bank accordingly. Deutsche Bank attributed the expected losses to “an acceleration in home price declines, lower indices and possibly newer issues with monolines, such as problems with insurance on home equity securitizations.”

Sources:

“IMF Cuts Global Forecast on Worst Crisis Since 1930s (Update 3)”
Shamim Adam
Bloomberg, April 2, 2008

“Analysts: Banks Could Lose $50 Bil. On Home Equity Loans”
Riley McDermid
FOXBusiness, April 2, 2008

Goldman Sachs Predicts $460 Billion In Credit Losses

According to Bloomberg today, Goldman Sachs Group Inc. said Wall Street institutions are now looking at $460 billion in credit losses stemming from the subprime mortgage debacle. Bloomberg’s Zhao Yidi wrote:

“There is light at the end of the tunnel, but it is still rather dim,” Goldman analysts including New York-based Andrew Tilton said in a note to investors today. They estimated that residential mortgage losses will account for half the total, and commercial mortgages as much as 20 percent.

On February 29, USA Today reported that research by Goldman Sachs economist Jan Hatzius and others showed total credit losses from the mortgage meltdown could total nearly $400 billion.

Bloomberg’s Yidi added:

Goldman said the $460 billion in credit losses it foresees may “result in a substantial tightening in credit conditions as these institutions pull back on lending to preserve their reduced capital and to maintain statutory capital adequacy ratios.”

Besides residential and commercial mortgage losses, it was noted:

Credit-card loans, auto loans, commercial and industrial lending and non-financial corporate bonds make up the rest of the $460 billion in credit losses.

As I write this, one of the financial news websites is running a story with the headline “Credit Disaster? Maybe It’s Not So Bad After All.” Yet, Goldman Sachs isn’t alone in their predictions for total credit losses dwarfing the amount disclosed to date. In a post from February 29 I talked about how analysts from UBS AG, Europe’s second largest bank, were predicting total industry losses from the ongoing credit crunch would reach $600 billion, with banks and brokers accounting for $350 billion of these losses.

Sources:

“Wall Street May Face $460 Bln in Losses, Goldman Says (Update1)”
Zhao Yidi
Bloomberg, March 25, 2008

“Credit losses from mortgage crisis could hit $400B”
Sue Kirchhoff
USA Today, Febraury 29, 2008

For Whom The Bell Tolls

The first in a new “series” on Boom2Bust.com, similar to “Signs Of The Time” and “Weird Housing Tales.”

Bloomberg’s Yalman Onaran tallied up the job losses so far on Wall Street since July 2007, when securities firms started letting go mortgage-related personnel:

Firm & Positions Cut
Citigroup 6,200
Lehman Brothers 4,990
Bank of America 3,650
Morgan Stanley 2,940
Washington Mutual 2,600
Merrill Lynch 2,220
HSBC 1,650
Bear Stearns 1,550
WestLB 1,530
UBS 1,500
Goldman Sachs 1,500*
National City 900
Credit Suisse 820
Royal Bank of Canada 500
Fortis 500
Wells Fargo 500
Wachovia 443
Deutsche Bank 370
JPMorgan Chase 100
_____
TOTAL 34,463 positions lost

Some company names have been abbreviated.

*Goldman Sachs said on January 25 that its job cuts reflected the firm’s policy of weeding out underperformers.

Onaran noted that after the Internet bubble burst, 39,800 jobs were eliminated during the same period. The Securities Industry and Financial Markets Association said this number climbed to 90,000 over the next two years. Jo Bennett, a partner at New York-based executive search firm Battalia Winston International, told Bloomberg:

This crisis is much worse than 2001 and we don’t know how long it’s going to last.

She added that job cuts “could be more than 100,000 in a few years,” as a number of Wall Street firms “haven’t fully disclosed their job cuts because they don’t want to appear financially weak.”

Source:

“Wall Street Firms Cut 34,000 Jobs, Most Since 2001 Dot-Com Bust”
Yalman Onaran
Bloomberg, March 24, 2008

All Rhyme, No Riddle For U.S. Economy?

I’ve always been a student of history. Even when I was a child, I loved reading about history so much that I needed permission at my local library to access the “adult” section with its shelves full of historical texts (and no, it wasn’t that adult section). In fact, upon satisfying the coursework requirements for my major in college, I decided to complete the requirements for a history major as well. Yet, through all these years, one particular observation sticks out. The American writer Mark Twain described it best when he declared:

History doesn’t repeat itself, but it does rhyme.

And what I’m seeing, or to be more specific, what I’m hearing, causes me a great deal of concern. I’m starting to wonder, is history starting to rhyme when it comes to the direction of the U.S. economy? If so, the prognosis doesn’t look very good.

The Associated Press’s Jennifer Loven wrote on Tuesday:

And remember Herbert Hoover, infamous for presiding over the onset of the Great Depression? History has slapped him with a laissez-faire legacy even though his administration acted aggressively to try to avert that economic meltdown.

Hoover’s reputation was built in part on remarks viewed as too rosy. “The problem is not at all insurmountable in the long run,” he said on Oct. 6, 1930, as unemployment, poverty and desperation climbed…

Even so, here was Bush making brief remarks to reporters on Monday morning after meeting with his economic advisers: “In the long run, our economy is going to be fine.”

Sound familiar? How about the following? From the CNBC website today (with “rhyming” statements in italics):

After the Federal Reserve’s aggressive moves this week to ease the credit crunch, some on Wall Street are starting to wonder if the worst is finally over.

Well-known banking analyst Richard Bove even delivered a report on the financial sector Thursday with the bold heading, “The Financial Crisis Is Over.”

Bove, of Punk Ziegel, admitted in the note that such a proclamation “sounds ridiculous,” but he genuinely believes the crisis is over.

Hysteria has now disappeared from Wall Street.
-The Times of London, November 2, 1929

“There will be more negative developments, but they will be meaningless,” Bove wrote.

In most of the cities and towns of this country, this Wall Street panic will have no effect.
-Paul Block (President of the Block newspaper chain), editorial, November 15, 1929

Later, in an interview on CNBC, Bove said: “I’m convinced that all the signs that you would want to see that would tell you that this thing is over are there. And this is over.”

Financial storm definitely passed.
-Bernard Baruch, cablegram to Winston Churchill, November 15, 1929

Bove said last weekend’s rescue of Bear Stearns was the watershed event that heralded the end. “This event sent so much fear through the market that action was taken,” Bove wrote, calling the Fed’s actions, “innovative, dramatic, and… brilliant.”

I am convinced that through these measures we have reestablished confidence.
-Herbert Hoover, December 1929

Is it just a coincidence that all the italicized statements were made during the panic that followed the U.S. stock market crash of October 1929?

According to CNBC, Art Cashin, director of floor operations for UBS Financial Services, remarked:

I admire a courageous call by Dick Bove. I’m not sure we’re totally out of the woods.

I don’t know about you, but it kind of sounds like Cashin was really trying to say, “I would never risk my reputation or job on such a brash statement.”

You can fault Wall Street for a lot of things, but when it comes to remembering bad calls, they make elephants look scatter-brained.

Sources:

“Analysis: Bush Plays Cheerleader Role”
Jennifer Loven
Associated Press, March 18, 2008

“Is the Financial Crisis Over? Some Believe It May Be”
CNBC, March 20, 2008

The Fed And Bear Stearns: Moral Hazard Or Crisis Mitigation?

Earlier today, Greg Ip from the Wall Street Journal’s Economic Blog picked up on former Federal Reserve Chairman Paul Volcker’s appearance on the “Charlie Rose Show” last night. Volcker, who I talked about in a post back on January 18 and who is credited with ending the rampant inflation of the 1970s by aggressively tightening monetary policy (for which he was greatly criticized in some quarters at the time), talked about JPMorgan Chase’s Fed-financed buyout of Bear Stearns, the 85-year-old global investment bank and securities trading/brokerage firm. Ip wrote in a post this morning:

Former Federal Reserve Chairman Paul Volcker said the Fed’s decision to lend money to Bear Stearns Cos. to keep it from collapsing is unprecedented and “raises some real questions” about whether that’s the appropriate role for the Fed. The wisdom of the decision depends on “how severe this crisis was and their judgment about the threat of demise of Bear Stearns,” Mr. Volcker said on the Charlie Rose Show on Tuesday evening. “That’s a judgment they had to make and an understandable judgment.” It is “absolutely” not “what you want for the longstanding regulatory support system.”

According to Bloomberg’s Caroline Baum yesterday, while the act reeked of a bank bailout, the Fed saw it necessary to prevent what they perceived as a financial crisis should the bank collapse. Baum wrote:

When the central bank said Friday it would provide funding to Bear Stearns via JPMorgan… it had “moral hazard’” written all over it. The Fed, in bailing out a major financial institution, was encouraging risky behavior in the future…

Bear Stearns was too big to fail, too weak to continue operations, and too intertwined with counterparties to go down without causing serious collateral damage. It was the judgment of Fed policy makers that the risk to the national economy from a margin spiral was greater than the appearance of bailing out a bank.

In retrospect, it seems that the too-big-to-fail bank served as a sacrificial lamb, held out (hung-out?) as an example.

“The Fed let JPMorgan steal Bear Stearns because it needed cover for the putative moral hazard in keeping the system afloat,”’ said Paul DeRosa, a partner at Mt. Lucas Management Co. “For macro reasons, the Fed had no alternative.”

Source: Minyanville

Sources:

“Volcker: Fed’s ‘Extreme’ Intervention ‘Raises Some Real Questions’”
Greg Ip
Wall Street Journal (Economics Blog), March 19, 2008

“Ask Bear Stearns Stockholders About Moral Hazard”
Caroline Baum
Bloomberg, March 18, 2008

UBS Predicts $600 Billion Loss From Credit Crunch

On Friday it was reported that analysts from UBS AG, Europe’s second largest bank, were predicting total industry losses from the ongoing credit crunch would reach $600 billion, with banks and brokers accounting for $350 billion of these losses. MarketWatch’s Steve Goldstein said earlier today that financial firms have been forced to write-down approximately $160 billion since the crisis began last summer. Goldstein wrote that, according to UBS strategist Geraud Charpin’s note to clients:

Corporate collateralized debt obligation have been relatively spared because defaults are low and CDOs are not mark to market, but risks remain, particularly as monoline insurers are heavily referenced in CDO baskets.

In today’s “Daily Briefing,” Fortune’s Colin Barr noted that:

The comment comes a day after insurance giant AIG (AIG) took an $11 billion hit on its portfolio of credit default swaps and government-sponsored mortgage lender Freddie Mac (FRE) took $3.1 billion in writedowns on its credit guarantee and derivatives holdings. UBS itself was hit with a $14 billion writedown on mortgage-related securities earlier this month…

“Leveraged risk positions are a cancer in this market, wrote UBS analyst Geraud Charpin, “and the sooner it is treated the better.”

According to CNN Money, the world’s largest manager of private wealth assets is concerned most underestimate the impact of the credit crunch:

The bank also noted that the crisis’ impact on the real economy is likely to be stronger than currently expected.

‘To cut a long story short, if we had a ‘rhetoric index’ measuring the tone of messages from our economics team, it would have been dropping since last September,’ the study said.

UBS said the downward trend has accelerated over the last few months with both US and EU data becoming increasingly worrisome.

‘At this stage, therefore, we have to recognise the risk that the economy will suffer more damage than what consensus suggests,’ UBS said.

No Sympathy For Wall Street

“Shanna, they bought their tickets, they knew what they were getting into. I say, let ‘em crash.”

-Airplane! (American comedy film. 1980)

I have this strange feeling that Washington Post columnist Steven Pearlstein is not Wall Street’s biggest fan. Maybe it has something to do with his piece from this morning entitled “Time for Wall Street to Pay,” in which he wrote:

I’d be lying if I didn’t admit there’s part of me that takes some perverse satisfaction from the ever-widening crisis that has engulfed Wall Street, humbling its most powerful institutions and exposing its hypocrisy and corruption.

Pearlstein was just getting started:

Over the ensuing two decades, Wall Street has been brilliant at dreaming up other financial innovations that picked up where junk bonds left off. These included complex futures and derivatives contracts; loan syndication; securitization; credit default swaps; off-balance-sheet vehicles; collateralized debt obligations, or CDOs; and blank-check initial public offerings.

As the industry and its cheerleaders constantly remind us, these innovations have helped to lower the cost of capital and make the business sector more efficient and globally competitive. But what we are now discovering — or perhaps rediscovering — are all the ways in which all this glorious financial innovation has weakened the economy and the society it serves.

Pearlstein listed how Wall Street’s “innovations” have taken their toll on America and its economy:

For starters, these innovations have helped to create a cycle of financial booms and busts that have a tendency to spill over into the real economy, contributing to a heightened sense of insecurity.

They have shortened the time horizons of investors and corporate executives, who have responded by under-investing in research and the development of human capital.

They have contributed significantly to massive misallocation of capital to real estate, unproven technologies and unproductive financial manipulation.

They have made it easy and seemingly painless for businesses, households and even countries to take on dangerous levels of debt.

They have given traders a greater ability to secretly manipulate markets.

They have given corporations clever new tools to hide risks, liabilities and losses from investors.

And by giving banks the tools to circumvent reserve requirements and make more loans with less capital, they have enormously increased the leverage in the financial system and with it the risk of a financial meltdown.

But far and away the greatest damage from all this financial wizardry is the obscene levels of compensation it has generated for a select group of Wall Street executives and money managers.

Regarding this last point, Pearlstein warned that because “huge bonuses paid in the good years are never required to be paid back in the bad years,” this creates an “asymmetric compensation system that encourages excessive leverage and risk-taking.” Furthermore, he lamented at the fact that the prospect of earning untold wealth on Wall Street has attracted “an enormous amount of young talent that could have been more productively used in science, engineering, medicine, teaching, public service and businesses that generate genuine long-term value.” He asked:

Is it not fair to ask whether the United States can remain the world’s most prosperous and innovative economy when half of the seniors at the most prestigious colleges and universities now aspire to become “i-bankers” at Goldman Sachs?

At which point, Pearlstein went nuclear:

So I hope you’ll forgive me, dear readers, when I say that the best thing that could happen to our economy is for a dozen high-profile hedge funds to collapse; for investment banking to enter a long, deep freeze; for a major bank to fail; and for the price of a typical Park Avenue duplex to fall by 30 percent. For only then might we finally stop genuflecting before the altar of unregulated financial markets and insist that Wall Street serve the interest of Main Street, rather than the other way around.

Yes, I know it’s harsh and vengeful solution, and there will be lots of collateral damage. But as I look out over the destruction sweeping across the financial sector, I just can’t silence the small voice in my head that keeps repeating that old ‘60s expression, “Burn, baby, burn.”