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Weekend Videos

Just got back to blogging late Friday evening. Had to entertain my relatives from Canada who are in. Like the Irish a couple of weeks ago, they shopped liked it was Christmas in July to take advantage of the weaker dollar. I know one thing for sure. Foreigners sure love our “strong dollar” policy…

“Oil Crisis”
Becky Quick
CNBC, July 18, 2008

From the CNBC website:

The House may vote on releasing oil from the strategic petroleum reserve, with Senate Majority Leader Harry Reid and CNBC’s Becky Quick.

You can view the 3 minute 18 second video here.

Note to Congress- there is no quick-fix for the energy crisis. I’m starting to consider donating funds to Jim Puplava’s proposed program, “No Congressman Left Behind.”

Apparently, it’s a non-issue now anyway, seeing that after oil prices suffered their biggest weekly drop ever, Yahoo! Finance asks tonight, “So is it time to declare the energy bubble popped?” By the way, the Associated Press is reporting that terrorists are trying to enter the United States with European Union passports. Good thing Congress wants to deplete oil stockpiles meant for a national emergency. Like a major terrorist attack, for example. If you think 9/11 was a one-off event, I have a bridge that spans the East River out in NYC that I can sell you for a really good price…

“Is government clueless about economy”
Jim Jubak
MSN Money, July 18, 2008

From the MSN Money website:

Washington is talking us into a deeper crisis. Neither the President nor Congress gets it: When you owe as much as the US does, keeping your overseas creditors happy is the most important thing, says Jim Jubak.

You can view the 4 minute 7 second video here.

Jubak said in the segment:

The Saudi government has gone into serious discussions about taking its currency off the dollar peg.

“Christmas In July”
The Dandy Warhols, “Little Drummer Boy” (1995)
YouTube Video Link

Half Of Wall Street Bank Profits Up In Smoke

What a difference a year makes. Louise Story of the New York Times wrote today:

Only a year ago, Wall Street reveled in an era of superlatives: record deals, record profit, record pay. But a mere 12 months later, nearly half of the profits that major banks reaped during that age of riches have vanished.

The numbers are staggering. Between early 2004 and mid-2007, a period of unprecedented wealth on Wall Street, seven of the nation’s largest financial companies earned a combined $254 billion in profits.

But since last July, those same banks — Bank of America, Citigroup, JPMorgan Chase, Lehman Brothers, Merrill Lynch, Goldman Sachs and Morgan Stanley — have written down the value of the assets they hold by $107.2 billion, gutting their earnings and share prices. Worldwide, the reckoning totals $380 billion, much of which reflects a plunge in the value of tricky mortgage investments.

Funny, but the word “tricky” doesn’t really come to mind when it come to describing those mortgage investments. Something with four letters beginning in “c” and ending in “p” seems to be a better fit.

Source:

“Nearly Half of Wall St. Bank Profits Are Gone”
Louise Story
New York Times, June 16, 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.”

Bank Of America Chief: ‘Even Chance’ U.S. In Recession

Last Thursday, the Charlotte Observer reported that Bank of America’s chief executive Kenneth Lewis told an audience at North Carolina State University that there is an “even chance” the U.S. is already in a mild recession, according to prepared remarks. The publication also said that last month the head of the Charlotte bank predicted minimal growth early in the year, “almost like a recession.”

Yet, the head of the largest commercial bank in the United States by both deposits and market capitalization was upbeat about the U.S. economy in the long term. According to the Observer:

In his remarks, Lewis acknowledged the role investment bankers played in creating complex mortgage-backed securities that have since plunged in value amid the housing crisis. However, he said the banking industry’s “originate-to-distribute” of making loans and then packaging them into securities for investors hasn’t been discredited.

Lewis told the newspaper:

Just as the bursting of the Internet bubble in 2001 was not the end of the Internet, the credit crunch of 2007 will not be the end of mortgage finance. The forms this activity takes will be simpler, but it will continue.

You may recall that I mentioned Ken Lewis in a post from last summer. On June 21, 2007, I wrote:

In an interview with Bloomberg on Tuesday, Bank of America’s Chief Executive Officer Kenneth Lewis said the U.S. economy will pick up speed due to a recovery in the housing sector. Lewis predicted, “You’ll see the economy begin to pick up in the third and fourth quarters,” and the slowdown in home sales is “just about to be over.” He went on to say that the housing market will begin to improve in the next month or two, forestalling a recession, according to Bloomberg. Lewis believes that job growth will lift home prices and reinvigorate construction by early 2008.

The Hazards Of Economic Forecasting

According to Bloomberg yesterday, Bank of America Corp. CEO Kenneth Lewis said at an industry conference in New York that fourth-quarter profit will be “quite disappointing.” Lewis predicted a “challenging” 2008 with higher writedowns for securities tied to the U.S. mortgage market. Jeffrey Harte, a Chicago-based analyst at Sandler O’Neill & Partners LP, told Bloomberg in an interview:

What’s disturbing is it sounds like Bank of America is becoming more bearish on the U.S. economy. Their franchise probably spans the consumer more than others, so what they say is meaningful.

Bank of America is the second-largest U.S. bank by assets, and the biggest when looking at deposits, with almost 6,000 offices across the country.

You may remember Bank of America’s Mr. Lewis from my June 21 post. At that time, I wrote:

In an interview with Bloomberg on Tuesday, Bank of America’s Chief Executive Officer Kenneth Lewis said the U.S. economy will pick up speed due to a recovery in the housing sector. Lewis predicted, “You’ll see the economy begin to pick up in the third and fourth quarters,” and the slowdown in home sales is “just about to be over.” He went on to say that the housing market will begin to improve in the next month or two, forestalling a recession, according to Bloomberg. Lewis believes that job growth will lift home prices and reinvigorate construction by early 2008.

Bloomberg made a note yesterday that regarding this housing prediction, “Bank of America Corp. Chief Executive Officer Kenneth Lewis is learning the hazards of economic forecasting.”

However, to be fair, says Alex Pollock, a former president of the Federal Home Loan Bank of Chicago and resident fellow at the American Enterprise Institute in Washington, Lewis’ optimism wasn’t the exception back then. Pollock told Bloomberg:

Early in the summer, a lot of people including high-ranking Washington officials, thought it was a problem in the subprime sector that wasn’t going to spill over into other areas. Like the old saying, forecasting is easy, but forecasting correctly is the hard part.

Yet, there were those who correctly forecast that problems associated with the U.S. housing sector weren’t going away soon. I also wrote in that June 21 post:

However, as Bloomberg pointed out, Mr. Lewis’ views contradict those of other market watchers, including money manager Paul McCulley of Pimco. At a Bloomberg News panel discussion on Tuesday, McCulley insisted that, “The housing-market recession ain’t over… It’s going to be a long, protracted recession.” Some are willing to go farther than that. Mark Kiesel, executive vice president of California-based Pacific Investment Management, said in Bloomberg yesterday, “It’s a blood bath… We’re talking about a two- to three-year downturn that will take a whole host of characters with it, from job creation to consumer confidence. Eventually it will take the stock market and corporate profit.” Nouriel Roubini, a former Treasury Department director under the Clinton administration and head of Roubini Global Economics in New York, added, “It’s not just a housing recession anymore, it looks more and more like an economic recession.” Roubini believes the chance of a recession in 2007 is at “50-50,” greater than the 33% chance former Federal Reserve Chairman Alan Greenspan was calling for back in March.

Today there are still a number of analysts saying there is no end in sight to the ongoing housing nightmare in the United States. Just this Tuesday, Fannie Mae CEO Daniel Mudd told CNBC that he didn’t expect the U.S. housing market to fully-recover until 2010.

2010? So much for a one to two month turnaround…

Sunday Edition: December 2, 2007

The Great Escape
If you haven’t heard yet, U.S. Treasury Secretary Henry Paulson announced on Friday that the mortgage industry was working with the U.S. Treasury Department on a broad plan to save the homes of subprime borrowers with adjustable-rate mortgages who cannot afford higher payments as their interest rates reset in coming months, but who otherwise could afford to stay in their homes. Earlier this afternoon CNBC reported that mortgage industry executives worked Saturday on the details of a homeowner “rescue plan,” where interest rates on some subprime mortgages could be frozen for up to 7 years. This weekend’s activities took place so that Secretary Paulson could announce a framework for the plan tomorrow, with full details released by Wednesday.

The Wall Street Journal reported Saturday that many of the particulars need to be hammered out, including the duration of the interest rate freeze and which subprime borrowers would be eligible for the bailout. Also unclear are the number of future mortgage resets. The Federal Reserve estimates that 2 million mortgages face resets, with as many as 500,000 homes in danger of being lost. As much as $362 billion in subprime mortgages are due to reset in the coming year, according to Banc of America Securities.

According to CNBC:

Deutsche Bank said in a report Friday that the population Paulson’s plan is aimed at — owner-occupants with at least some equity and facing their first reset — comprises 1.2 million loans valued at $258 billion, or one third of outstanding “first-lien” subprime loans.

Already, the proposed bailout is drawing fire from critics.

Some on Wall Street are saying that the U.S. government has overstepped its boundaries by meddling in the markets. Mark Adelson, a principal of Adelson & Jacob Consulting LLC, which consults on securitization and real estate issues, told the Wall Street Journal that:

There’s a part of this that’s just morally repugnant. The problem is that the policy makers are talking to servicers about giving away other people’s money.

It’s not the servicers’ money, but shareholders’ and investors’ money.

Andy Chow, manager of a $7 billion portfolio of mortgage bonds and other fixed-income assets for SCM Advisors in San Francisco, told the Journal that the success of the plan will depend on how many borrowers qualify. “Given what we know right now, it would benefit a smaller number of borrowers than the market is assuming,” he said.

Alan Fournier, a fund manager at New Jersey-based Pennant Capital Management LLC., is forecasting that the rescue plan may prolong the pain of the housing slump. He told the Journal that the Treasury’s program may merely delay inevitable foreclosures for some people who can’t afford their homes, while allowing holders of mortgage-backed securities to put off marking down their assets. Fournier explained, “This reduces the pressure short-term to bring everything to a clearing price. We really just need to let it wash through.”

Finally, there is the threat of lawsuits from investors in mortgage-backed securities. A temporary freeze on troubled home loans may help prevent defaults, but it would also reduce the amount of interest the loans would pay. “These investors were promised a certain yield, based on the expected hikes in interest rates, and an automatic freeze without reviewing individual loans may give them grounds to sue mortgage servicers,” CNBC reported today.

I’m curious to find out how homeowners who acquired their properties through conventional fixed-rate mortgages feel about the proposed plan.  Does it make you angry knowing that your neighbor in a comparable home may be getting their low-interest teaser rate extended up to 7 years, while you pay off that higher, fixed-rate loan?

Parting Shot
When I was in college, a roommate used to return from home with a bundle of tabloid newspapers to be used for bathroom reading material (thanks Mrs. McGrath!). I read a lot of ridiculous stuff in those papers.  Nowadays, I just turn on the television or read the mainstream press when I’m looking for that same type of entertainment. In the December 10 issue of Time, horror writer Stephen King said the following when asked who he would choose for Time’s 2007 “Person of the Year”:

Britney Spears and Lindsay Lohan symbolize the media’s growing obsession with issues of personality over substance. People care more about the details of Spears’ child-custody case than they do about where the billions the U.S. government has poured into Iraq have gone. It’s time for a discussion of whether the news media have chucked their responsibilities and run off to Tabloid Disneyland.

If it bleeds, it leads…

Have a wonderful week,

Christopher E. Hill
Editor
editor@boom2bust.com

Storm Brewing For U.S. Commercial Real Estate Sector?

A lot of media attention has been focused on the plight of the U.S. residential real estate market. But where is the U.S. commercial real estate sector headed? Will it follow housing’s lead down? By all appearances, commercial real estate has performed admirably. New York-based real estate research firm Real Capital Analytics noted commercial property sales hit $401 billion through October 18, outpacing last year’s $359 billion total. The U.S. Commerce Department said construction spending on office buildings, shopping centers, and other private, non-residential projects jumped 15.2% in August. The commercial sector has been immune to the residential mortgage mess because for the most part, buyers and sellers are more sophisticated, and they have more financial flexibility and resources to ride out credit market turmoil, experts told the Associated Press on October 22. Bernard Baumohl, managing director of New Jersey-based Economic Outlook Group, said, “It’s a different animal than the nonresidential construction business with the direct relationship between banks and business leaders, not banks and homeowners.” The National Association of Realtors’ chief economist Lawrence Yun spoke at this past weekend’s NAR convention in Las Vegas and said, “Despite some initial concerns, there have been no serious capital problems for institutional-grade properties, and most of the commercial market is performing well even though some private transactions have been cancelled or postponed.” Fundamentals remain strong with rising rents and occupancy levels expected to continue, especially in metropolitan areas. Yun said, “Vacancy rates should be gradually declining in the overall office, industrial, retail and multifamily sectors during 2008, reflecting the underlying demand for space in a growing economy. Areas with strong job growth will see the healthiest commercial markets.” Also, commercial markets are not in oversupply mode. “There’s plenty of excess capital that wants into real estate, especially in metro areas,” said Dan Fasulo, managing director of Real Capital Analytics. Finally, Yun noted that foreign investors, attracted by the weakened U.S. dollar, are pouring funds into the U.S. commercial sector. “Foreign investors are looking for good returns in a historically stable economy, and account for nearly 10 percent of total investment in U.S. commercial real estate sectors.”

Yet, some think the U.S. commercial real estate market is headed for a downturn. A report released Wednesday by the MIT Center for Real Estate suggests that the commercial sector may already be in transition. Prices in the third quarter were down 2.5%, the first drop in 4 years. MIT is suggesting that the new data signals not only the end of the 5-year boom for U.S. commercial real estate, but that weakness in the housing market is spilling over into commercial real estate as well. The center’s director, David Geltner, said in a prepared statement:

The fall in our index is the first solid, quantitative evidence that the subprime mortgage debacle, which hit the broader capital markets in August, may be spreading to the commercial property markets.

A new report from McGraw-Hill Construction also points to a slowdown in the sector, with commercial construction spending forecast to fall 6% next year from 2007’s record level.

Then there is the issue of commercial mortgage-backed securities, or CMBS. On November 12, the Financial Times (UK) said yields on commercial mortgage-backed securities have soared to levels not seen since the late 1990s, “indicating that they are seen as riskier.” The Federal Reserve notes that CMBS makes up 27% of the $3 trillion in commercial and multifamily development mortgage loans still outstanding, up from 4% in 1990. As the Financial Times explained:

Securitisation has allowed riskier, more leveraged purchases because the lenders originating the loans did not have to carry them on their balance sheets. As lenders rushed to cash in on the boom in the US commercial real estate market in the six to 12 months before the credit squeeze hit in July, underwriting standards declined and upped the risk of defaults, people in the industry said… In the third quarter, the average loan was 118 per cent of the property value, according to Moody’s, which includes expectations of properties’ incomes over several years in their calculations.

Sally Gordon, Moody’s head of commercial property research, told the Financial Times that level of leverage is “really kind of creepy.” In addition, consider the following from Monday’s edition:

Recent loans often assumed that the real estate market would get stronger, and there were a growing proportion of floating rate loans being issued. Even since the squeeze, loan-to-value ratios have barely fallen, while interest-only loans have actually risen, according to Reis, a real estate data firm. Some have already suffered the effects of fears over the kind of loans they are securitising, and have struggled to sell the bonds they are issuing. Wachovia, the biggest issuer of commercial mortgage securities in the US, according to Commercial Mortgage Alert, was hit by a $488m loss in the last quarter in the value of commercial mortgage securities that it could not sell.

Regardless, the recent performance of the U.S. commercial real estate sector may stall anyway as the U.S. economy sputters. “Commercial typically follows the national economy,” said Lawrence Yun at the National Association of Realtors’ industry conference.