Fed Determines Banks Need $74.6 billion in Fantasyland Scenario, $599 Billion in Cakewalk Scenario

The official results of the stress test are in. In the Fed's Fantasyland scenario, the Fed Determines 10 Banks Need Capital of $74.6 Billion.

The Federal Reserve determined that 10 U.S. banks need to raise a total of $74.6 billion in capital, concluding its unprecedented probe of the health of the nation’s 19 largest lenders.

The results showed that losses at the banks under ‘more adverse” economic conditions than most economists anticipate could total $599.2 billion over two years. Mortgage losses present the biggest part of the risk, at $185.5 billion. Trading accounts were the second-largest vulnerability, with potential losses of $99.3 billion.

“The results released today should provide considerable comfort to investors and the public,” Fed Chairman Ben S. Bernanke said in a statement. “The examiners found that nearly all the banks that were evaluated have enough Tier 1 capital to absorb the higher losses envisioned under the hypothetical adverse scenario.”

My Comment: The results cannot and will not provide "considerable comfort" because the stress test parameters were a cakewalk. In the so called "adverse scenario" the Fed concluded unemployment would peak at 10.3% at the end of 2010 and GDP would fall 3.3% this year. I think we see the unemployment rate at 9.8% by August and 11% by the end of 2009. The adverse scenario is my baseline scenario. The results are skewed from the start as the baseline scenario is pure fantasy.

Capital Shortfalls

Bank of America Corp. was judged to need $33.9 billion in additional capital under regulators’ criteria, the largest gap. Wells Fargo & Co.’s shortfall is $13.7 billion, while Citigroup Inc.’s gap is $5.5 billion. New York-based Citigroup has already announced plans to bolster its tangible common equity ratio by converting some of its preferred shares into common stock.

Fifth Third Bancorp’s capital need is $1.1 billion, KeyCorp’s is $1.8 billion, PNC Financial Services Group Inc.’s is $600 million, Regions Financial Corp.’s is $2.5 billion and SunTrust Banks Inc.’s is $2.2 billion. GMAC LLC needs $11.5 billion, while Morgan Stanley’s assessment was $1.8 billion.

Goldman Sachs Group Inc., JPMorgan Chase & Co., Bank of New York Mellon Corp., MetLife Inc., American Express, State Street Corp., BB&T Corp., US Bancorp and Capital One Financial Corp. were deemed not to need additional funds, according to the results.

Residential mortgages and consumer loans, including credit cards, “account for $322 billion, or 70 percent of the loan losses projected under the more adverse scenario,” the Fed said in its report.

Banks that need to raise capital under the government’s stress tests will have until June 8 to develop a plan and until Nov. 9 to implement it.

“The doomsday predictions in January and February that banks were insolvent is just wrong,” David Trone, senior analyst at Fox-Pitt Kelton Cochran Caronia Waller, said before the announcement. The tests “did succeed in genuinely stressing the banks and I think that would give confidence to people.”

The banks were insolvent and many still are. The Fed has thrown $trillions at this mess and the banks remain short of capital. If you are depending on research from Fox-Pitt Kelton Cochran Caronia Waller, you need a new analyst.

Wells Fargo, Morgan Stanley Boost Capital After Test

Bloomberg is reporting Wells Fargo, Morgan Stanley Boost Capital After Test.

Wells Fargo & Co., Citigroup Inc., Bank of America Corp., Morgan Stanley and Regions Financial Corp. are selling stock and debt and converting preferred shares to add capital after the U.S. stress test found the banks had too little common equity to withstand a prolonged recession.

Wells Fargo said today it will sell $6 billion of common stock to the public, Morgan Stanley aims to raise $5 billion by selling stocks and bonds and Citigroup is exchanging an additional $5.5 billion of preferred securities into common stock. Regions Financial said it’s studying options to raise $2.5 billion, and Bank of America will sell common stock.

Wells Fargo, the biggest U.S. mortgage originator, must raise $13.7 billion, the government said today. The San Francisco-based lender may face losses for 2009 and 2010 of $86.1 billion, or 8.8 percent of total loans.

Bank of America

Bank of America, the largest U.S. bank, needs $33.9 billion, according to the government. It could have losses during the next two years of $136.6 billion, or 10 percent of total loans.

The bank, based in Charlotte, North Carolina, plans to sell common stock and convert preferred shares into common equity, Chief Financial Officer Joe Price said in a statement. The bank is considering the sale of its Columbia Management mutual fund group and may consider joint ventures, according to the statement.

“We are comfortable with our current capital position in the present economic environment,” Chief Executive Officer Kenneth Lewis said. “The stress test asks what if the economy does much worse than most experts project.”

Ken Lewis is thoroughly discredited and should resign. Better yet, Let the Criminal Indictments Begin: Paulson, Bernanke, Lewis.

Goldman, Morgan Stanley, others see repaying TARP soon

After today's cakewalk, Goldman, Morgan Stanley, others see repaying TARP soon.

Goldman Sachs Group Inc (GS.N), Morgan Stanley (MS.N), JPMorgan Chase & Co (JPM.N) and several other big U.S. banks said they were in a position to quickly repay Treasury capital injections after regulators released bank stress test results.

Goldman, which passed the test, said it believed it had met all requirements and was "highly confident that we will soon repay the government's investment from the TARP's Capital Purchase Program."

JPMorgan also believes it is eligible to repay the $25 billion it has received in taxpayer money, Chief Executive Jamie Dimon said on a conference call with analysts.

"We will be in that process as soon as we can," said Dimon, who has repeatedly said that the bank did not want to take the funds in the first place.

Shares in the second largest U.S. bank sank more than 5 percent to $35.24 in regular trading and climbed slightly after hours to $35.85.

Morgan Stanley, even as it was directed to boost capital by $1.8 billion, said it too expected to repay its $10 billion in TARP funds "as soon as possible."

Morgan announced it would sell $2 billion in stock and $3 billion in 5- and 10-year notes not guaranteed by the FDIC. The debt sale is "multiple times" oversubscribed, sources said.

American Express Co (AXP), Bank of New York Mellon (BK), State Street Corp (STT), U.S. Bancorp (USB) and BB&T Corp (BBT) said they would seek to repay TARP as soon as they were permitted by regulators.

Citigroup (C), which was found to have a $5.5 billion capital shortfall, said it would repay the $45 billion it got from Treasury as soon as soon as possible.

Those who want to delve into the details of the stress test can do by reading The Supervisory Capital Assessment Program: Overview of Results.

Well capitalized or not, banks want to pay back TARP funds to escape conditions the Fed attached to the money. CEOs are all itching to give themselves big raises.

Since Bernanke is willing to brag “The examiners found that nearly all the banks that were evaluated have enough Tier 1 capital to absorb the higher losses envisioned under the hypothetical adverse scenario.”, I say prove it by canceling the fraudulent Public Private Investment Plan (PPIP) taxpayer ripoff.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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ADP Reports April Nonfarm Private Employment Decreased 491,000

Nonfarm Private Employment Decreased 742,000 according to the April ADP National Employment Report®.

Nonfarm private employment decreased 491,000 from March to April 2009 on a seasonally adjusted basis, according to the ADP National Employment Report®. The estimated change of employment from February to March was revised by 34,000, from a decline of 742,000 to a decline of 708,000.



Highlights

• Total Nonfarm employment fell by 491,000 vs. 742,000 last month.
  
• Service sector employment fell by 229,000 vs. 415,000 last month.
• Employment in the goods-producing sector declined 262,000, the twenty-eirhth consecutive monthly decline. Last month the goods-producing sector declined 327,000.
• Employment in the manufacturing sector declined 159,000, its thirty-eighth consecutive decline. Last month the manufacturing sector declined 206,000.
• Construction employment dropped 95,000 vs 118,000 last month. This was its twenty-seventh consecutive monthly decline, and brings the total decline in construction jobs since the peak in January 2007 to to 1,261,000.

April’s construction decline was the smallest since November of 2008.

Medium Businesses Leading The Decline



The above chart, 4th in a series of 5 interesting charts (click on the first link above to see all the charts) shows shows job losses stopped accelerating. However, 500,000 job are still very significant.

Medium sized businesses, defined as 50-499 employees are have been leading the decline in jobs lost starting summer 2008. Small sized companies (1-49) employees were hanging very tough until July 2008. That is no longer the case.

Small Business Report

The ADP Small Business Report notes the following breakdowns.

• Total small business employment: -183,000 vs. -284,000 last month.
• Total medium business employment: -231,000 vs. -330,000 last month.
• Total large business employment: -77,000 vs. -128,000 last month.

According to Joel Prakken, Chairman of Macroeconomic Advisers, LLC, “Nonfarm private employment decreased 491,000 from March to April 2009 on a seasonally adjusted basis, according to the ADP National Employment Report. Despite some recent indications that stock prices, consumer spending, and housing activity may be bottoming out, employment, which usually trails overall economic activity, is likely to decline for at least several more months, although perhaps not as rapidly as during the last six months.

Look for another grim employment report on Friday, perhaps in the range of 400,000 to 700,000 jobs lost. This will be the 16th consecutive months of jobs lost with no end in sight.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Preliminary Stress Test Results

Inquiring minds are taking a look at preliminary results from the stress tests. Actual results will be out tomorrow. In the meantime, please consider the following headlines.

Citigroup Said to Need About $5 Billion in Capital After Test

Citigroup Inc. was judged to need roughly $5 billion in additional capital as a result of regulators’ stress test on the bank, according to a person familiar with the matter.

The Federal Reserve is scheduled to release the results of the tests on the 19 largest U.S. banks tomorrow. Citigroup’s assessment incorporates the New York-based bank’s previously announced plan to convert government-owned and privately held preferred shares into common stock. Citigroup spokesman Jon Diat declined to comment.

MetLife Said to Have No New Capital Need After U.S. Stress Test

MetLife Inc. was judged not to need to raise additional capital after regulators completed their stress test on the bank, according to a person familiar with the matter.

The Federal Reserve is scheduled to release the results of the tests on the 19 largest U.S. banks tomorrow. MetLife spokesman Christopher Breslin declined to comment.

Morgan Stanley Said to Have No New Capital Need After U.S. Test

Morgan Stanley was judged not to need to raise additional capital after regulators completed their stress test on the bank, according to a person familiar with the matter.

The Federal Reserve is scheduled to release the results of the tests on the 19 largest U.S. banks tomorrow. Morgan Stanley spokeswoman Jeanmarie McFadden in New York declined to comment.

GMAC Is Said to Need $11.5 Billion in Capital After Stress Test

GMAC LLC requires about $11.5 billion in new capital as a result of regulators’ stress test on the auto and home lender’s balance sheet, according to a person familiar with the matter.

Regulators have said options open to lenders include converting existing government preferred shares. The company’s capital needs may be at least in part addressed in conjunction with the government’s broader efforts to aid the auto industry, the person said.

The Detroit-based company yesterday reported a first- quarter loss of $675 million on surging loan defaults and the elimination of a one-time gain from extinguishing debt.

Gina Proia, a GMAC spokeswoman, declined to comment.

Amex, JPMorgan, Bank of New York Mellon pass tests

American Express Co., JPMorgan Chase & Co. and Bank of New York Mellon Corp. will not be asked to raise more capital when federal officials announce the test results Thursday afternoon, according to people briefed on the results. The people requested anonymity because they were not authorized to discuss the results.

Goldman Sachs Said to Have No New Capital Need After Stress Test

Goldman Sachs Group Inc. was deemed not to need to raise additional capital after regulators completed their stress test on the bank, according to a person familiar with the matter.

The Federal Reserve is scheduled to release the results of the tests on the 19 largest U.S. banks tomorrow. Goldman spokesman Lucas van Praag in New York declined to comment.

Big banks need capital under stress tests

Regulators are ordering the largest U.S. banks to get tens of billions of dollars of capital to cushion themselves in the event of a deep economic downturn.

After conducting "stress tests" of the 19 biggest banks, the government has told Bank of America Corp it needs $34 billion of capital, roughly triple what had been expected, an industry source familiar with the results said.

Wells Fargo & Co needs $15 billion, Bloomberg News said, citing an unnamed source. Citigroup Inc may need as much as $10 billion, a person familiar with the matter said. About 10 of the 19 banks that were tested may need capital, a person familiar with the official talks said.

The sources were not authorized to speak because the stress test results are not public. Results are due late Thursday.

Analysts believe other banks that may need capital include Fifth Third Bancorp, GMAC LLC, KeyCorp, PNC Financial Services Group Inc, Regions Financial Corp and SunTrust Banks Inc.

Wells Fargo Said to Need $15 Billion in New Capital

Wells Fargo & Co., the fourth-largest U.S. bank by assets, requires about $15 billion in new capital as a result of regulators’ stress test on the lender, according to a person familiar with the matter.

Regulators have said options open to lenders include converting existing government preferred shares; Wells Fargo got $25 billion in taxpayer funds last year. As part of the stress tests on the 19 largest banks, officials are assessing whether banks have enough common equity, among other capital measures.

Wells Fargo’s assessment compares with the $34 billion gap at Bank of America Corp. identified by people familiar with the matter late yesterday. JPMorgan Chase & Co. doesn’t need to raise its capital, people with knowledge of its results said, while Goldman Sachs Group Inc. and Bank of New York Mellon Corp. have taken actions that suggest they also passed their reviews.

Geithner Says Banks’ Stress-Test Results Will Be ‘Reassuring’

Treasury Secretary Timothy Geithner said none of the 19 banks subjected to government stress tests are insolvent, which should reassure investors and the public that the U.S. financial system is sound.

While some banks will need to raise more capital, there are a number of ways they can do that and most should be able to do it in the private sector, Geithner said yesterday in an interview with Charlie Rose.

“I think the results will be, on balance, reassuring,” Geithner said. “None of those 19 banks are at risk for insolvency.”

Geithner, speaking in Washington, said he expects the “vast bulk” of banks will be able to raise needed capital “through private sources” instead of getting government financing.

“There is very significant cushions in these institutions today, and all Americans should be confident that these institutions are going to be viable institutions going forward,” Geithner said. “What we want to do is make sure that people have confidence that our financial system is going to be able to get through this and going to be able to lend.”

The government will take larger stakes in the banks, either by adding capital or converting preferred shares, “if necessary,” Geithner said, “but we’ll be reluctant to do that” and “we’ll get out as quickly as possible.”

He did not rule out forcing management changes at banks in which the government has a sizeable holding.

Geithner's Lie

Geithner says he expects the “vast bulk” of banks will be able to raise needed capital “through private sources” instead of getting government financing.

He is talking about the Public Private Investment Plan (PPIP) in which investors take 7% risk and taxpayers take 93% of the risk. For more on this line of thinking, please see Geithner's Plan Can Succeed and More Ugly Details Emerge On "Geithner's Heist America Plan"
.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Case Against the Fed and Fractional Reserve Lending

Fractional Reserve Lending (FRL) is fraudulent. Indeed, FRL in conjunction with micro-mismanagement of interest rates by the Fed is the root cause of the financial crisis we are in.

Unfortunately many do not see FRL for the fraudulent scheme that it is. Here are the most common defenses against the allegation of fraud.

Five Arguments Used To Defend FRL

1. FRL is not fraud because the lending is backed by assets.
2. FRL is not fraud because it is allowed by law.
3. Eliminating FRL would require unwarranted "regulation".
4. No one is harmed by FRL.
5. People have a legal right to make agreements with banks allowing their money to be lent with no reserves

Rebuttal

1R. To those who claim credit extended by fractional reserve lending is not fraudulent because it's backed by assets, I ask: "What assets?" The answer of course is ....

• Fannie Mae and Freddie Mac debt that would be worthless were it not for taxpayer bailouts.
• Asset backed commercial paper that has ceased to trade.
• Toggle bonds and other such nonsense where debt is paid back with more debt.
• Loans to hedge funds for speculation in credit default swaps and commodities.
• Commercial real estate boondoggles including scores of condo towers now sitting empty.
• A whole array of other silly loans that should never have been made.

Close analysis shows the "backed by assets" claim only holds true as long as asset prices are rising. When asset prices are falling as they are now, the true state of the non-existent backing is plain to see.

Credit extended via FRL is backed by nothing more than thin air and promises. Those promises are currently worth pennies on the dollar, and the entire global banking system is insolvent as a result.

2R. Some claim that fractional reserve lending cannot be fraud because it is legal. However, Just because something is legal does not make it right. For example: Slavery was once legal. It certainly never was right. Government decree cannot make slavery right, but it can and did make it legal. By the same token, government decree alone cannot change the fact that fractional reserve lending is fraudulent. Proof of fraudulence will be offered in the rebuttal to point number 4.

3R. Some claim that FRL cannot be eliminated because that would require regulation and such regulation would in and of itself be against free market principles. The fact of the matter is that a free market would quickly shut down any bank lending out more money than it had in the vault. No one would possibly trust such a bank. It is only government decree (regulation) that allows banks to get away with such obvious fraud.

Furthermore, people are confused by what "libertarian" means. Libertarian does not mean anarchy. There are laws against murder, theft, fraud, and slavery that no libertarian I know would argue against.

Indeed, for any society to function, there must be certain laws (regulations) in place. Here are the basic tenants of valid laws.

• Protection of property rights
• Protection of civil rights
• Freedom of religion
• Equal protection under the law regardless of race, creed, color, sex, nationality, wealth, etc.

4R. Proponents of FRL claim no one is harmed by it. In practice, everyone is harmed by it. Here is how it starts. Those with first access to money accumulate assets and those with later access to money bid up those assets. Consider housing. GSE creation of credit out of thin air is a perfect example of what happens. By the time credit was available to those of lower economic status, the bubble was already formed and ripe for a collapse. Even the non-participants were harmed. How so? Via rising property taxes and rising prices of goods and services without the benefit of rising wages.

Ironically, even those with first access to money (the banks and wealthy) ultimately did not fare well because they were greedy. When the bubble popped (as all debt bubbles eventually do) the only winners were the few who made timely bets on the demise of the bubble.

FRL is the enabler for credit bubbles. Given enough time, credit bubbles are guaranteed to implode in deflationary fashion. History is replete with examples. The South Seas bubble, the John Law Mississippi bubble, and tulip mania are prime examples.

5R. People have no such right to agree to commit fraud. Here are more things people have no right to do: Shout fire in a movie theatre, conspire to steal someone's money, agree to start a toxic waste dump in a location where it would poison every water source in the neighborhood. There is an infinite number of things two people cannot agree to do. The right of people to do things ends when it affects the property rights of everyone else. And as noted in 4R, everyone is affected by fraudulent agreements that allow more credit to be extended than there is money in the bank.

Sweeps

Greenspan authorized sweeps in 1994.

Sweeps allow Demand Deposits Accounts (checking accounts) to be systematically "swept" from checking accounts into savings accounts unbeknown to the checking account holder.

Savings accounts have zero reserves.

So... In actual practice there is almost no money backing up checking accounts, none (beyond what banks THINK they need historically). You can thank Greenspan for this.

This is not "Laissez Faire" economics or libertarianism. This is blatant fraud, something that those blaming libertarianism need to understand.

Such a construct would never flourish in a free market. It takes a regulator like Greenspan to allow it.

Search for Scapegoats

Instead of placing the blame on fractional reserve lending and the biggest regulator of all (the Fed), many claim there is not enough regulation and the Fed needs still more powers.

Please consider Anti-Libertarian Nonsense From Henry Kaufman & Company for a discussion of the so-called libertarian Fed, Fannie Mae and Freddie Mac, Rating Agency Madness, and the Glass-Steagall Scapegoat.

Fed Uncertainty Principle

Inquiring minds should also consider the Fed Uncertainty Principle.

Uncertainty Principle Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Why We Can’t Reinflate The Bubble

Ron Paul explains Why We Can’t Reinflate The Bubble.

Opening Statement:



Transcript:

We have to come to the realization that there is a sea change in what’s happening. This is an end of an era and that we can’t re-inflate the bubble, just as we devised a new system of Bretton Woods in ‘44 which was doomed to fail. It failed in ‘71 and then we came up with the dollar reserve standard which was a paper standard; it was doomed to fail and we have to recognize that it has failed. And if we think we can re-inflate the bubble by artificially creating credit out of thin air and calling it capital; believe me, we don’t have a prayer of solving these problems. We have a total misunderstanding of what credit is vs. capital. Capital can’t come from the thin air creation by the Federal Reserve System; capital has to come from savings. We have to work hard, produce, live within our means and what is left over is called capital. This whole idea that we can re-capitalize markets by merely turning on the printing presses and increasing credit is a total fallacy; so the sooner we wake up to realize that a new system has to be devised, the better.

Right now I think the Central Bankers of the world realize exactly what I’m talking about and they’re planning, but they’re planning another system that goes one step further to internationalize regulations, internationalize the printing press. Give up on the dollar standard, but we have to be very much aware that that system will be no more viable. We have to have a system which encourages people to work and to save. What do we do now? We’re telling consumers to spend and continue the old process; it won’t work.

All We Are Sayin’ Is Give Free Markets a Chance

Paul Kasriel, Director of Economic Research at the Northern Trust weighs in with All We Are Sayin’ Is Give Free Markets a Chance.

Given the economic and financial market “challenges” of the past year, some pundits and politicians are concluding that these challenges are the result of the failure of free markets. I would respond that we cannot determine whether free markets have failed unless we have had free markets. I do not think we have.

One of the most important markets in an economy is the market for credit. We do not have free markets in credit in the U.S. or anywhere else that I know of. The price of short-term credit is fixed by central banks. It would only be by accident that a central bank would fix the price of short-term credit at a level that would obtain if a free market in credit were allowed. It is beyond me why most economists would view with horror some government agency fixing the price of say, copper, but view the fixing of the price of short-term credit by central banks as nothing to be alarmed at.

There is at least one group of economists that realizes the economic mischief caused by central banks – economists who belong to the Austrian school. (For information about Austrian economics, click on this link to the Ludwig von Mises Institute or this link to Leithner and Company, a private investment firm located not in Austria, but in Australia.

I am not endorsing the political views or the investment advice of either of these entities, but I am endorsing their approach to economic analysis.) By holding a key short-term interest rate below or above the unobservable free market equilibrium level of this rate, the central bank creates credit, much as does a counterfeiter, or destroys credit, which leads to distortions in the economy and financial markets.

Typically, the central bank starts out by preventing the short term interest rate from rising to its equilibrium level. This leads to central bank credit creation. In turn, this encourages investments which are profitable only so long as the central bank prevents the interest rate structure from rising to its free-market equilibrium level. All of this manifests itself in the form of higher prices – higher prices of goods/services and/or the higher prices of assets. At some point, the central bank can no longer tolerate what it has wrought, and raises the level of the short-term interest rate above its free-market equilibrium. This precipitates a decline in asset prices, an economic recession and, later, a decline in goods/services prices (or
a slowing in their rate of increase). It was recognized by Austrian economists during the sharp run-up in U.S. stock prices in the late 1990s and the subsequent housing boom that the Greenspan-led Fed was especially egregious in keeping the federal funds rate far below its equilibrium level too long. We are now experiencing the economic and financial market fallout from Greenspan’s interference with the free market.

In free markets, risk-takers get rewarded if they are correct in the risks they take, but are punished if they are incorrect. Here, too, Greenspan intervened in the free markets. When it turned out some risk-takers had erred, Greenspan cushioned their losses by slashing the federal funds rate and creating central bank (counterfeit) credit. This central bank intervention in free markets encouraged risk-takers to take on even more risk inasmuch as their upside rewards would seem to be unlimited but their downside punishment would be limited.

Protection of Property Rights Is The Key Issue

The central point in a free market based banking system is to avoid violations of property rights. However, the current system of 100% fractionally reserved banks allows money to be created out of thin air robbing savers, by making those savings worthless over time. A pernicious effect of this system of permanent inflation is that it creates malinvestment and large boom-bust cycles that destroy wealth.

The Fed is a failed institution. Fannie Mae is a failed institution. Freddie Mac is a failed institution and fractional reserve lending is a fraud.

The correct policy decision is to abolish all of them, not to add layer after layer after layer of regulators watching over other regulators, who in turn watch over still other regulators, where some "god-like" super-regulator at the top supposedly has infinite wisdom and knows exactly how to regulate.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Bernanke Warns of Credit Relapse; Senator Sanders Warns Bernanke

While Fed Chairman Ben Bernanke Warns of a Credit Market 'Relapse', Congress is increasingly willing to stand up to the Fed Chairman.

Please consider Bernanke Warns of Danger of Credit Market 'Relapse'.

Federal Reserve Chairman Ben S. Bernanke warned that another shock to the financial system would undercut the central bank’s forecast that the U.S. recession will give way this year to a slow recovery.

“A relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall,” Bernanke said today in testimony to the congressional Joint Economic Committee. He highlighted that the economic contraction may be slowing and that the housing market has “shown some signs of bottoming” after a three-year slump.

The Fed’s effort at greater transparency in its emergency lending programs is a response to an April 2 nonbinding budget amendment sponsored by Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, and the panel’s ranking Republican, Alabama Senator Richard Shelby, Bernanke said. That proposal passed 96-2.

The Fed chief did not mention a tougher measure, also nonbinding, sponsored by Vermont Senator Bernard Sanders, an independent, that called on the Fed to identify borrowers. The measure passed 59-39 on the same day.

Sanders, in a statement after the hearing, threatened to pass the measure again “in a stronger form” if Bernanke failed to accept it. Bernanke told Sanders in February that identifying borrowers would be “counterproductive” and result in “severe adverse consequences for the economy.”

“Mr. Bernanke should not pick and choose which amendments he wants to respond to,” Sanders said. “My bipartisan amendment passed the Senate by 20 votes, and we expect him to respect it.”

Pick and Choose

Whether Bernanke is supposed to "pick and choose" is irrelevant. Bernanke and the Fed are going to attempt attempt to "pick and choose" . Meanwhile, as time goes on, the actions of the Fed are in complete alignment with the Fed Uncertainty Principle.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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GM Shareholder Wipeout

GM is preparing to do a 100-1 reverse split after issuing up to 60 billion new shares to pay down debt.

Please consider GM details plans to wipe out current shareholders.

General Motors Corp on Tuesday detailed plans to all but wipe out the holdings of remaining shareholders by issuing up to 60 billion new shares in a bid to pay off debt to the U.S. government, bondholders and the United Auto Workers union.

The unusual plan, which was detailed in a filing with U.S. securities regulators, would only need the approval of the U.S. Treasury to proceed since the U.S. government would be the majority shareholder of a new GM, the company said.

The flood of new stock issuance that could be unleashed has been widely expected by analysts who have long warned that GM's shares could be worthless whether the company restructures out of court or in bankruptcy.

The debt-for-equity exchanges detailed in the filing with the Securities and Exchange Commission would leave GM's stock investors with just 1 percent of the equity in a restructured automaker, ending a long run when the Dow component was seen as a bellwether for the strength of the broader U.S. economy.

GM shares closed on Tuesday at $1.85 on the New York Stock Exchange. The stock would be worth just over 1 cent if the first phase of GM's restructuring moves forward as described.

GM Plans 1-for-100 Reverse Stock Split

YahooFinance is reporting GM Plans 1-for-100 Reverse Stock Split

General Motors Corp. notified shareholders Tuesday it is planning a reverse stock split that would give them one share of new stock for every 100 shares they currently own.

The automaker said in a filing with the Securities and Exchange Commission that the deal would be part of an agreement with the Treasury Department in which the government would assume at least half of GM's debt in exchange for company shares. GM will send the information to shareholders currently holding a total of 610.5 million outstanding shares.

When all the deals are done GM expects to have about 62 billion shares, 100 times more than currently are outstanding.

"If the restructuring as currently contemplated occurs, there will be very substantial dilution to existing holders of GM common stock," GM's filing said. Hence, the reverse stock split proposal.

Critics, mainly bondholders, have accused the Obama administration of favoring the government and the UAW at the expense of investors.

GM shares closed on Tuesday at $1.85 on the New York Stock Exchange. The stock would be worth just over 1 cent if the first phase of GM's restructuring moves forward as described.

Inquiring minds are investigating how option traders perceive the action. Please consider GM option plays.

GM Option Plays



click on table for sharper image

If GM's demise comes on or before May 15, then holders of 60,671 PUTs will see the value soar from 3 cents to 99 cents equating to a gain of 3000+%. I am not recommending this play, but I sure as hell would not want to be the writer of those options.

More likely is a demise by June 19 which would see the bid on June puts rising from 30 cents to 99 cents or so (assuming the scenario plays out as described above).

GM Maximum Pain



Ignoring the gigantic risk reward lottery tickets of May GM options, inquiring minds are looking ahead to June. In June, we see Maximum Pain (the point at which most options expire worthless, is $3)

Without recommending (or playing) the over/under line, I would bet on the under line, presuming GM is highly unlikely to close over $3 at the June expiry. However, strike 3 PUT holders paying $1.90 for the option need to see a close below $1.10 at the June expiry (assuming options held for duration), to show a profit.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Credit Card Lending Goes Full Cycle

Here is an interesting email from "Scott" who was denied a credit card from Capital One, on the basis of "worsening economic conditions" in his area. "Scott" says he has a FICO score of 800. From Scott .....

Hey Mike,

I attempted to sign up for a new rewards style card from Capitol One. A few days prior I got my FICO score which is 800, with no balances. Capitol One denied me online, and said they'd send a mail as to why.

A few days back I got their response:

"Based on the application information for Scott E*******, there are worsening economic conditions in your area."

They also state that, "We did not request a copy of your credit file and therefore no inquiry will be placed on your credit report."

There you have it, a credit worthy borrower denied credit just because I live in Tampa.

Scott

Scan of Letter



One case does not a trend make, but redlining appears to be back in vogue. We have gone from redlining to reverse redlining (seeking out the worst possible credit risks after the Bankruptcy Reform Act of 2005), back to redlining in front of new card rule changes from Congress.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Wages Contract in US, UK, Japan

Inquiring minds are investigating trends in wages, disposable income, and ability to service debt.

Japan’s Wages Fall at Fastest Pace Since 2002 on Output Slump

Japan’s wages dropped at the steepest pace in more than six years in March as manufacturers slashed overtime pay to cope with a collapse in exports. Monthly wages, including overtime and bonuses, dropped 3.7 percent from a year earlier, the most since July 2002, the Labor Ministry said today in Tokyo.

Overtime payments slid an unprecedented 20.8 percent as manufacturers cut extra working hours by a record 49.5 percent, the report showed. The government has been tracking the figures since 1990.

UK wages collapse at fastest rate in 60 years

Weekly wages fell at the fastest rate in 60 years in February as City bonuses were slashed and workers agreed to reduced hours in the wake of recession, the latest official figures show.

The Office for National Statistics said average weekly earnings fell 5.8pc compared with the same month last year, to £459.10. The private sector took the full force of the fall in weekly earnings, down sharply by 7.7pc at £463.50, while average weekly earnings in the public sector actually rose by 3.2pc to £442.90. Bonuses in the financial services fell to £549.90 a week in February - which is part of the peak period for bonus payments - from £1,312.80.

"We certainly haven't seen anything like this in the last 60 years - and probably not in peacetime since the 1930s. In that sense it's much like everything else in the economy," said Michael Saunders, chief UK economist at Citigroup.

U.S. Workers' Wages Stagnate As Firms Rush to Slash Costs

Across the country, workers' earnings are stagnating or, in some cases, declining. For many Americans, the setbacks are all the more troubling because they have lost so much wealth in recent months, with the value of their homes and retirement packages plummeting.

Employers big and small have resorted to slashing hours and once-unthinkable wage cuts. In March, staffing agencies that work for Microsoft agreed to a 10 percent reduction in their bill rate. In April, hotel operators in New York City asked unionized waiters, housekeepers and bellhops to reopen their contract and accept wage cuts. State governments such as Indiana's have frozen pay, while others, including Maryland and California, have furloughed employees.

According to a recent Washington Post-ABC News poll, more than a third of Americans say they or someone in their household has had their hours or pay cut in the past few months. That's a nine-point increase since a similar poll was conducted in February.

The previous U.S. recession, in 2001, was relatively weak and didn't last the full year. But once inflation is factored in, wages actually fell, sapping workers' buying power, and didn't return to pre-recession levels until 2006, just before the economy fell into its latest funk. As a result, from 2000 to 2007, the median income of American households, when adjusted for inflation, fell by $324, according to the Commerce Department.

Wages for new hires have already fallen, according to an index compiled by the Society for Human Resource Management, a trade association based in Alexandria. Temporary workers' hourly rates are shrinking, too. Joanie Ruge, senior vice president of the staffing firm Adecco Group North America, said her company's clients have shaved as much as 10 percent off their rates.

Trends In Disposable Personal Income

Disposable income is the amount of income left to an individual after taxes have been paid, available for spending and saving. Please consider the following chart.




The chart shows DPI is still growing, in aggregate. What it does not show is how skewed the growth is. I would be interested in seeing what the chart would look like with the top 10% of wage earners taken out. I do not have that data but I suspect that if we took out the top 10% of wage earners, the chart would be negative.

Notice that DPI growth became very weak in the era of biggest debt growth, yet it was strong when debt growth was subdued. So much for the notion that inflating money supply and credit 'creates wealth'. It is not only a theoretically indefensible position, the empirical data confirm it as well.

Household Debt Service Payments Rise



It now takes close to 14% of disposable income to service household debt. In the early 1990's it took under 11%. Factor in property taxes and automobile lease payments and the numbers get worse.

Household Obligations Rise



The household debt service ratio (DSR) is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt.

The financial obligations ratio (FOR) adds automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance, and property tax payments to the debt service ratio.

It now takes 19% of DPI to meet household financial obligations.

Total Consumer Credit



Think that consumer credit is going to be paid back? I don't, not as long as we are losing 600,000 jobs a month and wages are contracting on top of that.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Euro-Zone Jobless To Hit Postwar Record

Fessing up to reality, the European Union says euro-zone jobless to hit postwar record.

Deepening the economic gloom in Europe, the European Union admitted Monday that its previous forecasts were way off the mark. It now predicts "a deep and widespread recession" across the continent and says unemployment among nations using the euro currency will rise to a postwar record of 11.5 percent in 2010.

The new forecasts expect the economies of the 27-nation EU and the 16-nation euro-zone to shrink by 4 percent this year -- more than double a January estimate.

The EU now reckons that Germany will contract by a massive 5.4 percent this year as global demand dries up for the high-value goods such as cars and machinery that the country makes and exports. In January, the EU thought Germany would only shrink 2.3 percent this year.

The European Commission said more than 26 million people in the EU will be out of work next year as a contracting economy sheds an extra 8.5 million jobs -- putting pressure on governments and central bankers to do more to alleviate the downturn.

Just four months ago, the EU thought the EU economy would only contract 1.8 percent and the euro-zone only sink 1.9 percent this year.

Almunia [the EU's top economy official] said quarterly growth is unlikely to emerge until 2010, and that even then both the EU and the euro-zone will likely shrink 0.1 percent over the whole year -- provided the banking sector recovers and world trade turns around.

That last paragraph is interesting. The EU is now expecting a contraction for two straight years, even IF the banking sector recovers and world trade turns around. This is in sharp contrast to never ending the talk of "green shoots" in the US with many US economists predicting the recession will end in the second half of 2009.

One of those forecasts is going to be wrong.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Let Warren Buffett Buy Wells Fargo

Warren Buffet is the largest shareholder in Wells Fargo. He claims it is a "Fabulous Bank" and would like to buy it all. Is he serious or is he just talking up his shares?

Let's investigate staring with a look at Berkshire’s Buffett Calls Wells Fargo ‘Fabulous’ Bank.

Billionaire Warren Buffett, whose Berkshire Hathaway Inc. is the largest shareholder in Wells Fargo & Co., said the lender is a “fabulous” company.

“All banks aren’t alike by a long shot, and in our view Wells Fargo, among the large banks, has some advantages the others do not,” Buffett said today at Berkshire’s annual meeting in Omaha, Nebraska.

Buffett, who has said he values lenders partly on their ability to acquire funds from depositors, told shareholders today that he’d “love” to buy the entire bank and is unable to do so because Berkshire wouldn’t get permission from regulators.

Buffett Dismisses Stress Tests for Assessing Banks

Bloomberg is reporting Buffett Dismisses Stress Tests for Assessing Banks.

Berkshire Hathaway Inc. Chairman Warren Buffett dismissed the importance of the government’s stress tests of major U.S. financial institutions in helping him assess banks he invested in.

“I think I know their future, frankly, better than somebody that comes in to take a look,” Buffett said before the start of Omaha, Nebraska-based Berkshire’s annual shareholder meeting today. “They may be using more of a checklist type approach.”

If Buffet knew the future he sure would not have been shorting PUTS on the S&P when he did. He would have done it in March.

OK, so Buffett admits he is not concerned about the short term, nor is he particularly adept at timing it. However, shorting puts headed into a consumer led recession was an ill-conceived idea at best, regardless of how that bet eventually pans out.

In regards to Wells Fargo, it remains to be seen how their takeover of Wachovia turns out. Here is a quick recap of the chain of events that led to the demise of Wachovia.

• On May 7, 2006 Wachovia purchased of Golden West Financial for a cash offer of $25 billion. Under the weight of Golden West's mortgage portfolio (including massive exposure to Pay Option ARMs), Wachovia collapsed.
  
• On September 29, 2008 Wachovia announced its intention to sell its banking operations to Citigroup for $2.2 billion in an open bank transaction facilitated by the Federal Deposit Insurance Corporation; according to the FDIC, Wachovia "did not fail."
  
• The FDIC sponsored shotgun marriage in turn fell through when Wells Fargo made a better offer.
  
• Citigroup is still pursuing its $60 billion claims, $20 billion in compensatory and $40 billion in punitive damages, against Wachovia and Wells Fargo for alleged violations of the exclusivity agreement (i.e. the shotgun marriage arranged by the FDIC that subsequently collapsed).

The Pay Option ARM portfolio that Wells Fargo is sitting on via the above chain of events is still a ticking time bomb.

Buffett Supports Bailouts; Sees ‘No Signs’ of Recovery in Housing, Retail

Even though he is thrilled with the prospects of Wells Fargo, Buffett Says He Sees ‘No Signs’ of Recovery in Housing, Retail.

“There’s no signs of any real bounce at all in anything to do with housing, retailing, all that sort of thing,” said Buffett, 78, in a Bloomberg Television interview before the Omaha, Nebraska-based company’s annual shareholder meeting today. “You never know for sure, even if there’s a leveling off, which way the next move will be.”

Buffett, in his most recent letter to shareholders in February, said he supported the U.S. government actions, while predicting bailouts will cause “unwelcome aftereffects” including inflation.

Of course Buffet supports the bailouts. So does PIMCO and so does anyone holding corporate bonds of financial institutions in general. They stand to benefit from these taxpayer sponsored bailouts. It's as simple as that.

More Bank Losses On The Way

JPMorgan says $400 Billion More In Bank Losses On The Way. I think it's more like $1 trillion minimum. And if housing has not bottomed (I agree with Buffett that it has not), then some massive losses are coming up from Wells Fargo over Mortgage Backed Securities in general and Pay Option Arms specifically.

In my opinion, the only way it makes sense to own Wells Fargo, Citigroup, Bank of America, etc, is if taxpayers are forced to keep shelling out more money to keep the banks solvent. Otherwise massive shareholder dilutions will be right around the corner as banks scramble to raise still more capital.

Unfortunately, Geithner has every intention of protecting banks and corporate bondholders regardless of the cost to taxpayers. Please see Geithner's Plan Can Succeed as well as More Ugly Details Emerge On "Geithner's Heist America Plan" for details.

Let Buffett Buy Wells Fargo

To not let a well capitalized company like Berkshire Hathaway to acquire a bank when banks are clearly struggling to raise more capital makes no sense. Since Buffet claims he would “love” to buy the entire bank I suggest he should be allowed to do so. Then we would get to see if he really wants it or if he is just talking his book.

One thing's for sure: It's far better for shareholders to to take the hit when this mess blows the second time than taxpayers in general. Yet, if Buffet is indeed right about the prospects of Wells Fargo, then by all means, Berkshire Hathaway shareholders should be allowed to profit from that position.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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How Banks Become Condo Rental Agents

Last month in a Boston foreclosure sale, John Hancock Tower Lenders Took, a 65% Haircut In 3 Years . Boston is back in the news today with another foreclosure auction. This time it's condo related, with Chorus Bank in the thick of things.

Please consider 441 Stuart Street: What Happened?

This week, the building at 441 Stuart Street was offered to the public through a foreclosure auction. The property was most recently purchased in 2004 for $37.5MM with the intent of converting the building to condominiums.



Recorded documents show that Corus Bank, a well-known condo conversion lender out of Chicago, placed $42MM in debt on the property in 2004.

The auctioner opened at $30MM and asked if there were any bids. There were not. Next he cut the bid in half and asked for $15MM, and the bids that followed were $15.1MM, $16MM, $16.1MM, and finally $17MM. There was only one 3rd party who bid the $15.1 and $16.1 against the bank. The lender bought the property back at $17MM.

Nevermind the fact that the highest 3rd party bid for the property was less than 40% of the known debt, consider the fact that the number represents only about $100/foot. Remember that this property is in Copley Square. If retail prices for completed condos are $600-900/SF and construction costs run $150-250 per foot then that’s a margin of 40% or better - isn’t it?

It's interesting that no one wants this building at $100 a square foot with completed condos going for $600 to $900 a square foot.

Corus Bankshares Receives 'Going Concern' Qualification

In Bank Watch (Apr. 12-18): CoStar is reporting Corus Bankshares Receives 'Going Concern' Qualification.

Corus Bankshares Inc. in Chicago announced that its audited financial statements for the year ended 2008 contained a 'going concern' qualification from its independent registered accounting firm Ernst & Young LLP.

Corus, with a portfolio consisting primarily of condominium construction loans, many in the hard hit areas of Arizona, Nevada, south Florida and Southern California, has seen a rapid and precipitous decline in the value of the collateral securing its loan portfolio. Thus, it is experiencing significant loan quality issues.

The net loss of $456.5 million it recorded in 2008 was primarily the result of significant increases in the provision for credit losses.

The company said its board of directors has formed a strategic planning committee to seek all strategic alternatives, including a capital investment, a sale, a strategic merger or some form of restructuring.

The company also reported that there are additional concerns that regulators may take other actions, including placing the bank into conservatorship or receivership.

Here are a few snips of other Banks in the CoStar Article.

Community Bancorp Feeling Heat of Declining Desert Area Real Estate

Community Bancorp, the Las Vegas-based holding company for Community Bank of Nevada and Community Bank of Arizona, is late filing its annual report for 2008 with the U.S. Securities & Exchange Commission.

Community Bancorp said it expects that it will report a loss for the year compared to net income of $20.4 million for a year earlier.

As a result of these losses, the company expects that federal and state regulators will require a formal agreement with respect to, among other things, asset quality, capital and earnings.

Preferred Bank Hit By Declining San Diego Property Values

Preferred Bank, an independent Los Angeles-based commercial bank focusing on the Chinese-American and diversified Southern California market, reported an additional revision to results for the quarter and year ended Dec. 31, 2008, due to the receipt of an appraisal on an impaired construction loan.

The March "appraisal indicates a value deterioration far beyond our estimation for that area and far in excess of published market statistics for that market area," said Li Yu, chairman and president of Preferred Bank.

Union Center National Bank Takes Back Warehouse Project

Union Center National Bank in Union, NJ, announced that for the first quarter of 2009, it intends to establish a loan loss provision of $1.4 million, which covers a charge-off of approximately $900,000 in connection with a $4.9 million commercial real estate construction project of industrial warehouses. It had recently downgraded the loan to non-accrual status and increased its level for loan loss allowance by $521,000.

"At March 31, 2009, the corporation expects non-performing assets to amount to $9.1 million -- up from $4.7 million at Dec. 31, 2008," said Anthony Weagley, president and CEO of the bank's holding company, Center Bancorp Inc.

The bank's other real estate owned will increase to $4.4 million, with the other asset being a residential condominium project that was taken back in the fourth quarter of 2008. The bank holding company is near completion of that project and has elected to begin to rent the units.

Expect to see more banks completing projects and electing to rent units as the recession wears on. Ironically, you can also expect to see the opposite extreme whereby banks acquiring real estate in foreclosure processes and tear it down because they do not want to become rental agents. For an interesting video of teardowns of brand new homes please see Extreme Home Makeover Depression Edition II.

Meanwhile, it's just a matter of time for Chorus Bank (CORS) heads into receivership. It was trading at $28 in April of 2006 and you can be a proud owner today at 31 cents.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Stupidity Squared

John Mauldin's weekly E-Letter, Sell in May and Go Away, is a good read. My favorite portion of the E-Letter is the section "A Dangerous End Game". Let's take a look.

The Fed and the Obama administration are playing a dangerous game. The Fed is going to print trillions of dollars to forestall deflation and try to re-ignite the economy. But for a variety of reasons we will go into next week, a real, sustainable recovery may be a few years away. What happens when the market start balking at high and unsustainable national deficits? What happens when inflation (finally) does return? Can the Fed remain independent and take back the money it is printing in the face of what will likely be a tepid recovery? And if they don't, what happens to the dollar?

Next year, we will be entering what will certainly be the most dangerous era in my lifetime for the US economy. It is not clear what will happen. There are a lot of paths that can be taken, though some are more likely than others. For those who are convinced that high inflation and a falling dollar are absolutely, unequivocally in the future I have just one word: Japan.

Yes, there are differences, but there are a lot of similarities. While I think the most likely outcome is a long Muddle Through recovery, the likelihood of a lost decade of deflation a la Japan is a very real potential outcome. And the possibility of stagflation and a seriously impaired dollar is also quite real.

Investors, businessmen, and entrepreneurs need to be as nimble as possible. A free market will figure out what paths to take, and I am still optimistic about the long term. But we have some very dangerous times in front of us, and we need to be realistic.

And before I close, let me make a few comments about the Chrysler and GM issues. I tell my kids all the time that actions have consequences. If I hold senior secured debt of a company and the government tells me I have to take less than unsecured junior debtors, I am not going to be happy. I may have been dumb to make the loans in the first place, but I did it under a very specific contract and the rule of law.

If the Obama administration arbitrarily changes those rules to favor a political class (unions), then that is going to have a chilling effect on future lending to all corporations. As an aside, they are spending $12 billion to save 54,000 Chrysler jobs (at $22,000 per job). With 600,000 jobs a month being lost, why are these 54,000 jobs more special than those of the rest of the unemployed, who get a fraction of that amount in unemployment benefits?

Actions have consequences. The lenders who are forcing the Chrysler deal into bankruptcy court are not all "predatory hedge funds." They are mutual funds, pension funds, and other financial firms with small stakeholders as their investors.

Cerberus, the hedge fund that originally bought Chrysler, deserves to lose their money. They made a bad investment. But those who lent money deserve to be treated in accordance with the contracts they signed.

Demonizing investors and businessmen is hardly helpful. They are precisely the people we need to help get this economy moving. Governments don't create true job growth, businesspeople do, and mostly small businesses. I am not certain why small business owners, the job creation engine of the country, should see their taxes raised in order to protect bond holders of automobile companies or banks, or for union jobs to be preserved in companies that are clearly not competitive.

Consequences Indeed

Somehow Bernanke, Geithner, and Obama think they can ignore (or get away with) fraudulent bailout schemes, shameful treatment of auto bondholders to help out unions, and cotton candy treatment of bank bondholders.

While banks are happy and financial bondholders are ecstatic with the bailouts (at least for now), taxpayers are taking it on the chin.

What Happens ....?

In his article, Mauldin asks bunch of "What Happens?" type questions. He does not answer them. Perhaps there are no answers, at least not yet.

However, it's important to remember we are in this mess because Greenspan elected to blow another bubble rather than face what would likely have been a short-term recession of limited consequences. Instead, Greenspan elected to bail out his banking buddies who were in deep trouble with loans to dot-com companies and Latin America. The fruits of Greenspan's attempt to bail out banks were worldwide housing and credit bubbles of epic proportion that have now popped, leaving banks much worse off than before.

Compounding Greenspan's errors, the trio of Bernanke, Geithner, and Obama, like the trio of Bernanke, Paulson, and Bush before them, all seem to think the results will be better this time if we just do it again with more force.

I have news for all of them. While we may not be able to predict for certain the consequences of "Stupidity Squared" we can say for certain the result cannot possibly be any good.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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4,820 California gov't workers collect annual pensions of $100K or more from CalPERS

The California Foundation for Fiscal Responsibility is reporting 4,820 CalPERS RETIREES RECEIVE ANNUAL PENSIONS IN EXCESS OF $100,000.

We have a lot to worry about these days. We’re worried that we may lose our jobs, that we may lose our healthcare insurance and that we won’t have sufficient retirement savings. We realize that without jobs we can’t make our mortgage payments; we know that our homes have dropped in value resulting in little or no equity, so we can’t afford to stay in or sell our homes.

In California there is one lucky group that doesn’t have those worries: state and local government retirees.

As of May, 2008, there were 4,820 CalPERS retirees receiving annual pensions in excess of $100,000. That didn’t include government retirees in 80 other plans in California—judges, UC, STRS, charter cities, and 1937 Act counties. About half of these retirees were public safety workers: cops, firefighters, prison guards. The remaining half includes former city managers, assistant managers, county executives, district attorneys, engineers, finance officers, personnel directors, computer scientists, and physicists.

Since May 2008, more than 120 new retirees have joined the “$100,000 Club” – each month - every month. That’s been going on for the last 12 months – more than 1,500 have joined that well-paid retirement group ; this rate of increase will accelerate as droves of retired public safety workers who are now in the $90,000 to $100,000 range receive annual cost of living increases.

...

We must stop this nonsense at the ballot box.

Indeed, the only way to stop this madness is at the ballot box, so get involved!

Search the $100,000 Pension Club database

Inquiring minds investigating the $100,000 Pension Club Database.

CalPERS Top 10



click on chart for sharper image

California Foundation for Fiscal Responsibility Weighs In

Keith Richman at the CFFR states: Unless changes are made, pension debt will overwhelm the state's ability to fund higher education, build roads and develop technology."

CFFR was founded in 2007 by Richman, a former 38th District Assemblyman. Richman says the foundation's sole purpose is to tackle the skyrocketing costs of public employee retirements.

"If we don't do something soon there may be several government entities that go bankrupt, and those that don't are going to die from a thousand cuts in services," says Richman. "And because of the strength of the public employee unions as a special interest group in California, I don't have any confidence at all that Sacramento will address this issue."

CFFR Reform Initiatives

Please consider the CFFR Recommendations to Solve Vallejo's Fiscal Crisis as well as the CFFR PUBLIC EMPLOYEE BENEFITS REFORM INITIATIVE.

The CFFR recommendations are certainly a big step in the right direction. However, the proposed changes are still way too generous. Stop the madness now. Get involved.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Auto Sales Plunge Near 30 Year Lows

Bloomberg is reporting Chrysler U.S. Sales Fall 48% as Toyota, Ford Trail Estimates.

Chrysler LLC’s U.S. sales plunged 48 percent in April as the automaker slid toward bankruptcy, helping drag Toyota Motor Corp., Ford Motor Co. and Nissan Motor Co. to declines that exceeded analysts’ estimates.

General Motors Corp.’s 34 percent drop and Honda Motor Co.’s 25 percent decrease were smaller than projections. Ford slumped 32 percent, Toyota tumbled 42 percent and Nissan decreased 38 percent. Chrysler also fared worse than estimates.

GM projected a annual U.S. sales rate of 9.6 million vehicles, less than the average estimate of 9.9 million vehicles among 7 analysts surveyed by Bloomberg before today’s results. The March rate also was 9.9 million, after a 9.1 million rate in February that was the lowest since 1981. Sales totaled 13.2 million in 2008, and averaged 16.8 million this decade through 2007.

Automakers’ spending on incentives averaged $3,031 for each vehicle, a 29 percent increase from a year earlier, according to automotive researcher Edmunds.com of Santa Monica, California. Still, that was down from the record of $3,165 in March.

Ford Overtakes Toyota

The Wall Street Journal is reporting Auto Sales Remain in a Rut; Ford Overtakes Toyota.

Ford Motor Co. reported a 32% drop in U.S. vehicle sales for April, but the healthiest of Detroit's auto makers outsold Toyota Motor Co. for the first time in at least a year.

The Japanese auto maker's U.S. sales fell 42%. General Motors Corp. said its sales fell 33% last month, however the auto maker noted that shipments were up significantly from March.

"We see that stabilization, along with the firming up of our fleet business and improvement in Silverado and Sierra sales, as an encouraging sign," said Mark LaNeve, GM's Nirth American sales chief.

GM sold 172,150 vehicles in the U.S. in April, down from 257,638 a year earlier. Its car sales fell 41%, while sales of light trucks – which include sport utility vehicles, vans and pickups – fell 27%.

Ford said in April it sold 133,979 light vehicles in the U.S., down from 195,665 a year earlier, but the company said it is gaining market share.

Ford, Lincoln and Mercury car sales dropped 31% despite record sales of its Fusion sedan. Sport-utility vehicles continued to tumble, falling 61% in April. Sales of pickups and vans dropped 36%.

Toyota sold 126,540 vehicles in the U.S., as both car and light-truck sales fell more than 40%.

Also Friday, Honda Motor Co. said its U.S. sales fell 25% to 101,029. Nissan Motor Co. reported a 38% drop to 47,190 vehicles, while Daimler AG's sales fell 31% to 15,910. Other auto makers will release their monthly results later in the day.

30-year lows

Reuters is reporting Auto sales plunge to near 30-year lows.

U.S. auto sales in April were on the road to plunging to their lowest levels in nearly 30 years according to sales reports released on Friday, the day after Chrysler LLC filed for bankruptcy.

Japan's Toyota Motor Corp posted the largest sales drop at 42 percent among major automakers in the U.S. market, followed by Nissan Motor Co Ltd at 38 percent.

Sales at U.S. automaker Ford Motor Co slid almost 32 percent last month, while sales General Motors Corp, which like Chrysler has been operating under federal supervision, fell 34 percent.

Honda Motor Co's sales were off 25 percent.

U.S. auto sales typically account for as much as one-fifth of all retail sales in the country and represent one of the first indicators of consumer demand every month. Both GM and Chrysler have announced plant shutdowns to slash bloated vehicle inventories.

Inventory Overhang

With a huge glut of inventory, GM set its second-quarter production forecast at 390,000 vehicles, down 53% from a year ago. GM has little choice but shut down its production lines for up to 11 weeks this summer. See Idled GM factories to affect more than workers for more details.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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ARMs Reset Crisis Revisited

Just over a year ago I took a Close Look At The ARMs Reset Problem.

Inquiring minds may be asking "What's Changed?"

The answer is: there has been much improvement across the board, but especially for 5-1 ARMs. In addition, those in ARMs tied to the Cost of Funds Index (COFI), will be pleased to note that on April 30, the COFI sank to an all time low.

The History of COFI shows the March 2009 index value at 1.627, a record low. A year ago index value was 3.280. Last month it was 2.003.

COFI is the weighted average of the cost of funds (CDs, savings deposits, checking deposits, etc) for member banking institutions of the Federal Home Loan Bank of San Francisco (the 11th District). COFI is a lagging index. The index value for a given month is typically reported on the last day of the following month. For Example: At or after 3 p.m. on the last business day in September, the bank announces the August COFI.

The most common indices used to compute ARMs are COFI, 1-Year Constant Maturity Treasuries (CMT), 1-Year LIBOR, and 1-Month LIBOR.

Rate Comparisons - COFI, 1-Yr CMT, 1-Yr LIBOR



Those in interest only loans are frequently tied to 1-Month LIBOR.

1-Month LIBOR



All charts courtesy of Money Cafe.
Click on any chart to expand.

ARM Index Rates

COFI - 1.627%
1Yr CMT - .64%
1Yr LIBOR - 1.97%
1Mo LIBOR - .41%

ARM rates consist of an index rate (typically one of the above), plus a margin component (e.g. 1 Month LIBOR + a spread). The amount of the spread is based on credit risk and other factors at the time the loan. Regardless of what index rate is, ARMs that are now resetting are likely to be coming in at lower rates, perhaps even much lower rates.

1 Year CMT Table



One Month LIBOR Table



One Year LIBOR Table




COFI Table



Across the board, those in 3-year ARM rates that have recently reset or are about to reset, will do so at a much lower rate unless there is a floor. Moreover, with the specific exception of 1-Year LIBOR based loans, there will also be a reduction in 5-Year ARM rates when those loans reset. Looking ahead just one month, even 5-Year ARMs tied to 1-Year LIBOR are likely to reset lower.

Thus, even homeowners ineligible to refinance now because they are underwater on their homes, have already (or soon will) see a significant reduction in mortgage interest rates (assuming there is no floor that prevents rates from going lower). I do not have stats on the percentage of loans with and without a floor, but even with a floor, rates should not rise.

Principal Payments Need To Be Factored In

There is still one more issue to address, and that is higher payments when the interest only period ends. For example, a 5-year ARM loan typically goes from interest only payments to interest + principal amortized over 25 years on the first rate reset. Likewise a 3-year ARM loan typically goes from interest only payments to interest + principal amortized over 27 years on the first rate reset. Some ARMs have a 10 year interest only period which postpones this particular problem.

Across the board, those in 3-Year ARMs with principal and interest payments will likely see their total mortgage payment drop. However, those paying interest only, especially those in 5-1 ARMs, may see their total payments rise. Even so, the situation has hugely improved from a year ago.

Pay Option ARMs Still A Problem



The problem with Pay Option Arms is over 80% of POA mortgagees only make the minimum payment. Given that minimum payments typically do not cover interest owed, the loan balance increases every month. This is called negative amortization, and it has been going on for years.

Negative amortization is compounded by falling home prices. At some point, typically 110-125% of the mortgage, an enormous gotcha kicks in. That gotcha requires a fully indexed fully amortized principal and interest payment, amortized over the remaining years. People who could only afford the minimum payment will be forced to pay principal, plus interest, on top of a loan balance that has been growing monthly. Good luck on lenders getting all their money back on those loans.

The second problem in regards to POAs is that a huge portion of these loans originated if the least affordable, biggest bubble areas, like Florida, California, Las Vegas, etc. From a lender's perspective that hugely increases the likelihood of default as well as the size of the problem should default occur.

Conclusion

Other than the ticking time bomb of Pay Option Arms (which is still a huge problem, especially for California), the ARM reset problem has vanished for as long as rates stay low, or permanently if ARM holders roll over into affordable fixed rate mortgages.

Unfortunately, reset issues are not the only problem. The economy is still losing 600,000+ jobs a month and for every job lost there is another person who might be shoved into foreclosure as a result.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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