The Crisis Has Just Begun, But…

Posted by Ray on April 6, 2010 under Economy, Main | Be the First to Comment

There is some hope that the next aftershock might be muted, a little bit at least. The President just launched his new initiative to save the housing market which involves principal write downs, but no one is asking the really big question, why? With an industry report due out shortly you will see why, according to Diana Olick of CNBC the foreclosure report coming will set a new record. Am I surprised? Nope and you should not be either.

The mortgage mania was an era that will probably never be repeated again by private lenders, it continues through the FHA though. Many believe or believed the worst was over for mortgages blowing up in 2009, but they clearly had not read any meaningful material on the subject. If one read any of the numerous books about the credit crisis, aka lend anyone with a heart beat some money to buy a house they could not afford, they would know that 2009-2010 (the beginning of 2010 at least) was the lull before the storm. Whitney Tilson has probably the best book about the subject with many interesting charts in it, but most telling is that the last 12 months was merely the eye of the storm.

What happens next is really anyone’s guess, but what we all know for sure is that the problems that existed in 2008 are still on the books right now and the problems were merely covered up with the FASB’s suspension of rule 157, mark-to-market accounting rules. As you know firms can now make-to-fantasyland what they feel all that worthless paper is worth, I wish we could run our books like that because I have a painting of some dogs playing poker that I know will be worth millions in a few hundred years. Regardless, the next wave of the crisis is starting to break now as we have resets on prime mortgages, Alt-A’s and even some sub-prime that will begin now.

Why do you think the major banks were so quick to agree with Obama and begin to really renegotiate those loans? It is because they know that the problem is still there and needs to be dealt with since mortgage modifications clearly have not worked, there-default rate is through the roof. Obama knows that the mortgage problem is still very real as well and if the FASB goes back to mark-to-market, well, we are right back to September of 2008 and now the Fed and the government have zero ammo left besides outright nationalization of the banking sector. This is why Obama has offered rich incentives to all parties to begin this program, to help avoid the next wave, but I have little faith that the program will work based on the modification failure. This has nothing to do with politics as I think this is the best plan to deal with the problem, but it is a huge problem and principal write down’s will mean losses for some banks.

The interest rate reset issue is also why you will not see the Fed raise interest rates soon either, along with that other little problem known as the national debt. All the talk about Hoenig getting rid of the “extended period” talk is just a side show. While he might have bubble concerns, rightfully so I might add, he merely wished to change the language, but it means, essentially, the same thing. According to the FMOC minutes here is what was said on the whole dissent issue:

“Kansas City Fed President Thomas Hoenig again dissented on this count, favoring a more flexible commitment to keep rates low “for some time,” according to the minutes, which did not elicit major market reaction.

Fed officials expressed concern about renewed weakness in housing and persistently high unemployment, saying the threat of a vicious cycle had not fully receded.”

His dissent was for the markets, not because he really disagrees with the low interest rate policy. The Fed knows that the housing market is a mess, as they stated in their minutes, and they know that there are plenty of adjustable rate mortgages ready to reset, the terms stink I might add. Sub-prime resets are usually fixed to a maximum of, if memory serves me correctly, 15%, but the real issue is the deterioration of the prime mortgages which has yet to really get started. The prime mortgages, in my opinion, is just one of the reasons rates will not increase as the resets are prime plus (insert risk premium here). If these mortgages can be written down problem solved! Kind of.

Whether or not this new initiative will actually solve the problem remains to be seen, but as I said earlier it is just about all we got left without the government actually buying the houses and letting people pay rent to live in the house. Luckily we are not doing, oh, wait we are doing that to, never mind. Again, another shock to the system will be devastating and this is why the big banks are all over this new modification program, but it is unclear whether or not homeowners will go for the plan or not, see the latest GSE study on how Americans view homeownership. No matter what, unless there is another accounting gimmick, the banks will have to take some losses in the near future albeit smaller losses than a foreclosure.

Of course, the media is not looking at this data and merely parade people wearing rose colored glasses in for their interviews, but this problem is real and it is getting closer. I do not believe it will be as bad as 2008, but it certainly can turn as bad if the problem is not cut off over the next few months. If this new program fails or has a low participation rate that may be a problem. The other unreported issue is the SIV accounts that need to be brought on the banks balance sheets in the near future, those are the accounts that banks “sold” their CDO’s to in order to securitize them, but since 2008 that paper has not moved.

In short, the problems have not changed or gone away. All those who told you everything is fine are either lying or do not have a clue what was written. With 4 negative days in the past month and a rising tide still lifting all boats I think that alone should be a warning that we are still in very unusual times. Let’s face it, markets never go parabolic without having a not so bullish ending and with the banking system still impaired I believe there is a recipe for disaster in the not so distant future.

LIBOR Overnight Shoots Higher

Posted by Ray on March 16, 2010 under Main | Be the First to Comment

Just a week or so ago the overnight LIBOR rate, this is the rate banks loan money to each other at (such as prime plus LIBOR or similar), was a paltry .17% and today it is a whopping .22%. While this is might not seem like a huge issue, and it is not on its own, it is a signal of something. Perhaps it is signaling that the wall of liquidity is coming to an end or that there is more risk lending to institutions than originally thought. Or, perhaps, Zero Hedge’s rumor mill was right and some of the GSE’s cut off 10 European banks from lending which caused the overnight rate to shoot up, it looks like they had it nailed.

I typically do not act or comment on rumors because some 90% are not true, but this one I watched because LIBOR was one of the signals preceding the credit crisis beginning in 2007 to 2008. If this rumor ends up being true, and it looks that way, I think there will be some negative implications for the equity markets as the rally is liquidity driven. However, LIBOR at .22% is nothing to worry about, at all, and unless it climbs higher I would not be worried, but it is on my ‘watch’ screen as it has implications. Also, the LIBOR rate is outside of the Fed’s control, frankly, as they already spent all their ammo in that department.

Well, let me rephrase that, they would need to start up recently closed programs and institute new programs in order to bring down the interbank lending rate. The markets are not fully healed and credit is still tight meaning that trust is still lacking in many areas. Credit is merely trust and, frankly, would you really trust a European bank right now? Who knows how much Greek debt they hold or other PIIG debt they have on the books. If you do not know you cannot trust them. If you can’t trust them you do not extend credit to them or you charge them more for credit to cover the potential risk. It is a vicious cycle and the system cannot handle any other shock or it will be in jeopardy again.

I am not saying there is much to read into, yet, but keep an eye on it as little things like the LIBOR usually signal or are the first sign of potential larger problems. It also looks like the Zero Hedge rumor mill was on to something, I am going to email them to see if they have a follow-up on the story. In the mean time, do not look for anything exciting from the Fed meeting, nothing will happen and the language will not change, which should concern you as well. Trade carefully and the market that is in front of you, I bought August VIX calls today as volatility is way too cheap, historically the VIX is at 20, and there seems to be no one betting it will go down, look at the put action.

Failure Friday

Posted by Ray on March 12, 2010 under FDIC | Be the First to Comment

Another Friday and another busy night for the FDIC who had to close 3 institutions tonight bringing the total for 2010 to 30. On the bright side of things the FDIC troubled bank list is getting smaller. It was 702 and now it is now in the high 600’s unless they added more to the list. No worries though, everything is fantastic, oh did I mention Kansas City is closing half of its schools and Dade County Florida is under investigation for misleading investors on its finances, makes you wonder about the recent CA bond issue doesn’t it, or not.

Anyhow, tonight’s lucky winners are:

Apparently The Park Avenue Bank had a killer art collection complete with Andy Warhol pieces, I wonder how that will be handled, and its own curator.  Regardless, it was another somewhat large night for the FDIC with assets of the failed institutions totaling over $1B, I am not including Thursday’s closure. While the losses may not be huge they are persistent and it is like a death by a thousand cuts for an institution running a negative balance sheet. Again, no worry as everything is fine.

Now comes the fun part, how much did the FDIC actually lose tonight?

As you can see the losses and loss-share agreements are about $1B altogether so all these little banks add up. All the banks tonight were merged with another so nothing other than the name, and the fees depositors pay, will change tomorrow. While these banks were acquired it is important to realize that not every failed bank is bought. If your bank fails and it is not bought anything over the FDIC guarantee limit may not be covered, food for thought.

The Park Avenue Bank:

The Park Avenue Bank, New York, New York, was closed today by the New York State Banking Department, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Valley National Bank, Wayne, New Jersey, to assume all of the deposits of The Park Avenue Bank.

The four branches of The Park Avenue Bank will reopen during normal business hours beginning tomorrow as branches of Valley National Bank. Depositors of The Park Avenue Bank will automatically become depositors of Valley National Bank. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. Customers should continue to use their existing branch until they receive notice from Valley National Bank that it has completed systems changes to allow other Valley National Bank branches to process their accounts as well.

This evening and over the weekend, depositors of The Park Avenue Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of December 31, 2009, The Park Avenue Bank had approximately $520.1 million in total assets and $494.5 million in total deposits. Valley National Bank will pay the FDIC a premium of 0.15 percent to assume all of the deposits of The Park Avenue Bank. In addition to assuming all of the deposits of the failed bank, Valley National Bank agreed to purchase essentially all of the assets.

The FDIC and Valley National Bank entered into a loss-share transaction on $379.8 million of The Park Avenue Bank’s assets. Valley National Bank will share in the losses on the asset pools covered under the loss-share agreement. The loss-share transaction is projected to maximize returns on the assets covered by keeping them in the private sector. The transaction also is expected to minimize disruptions for loan customers

Customers who have questions about today’s transaction can call the FDIC toll-free at 1-800-640-2538. The phone number will be operational this evening until 9:00 p.m., Eastern Standard Time (EST); on Saturday from 9:00 a.m. to 3:00 p.m., EST; on Sunday from 9 a.m. to 3:00 p.m., Eastern Daylight Time (EDT); and thereafter from 8:00 a.m. to 8:00 p.m., EDT.

As part of this transaction, the FDIC will acquire a cash appreciation instrument. The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $50.7 million. Valley National Bank’s acquisition of all the deposits was the “least costly” resolution for the FDIC’s DIF compared to all alternatives. The Park Avenue Bank is the 28th FDIC-insured institution to fail in the nation this year, and the second in New York. The last FDIC-insured institution closed in the state was LibertyPointe Bank, New, York, New York, on March 11, 2010.

Old Southern Bank:

Old Southern Bank, Orlando, Florida, was closed today by the Florida Office of Financial Regulation, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Centennial Bank, Conway, Arkansas, to assume all of the deposits of Old Southern Bank.

The seven branches of Old Southern Bank will reopen on Monday as branches of Centennial Bank. Depositors of Old Southern Bank will automatically become depositors of Centennial Bank. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. Customers should continue to use their former Old Southern Bank branch until they receive notice from Centennial Bank that it has completed systems changes to allow other Centennial Bank branches to process their accounts as well.

This evening and over the weekend, depositors of Old Southern Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of December 31, 2009, Old Southern Bank had approximately $315.6 million in total assets and $319.7 million in total deposits. Centennial Bank will pay the FDIC a premium of 1.00 percent to assume all of the deposits of Old Southern Bank. In addition to assuming all of the deposits, Centennial Bank agreed to purchase essentially all of the failed bank’s assets.

The FDIC and Centennial Bank entered into a loss-share transaction on $282.7 million of Old Southern Bank’s assets. Centennial Bank will share in the losses on the asset pools covered under the loss-share agreement. The loss-share transaction is projected to maximize returns on the assets covered by keeping them in the private sector. The transaction also is expected to minimize disruptions for loan customers.

Customers who have questions about today’s transaction can call the FDIC toll-free at 1-800-822-1918. The phone number will be operational this evening until 9:00 p.m., Eastern Standard Time (EST); on Saturday from 9:00 a.m. to 6:00 p.m., EST; on Sunday from noon to 6:00 p.m., Eastern Daylight Time Eastern Daylight Time (EDT); and thereafter from 8:00 a.m. to 8:00 p.m., EDT.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $94.6 million. Centennial Bank’s acquisition of all the deposits was the “least costly” resolution for the FDIC’s DIF compared to all alternatives. Old Southern Bank is the 29th FDIC-insured institution to fail in the nation this year, and the fourth in Florida. The last FDIC-insured institution closed in the state was Marco Community Bank, Marco Island, February 19, 2010

Statewide Bank:

Statewide Bank, Covington, Louisiana, was closed today by the Louisiana Office of Financial Institutions, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Home Bank, Lafayette, Louisiana, to assume all of the deposits of Statewide Bank.

The six branches of Statewide Bank will reopen on Saturday as branches of Home Bank. Depositors of Statewide Bank will automatically become depositors of Home Bank. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. Customers should continue to use their former Statewide Bank branch until they receive notice from Home Bank that it has completed systems changes to allow other Home Bank branches to process their accounts as well.

This evening and over the weekend, depositors of Statewide Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of December 31, 2009, Statewide Bank had approximately $243.2 million in total assets and $208.8 million in total deposits. Home Bank did not pay the FDIC a premium to assume all of the deposits of Statewide Bank. In addition to assuming all of the deposits, Home Bank agreed to purchase essentially all of the failed bank’s assets.

The FDIC and Home Bank entered into a loss-share transaction on $163.5 million of Statewide Bank’s assets. Home Bank will share in the losses on the asset pools covered under the loss-share agreement. The loss-share transaction is projected to maximize returns on the assets covered by keeping them in the private sector. The transaction also is expected to minimize disruptions for loan customers.

Customers who have questions about today’s transaction can call the FDIC toll-free at 1-800-913-3062. The phone number will be operational this evening until 9:00 p.m., Central Standard Time (CST); on Saturday from 9:00 a.m. to 6:00 p.m., (CST); on Sunday from noon to 6:00 p.m., Central Daylight Time (CDT); and thereafter from 8:00 a.m. to 8:00 p.m., (CDT).

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $38.1 million. Home Bank’s acquisition of all the deposits was the “least costly” resolution for the FDIC’s DIF compared to all alternatives. Statewide Bank is the 30th FDIC-insured institution to fail in the nation this year, and the first in Louisiana. The last FDIC-insured institution closed in the state was The Farmers Bank & Trust of Cheneyville, Cheneyville, December 17, 2002

Foolishness

Posted by Ray on January 27, 2010 under Main | Be the First to Comment

Here we are on the eve of the Presidents ‘State of the Union’ address, which should prove mind numbing as I will explain later, along with a host of other exciting events on Capitol Hill. We will see testimony from a few important figures from 2008 regarding the credit crisis, how they cannot figure out the cause is really beyond me as my 9 year old can recite the causes, but that is your government at work. While I fully expect to hear, during the Congressional hearings, ‘we did everything right and we would do it again ,‘ like they would admit that they screwed up. The President will give the usual speech tonight, the state of the union is strong, but we need to do work, a complete contradiction of reality I can assure you.

We will also hear the President talk about fiscal responsibility, which is a complete joke, as he talks about the massive $250B 10 year spending freeze in government, after he increased spending in those same departments 40% last year. Basically, the President is saying we will save $250B over 10 years, but those spending increases from last year will cost $1.3T, or so. With numbers like those I can assure you the media will not talk about the total hypocrisy of the spending freeze. I am sure we will hear about how well things have ‘improved’ from last year when he inherited this mess, the public is getting tired of that line Mr. President, and keep this in mind, ‘improved’ is a relative term and more politically correct than true for the average American.

A twist will be the indication that Mr. Obama ‘heard’ the public with the MA Brown victory, but he is still not listening. Like him or hate him there is one fact that cannot be ignored, Obama is tone deaf to the public and his arrogance is overwhelming, dare I say more than Bush’s? The point is that he may have ‘heard’ Americans, but he still will not listen to them which will cost him in the upcoming elections. Let’s face the facts, Obama campaigned for 3 Democrats and all 3 Democrats lost and he thinks it is not a repudiation of his policies? Sorry Mr. President, but 3 strikes and you are out. Like most Americans I like Obama on a personal level, but that is not the same thing as endorsing his policies or being blind to the fact that his policies are not working. Hell, Ted Bundy by all accounts was a likeable guy, but few people would want to be roommates with the guy.

No matter what the rhetoric is from tonight’s speech I can assure you that it is going to be meaningless and tone deaf to what is really needed for the country. What is also clear, to me at least, is that fiscal responsibility does not exist and the only things to cut are social programs, labeled ‘entitlement programs.’ It is only a matter of time that Social Security and Medicare benefits are reduced or altered, it needs to be done, but I do have a problem with that. The thing about entitlement programs is that every time you get paid a piece of your money goes into those entitlement programs. In other words, you already paid for these programs through years of work.

The irony is this, we know that these programs were not funded properly and they are broke, even though we put such a large portion of our checks into them every week, but Obama seems to think national or single payer health care is viable. How can any single payer or national health care be viable is Medicare and Social Security are bust and why would any trust the government after 2 large examples of, essentially, failed programs? I am not saying get rid of the 2 programs, the opposite is true, as these programs helped millions of Americans survive, literally, retirement. What I am saying is that these two programs are broke and if these programs, which pays benefits out to those 60 and older, cannot support that segment of the population how in the world can over 300M people get insurance from the government and not have that program blow up? It is not possible, sorry.

Regardless, the President is showing zero sign of fiscal responsibility as his $1.35T budget shows. What I found interesting is that the CBO came out with a damning report on the deficits which got a little air time, but not as much as it should have. However, even the CBO has the projects rosier than what is likely to happen. They actually predict that the deficits will shrink as the Bush tax cuts expire, this is true, for year 1 after the cuts expire. However, we know from history that as taxes go up revenues go down because the ‘wealthy,’ who are the enemy of the state now, decide to earn less because it will eventually be equally as profitable for them to earn less so they can keep more, this is why tax hikes never work long-term. However, that logic is lost on people who care to ignore both history and economics.

The good news is that real tax hikes will not take place until this fall, after the mid-term elections. Now, as far as the whole repayment of TARP tax proposed by Obama, that is a joke because TARP was paid back by most major banks. However, Detroit will likely never payback what they owe, how can they when unions now have board seats? Unions are the ones who killed Detroit to begin with, that is another argument though. The fact is that TARP, a Bush solution, worked, as much as I hate it, and if Obama stuck with only banks receiving it then it would have been profitable. However, now banks have to pay for Detroit which is about par for the administration, blame everyone else but themselves and make others pay for their pet project failures.

I am not sure how the President can claim everything is fine when all the economic data, bad data I mean, is coming home to roost. Unemployment is going to move higher as initial claims increase and the GDP figures, minus government transfers, will show horrible organic growth. We are not out of the woods yet, but everyone is acting like we are.

Bailouts for Everyone, Forever

Posted by Ray on December 29, 2009 under Main | Be the First to Comment

GMAC is apparently close to yet another $3.5B in additional aid from the government. This is on top of the original $12B the firm already received the first go around. Of course, the government will insist that this ‘investment’ will be profitable just like CIT, GM, Chrysler and anyone who invested with Bernie Madoff. This news comes on the heels of the Freddie and Fannie announcement that the government will backstop all, not just the original $400B, of the GSE’s losses which could be trillions at the end of the day.

Of course in the case of Freddie and Fannie the top executives will continue to receive millions in compensation because it takes talent to lose billions, it must because Brewster, of Brewster’s Millions, could barely do it if you remember. I find it hard to believe that anyone could possible argue that these bailouts are not permanent or will end at any point in the future. I think this latest blast of reality from the state owned automaker and mortgage issuer is proof enough that these bailouts will continue indefinitely.

The irony is that we are seeing all of these bailouts or ‘additional investments’ in the face of the greatest economic recovery that never was. Let’s face it, when the fantasy 3.5% GDP was whittled down to 2.8% you could live with that because that meant there was still private sector activity, but now that the official 3Q09 GDP figure is 2.2% that means there was no private sector activity at all. That was also with cash for clunkers and the housing tax credit in full force as well. Of course last week’s housing numbers showed us what the housing numbers will look like without government help, in a single word awful, but imagine when mortgage rates are at 6%. Regardless, if things were rosy then I find it hard to believe that GMAC would need more money.

Oh, I forgot, Citi and the rest of the banks are paying back TARP, sure, that means that banks are doing fantastic. Did you read the beginning of the story, the bailouts are permanent and these banks know 2 things, 1) the government will never let them fail; and 2) TARP is not going anywhere. Not only that, but these banks also carry massive guarantees on their portfolios and FDIC issued debt so the repayment of TARP, I am stealing this from Whitney Tilson, is the greatest scam ever. Basically the banks now can pay themselves whatever they want, they have guarantees on the crap on their books, implied guarantees, can issue guaranteed debt (in some cases), now they pay far less for many of those privileges and the government lost 90% of its leverage – nice job guys.

The payback of TARP does not mean banks are healthy it simply means the banks can go to the market and get other suckers to buy their debt to get Uncle Sam off their back. I did not think it was very hard to figure out, but apparently it was because the media and investors are swallowing this stuff hook line and sinker. The proof is in the pudding and bank stocks have done nothing since August and, frankly, the only good one is JP Morgan and who really knows what is on their offshore books or what they are really on the hook for through Bear? To think there will not be a need for another TARP bailout in the near future is crazy, banks would not be holding all this cash if; 1) the economy was really recovering; and 2) they were really as healthy as they want us to believe.

I may have been wrong about a correction this fall, I admit that, but there is no way that the continuous flow of bailouts can be framed as a good thing. Oh, if you are happy about Freddie and Fannie executives paying themselves millions, I would suggest calling your representatives and letting them know how you feel, especially if your in Barney Frank’s district because he really doesn’t care about you.