WSJ says FHA will probably need a bailout before long:
“Asked at the hearing whether the FHA would need a bailout, HUD Inspector General Kenneth M. Donohue said he couldn’t predict. “Based on the numbers we’re seeing, I think it’s going in the wrong direction,” he said.”
What is the reason for the needed bailout? Well, er, bailing out other banks….
“In an interview Wednesday, Mr. Donovan said that the agency may need to sustain losses to keep backstopping lenders who otherwise wouldn’t make loans. “[W]hile we’re rightly concerned about the safety and soundness of FHA…we also need to be focused on the fact that credit is critical to the economic health of the country,” he said.”
“Debt protection costs on Citigroup Inc (C.N) hit record highs on Wednesday, ahead of a vote on a proposal to give banks more leeway on how they should apply mark-to-market accounting standards.
The accounting, in which assets are marked to their current market value, has been criticized for exacerbating market woes as extreme illiquidity in markets depressed debt prices.
Bank of America’s (BAC.N) debt protection costs also rose to around 400 basis points, up from 395 basis points on Tuesday, according to Markit.
Some analysts view modifications to mark-to-market accounting as risky as it will allow banks to create their own values for securities, which could increase distrust over assets held on their balance sheets.
“We still know the ‘stuff’ is on the balance sheets and if the financials are actually allowed to adjust capital based on unreal marks then who will ever buy financials again,” Tim Backshall, chief strategist at research firm Credit Derivatives Research said in a report.”
If we get a pop from a change in MTM today, it will mean more separation between the credit markets and the equity markets. Which is right? We are going with the credit markets on this one…
Gillian Tett at FT:
“As more toxic assets keep emerging, public confidence in the financial system keeps crumbling afresh. Little wonder. After all, the only thing more scary than the current scale of today’s banking woes is that, a full two years after subprime defaults got under way, policymakers and bankers alike remain confused about just how big the toxic rot really is, let alone when it might end.
That is no accident. One dirty secret that hangs over Thursday’s meeting is that there is still precious little global consensus about how to tackle the toxic woes. Some countries (such as the US) are trying to persuade banks to sell their bad assets; others (such as the UK) are trying to “insure” the banks against losses instead.
Meanwhile, several governments in continental Europe seem to be just holding their breath – and praying that the problem will magically disappear.”
The IMF currently estimates world banking losses at $2.2 Trillion. Rumors are now circulating that number will soon be revised. As the world economy get worse, more assets begin to fall into the “toxic” category.
We all recall the recent boasting by Citi, B of A and JP Morgan that earnings in Jan and Feb were positive and the subsequent backpedaling that occurred regarding March. Euromoney is questioning whether the banks can deliver on these new raised expectations. They document that investment banking fee revenues have supplied some profits, but that the trend is down, globally. The other three main lines of business are also down:
“In other business lines, revenue has collapsed. Banks made just $679 million in net revenues from syndicated loans in the first three months of 2009, down from $1.5 billion in the fourth quarter of 2008 and $2.8 billion in the third quarter and just one-eighth as much as in the high-water-mark second quarter of 2007.Revenue from M&A in the first quarter of 2009 was running at just above half the rate of that in the fourth quarter of 2008, down from $4.5 billion to $2.6 billion in the first quarter to March 27. Quarterly revenues from M&A had run above $5 billion for the first three quarters of 2008, having peaked at above $8 billion in the last quarter of 2007.
ECM revenue has not been as robust as one might have hoped, dropping to $1.8 billion with two days to go until the end of the first quarter from $2.6 billion in the final quarter of 2008 and at barely half the rate of $3.7 billion in the first quarter of 2008. ECM revenues’ most recent peak was in the final quarter of 2007 at $6.9billion.
Put the four business lines together and total revenue for the year to March 27 is $9.2 billion, compared with $10.7 billion for the prior final quarter of 2008, $15.4 billion for the comparable first quarter of 2008 and $26 billion in the record second quarter of 2007.
Oddly, as March drew to a close, at the end of a month in which Vikram Pandit had talked up Citi’s capital strength and earnings capacity, the bank’s own credit analysts delivered a warning: don’t lose sight of the downside. “In our opinion, investors are simply too optimistic about the earnings of the financials and may be disappointed if their expectations are not met. Although the earnings from continuing operations might provide some boost, we are afraid that potential additional write-downs could more than offset this”. “
The next 2 weeks of first quarter earnings reports will truly be interesting for followers of many companies, but for the banks, are we in for a disappointment?
Besides the Community Reinvestment Act, the repeal of the Glass Steagall Act, which separated investment banking from traditional banking, must be viewed as a primary cause of the fine mess we are in now. A list of senators who voted against the Banking Oligarchy that really controls America from Money and Markets:
“Only eight senators opposed the Gramm-Leach-Bliley repeal of Glass-Steagall:
- Richard Shelby (R-AL)
- Barbara Boxer (D-CA)
- Richard Bryan (D-NV)
- Byron Dorgan (D-ND)
- Russell Feingold (D-WI)
- Tom Harkin (D-IA)
- Barbara Mikulski (D-MD)
- Paul Wellstone (D-MN)
If your senator was around in 1999, and he or she isn’t on that list, you can be fairly certain that your senator does the bidding of the Wall Street banksters, not you.”
Mr. Wellstone is dead. That leaves 7 in whom we may, perhaps, have more confidence than the rest.
ml-implode.com reports that according to the CBO, social security will run out money much sooner than projected even last year due to reduced payroll tax receipts:
“Last year, the CBO figured the surplus would be $80 billion this year and next, rising from those levels before falling to zero in about ten years. The most recent projections are for a slim $16 billion surplus this year and just $3 billion next year but, given the rosy predictions that usually come out of Washington, a deficit is certainly within the realm of possibilities.
This is bad. We were supposed to have until 2012 that Social Security would still be in a “surplus” — meaning more SS taxes were being taken in than outlays. Thus, Social Security would be contributing to the government’s general operating revenue until that time (the Social Security money taken in is not segregated in any way — it is just “tracked” through the holding of Treasury Securities).
Apparently, that “lucky” state of affairs is all but over — now the fund will have to start selling off its trillion or so of accumulated Treasuries, contributing to the overall funding problem of the Federal Government, at the worst possible time.
The US is bankrupt, folks. Its time to acknowledge it and deal with it.”
Rex Nutting at Dow Jones reports:
“Home values in 20 major U.S. cities fell at the fastest rate on record in January and are now down a record 19% in the 12 months ending in January.
The Case-Shiller index tracks repeat sales on the same properties over time, but it closely tracks only 20 cities, not the whole country.
A similar index from the Federal Housing Finance Agency released last week found prices rose 1.7% in January, the first increase in a year. The FHFA index tracks the whole country, but relies on data from Fannie Mae and Freddie Mac, so it missed most of purchases financed by subprime loans earlier in the decade.”
It’s beginning to be clear that we can have much less faith in the government’s data releases.
The McKinsey Quarterly reports on the importance of growing household incomes to facilitate reducing the abnormal debt level (see chart below) without such drastic reductions in consumption.
“In short, the importance of income growth is difficult to overstate. With it, households can simultaneously reduce their debt burden, rebuild savings, and boost consumption. But without significant income gains, deleveraging could undermine consumption and the global economy for years to come. One implication: policy choices that favor productivity and employment growth—critical determinants of income growth—will make deleveraging less painful. Efficiency breakthroughs in sectors, such as health care and government, that employ large numbers of people—but that have not enjoyed productivity revolutions similar to those experienced in industries like retailing and wholesaling—would make a dramatic difference.”
The problem is that in the current outlook there is not much opportunity for income growth for thenext 2 or 3 years. So… with the consumer’s new need to save, consumption is cliff diving.
FT published its “exclusive interview” with President Obama today. The interview of the “much like FDR” portrays the President as one who, in comparison to his predecessors, “conveys a degree of pragmatism” and “modulated phrasing” and who has a good chance to succeed in uniting the world at “the most important world economic gathering in decades”:
“Many believe that the G20 summit will prove a vacuous waste of time and that the world economy will continue to be sucked into the recessionary vortex. Mr Obama, however, projects a Zen-like calm towards the emergencies that he faces. If his rescue operations fail to arrest the tide, history may show him to have been too unfazed. If things started to stabilise and improve, Mr Obama could be hailed as the new FDR.”
Businessinsider.com recently wrote about the New York Post article documenting Citigroup and Bank of America’s recent purchase of Alt-A and ARM mortgage backed securities in anticipation of the public/private partnerships bidding to buy similar assets from such banks:
“This raises serious questions about how the banks are using TARP funds. Instead of stimulating the economy by making new loans, B of A and Citi seem to be spending money to buy up old loans. That’s probably a bet that the Geithner plan will create renewed demand for MBS.”
Mike Whitney at Global Research assumes the worst – that the banks are betting they will get a higher price when the Geithner plan is implemented:
“Thus begins the next taxpayer-subsidized feeding frenzy featuring all the usual suspects. The race is on to vacuum up as much toxic mortgage paper as possible so it can be dumped on Uncle Sam at a hefty profit. Nice. These are the same miscreants the Obama administration is so dead-set on rescuing. It’s crazy to try to help people who use the cover of a financial crisis to fatten their own bottom line. It’s better to let them sink from their own bad bets.
How is it that industry rep Geithner couldn’t see that his latest round of corporate welfare would create incentives for the bank scoundrels to game the system again? Naturally, if the government goes into the business of buying crap-loans from teetering financial institutions, the speculators and snake oil salesmen will follow. And so they have. Citi and B of A are just the first to respond to Geithner’s pigwhistle. Next will be the hedgies and the Private Equity porkers, all nuzzling up to the Treasury’s burgeoning feedbin hoping to sink their teeth into whatever tasty nuggets bob to the top of the trough.”
Regardless of their deeper motivations, there is another, simpler message in the bank’s recent actions to buy these assets – The banks simply believe them to be cheap. What is the take away for the PIMCO’s, Blackrocks’s and the others bellying up to the Treasury’s free money feedbin? The banks are telling them they will have to pay more than what the banks just paid…likely a price closer to the price the banks are carrying similar assets on their books. Are they worth what the banks will be asking for them because they have special cheap financing from the government on a non-recourse basis? One might say “yes” due to the special financing. But wait not so fast! The banks have special financing too. What if the banks bought a few extra of these type of assets just so they could sell those (and only those) back to the partnerships? This does nothing really for the bank’s balance sheets, but … it would provide some example transactions that Geithner and company could point to so that the program could be called a success.
