bank run blog

The House Financial Services committee approved a $15 billion housing bill that is intended to assist American families who run the risk of having their homes seized by financial institutions through foreclosure actions leaving them homeless. Though there has been bipartisan support for a measure that would provide relief for homeowners, the bills currently under consideration in both houses rely heavily on tax breaks and incentives for homebuilders and offer little for families facing foreclosure and no funding at all directly to homeowners who are locked into expensive loans as their properties rapidly lose value.

Key provisions in both bills call for supplying $4 billion in federal aid to local governments in areas hit hardest by foreclosures, offering a $7000 dollar tax credit to purchasers of foreclosed properties, and providing $100 million in federal funding to groups that offer mortgage counseling.

The most expensive component of the federal spending measures proposed, however, is a tax provision that provides aid not to families, but rather to the home building industry. The provision allows companies to charge off losses from this year and next year against taxes that the companies have paid going back to 2004. This would allow businesses to either receive refunds of taxes paid in past years or use their losses to reduce their taxable income in any of the next 20 years. The write-off provision is estimated to cost taxpayers $6.1 billion. The provision was promoted by the National Association of Home Builders, which has donated more than $11 million to political candidates and parties since 2000.

The Center for Budget and Policy Priorities estimates that “about three-fifths of the bill’s cost reflects tax-cut provisions that will do little or nothing to help either homeowners or hard-hit communities.”

A provision that would allow bankruptcy judges to cut interest rates on mortgages to help families that have filed for bankruptcy protection to remain in their homes was killed in the Senate version of the bill by a vote of 58-36. Eight Senate Democrats and independent Joe Lieberman of Connecticut voted with republican Senate members to deny homeowners this protection.

cross posted at

redstateupdate.net

In is often difficult to find meaningful or critical analysis of the current banking crisis in the mainstream financial press in the United States, with most news outlets recycling government and corporate press releases. Actual forecasts for earnings in the banking sector are grim, but most of the American chatter assumes that bottoms have been reached in housing, banking, and financials. The optimism ignores warnings from economists familiar with the fundamental numbers. A report from the BBC asks, Can the US economy be revived? :

“They have allowed all the major financial institutions - which include investment as well as commercial banks - to borrow from a $100bn short-term fund set up to by the Fed.

This has eased their short-term liquidity problems, but it is not clear that we have reached the end of the write-offs from sub-prime and other credit losses.

So far, only around $250bn of the $1 trillion in credit losses estimated by the IMF has been announced.”

full story

At Minyanville, Mr. Practical has a markedly different point of view than most American market analysts, in US banking system on the fritz :

“We’re still very early in this process. You can choose to listen to the assurances of those that never saw this coming, or worse, denied it all along saying that the worst is over. Or you can use logic in understanding that there is six times the normal amount of debt in the system and the level of actual savings and income in the economy cannot support half of that.”

full story

Yesterday, the US Treasury began sending out tax rebates to millions of American families and individuals, as part of the Bush administration’s “economic stimulus” package. With giant corporations like Wal-Mart scrambling shamelessly to position themselves to gain from the meager increase in consumer spending, it is doubtful that any of the benefits of the package will accrue to small or locally owned businesses.

But even mega-retailers like Wal-Mart won’t be first in line to profit from the stimulus checks. They will be behind the sector of the economy least in need of stimulation: multinational petroleum corporations. Cynical observers have been predicting for months that the arrival of the checks would coincide with record oil and gas prices.

Associated Press : Tax rebates start going out today, earlier than planned

Reuters : Wal-Mart to cash tax rebate checks for free

Guardian (UK) : US retail gasoline price hits record $3.60/gln-EIA

New York Times : Shell and BP Report Record First-Quarter Profits

New data out today shows that vacancies in the US housing market have hit another all-time high. Analysts have so far underestimated the extent to which the sheer volume of foreclosures will act as a drag on the economy over the next few years. According to Reuters :

“The share of vacant U.S. homes rose to a record level in the first quarter, the government reported on Monday, with homeowners finding it increasingly difficult to find buyers in a collapsed market and more homes in foreclosure.”

The article goes on to note the market fundamentals that make a soft landing or a quick recovery impossible :

“According to data last week from the National Association of Realtors (NAR), 18 percent of previously owned homes that are for sale have negative equity and are either in foreclosure proceedings or headed for a ‘short sale’ in which the lender will write off some of the original loan amount.”

full story

S&P released a statement today warning of downgrades in the ratings of large commercial banks, tacitly admitting that the economic fundamentals remain bleak and the financial services sector remains highly exposed. Reuters reports :

“Standard & Poor’s on Monday said the chance of rating downgrades to large U.S. banks has increased over the past two weeks and their current high ratings have little cushion for volatile earnings.”

One of the exposed entities, investment bank Morgan Stanley, issued its own pessimistic forecast for bank earnings, according to Bloomberg :

“U.S. banks’ earnings may fall 26 percent this year and a further 15 percent in 2009, as credit continues to deteriorate and trim profit, according to analysts at Morgan Stanley.

Bank earnings will decline by $17 billion this year and a further $13 billion in 2009, driven by higher borrowing expenses and bad loans, analysts including New York-based Betsy L. Graseck wrote in a note to investors today. Lenders will probably cut dividends and raise capital to offset the losses, she said.

‘We are only in the 3rd inning of the credit cycle and expect it will be worse than 1990-91,’ Graseck wrote. ‘Credit deterioration will accelerate and banks will raise more dilutive equity and cut dividends.’”

Reuters : S&P says chance of U.S. bank downgrades has increased

Bloomberg : U.S. Banks’ Earnings May Fall 26% in 2008, Morgan Stanley Says

Instability and labor unrest has driven the price of oil to a new high. Insurgents in Nigeria attacked an oil pipeline late last week, the fourth such oil pipeline attack in Nigeria in 7 days; and, Oil workers, striking to preserve pention rights from their employer, Ineos, who plans to slash benefits for younger workers, closed a refinery, which is likely to reduce availability of refined oil in the UK.

The LA Times reported;

“Oil prices hit an all-time high near $120 a barrel Monday after a weekend refinery strike closed a pipeline system that delivers a third of Britain’s North Sea oil to refineries in the U.K. The shutdown comes amid supply outages in Nigeria that have helped to support oil against a strengthening dollar. Light, sweet crude for June delivery rose to a record $119.93 a barrel in electronic trading on the New York Mercantile Exchange.”

The Guardian reported, “The energy minister, Malcolm Wicks, today warned motorists they may not be able to fill up with petrol as fears mount that a strike by workers at Scotland’s biggest oil refinery could spark a national fuel crisis.”

Also on Friday, reports the Associated Press, “Oil prices rose sharply…on news that a ship under contract to the U.S. Defense Department fired warning shots at two boats in the Persian Gulf.” The news raised concerns that a war between the U.S. and Iran could cut supplies of crude oil from the Middle East.

In the US, gas prices continue to climb with prices exceeding the 4 dollar mark in many areas.

see stories-
Associated Press: Oil prices up on word US ship fired on boats in Persian Gulf
Guardian: Minister warns of pump shortages as refinery strike looms
Los Angels Times: Oil nears $120 following labor and military strikes

The markets have accepted the huge first quarter losses in the financial sector with equanimity, apparently relieved that things weren’t even worse. Outside the financials and banks, earnings reports have been better than expected, with GE’s losses the only significant unpleasant surprise. Yesterday the Associated Press looked forward to the consumer discretionary related earnings reports due out over the next few weeks :

“But the coming week might change the market’s dynamics, as a string of consumer-oriented companies including electronics stores and food companies are scheduled to release their results. Wall Street is worried about slowing consumer spending, and these companies might give investors their best indication yet about how much Americans are willing to spend these days.”

full story

A column in the New York Times pondered the market resiliency, locating at least a few analysts who feel that the recent trends don’t comport with the underlying fundamentals :

“Small-cap stocks, meanwhile, are actually holding up slightly better than big, blue-chip shares. Since the start of the year, the Standard & Poor’s 600 index of small stocks has lost 3.5 percent of its value, while the S.& P. 500 index of blue chips is down 4.8 percent.

And as for defensive plays like health care? That sector has lost nearly 11 percent, on average, since the start of the year. Consumer discretionary stocks, on the other hand, have lost less than 3 percent. ‘It is puzzling to me that the consumer discretionary part of the S.& P. 500 is beating the index,’ Mr. Orndorff said. ‘We are in a recession and consumer spending is slowing, so it should stand to reason that these stocks would do poorly.’”

full story

Typically, the British financial press is out in front of US journalism on the prognosis for the global economic crisis that started in New York. Today’s Sunday Times says Forget 2008. Next year is the one to fear :

“Take last week, for example. Boeing, Amazon, Apple and Volkswagen all produced strong growth in quarterly earnings, a welcome relief following the gloom that descended on Wall Street after General Electric’s profit warning a fortnight ago. One view is that there is enough momentum in order books to sustain earnings for this year, particularly for companies, such as aerospace group Rolls-Royce, with strong exposure to Asian markets. Industrial stocks also look like weathering the immediate storm.

The concern is what will happen next year. As Sir Martin Sorrell, chief executive of advertising group WPP, said last week: ‘When will the real world start feeling the slowdown’s effect? My feeling is that it is 2009 when the rubber really hits the road.’”

full story

Increasing reports of suspicious house fires and automobile fires across the country have led law enforcement officials and insurance companies to conclude that some owners who cannot afford to make loan payments may be choosing to commit arson as a way out of seemingly intractable financial situations.

Although rates of arson declined by 60 percent between 1997 and 2007, arson and cases of suspected arson have been increasing in certain areas across America, most significantly in areas where there have been large numbers of home foreclosures. In Ohio, a sate that has seen a dramatic increase in foreclosures, instances of automobile arson and staged auto thefts have risen by 150 percent in the past two years.

In California, where thousands of properties have been seized by banks, the number of suspected home arson cases referred for official investigation has doubled and the number of auto arsons has increased by a third. In the San Joaquin Valley, which had the nation’s highest rate of foreclosures in March, cases of suspicious auto fires have doubled over the past three years.

Investigators from the insurance industry have requested a meeting with the state’s insurance commission to convince the authority to investigate instances of possible arson that occurred during last year’s wildfires that destroyed 2000 homes in the state.

cross posted at
redstateupdate.net

US consumer confidence fell to a 26-year low point. The Reuters/University of Michigan consumer sentiment survey reported consumer sentiment fell from 62.6 percent to 69.5 percent. The survey also found that 9 out of 10 respondents believe that the US economy is in recession, and reported that the one-year inflation expectations reading fell to 4.8 percent.

The downward shift of consumer confidence has been attributed to record fuel prices and rising unemployment, among other economic factors. Bloomberg provides this analysis;

“Consumers are growing increasingly anxious because the economy has lost almost a quarter million jobs so far this year, gasoline is up 17 percent and property values have fallen. Sales of houses and cars have declined as a result, contributing to a slowdown that may bring an end to the six-year expansion.”

see stories:
Bloomberg: U.S. Economy: Sentiment Weakens More Than Anticipated
The Australian: US consumer confidence at 26-year low

Yesterday Reuters reported that after this week’s huge losses, troubled bond insurer Ambac might have to raise even more capital to stay afloat :

“New York’s insurance regulator said on Thursday that Ambac Financial Group Inc may need more capital at some point, but added that the bond insurer’s $1.66 billion first-quarter loss was within the range expected by rating agencies.

Eric Dinallo told Reuters that he is not pressing Ambac to raise more capital now.

‘I’m not on the phone with (Ambac Chief Executive Michael) Callen telling him to get more capital. There’s been no such conversation,’ said Dinallo, who is New York State’s insurance superintendent.

On Wednesday, Ambac posted a $1.66 billion first-quarter loss, and took more than $3 billion of charges for bonds related to mortgages.”

The week’s events have prompted more than one observer to wonder if the financial markets could get along without the monolines. The Motley Fool ran an article speculating that the problems will be too much to overcome for Ambac and its chief competitor, MBIA :

“The amount of damage from insuring CDOs over the past several years may very well be enough to take down what was once a healthy, cash-generating business model.”

But Minyanville editor Todd Harrison correctly warns of another round of contagious counterparty risks as the monolines fail and the market tries to absorb the losses :

“The real concern is that Ambac’s collapse could ignite fears about counterparty risk, and that traders could again stop trading. Illiquid markets exacerbate pricing pressures, induce margin calls and can eventually lead to situations like the Bear Stearns run on the bank.”

Reuters : NY insurance regulator says Ambac may need capital

Motley Fool : Ambac Obliterated: Is This the End?

Minyanville : Can Ambac Survive?