bank run blog

Before the US markets opened this morning, the Associated Press filed this brief report on a highly unusual bank failure in Denmark :

“The Danish central bank said Monday it has taken over the country’s 10th largest bank after it was hit by the subprime housing crisis.

Roskilde Bank will receive 4.5 billion kroner ($892 million) in cash from Nationalbanken and the financial sector in Denmark after the bank was unable to find a buyer.

The Danish central bank also said it would assume 37.3 billion kroner ($7.43 billion) of debt in the deal. Last month the central bank granted a liquidity facility to Roskilde Bank and bought its debt until it could be resold.

Nationalbanken said that it has the backing of the government and would get a guarantee to cover any losses it might suffer in the takeover. Roskilde Bank’s operations will continue in a new bank under the same name, it said.

Bailouts are rare in Denmark. Nationalbanken has only rescued a few banks in crisis, most recently in 1984.”

Bloomberg quoted the chief of the Danish central bank, who said he was trying to avoid the spread of a “contagion” in his country’s financial sector :

“’We wanted to secure financial stability in Denmark,’ central bank Governor Nils Bernstein said at a press conference in Copenhagen today. ’The alternative would have been that Roskilde went bankrupt and that would have resulted in a considerable contagion throughout the financial sector.’”

Associated Press : Danish central bank rescues crisis bank

Bloomberg : Danish Central Bank to Lead Takeover of Roskilde Bank

The Commerce Department reports that retail sales fell in July, the decline in sales was the first drop seen in five months. Reuters writes the government stimulus package of so-called “tax rebate” checks may have helped to boost consumer spending during the month of June, “but their influence appears to have petered out by July.” Consumer spending makes up more than two-thirds of the US economy.

The White House says high fuel prices are among the factors creating “substantial headwinds faced by households” that bought fewer automobiles last month, causing the drop in consumer spending. Commerce reported that sales at auto dealers and parts stores dropped 2.4 percent.

Bloomberg said that consumer spending “is likely to keep fading as a boost from tax rebates wanes and households try to cope with job losses and house-price declines.” Bloomberg quoted an executive of the Manufacturer’s Alliance who believes;

“A whole host of factors - unemployment growing, wages flat to stagnating, the wealth effect of lower house prices and stock prices - all are conspiring to forecast, I think, weaker sales ahead.”

One bright spot in the retail sales numbers was in the sale of gasoline since last year at this time. Although the American Petroleum Institute reported that gasoline use has declined by more than 2 percent since last year at this time and the Federal Highway Administration said that Americans drove 12.2 billion fewer miles this June compared to last year, the rise in gas prices pushed sales up by 0.8 percent over last years figures.

see stories-
Bloomberg : U.S. Economy: Retail Sales Fell in July, Led by Autos
Associated Press : Retail sales drop for first time in 5 months
Reuters : Check Out Line: The short-lived tax rebate boost

In a predictable but unfortunate response to the collapse of the securitized debt market that they themselves created, banks are now “tightening their lending standards,” or, more accurately, suspending all lending activity while they chase short profits and try to replenish their reserves. This is bound to have an immense impact on the US economy, which has been built on easy access to consumer credit. The Associated Press is reporting tonight that the Federal Reserve finds deepening credit crisis :

“More banks are tightening lending standards on home mortgages and other consumer and business loans as a deepening credit crisis exerts a heavier toll on the economy.

The Federal Reserve said Monday the percentage of banks reporting tighter lending standards rose across various loan types in its July survey. In April, the central bank had found that the percentage of banks reporting tighter lending standards was already near historic highs.”

The AP article notes that all areas of consumer credit have been affected :

“For home equity lines of credit, 80 percent of the banks surveyed said they had tightened their lending standards in this area.

For credit cards, the percentage of domestic banks reporting tighter lending standards was about 65 percent, more than double the 30 percent who reported they were tightening lending standards for credit cards three months ago.

Analysts said that the big jump in higher standards for credit card debt could represent a serious threat to the already weak economy, given that consumer spending accounts for two-thirds of total economic activity.”

A piece in the Financial Times quotes a US analyst who recognizes that the third and fourth quarter are unlikely to yield the “modest recovery” the Fed predicted at the beginning of the year :

“’Coming at a time when the cash flow from the rebates has dried up and the growth in labour income is slowing to a crawl, the restriction in lending to households underscores the challenges facing the consumer in the second half of the year,’ said Michael Feroli, a US economist at JPMorgan.”

Associated Press : Federal Reserve finds deepening credit crisis

Financial Times : Tighter rules dash hopes of end to squeeze

Realty Trac reported today that 739,714 homeowners received notice that their homes were in foreclosure in the second quarter, up 13.8 percent compared to the first quarter of 2008. Foreclosures are up a 121 percent compared to the same quarter in 2007.

Bank seizures in the first half of the year increased by 154 percent to 370,179 from the same period in 2007. 48 of 50 states and 95 of the 100 largest US cities had year-over-year increases in foreclosure filings in the second quarter. Realty Trac reported that the following states saw the largest increases in foreclosures last quarter;

Nevada: one in every 43 households received a foreclosure notice in the quarter

California: one in every 65 households received a foreclosure notice in the quarter

Arizona: one every 70 households received a foreclosure notice in the quarter

Also among the top ten states where home owners receive foreclosure notices were Florida, Colorado, Ohio, Michigan, Georgia, Massachusetts and Illinois

Bloomberg quotes Bill Gross, manager of the bond fund at Pacific Investment Management, who said “About 25 million U.S. homeowners risk owing more than the value of the their homes.” Bloomberg writes;

“One in every 171 households was foreclosed on, received a default notice or was warned of a pending auction.”

see stories -
Reuters :RealtyTrac report says Q2 home foreclosures up 13.8 pct from Q1
Bloomberg : U.S. Foreclosures Double as House Prices Decline

The Office of Federal Housing Enterprise Oversight reports that U.S. home prices fell a record 4.8 percent in May since the same time last year. The agency also said that home prices fell 0.3 percent since last month. OFHEO oversees the government-sponsored mortgage-finance companies Fannie Mae and Freddie Mac.

Market Watch points out, “The OFHEO index tracks mortgages data from Fannie Mae and Freddie Mac of sales of the same homes over time. It does not include jumbo loans, or subprime loans, so it may understate the declines in the bubbliest areas of the country, such as California, Florida, Nevada and
Arizona.” Market Watch notes that the more comprehensive Case-Schiller index;

“will be released for May by Standard & Poor’s next week. Through April, home prices were down 15.3% in the past year according to Case-Shiller. It includes subprime and jumbo loans, so it covers more homes than the OFHEO index does.”

There are wide regional disparities in home values that the national averages do not reflect. While the OFHEO reports that prices rose in May in the Middle Atlantic (New York, New Jersey and Pennsylvania) and the East North Central states (Michigan, Wisconsin, Illinois, Indiana and Ohio), the San Diego Union Tribune writes, “DataQuick Information Systems reported yesterday that the statewide median home price was down 31.5 percent last month from June 2007 levels.”

See articles-
Market Watch : U.S. home values fall 4.8% in past year, U.S. says
Associated Press : US home prices fell 4.8 percent in May
San Diego Union Tribune : Statewide home prices fall

Wachovia, the nation’s fourth largest bank, reported a record second quarter loss of almost $9 billion this morning, becoming the only one of the five biggest US banks to “miss Wall Street analysts’ expectations”. Reuters reports :

“Wachovia Corp on Tuesday posted an $8.86 billion second-quarter loss, slashed its dividend and announced 6,350 job cuts after losses tied to mortgages soared.

Its shares fell $1.67, or 12.7 percent, to $11.51 in premarket trading.

The net loss attributable to common stockholders equaled $4.20 per share and compared with a profit of $2.34 billion, or $1.22, a year earlier.

Results included a $6.1 billion write-down of goodwill, and reflected a $4.2 billion increase in reserves for bad loans.

The Charlotte, North Carolina-based bank slashed its quarterly dividend 87 percent to 5 cents per share from 37.5 cents, and has now lowered it 92 percent this year.”

Wachovia has been battered since its unwise acquisition of Golden West Financial Corporation, a subprime and Alt-A mortgage specialist that marketed the ill-fated ‘Pick-A-Payment’ marketing twist. According to the Associated Press :

“Wachovia recently discontinued offering the ‘Pick-A-Payment’ loan option, which allows customers to pay a less-than-full interest payment on all new home loans. The bank also had hired The Goldman Sachs Group Inc. to conduct an analysis of its loan portfolio and advise it on strategic alternatives.

Late Monday, Wachovia announced plans to leave the wholesale mortgage lending business. And beginning Friday, the company will no longer offer mortgages through brokers, joining other lenders making similar moves to exit the troubled sector.”

The article continues, noting that the bank recently turned to a consummate insider in an unsuccessful effort to right the ship :

“Earlier this month, Wachovia named former Treasury Undersecretary and Goldman Sachs Group Inc. executive Robert Steel as chief executive, replacing the ousted Ken Thompson. Within a week of being on the job, the bank’s shares tumbled to a new 17-year low.

In premarket trading Tuesday the stock shed nearly 12 percent to $11.80. That level would mark the stock’s lowest price since roughly June 1991.”

Reuters : Wachovia loses $8.86 billion, slashes jobs

Associated Press : Wachovia has $8.9B loss, cuts 6,350 jobs, dividend

As inflation and unemployment spike upward, the misery index is at its highest point since 1993, The misery index combines the unemployment rate and the rate of inflation to come up with an indicator that suggests how tough times are for the average working American. Bloomberg reported last week;

“The year-over-year inflation rate accelerated to 5 percent, the fastest since May 1991, the Labor Department said. A separate report July 3 showed a 5.5 percent unemployment rate for June. Today’s consumer price index data also showed wages fell 2.4 percent over the last 12 months, after adjusting for inflation…The June unemployment rate held at 5.5 percent after soaring the most in two decades in May from April’s 5 percent”

Bloomberg also predicted, “Surging costs and falling payrolls will cause consumers to slow spending growth to the weakest pace since 1991 by the fourth quarter.”

The misery index was conceived of by economist Arthur Okun who was an economic adviser to President Lyndon Johnson in the 1960’s. The web site www.miseryindex.us writes, “It is assumed that both a higher rate of unemployment and a worsening of inflation both create economic and social costs for a country. A combination of rising inflation and more people of out of work implies a deterioration in economic performance and a rise in the misery index.”

see article-
Bloomberg : U.S. `Misery Index’ Climbs to 15-Year High on Prices

At the end of a week when General Motors announced a seismic company wide restructuring that includes both layoffs and plant closings, and the company’s stock price gained 37 percent in a three day period (trading at $12.85 on Friday, up from its close on Monday of $9.38 but still significantly lower over the long term- plunging 62% this year to 50 year lows), the town of Flint, MI celebrated the 100 year anniversary of the GM. The Detroit News reports;

“A parade will be held at 1 p.m. Sunday that will feature 92 vehicles, each meant to represent a year in GM’s history. Three 1908 Buicks will start the parade at City Hall, which ends on Saginaw Street. A 2008 Chevrolet Tahoe hybrid, a Cadillac CTS and a Chevrolet Malibu will bring up the rear of the parade. Also included in the parade are military vehicles and Corvettes, Pontiacs, Oldsmobiles and other GM staples.”

The celebration takes place in the home city of GM, William Durant founded General Motors in Flint in 1908, where the company has scaled back it operations. GM closed its huge Buick manufacturing plant in the late 1990’s. The Detroit News notes;

“The sprawling 235-acre site was meant to be GM’s answer to Toyota’s Toyota City in Japan. A sign that welcomed people to Flint, calling it Buick City, has since been removed.”

GM announced on Tuesday that it will cut more than 20 percent of its workforce in the U.S. and Canada, and that it has suspended paying dividends on common stock, asset sales and capital market activities. GM Chairman and CEO Rick Wagoner said, “We need to take some very tough actions to ensure our survival and success.”

Analysts say that GM made a fatal miscalculation when it bet that Americans would always want bigger cars and trucks. Rising fuel prices have hurt GM. Total sales of GM products are off 16 percent this year compared with an industry average of about ten percent. Truck sales fell by 21 percent in the first half of 2008. Sales of the gas guzzling Hummer have plunged 40 percent.

The corporate transformation at GM will mean shifting from the manufacture of larger vehicles and shuttering plants where trucks are built. CNN Money qoutes GM vice president of global product development who said, “Our stated goal is to become the fuel economy leader in every sector in which we participate.” The Vancouver Sun reports;

“In June, GM announced it would close its Oshawa, Ont., truck plant in late 2009. The decision came just two weeks after signing a collective agreement with the Canadian Auto Workers union, in which it said it would keep the plant –employing 2,600 unionized workers — open until at least 2011.”

The Sun wrote that the Canadian Council for Automotive Human Resources reported that “20,000 jobs have been wiped out in Canada’s auto sector since its employment peak in 2000. A further decline of the same amount is likely by 2014″

Here is a segment of a video presentation that Wagoner gave to GM employees where he describes the company wide restructuring plan;



In an interview with the Flint Journal earlier this week, prior to his announcement of worker layoffs and manufacturing cut-backs at the company, Wagoner acknowledged all of the problems that the company faces but seemed to hold out hope that GM could expand its facilities again in Flint;

“Right now, tough economic conditions and high energy costs are affecting the entire auto industry and creating a lot of uncertainty on the part of consumers. Given all these uncertainties, I really can’t speculate on the future of specific products or facilities. But, rest assured, we have every intention of ensuring that Flint has every opportunity to play an important role in GM’s future.”

See stories-
Detroit News : Flint celebrates GM’s 100th anniversary
Flint Journal : GM’s Rick Wagoner has hopeful words for Flint in reflecting on company’s 100th
Vancouver Sun : GM to cut 20% of salaried jobs
CNN : GM to cut jobs, suspend dividend
Reuters : GM sheds bankruptcy risk - now comes the hard part
Detroit Free Press : GM stock climbs for a 3rd day Market signals trust in restructuring plan

Reuters reports that the International Monetary Fund has reasserted its estimate that the total cost from “losses on U.S. assets from the subprime crisis and its wider fallout” will be approximately $1 trillion dollars. Reuters quotes the director of the IMF capital markets division, Jaime Caruana, who said;

“Basically, we think this is a reasonable figure and we are not revising the figure every day.”

Caruana also said that European governments may find it difficult to raise capital for development due to the effects of the “credit crisis” for some time to come.

see story-
Reuters : IMF sticks by $1 trillion U.S. subprime fallout

Journalists often employ the term “staged” in their coverage of the markets, as in “Wall Street staged a rally”, and it is particularly appropriate in the context of the 480-point rise of the Dow Jones index over the last two days. The media has attributed the gains to a succession of “better-than-expected” earnings reports, combined with the sharp drop in oil prices.

But a number of analysts are whispering that what we are really witnessing is an insider’s short covering rally. It is important to remember that even with the increases, the market closed Thursday at 11,447, just 23 points above official bear territory.

According to the Associated Press, this morning’s good news is the $2.5 billion second quarter loss posted by Citigroup :

“Citigroup posted another loss and laid off 6,000 employees in the second quarter as it struggled with surging loan defaults, but the $2.5 billion shortfall was smaller than Wall Street anticipated

Citi’s shares rose 5 percent in premarket trading Friday and helped boost the broader market, whose grim prognosis for the U.S. financial system this year sent stocks plummeting.

The nation’s biggest banking company by assets lost the equivalent of 54 cents per share in the April-June period. In the same timeframe last year, the bank earned $6.23 billion, or $1.24 per share.”

Much further down in the AP article, there is this brief summary of the banking giant’s recent performance :

“Citigroup has failed to turn a profit for three straight quarters, losing a cumulative $17.4 billion during that period after writing down its assets by about $46 billion. Its shares have tumbled 65 percent over the past year, and recently hit their lowest point since the day Citicorp and Travelers combined in October 1998.”

full story

In a similar vein, yesterday the Financial Times covered the reaction to JP Morgan Chase’s second quarter earnings report, which saw profits cut by more than 50 percent :

“JP Morgan, which acquired its stricken rival Bear Stearns for a cut-price figure in March, saw profits fall by more than half during the period, hit by the credit crunch, the US housing crisis and the cost of the Bear acquisition.

However, its net income of $2bn, or 54 cents a share, beat Wall Street’s expectations of 44 cents a share, thanks to strong results in its commercial banking and treasury operations. In the same period last year, the bank made $4.23bn, or $1.20 a share.”

full story

In this context it is difficult to outdo Wells Fargo, which reported on Tuesday. The bank suffered a 23 percent drop in 2Q earnings and responded by rasiing its dividend! CNN reported :

“Wells Fargo reported a 23% decrease in its second-quarter net income as the nation’s fourth-largest bank by stock market value set aside $3 billion for loan losses.

The bank recorded net income of $1.75 billion, or 53 cents a share, down from $2.28 billion, or 67 cents a share, a year earlier. But the earnings beat the mean estimate of analysts polled by Thomson Reuters, which expected earnings of 50 cents a share.”

full story

If these earnings reports are legitimate reasons for a bullish stock market, one has to wonder why the disappointing earnings published by behemoths Microsoft, Google, and Merrill Lynch have so far failed to have an equivalent downside impact.