Tuesday, March 31, 2009

Interactive Link: Bank Market Cap Over Time


Interactive graph allows for viewing market cap over a 10 year timeline.

Bail Out Totals & Limits


Useful table at end or article.

Monday, March 30, 2009

Spain Joins the Party

USA, UK, Ireland, Iceland, Germany and now Spain


Spain sports an unemployment rate of around 14%.

On a side note, I mentioned to a loyal reader on Friday that I believed a major U.S. bank (either Citi or BoA) would be nationalized within 45 days. It would be a major policy shift, but there is no choice. Target date: May 7, 2009.

Saturday, March 28, 2009

Back to The PPPIP

The new administration thinks that their plan will work as follows:

- Rip off the taxpayer to create a great deal for private bidders in acquiring junk assets from banks

- The banks, now that they have received a taxpayer supported, higher price for their junk assets, will lend again

- Economy will be saved

We all know that I hate this plan and that the only solution is bank nationalization. One of the big ones (Citigroup or Bank of America) will be reduced to a zero stock market value, but they probably all should be annihilated. I truly believe that the entire system is insolvent.

Anyway, you would think that as a result of this plan, the junk assets would improve in price. However, that is not the case.

The above graph tracks the price of credit default swaps on asset backed securities. The principal underlying loans for these securities are residential mortgages. The blue line shows the price range for each index and the red tick mark indicates Friday's closing price. For this index, the lower the price, the more expensive the credit protection. Notice that some indices hit new all time lows on Friday.

The above graph tracks the price of protection on securities backed by commercial mortgages. It works the opposite way: the higher the spread, the more expensive the protection. Once again, new highs for some indices.

So, either the market believes that the plan will not actually come to fruition or that the assets are so junky, that there is now way to save them. Either way, the rally in bank stocks is premature.


Bank failure number 21 yesterday: Omni National Bank. It was near the top of the bad banks list, yet another collapse of a bank domiciled in Georgia. The average loss rate this year is 26.6%.

Friday, March 27, 2009

It's Official: Charter Communications Files for Bankruptcy

ST. LOUIS--(BUSINESS WIRE)--Charter Communications, Inc. (NASDAQ: CHTR) and its subsidiaries (“Charter” or the “Company”) today commenced the next phase of its previously announced financial restructuring, which is expected to reduce the Company’s debt by approximately $8 billion. As announced on February 12, 2009, the Company reached agreements-in-principle with members of a committee of certain of the Company’s debt holders (collectively, the “Bondholder Committee”). These agreements-in-principle contemplate the investment by members of the Bondholder Committee of more than $3 billion, including up to $2 billion in equity proceeds, $1.2 billion in roll-over debt and $267 million in new debt to support the overall refinancing. Charter expects the proposed restructuring to position the Company to generate positive free cash flow through significant interest expense reductions. The Company has been working closely with the Bondholder Committee to finalize a pre-arranged plan of reorganization and related documents and agreements based upon the agreements-in-principle (the “Pre-Arranged Plan”).

Thursday, March 26, 2009

Gross Domestic Product

In today's earlier post, I compared nominal GDP to the federal debt. That is because I made no adjustment for inflation when calculating the national debt (comparing apples to apples).

The above graph is adjusted for inflation. It is a more accurate snapshot of economic activity, no pricing distortions.

A Bit More on Real Estate

Much has been written this week about housing data pointing to a bottom in home prices. On Monday, existing home sales were released and I mentioned that I could see why some would think that a bottom might have been reached. The graph I posted highlighted the fact, however, that housing inventory was still within is recent range despite a dramatic fall in prices.

New home sales were released yesterday and the hoopla reignited because there was an uptick from the previous month. Judging from the below graph, would you be confident in saying the worst was over?

Another blogger made a great point: the increase might not have even happened. The increase from the previous month was 4.7%. However, the margin of error was plus/minus 18.3%. This certainly marginalizes the prospect of a bottom. This number is subject to revision, so the prudent step may to wait until April until proclaiming a bottom.

The graph below is included just for fun.

Here We Go......Into The Debt Jungle

Before we dive into this topic, I would like to review a few things. The above table tracks the Debt of the General Fund for the last 35 years or so. After perusing the data (please click on table to expand), it is easy to dispense with the typical political name calling. This is not a political issue anyway, it is a question of a sustainable monetary and banking system. The numbers for the Obama presidency are my own estimates.

The growth over time is substantial. This is only one side of the issue though. For example, private companies often borrow money as a standard means of operating. The key for the lender is whether or not the borrower is making money and has stable operating margins. This is a simplified analysis, but the point is that borrowing can make sense.

The above table tracks the Gross Domestic Product (nominal terms) of the U.S. You will notice that, at best, GDP was growing as fast as the debt. GDP is a proxy for the revenue of the Federal Government since it gives us an idea of the potential tax revenue. If the economy is growing, corporate income tax receipts rise and personal income tax receipts rise.

This is the problem: the ratio of debt to GDP has increased from 33.2% to 69.6%. If my projections are on target, the ratio will rise to 88.2% by the end of Obama's first (only?) term. This is why China and other creditors are making noise about the fiscal position of our country. How can we pay off the debt if the tax base is losing ground?

After further analysis, we will see that the following identity exists in our monetary system: money = debt. Hence the current paradox. The market doesn't want more debt, but more money is needed to promote growth.

Commercial Real Estate Warning

Back on 2/6/09, 3/23/09 and in private conversations, I have warned about the impending commercial real estate collapse. Here is another news story:


March 26 (Bloomberg) -- Billionaire investor George Soros said U.S. commercial real estate will probably drop at least 30 percent in value, causing further strains on banks.

“Commercial real estate has not yet fallen in value,” Soros, speaking at a forum in Washington, said. “It is inevitable, it is written, everybody knows it, there are already some transactions which reflect and anticipate it, so we know, they will drop at least 30 percent.”

Let's Catch up With the DJIA

On March 5th, I mentioned that I thought an equity market rally was on the horizon. Back on March 16, I thought the rally would take the Dow over 7,500 by month end. The rally has indeed taken the index over that level, closing above 7,900 today. Trading volume in the Dow components has started to drift lower over the last few sessions and more than half of the 12/31/08 - 3/9/09 loss has been recouped. I think tomorrow will be the beginning of the end of the rally.

Tuesday, March 24, 2009

I'm Watching Frontline on PBS Right Now....

The topic is the debt that Obama has inherited. It is focused on the Bush II administration. While I do believe that the fiscal irresponsibility was monumental, they are missing the point:

- Although the deficits were tamed under Clinton, the borrowing was simply shifted to Fannie, Freddie and other GSEs

-THE DEBT CAN NEVER BE PAID OFF UNDER THE PRESENT SYSTEM. It doesn't matter who is in Congress or who is in the White House: money equals debt in our system

I have touched on these points in previous posts and I am in the process of preparing an in depth exploration of the topic.

Joseph Stiglitz Agrees.....


"The Geithner plan is very badly flawed," Stiglitz told Reuters in an interview during a Credit Suisse Asian Investment Conference in Hong Kong.

U.S. Treasury Secretary Timothy Geithner's plan to wipe up to US$1 trillion in bad debt off banks' balance sheets, unveiled on Monday, offered "perverse incentives," Stiglitz said


Leave off the last "S" for "See Ya"

Dial-a-Mattress, 1-800-Mattress File For Bankruptcy Protection

By Tiffany Kary

March 24 (Bloomberg) -- Dial-a-Mattress and its brand-name retailer 1-800-Mattress filed for bankruptcy court protection after creditors tried to force it into court protection last week.

The petitions for Chapter 11 bankruptcy filed in federal court in Brooklyn, New York, yesterday both listed under $50,000 in debt and assets. The New York City-based company had faced involuntary bankruptcy after Sealy Corp., the world’s biggest bedding maker, and two other companies owed a total of $1.65 million filed a Chapter 7 petition against it March 17.

More Fuel for the Fire....


"In a note to investors March 23, Bernstein advised selling bank shares. Removing distressed assets from banks’ balance sheets is a short-term solution that will prolong a resolution of the credit crisis, he said."

The Morning After

Paul Krugman and James Galbraith are among the economists that have criticised the PPPIP. In addition, Moody's (yeah, I know, why pay attention to those guys) and CreditSights are of the opinion that the scale of the plan is too small to fix the problem.

I take issue with:

- The taxpayer is saddled with virtually all of the risk for a fraction of the reward

- The plan assumes that the assets will recover in price. This is a terrible assumption. The prices of the loans and securities are not depressed only because of liquidity issues. The loans and securities are suffering huge amounts of defaults. There is NO recovery from this. If a plain, vanilla bond drops in price to 80 cents on the dollar, the issuer is still contractually obligated to pay 100 cents on the dollar at maturity. If they don't, the bond holder gets to exercise their rights in the contract. This is not the case with securitized assets. Even without defaults, there is no guarantee that the holder will receive par value.

- As pointed out by a reader, a bank owning these junk assets could bid against a private market bidder. This would drive up the price of the asset and increase the burden on the taxpayer.

- I agree with the rating agency analysts, it is not enough money. Remember, the money is coming from the TARP, Congress has to get involved if they want to use more money since the TARP is nearing its limit.

- Eligible banks are at risk of insolvency if they participate. If the the difference between the actual bids and the current price on the books of the firm is sufficient, the bank could deplete all of its capital. This would motivate banks to put only the not so junky assets up for sale and leave the really bad stuff mis-marked on their books.

- There is still no guarantee that this plan will free up capital to lend. Banks won't lend if they believe that there is a lack of credible borrowers, regardless of there balance sheet position (at least in today's world).

- We are experiencing a debt deflation. The market is clearly telling us that the appetite for debt has diminished substantially, epic proportions in fact. A plan that increases the amount of debt via the FDIC leveraging will only delay the inevitable dismantling of the debt market. See Irving Fisher's piece.

If you agree with he points I have highlighted here, please, please, please contact your Congressional representatives. Tell them, in no uncertain terms, that they will no longer receive your electoral support if they allow this plan to proceed. I have not given up on this country, let's exercise our rights and usher in a new era of true patriotism.

Monday, March 23, 2009

More on The Treasury's Plan to Dismantle Our Country

I just got through calling and e-mailing my U.S. Senators and Representative about this embarrassment. Please consider doing the same. This plan is an utter abomination and indictment of the American way of life.


There is only one answer: bank nationalization. Eliminate current management, eliminate equity stakes and decrease balance sheets. It worked in resolving the S & L Crisis, it will work again. It is not in our interest to support this President or Congress if this is what they want to saddle us and future generations with.

Some Notes on the Public Private Partnership Investment Program

The U.S. Department of the Treasury Announced their intention to organize the Public Private Partnership Investment Program (PPPIP). News headlines are touting a $1 trillion fix, but that is not really accurate.

The Treasury will allocate $75 billion to $100 billion from the TARP, so this is not new money being added to the fix. This program also has the same problem as the initial TARP: banks will become insolvent as they participate. The losses that will be incurred as a result of the market priced sale will deplete bank capital. Paradoxically, there will be fewer TARP funds available to prop up bank losses because of the funding of the PPPIP.

In addition, there is a non-trivial amount of leverage being employed to arrive at the initial $500 billion infusion of funds:

- Bank offers to sell loans

- The FDIC would evaluate the loans and decide how much of the pool they would guarantee

- Private sector bidders would then bid on the loan package

- The Treasury would finance 50% of the funds due


- Bank seeks to sell loans, $100 face value

- The FDIC determines that they are willing to provide leverage of 6 to 1 (maximum allowable under program)

- Private sector buyer wins the pool with a bid of 84 cents on the dollar

- FDIC provides guarantee of 72 cents on the dollar [(6/7) * 84 cents]

- Private sector buyer provides 6 cents, Treasury provides 6 cents

Buying securities process:

- Private sector buyer provides $100 in capital

- Treasury provides $100 in capital

- Treasury provides $100 - $200 in loans to the new fund

- Fund has access to TALF

It looks to me that the Treasury thinks that the problem is nowhere near being solved. This is attractive to the private sector because they can basically return to their old leverage ratios while DC picks up the tab. Of course, this will not work for the economy. This program tells us how little interest there is in buying debt and all they want to do is issue more debt.

Existing Home Sales

Existing home sales surpassed street estimates, coming in at a seasonally adjusted, annualized rate of 4.72 million. Of note, 45% of all sales were composed of distressed properties.

The above graph tracks the median sales price versus the amount of inventory since January, 2008. The last two month's of data are pretty much on top of each other. Part of me wants to say that this is a sign of the bottom. Inventory seems to have stabilized and the price drop since June, 2008 is 23%. This is not a great answer, but I have a gut feeling that we have not seen the bottom in residential real estate. More layoffs are on the horizon and ARM resets will be a drag for the rest of the year.

Finally, a Story About Commercial Real Estate


Most of you are tired of hearing my story about the strip mall in New Jersey that was home to a Circuit City AND a Linens 'N Things, that is a 5 minute drive from a still vacant Comp USA store and is down the road from a Bennigan's.

We are not out of the woods.

More on the FDIC

Last week the FDIC revised its Quarterly Banking Profile for the 4th quarter of 2008. The source of the revision was an increase in the amount of industry-wide goodwill writedowns (see posts from 2/27 & 1/23 for goodwill details).

As a result:

-Goodwill and other intangibles fell to $423.2 billion from $484.1 billion in the previous quarter.

-Net Income for all of 2008 fell to $10.2 billion. This represents a 89.8% decline from 2007.

-On a good note for banks (but terrible for every taxpayer), the industry's annual income tax burden fell from $46.5 billion to $6.2 billion.

Saturday, March 21, 2009

The Year In Bankruptcies So Far..

An updated list of the 20 largest bankruptcy filings this year. Charter Communications (cable TV operator) should file in the next few weeks. Closer to home, N.Y. Waterway (commuter ferry operator) may file in the next month or so.

Failure Friday Returns

The FDIC closed 3 more banks yesterday (all of which were on the bad banks list), bringing the year's total to 20. I'll say it again, I don't know what they are waiting for. They skipped last Friday and the entire bad banks list could be shut down immediately. Dragging this out is of no use.

More spectacularly, there were 2 large credit union failures yesterday. A credit union functions like a bank, but the depositors are also the owners. In addition, a person must apply to be a member. Often there is some affiliation, such as employees of a certain company or residents of a certain community, that allows people to join. The National Credit Union Administration (NCUA) operates the National Credit Union Share Insurance Fund (NCUSIF). The NCUA functions in a similar fashion to the FDIC.

The credit unions that were place into conservatorship were corporate credit unions. A corporate credit union is owned by other credit unions. It functions like a central bank in a way. The corporate credit union lends to its members or accepts deposits from its members. It invests in loans or securities with the money it accepts.

U.S. Central Corporate Federal Credit Union and Western Corporate Federal Credit Union were shuttered beacuse their balance sheets did not pass the NCUA's stress tests. Here is the shocking part: they held $34 BILLION AND $23 BILLION IN ASSETS RESPECTIVELY.

The NCUA estimates that the NCUSIF will be drained by $1.2 billion because of the reprehensible actions of these 2 credit unions. As a result, the NCUA is seeking to increase its credit line with the U.S. Treasury to $6 billion from its current $100 million (Congressional testimony delivered yesterday). Why such an increase? Well, as of 6/30/08, the NCUSIF ONLY HELD $7.64 BILLION.

Wait, it gets better. The NCUA anticipates a reserve need of $4.7 billion - $5.9 billion for the fund. If they are correct, the fund is wiped out. Don't fret credit union members (of which I am one). Just like the FDIC, we will be insuring our own deposits because the funds will be supported by the taxpayers.

The FDIC and NCUA represent some of the worst supervisory performances in the history of our country. If I have to hear about Sheila Bair wanting the FDIC to shoulder more responsibility, I'm moving to Canada.

Tuesday, March 17, 2009

Morning Data

PPI inched a bit higher since last month, but posted another annual drop of greater than 1% in today's release.

The housing start number was a bit puzzling at first glance: why would builders increase inventory at a time when foreclosures (cheap alternative) are sky-rocketing? I took a look at the raw data and it seems that there is usually an uptick in starts from January to February. The below graph contains the unadjusted, monthly data. Notice that there are only two occurrences where starts drop between those 2 months. It is also shocking to see the drop in actual monthly starts.

That Bernanke, What a Joker!


So Bernanke thinks that levering up the Fed will be the answer. Fine, give it a shot. Just make sure that you are paying the proper price. There is only one answer for an economy (or anything) with too much debt: reduce the debt. Loans either have to be written off entirely or drastically marked down to reflect the inability of borrowers to repay their loans. Oh, and if the sellers of the junk to the Fed are just going to hoard the cash, the plan won't really help. There is a need to expand underwriting oversight and credit management staff. Lending money is just a tool, it is not good or evil. It has to be done responsibly.

FOMC meeting tomorrow, triple witching this Friday and a few more economic number this week.....let's be careful out there.

Monday, March 16, 2009

Where Do We Go? Where Do We Go Now?

Quite the slip & slide so far this year.......

The Dow Jones Industrial Average was down as much as 2,229.34 points or 25.4% before rebounding the last few sessions. The Index has gained 622.53 points or 9.44% since 3/5/09. Financial stocks have lead the rebound, with market participants focusing on operating earnings for the first quarter. This appears to be a tradable rally, perhaps taking the index over 7,500 before the month is out. In fact, I think that is the most likely scenario. Gold has topped out in the short term, as well as Treasuries. In the intermediate/long term however, the prospects are far different.

The graphs below depict the grim reality of our fiscal situation. Nominal (unadjusted for inflation) GDP growth has been slowing for the last thirty years. Technological achievements notwithstanding, this is typical of a mature economy.

The problem is the growth rate of debt to support this economic expansion. We have come to expect 6% growth rates, but this is simply not rational. Take a look at the leverage necessary to get our economy to run at those rates. For simplicity, I have only used Treasury data when calculating debt growth rates. Both household mortgage debt and consumer credit have expanded at similar rates over the last thirty years. The sum of the three is stunning: $23 trillion.

An economics professor of mine once commented that the debt load of our country was a curious development and made little practical sense. His rationale was that a mature economy should be lending to other nations as a supplement to its own decreasing opportunities. An economy as large as ours shouldn't be borrowing, we shouldn't need to. Little attention was paid to this in the 1990s, growth kept going and there was always a buyer for our debt. This current crisis is forcing the rest of the world to look behind the curtain and critique our system. They can't like what they see.

Debt Deflation in the News


Friday, March 13, 2009

Every Silver Lining Has a Cloud


Equity futures are up this morning, pointing to continuing gains for the stock market. I would like to point out however the story regarding China's concern over their U.S. Treasury holdings. In the past, I have posted my concerns over the amount of debt that the government is issuing. Japan has voiced concern (late last year) and credit default swap markets are pricing Treasuries at historic highs.

This is not an anti-Chinese sentiment that I am expressing, it is an anti-ceding control of our economy and national security sentiment. Japan holds roughly $626 billion in Treasuries and China holds roughly $727 billion. Add it up, we get $1.35 trillion. That equates to about 12.3% of all of the federal government's debt. Simply put: if they have a problem with lending the U.S. money, we have a major issue.

Thursday, March 12, 2009

Fannie Mae(Day) and Freddie Muck

The taxpayer owns about 80% of each of these terrible corporations. I'll just say this for now:

- These companies were supposed to be the backbone of the mortgage lending industry

- While the Federal Government was paring down their borrowing under the Clinton administration, Fannie & Freddie were borrowing up a storm: more leverage, different name.

More of the Same: Weekly Jobless Claims

The Department of Labor released their weekly jobless claims report today:

- Initial jobless claims totaled 654,000 for the week ended 3/7/09
-- This marked the sixth consecutive week that the tally was over 600,000
-- The 5 week moving average (a moving average is less volatile than the week to week number) hit 645,400 and eclipsed 600,000 for the fourth straight week.

- Continuing claims totaled 5,317,000 for the week ended 2/28/09 (this data is always a week behind the initial claims)
-- This marked the third consecutive week that the tally was over 5 million
-- The insured unemployment rate hit 4% for the week ended 2/28/09

The insured unemployment rate is equal to the number of continuing claims divide by the number of workers covered by unemployment insurance. According to a 2003 report by the Congressional Research Service:

"A state is classified as a high-unemployment state if the state’s insured
unemployment rate (IUR) is at least 4%, and at least 120% of the average of the 13-week
IUR in the prior 2 years for the same 13-week calendar period."

The country as a whole now fits this description.

Friday, March 6, 2009

Labor Wrap Up

BLS report really doesn't anything that the ADP didn't. Although the headline print of a 651,000 decrease in jobs was better than some forecasts, the prior month revisions paint a slightly worse scenario.

Nonetheless, including and since the Feb, 2008:

ADP reports 4.04 million jobs lost

BLS reports 4.31 million jobs lost

Thursday, March 5, 2009

This Has Been a Rough Year Already

So far in 2009:

- Dow Jones Industrial Average is down 2,181.95 points

- This is a drop of 24.86%

- 28 out of the 43 trading sessions have been negative

- The longest streak of gains is only 3 days (1/26, 1/27, 1/28)

- That streak was wiped out by the next 2 trading sessions (1/29, 1/30)

I am thinking of retiring this table, it is always good to go out on top. For the first time, the TARP infusions EXCEEDED THE TOTAL STOCK MARKET CAPITALIZATION of the recipients. The stock market is finally getting how bad the situation is. I think a rally is on the horizon.

Wednesday, March 4, 2009

Jobs Data: ADP Report

The U.S. economy lost 697,000 in February according to ADP's monthly jobs report. 3,938,000 jobs have been eliminated since (including) the February, 2008 report. This is roughly the amount of jobs that were created from May, 2005 to January, 2008.

A simple regression of the ADP number is pointing to a loss of 676,000 jobs for the BLS report (released this Friday).

I am expecting the pace of job cuts to fall off in the next few months. It seems to be the case that job cuts are usually overdone and indiscriminate when executives need to pare costs and support earnings. The negative effects need to be suffered before an appraisal period begins.

Monday, March 2, 2009

When The Levee Breaks....

From the Federal Reserve statistical release H.4.1 (2/26/09):

-- The Federal Reserve System holds
in assets for each dollar of capital

-- Their holdings of U.S. Treasury securities have decreased by $238 billion in 1 year

-- Term auction credit totaled $448 billion

-- Commercial Paper Funding Facility has provided $243 billion in liquidity

-- Deposits from depository institutions (The Fed's liability) totaled $701 billion, a $679 billion increase from a year ago

-- Net portfolio holdings of Maiden Lane LLC: $26 billion

-- Net portfolio holdings of Maiden Lane LLC II: $19 billion

-- Net portfolio holdings of Maiden Lane LLC III: $28 billion

Okay, let's comment on the numbers:

Although the leverage ratio has been in the low $50s over the last few months, the Fed balance sheet is still massively leveraged. This range of leverage sunk Merrill Lynch, Lehman Brothers and Bear Stearns. Yes, I get it, the Fed has much deeper pockets. However, is this the amount of stress we want the backstop of our financial system to be under?

The Fed holds fewer Treasury securities, one indicator that their risk profile has increased. In addition, the Fed is exposed to riskier securities that are pledged as collateral for its lending programs. Even though most of these collateralized loans are short term, the market has witnessed AAA rated securities drop to junk in the blink of an eye.

The other winners are the almost $40 billion loan to AIG and the exposure to the Maiden Lane entities. These corporations were set up to house the securitized loans made to JP Morgan (Bear Stearns acquisition) and AIG (II & III). These are assets that are very difficult to price and highly illiquid. As you may remember, they are non-recourse loans as well. The Fed can't go after any other assets of the borrowers if they default on the loans.

The Fed only sports $42 billion in capital...........................

Check the link below for a review of ALL of the Fed programs.

Round Trip

Almost 12 years of gains down the tubes.

Sunday, March 1, 2009

In Like a Lion...

The snow is coming here in New York, looks like about 3 inches or so already. Also ushering in the new month is a falling Japanese stock market. The Nikkei 225 is down over 200 points or 3% in early trading.

Accordingly, S & P 500 and DJIA futures are pointing to a 1.2% drop for the equity market. Rumors surfaced on Friday night about more problems at AIG and the possibility of another government investment and loan restructuring.

Economic data this week includes ISM, Beige Book and Non - Farm. We will also see how all of the Treasury supply settles into the market. Be careful out there.