The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

This is rather amusing.  Note the Industry: Sovereign!

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Hat tip Josh Rosner

As they round the clubhouse turn, moving up on the inside post, its Florida’s BankUnited FSB.

We have a new winner for the biggest bank failure this year: Expect this debacle to cost the FDIC’s insurance fund $4.9 billion.

BankUnited moves into the 2nd place position in recent years, behind only IndyMac Bank, which cost the FDIC $11 billion. (Schumer!)

WSJ:

BankUnited’s failure is a stark reminder of how fragile many banks in the country remain. The U.S.’s 19 biggest banks this month performed better than expected on government “stress tests” and several large and midsize banks in recent weeks have successfully raised capital through public stock offerings. Government officials say they are still concerned, though, about dozens of banks across the country that made bad bets on real estate, and these troubles will likely continue to ripple through the financial system.

Bloomberg:

BankUnited Financial Corp., the ailing Florida lender, was shut by federal regulators and its assets were sold to private-equity firms including WL Ross & Co. and Carlyle Group in the largest U.S. bank failure this year. The group’s purchase of the bank, deemed “critically undercapitalized” by the Office of Thrift Supervision, was the “least costly” resolution, the Federal Deposit Insurance Corp. said today in a statement. The closing will cost the insurance fund $4.9 billion, pushing the total cost of 34 seizures so far this year to more than $10 billion.

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Previously:
Office of Thrift Supervision: Asshat Central (December 24th, 2008)

http://www.ritholtz.com/blog/2008/12/ots-asshat-central/

Sources:
BankUnited Fails in Year’s Biggest Bust
DAMIAN PALETTA and JOE BEL BRUNO
WSJ, May 22, 2009

http://online.wsj.com/article/SB124294168567644901.html

BankUnited Shuttered, Assets Sold to Kanas-Led Group
Jonathan Keehner and Linda Shen
Bloomberg, May 21, 2009

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aSXxrVqwoLGM

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Good Evening: The U.S. capital markets shuddered with a thought that many participants had never before considered — the credit worthiness of the sovereign entity known as the United States of America . This unheard of discussion started with a small downtick in the credit outlook for Great Britain , but, as with any form of contagion, the sovereign credit pathogen hopped aboard a transatlantic flight and soon landed in New York . PIMCO’s Bill Gross only added to these concerns about our nation’s fiscal health when he opined that the U.S. would eventually lose its AAA status. By day’s end, stocks, bonds, commodities, and the U.S. dollar were all significantly lower. Investors are finally waking up to the fact that trying to bail out everything may have large consequences.

Today’s economic data — jobless claims, leading indicators, and the Philly Fed survey — were all within consensus estimates. Only jobless claims had much of an impact, as a new record high in continuing claims hit our stock index futures prior to the opening bell. Those futures were already under some pressure after S&P announced that it was changing the credit outlook for the AAA-rated U.K. to “negative” from “stable”(see below). The news cost the Sterling a shilling or two and British stocks were pounded. Back across the pond, U.S. stocks opened lower in sympathy, but the U.S. dollar and Treasurys initially benefited from the U.K.’s plight.

Our relative outperformance lasted only until market participants started wondering if such a fate could some day befall Uncle Sam. Stocks kept edging lower until the major averages were down 2% or more by lunchtime, but it was the action in the bond and currency markets that created a mid day stir. First, the Fed bought fewer Treasurys today than traders were expecting. Second, a huge refunding was announced for next week that reminded everyone of how much supply looms on the horizon. Treasurys and the dollar fell together and soon found the footing even more slippery when PIMCO’s Bill Gross had the following to say:

“The markets are beginning to anticipate the possibility of” a downgrade to the U.S.’s top rating, though “it’s certainly nothing that’s going to happen overnight…Both the U.K. and the U.S. have prospective deficits of 10 percent annually as far as the eye can see,” Gross said. “At some point over the next several years” the debt of each “may approach 100 percent of GDP, which is a level at which country downgrades tend to occur,” he said. (source: Bloomberg.com)

I’m a little surprised that Mr. Gross finally voiced in public what many have thought in private (or have been saying more subtly), but now it’s out there for all to contemplate. Let me be clear when I say that we live in a great country, one that will NOT have trouble discharging its dollar-denominated debts. We can decide to reduce spending, raise taxes, enhance our productivity, or, when all else fails, invoke Mr. Bernanke’s helicopter concept. What the “full faith and credit of the United States of America” does not guarantee, however, is that the dollars received will be worth tomorrow what they are worth today. A falling currency, rising interest rates, and ascending precious metals prices would be the market response to this outcome. We saw a taste of this today.

I hope Mr. Gross was just trying to call the attention to this problem, and I hope our leaders in Washington were listening. Our capital markets buckled when they heard this message, which should be statement enough for both parties to take it seriously. If any readers have wondered why I’ve been whining in print about all the printing of money and excess spending in Washington, today’s market action offers a simple and elegant reason why. Past a point (and we’re not there yet) it’s dangerous.

After descending 3% or more, the major averages made a small comeback before the bell rang. The losses ranged from the Dow’s 1.5% to almost 4% for the Dow Transports. Treasurys were smacked and the yield curve noticeably steepened. 10 year and 30 year yields rose by more than 15 bps each. The dollar gave up its early gains and headed south to the tune of 1% (see below). The diving greenback should have helped commodities, but they cowered in the face of higher interest rates and weaker stock prices. Only the precious metals showed any resilience today as the CRB index declined 1%.

market-focus-long-shadows

The financial crisis cum bear market of 2007-2009 has brought with it a vast array of uncertainties. About the only two things we all know for sure are that 1) the machinery behind private credit creation (a.k.a. the shadow banking system) has broken down in the U.S, and that 2) the U.S. government has stepped in with multiple trillions of dollars to help restart it. Hopes that the myriad forms of interventional rescue were going to be a decent substitute for decisions banks once made privately have been plain to see since March. With the arrival of spring, stocks have blossomed, credit spreads have narrowed, and the first green shoots of confidence have returned. It’s been a welcome sight to see the markets recover, but what about the economy?

The answer is that it is very hard to measure just how Uncle Sam’s attempts to become a banker are faring. Too much credit, too little of it, and the happy median of the Goldilocks era would each require different policy adjustments, but who can measure the difference between the amount of private credit withdrawn and the amount of public credit being created? The Credit Suisse fixed income team in London tackles this very subject in its latest “Market Focus: Long Shadows” (see above). CS attempts to define these various monetary relationships (simple money supply is a shadow of its former self and only tells part of the story) and then measure the changes in them over time.

It’s a long and fascinating piece, if you’re a money and credit junky like me. If you aren’t, let’s just jump to the end and say that the CS team believes the U.S. policy response has been admirable to date. They believe that of the trillions of credit withdrawn, Uncle Sam has stepped in to provide just less than a matching amount. I do have questions about their methodology (they rely on repo. haircuts as a proxy for credit creation in the shadow world), but I think their work is an interesting way to think of credit flows outside the traditional banking system. If Credit Suisse continues to track these figures and their changes, I’ll be curious to see what impact the Fed’s expanded TALF program has on their data. What effects this government-sponsored lending has on the markets and our economy is another matter entirely. As we saw with today’s gyrations in our capital markets, these policies will — even if they “work” — have effects that are far-reaching and consequences that may or may not be the ones our leaders originally had in mind..

– Jack McHugh

U.S. Stocks Tumble on Jobless Claims, U.K. Debt-Rating Concern

U.K. May Lose AAA Rating at S&P as Finances Weaken

Pimco’s Gross Says U.S. ‘Eventually’ Will Lose AAA

Dollar Decline Takes on ‘Life of Its Own,’ RBS Says

How do the Obama deficits compare with past presidents? And how did the national debt get so big anyway. This video tries to answer those questions by looking at the debt as a road trip and seeing how fast different administrations have been traveling.

Pau Bryant writes:

Thought you would be interested to know Bailout Nation is on the shelves here in Singapore, and on the “highlights” shelf – photo evidence from Page One store attached (price SGD43.82).

Notice the company it is keeping on the right?

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Big banks have raised billions since the stress tests and policymakers are now turning their bailout affections to life insurers and automakers. Is the government trying to tell us the crisis in the financial sector (proper) is over?

Just to keep you all up on the conference as it comes into the final stretch. Rep. Alan Grayson (D-FL) is going to come to conference and present his ideas about what government needs to do to prevent the issue of systemic risk rising again. Since this is part of Nassim Taleb’s theme, we’re also going to try to have conversation between Taleb and Rep. Grayson as part of the morning program. The legislative schedule in Washington might conspire against this. But, for the moment, that’s the goal for the morning session.

For more information, press queries or interest in one of the remaining seats at the conference. Click here.

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AIG says Chairman and CEO Liddy plans to step down from those roles after successors are found.

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I am constantly amazed at the willingness of some very smart people on Wall Street to follow the herd, even over the proverbial cliff. How can we believe in rational markets when so many investors are sticking their heads in the sand?  The people buying bank stocks  on “value” fall into this camp, IMHO.  More on this lemming phenomenon in our comment next week.

In a client comment today, we said the following:

“To us, four questions must be asked of any name before you can really embrace a long-term bull view of particular financials:

1) what is your plan for repatriating SPEs by year-end 2009 and the post-repatriation TCE ratios? In the case of WFC, that means a potential increase in total assets of nearly 80%;

2) what are your plans and timeframe to reverse repo transactions with the FRBNY? What is the M2M adjustment on this collateral?

3) When are you ending participation in the FDIC debt guarantee program? What is the blended cost of funds projected for bank?

4) What is the peak level loss rate for the bank and how much TCE must be on hand to repay TARP and stay in good graces with regulators? That is, is 5-6% TCE enough?”

Martha White writes a very nice summary of #1 in, of all places, Slate today under the title “Holy Sheet: Why we have all just woken up to what goes on banks’ books”

http://www.thebigmoney.com/articles/explainer/2009/05/20/holy-sheet#comment-1178

She quotes your blogger in a good summary of the mess:

“The FASB’s new edict isn’t without risks: Institutional Risk Analytics speculated in a recent client newsletter that the ruling could lead to another capital deficit for the big banks, which could spark a scramble for more money to shore up their reserve bases when the FASB ruling kicks in at the start of next year.”

Questions, questions:

1) Did the government stress tests for the big banks take into account the repatriation of OBS assets at the end of 2009 under FAS 140?

A: NOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO.

2) Did your salesperson from XYZ broker dealer tell you about the FAS 140 issue before letting you in on the opportunity to buy WFC or BAC new issue equity?  What a deal.

A:  NOOOOO.

3) Did you make a mistake by going long financials this week?

A: LOL.We’ll find out.

Another fine operation by Tim Geithner and Ben Bernanke.

With Rosie now gone from Merrill Lynch/BofA (new research here), let’s see what his replacement, Neil Dutta, is up to:
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Leading measure of commercial real estate market heads south

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Neil  notes that Commercial construction contracting, as demand for architectural services (a  leading indicator for nonresidential construction) is still contract as of March 09, as the Institute of Architects’ Architectural Billings Index dropped to 42.8 in April from 43.7 in March.