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

The MBA said purchases for the week ended Friday fell to the lowest level since May ’97. After buying $1T+ of MBS and instituting the home buying tax credit all we got was a temporary boost that now seems to be flaming out. The data is seasonally adjusted so its not just ‘that time of the year.’ Hopefully though as spring time hits and people realize that the housing stimulus will soon end, buying will pick up again. It is with this backdrop that Bernanke today will reiterate that rates will stay very low for a while. They must face the tail end of QE and its eventual reversal before they start adjusting rates. Bullard last night said they may hold off on moving rates thru ’10. Threading a needle with yarn is what they face. ABC confidence followed yesterday’s # by falling 1 pt to -50, the lowest since Nov. Portugal sold 5 yr notes with a bid to cover of 1.8, down from 2.02 2 weeks ago. Greece will be selling 10 yrs sometime in the next week.

II: Bulls 41.1 v 35.6 Bears 23.3 v 27.8 Correction 35.6 v 36.6

Be sure to see Vitaliy N. Katsenelson’s Japan: Past the Point of No Return

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Japan – Past the Point of No Return – By Vitaliy Katsenelson

The MBA said purchases for the week ended Friday fell to the lowest level since May ’97. After buying $1T+ of MBS and instituting the home buying tax credit all we got was a temporary boost that now seems to be flaming out. The data is seasonally adjusted so it’s not just ‘that time of the year.’ Hopefully though as spring time hits and people realize that the housing stimulus will soon end, buying will pick up again. It is with this backdrop that Bernanke today will reiterate that rates will stay very low for a while. They must face the tail end of QE and its eventual reversal before they start adjusting rates. Bullard last night said they may hold off on moving rates thru ’10. Threading a needle with yarn is what they face. ABC confidence followed yesterday’s # by falling 1 pt to -50, the lowest since Nov. Portugal sold 5 yr notes with a bid to cover of 1.8, down from 2.02 2 weeks ago. Greece will be selling 10 yrs sometime in the next week.

Too be filed under Doh!:

“With bank failures running at their highest level in nearly two decades, the F.D.I.C. is racing to keep up with rising losses to its insurance fund, which safeguards savers’ deposits. On Tuesday, the agency announced that it had placed 702 lenders on its list of “problem” banks, the highest number since 1993.

Not all of those banks are destined to founder, and F.D.I.C. officials said Tuesday that they expected failures to peak this year. But they also warned that the fund might have to cover $20 billion in additional losses by 2013 — a bill that could be even greater if the economy worsens…

With so many banks failing, the federal deposit insurance fund has been severely depleted. At the end of 2009, it carried a negative balance of $20.9 billion.”

Surprisingly, the FDIC’s reserves are somewhat better than they appear:

“The insurance fund is in better shape than such numbers might suggest, however. Officials estimate that bank failures would drain about $100 billion from the fund from 2009 through 2013. But of that amount, a total of roughly $80 billion in losses were recognized last year or projected for 2010. By that math, the agency is expecting an additional $20 billion of losses over the next three years.”

Of allt he regulators who were thwarted by politicians or who missed the crisis, the FDIC did the best job heading into the crisis. And for the record, the FDIC fund, unlike TARP, is NOT taxpayer monies. Rather, its paid for with bank fees. Even if they deplete the fund, they are looking for a line of credit, not actual cash.

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Source:
At F.D.I.C. , Bracing for a Wave of Failures
ERIC DASH
NYT, February 23, 2010
http://www.nytimes.com/2010/02/24/business/24fdic.html

How can you not love that hedder?

It sums up everything in the article in a tidy little package, and delivers it with style and grace. (Plus, its the second time today I have gotten to use the word epic!)

Here is the Journal’s version (pub date FEB 24, 2010):

“U.S. banks posted their sharpest decline in lending since 1942 at the end of last year, suggesting that the industry’s continued slide is making it harder for the economy to recover.

While top-tier banks are recovering at a faster clip, the rest of the industry is still suffering, according to a quarterly report from the Federal Deposit Insurance Corp. Banks fighting for survival, especially those plagued by losses on commercial real estate, are less willing to extend loans, siphoning credit from businesses and consumers.

Besides registering their biggest full-year decline in total loans outstanding in 67 years, U.S. banks set a number of grim milestones. According to the FDIC, the number of U.S. banks at risk of failing hit a 16-year high at 702. More than 5% of all loans were at least three months past due, the highest level recorded in the 26 years the data have been collected. And the problems are expected to last through 2010.”

That is epic!

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Click for Interactive Graph on Bank Failures

Courtesy of WSJ

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Source:
Lending Falls at Epic Pace
MICHAEL R. CRITTENDEN And MARSHALL ECKBLAD
WSJ, FEBRUARY 24, 2010
http://online.wsj.com/article/SB10001424052748704188104575083332005461558.html

Tuesday afternoon links:

• Targeting short-sellers attempts to shift the blame from the true culprits (Barron’s)
• Harvard’s Rogoff Sees Sovereign Defaults, ‘Painful’ Austerity (Bloomberg)

• Smackdown: Tim Geithner in Vogue vs Sheila Bair in The New Yorker

• Horrid Job Number Coming (Floyd Norris)
• Q4 2009 Brought Still More Declines in State Tax Revenue (Nelson A. Rockefeller Institute of Government)
• Wall Street Bonuses Rise 17% (WSJ)
• Coldwell Banker Survey Identifies Multi-Generational Homes as a Trend in Real Estate (Marketwire)
• What the PBoC cannot do with its reserves (China Financial Markets)
• The Lomborg Deception: Debunking the claims of the climate-change skeptic (Newsweek)
• The Mariana Trench To Scale [Pic]

What are you reading ?

In yesterday’s reads, I mentioned a The New Yorker article on Paul Krugman. One line in the piece jumped out at me:

“Let’s put it this way. I can have fairly high confidence—it’s a personality thing—that a market is overvalued. Somehow I never have the same confidence in saying that it’s undervalued.”

Hey Paul, the reason for that has nothing to do with your personality — rather, it has to do with who was running the Fed for most of your adult life: Some guy named Alan Greenspan.

Consider the following two charts:  The first chart shows the 1977-2007 period P/E ratio for the S&P500, highlighting the band of where stock prices would have been if the P/E ratio had stayed within one standard deviation of their long term average.

As you can see, for most of Greenspan’s tenure, as well as Bernanke’s (excepting the March ’09 lows), stocks have been mostly-to-extremely overvalued:

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Source: S&P, Factset

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The second chart is a chart of how much the consumer leveraged themselves up during Greenspan’s tenure: What they purchased in excess of their cash income:

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It appears that a leveraged consumer and a pricey stock market were the most likely culprits — not your personality.

Perhaps a better title for this post might be “When Were Stocks Last Fairly Valued ?”

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See also:
Are Earnings Normalizing? At What Level? (February 22nd, 2010)
http://www.ritholtz.com/blog/2010/02/are-earnings-normalizing/

I cant say I would have used the time as productively stuck in a airport alone for 12 hours:

Girl stuck in Pittsburgh airport overnight shoots epic horsing around video
My adventures in the Pittsburgh International Airport during the worst snow storm of the century. After arriving late for a flight at 7:40 PM to LGA I decided to stick around my gate until my flight at 5:40 and had a BLAST!

Hat tip boing boing

Wait, don’t tell me, let me guess . . .

The identification of securities in the document, known as Schedule A, and data compiled by Bloomberg show that Goldman Sachs underwrote $17.2 billion of the $62.1 billion in CDOs that AIG insured — more than any other investment bank. Merrill Lynch & Co., now part of Bank of America Corp., created $13.2 billion of the CDOs, and Deutsche Bank AG underwrote $9.5 billion.

I guess it isn’t much of a a surprise or a coincidence that the firm that underwrote the greatest amount of toxic CDOs also purchased the greatest amount of Credit Default Swaps on top of them.

What is a surprise is the lengths the NY Fed went to hide this little factoid:

“Representative Darrell Issa, the ranking Republican on the House Committee on Oversight and Government Reform, placed into the hearing record a five-page document itemizing the mortgage securities on which banks such as Goldman Sachs Group Inc. and Societe Generale SA had bought $62.1 billion in credit-default swaps from AIG.

These were the deals that pushed the insurer to the brink of insolvency — and were eventually paid in full at taxpayer expense. The New York Fed, which secretly engineered the bailout, prevented the full publication of the document for more than a year, even when AIG wanted it released . . .

That lack of disclosure shows how the government has obstructed a proper accounting of what went wrong in the financial crisis . . . “

What was the specific non-disclosure? Recall that in November 2008, as AIG was preparing a regulatory filing, they had been planning to include all of their counter party payments. Bloomberg calls this doc “Schedule A,” and it was a full breakdown of the pass-thru payments:

Unfortunately, a lawyer for the Fed killed the disclosure, according to e-mails found via FOIA:

“The identification of securities in the document, known as Schedule A, and data compiled by Bloomberg show that Goldman Sachs underwrote $17.2 billion of the $62.1 billion in CDOs that AIG insured — more than any other investment bank. Merrill Lynch & Co., now part of Bank of America Corp., created $13.2 billion of the CDOs, and Deutsche Bank AG underwrote $9.5 billion.

These tallies suggest a possible reason why the New York Fed kept so much under wraps, Professor James Cox of Duke University School of Law says: “They may have been trying to shield Goldman — for Goldman’s sake or out of macro concerns that another investment bank would be at risk.”

To review: Tim Geithner’s NY Fed bailed out Goldman Sachs at 100 cents on the dollar, and then went through all manner of contortions to hide this fact from the public and members of Congress.

Read the Bloomberg piece — but not on a full stomach . . .

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Source:
Secret AIG Document Shows Goldman Sachs Minted Most Toxic CDOs
Richard Teitelbaum
Bloomberg, Feb. 23 2010
http://www.bloomberg.com/apps/news?pid=20601109&sid=ax3yON_uNe7I&