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

Brilliant:

Laugh out loud funny . . .

“It’s highly unlikely the claims would be so large that BP would pay any valid claims less than in full. The environmental claims and other claims would all ride through bankruptcy and be paid in the normal course.”

-bankruptcy lawyer Martin Bienenstock of Dewey & LeBoeuf, who advised General Motors Co. and Chrysler Financial Corp. in their bankruptcies.

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FYI:

“BP Plc, whose potential liability for the Gulf of Mexico oil spill has lawmakers and analysts raising the specter of bankruptcy, would be unlikely to avoid paying claims by seeking court protection, restructuring experts said.

The spill, the worst in U.S. history, threatens wetlands, wildlife, fishing and tourism in five states. BP has spent more than $1.43 billion to stop the leak and clean it up, and to compensate local businesses and residents since the April 20 explosion of the Deepwater Horizon oil rig.

The U.K. energy company faces more than 200 lawsuits, and the U.S. is assessing the cost of restoring natural resources destroyed or fouled by the spill. BP’s liabilities include $37 billion in cleanup and potential litigation expenses, according to a June 2 Credit Suisse report. While a U.S. bankruptcy may halt many claims, it wouldn’t allow BP to avoid paying for most of the cleanup and damages, said New York bankruptcy lawyer Martin Bienenstock of Dewey & LeBoeuf LLP.”

Interesting stuff . . .

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Source:
BP Bankruptcy Would Offer No Protection From Costs
Margaret Cronin Fisk and Linda Sandler
Bloomberg, June 15 2010
http://www.bloomberg.com/apps/news?pid=20601087&sid=aH.LE356FwQY&

Discussing the future of financial regulation, with Paul Volcker, former FOMC chairman

Airtime: Mon. Jun. 14 2010 | 7:00 DT ET

Hat tip Jay

A few interesting reads that caught my eye:

• Calling a Bear a Bear (Barron’s)

• The most discussed article of the day: U.S. Discovers Vast Riches of Minerals in Afghanistan (NYT)

• Years of Internal BP Probes Warned That Neglect Could Lead to Accidents (ProPublica)

• Dan Gross: Can the United States and Europe cut their way to economic prosperity? Probably not.  (Slate)

• Radical Ideas From a Federal Housing Bureaucrat  (WSJ Developments)

• Obama pleads for $50 billion in state, local aid (Washington Post)

• Study Says Math Deficiencies Increase Foreclosure Risk (NYT)

• Martin Wolf: Fear must not blind us to deflation’s dangers  (FT.com)

• Google’s new web indexing system called Caffeine (Google blog)

What are you reading . . . ?

Discussing whether we really are in a double-dip recession, with Lakshman Achuthan, Economic Cycle Research Institute.

Jun. 11 2010 | 7:39 PM ET

Nice explanation of how Oil spreads and decomposes, from MSNBC.

There are 8 steps involved: Spreading, Evaporation, Dispersion, Dissolution, Emulsification, Oxidation, Sedimentation, and Biodegradation.
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click for interactive graphic

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Hat tip Flowing Data

If only the games were a bit more entertaining!

Well, the U.S.-England game over the weekend was pretty darn exciting, thankfully. I have to eat crow for calling out Steven Gerrard in Friday’s Second Note since he scored a crucial goal for England, and also for predicting a 3-0 victory for the U.S. That said, a 1-1 result was totally satisfactory! Now, hopefully both teams will take care of business against Algeria and Slovenia (knock on wood).

In any event, most of the focus went to the TV on Friday and we saw just 7.6 billion shares change hands – the lowest total since April 6th, before the market started to wobble on euro zone fears. A late push saw the S&P 500 break out of a tight range and close at 1091, +0.4% on the day. The Russell 2000, which I’ve been watching a bit more closely lately because I’m fixated on breadth, used support at its 200-day moving average (633) to close 1.4% higher. The transports (+1.1% for the Dow Transports) and tech stocks (Nasdaq Composite +1.1%) outperformed while the defensive sectors that had held up better earlier in the week (food retailers, tobacco, precious metals stocks) lagged with a mixed-to-negative performance.

Since the opening game of the WC didn’t start until 10 a.m. EST, traders were still paying attention at 9:55 a.m. when the University of Michigan’s consumer confidence survey was released. It showed a pop to 75.5 in June from May’s 73.6, with the Street looking for a more subdued 74.5. The key “outlook” component rose to 70.7, the best result since September 2009. However, as the below graphs show, both the outlook and conditions components appear to have stalled out. The Census Bureau’s retail sales report for May provided the only other meaningful headline of the day, but the miss (-1.2% m/m versus consensus 0.2% m/m) failed to reverse the market’s fledgling bullish momentum.

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University of Michigan Economic Outlook

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University of Michigan Economic Conditions

Source: Bloomberg

MacroAdvisors goes out on a limb to make the call that the “Chances of a “Double-Dip” are Essentially Nil.”

They do so based on a recession probability model:

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The probability is estimated as a function of the term slope of interest rates, stock prices, payroll employment, personal income, and industrial production. (And the latter is estimated as a function of the term slope, stock prices, credit spreads, bank lending conditions, oil prices, and the unemployment rate).

Media commentary is leading in the pro-double dip camp:

• Bloomberg.com – Video: Shiller Sees `Significant’ Double-Dip Recession Chance

• NPR.com – Several factors point to double-dip recession

Former Labor Secretary Robert Reich explains why there’s not enough oomph in our current economic situation to promote a recovery.

Reich also says the economic boosters we currently rely on are running out: 75 percent of stimulus has been spent and the Fed is worried that zero interest rates will cause more inflation down the road. Some economy-watchers were hoping U.S. exports would give recovery a boost, but with uncertainties in Europe promoting the dollar as a safe haven, exports have become more expensive. Despite recent positive news of slow but steady economic growth from Fed Reserve Chairman Ben Bernanke and others, Reich says it’s not enough. “In a typical recovery, we would expect far better. And we’ve fallen into a far deeper hole than in a normal recession, so the recovery has to be much bigger.” So why is this recovery so different? “Most recessions are caused by the Fed overshooting in its efforts to control inflation and raising interest rates to high,” Reich says. “So it’s pretty simple for the Fed to reverse course, cut rates and get the economy back on track. But the Great Recession was caused by the bursting of a giant housing bubble, which directly reduced the value of most people’s biggest assets. Consumers can no longer use their homes as ATMs.”

• The Sacramento Bee – Is a double-dip recession ahead?
The economy “is pulling back to reality,” said Jeff Michael, director of the University of the Pacific’s Business Forecasting Center. “The most likely reality is a slow recovery. The data is going to bounce around a bit.” Consumers account for about two-thirds of all economic activity. A one-month drop in spending isn’t a cause for panic, but it is worrisome. The economy continues to face fundamental stumbling blocks, said Chris Thornberg of Beacon Economics consulting in Los Angeles. “I worry about the ability of the expansion to continue,” he said. “The banks are still a mess. Millions of people are still having trouble with their mortgages.”

• The Wall Street Journal – Auto-Sales Optimism Fades
Just a few months ago, optimism was rising in the auto industry that new-vehicle sales would make a strong rebound this year after falling to historic lows in 2009. New data, however, suggest the recovery isn’t as strong as it appeared earlier in the year. The increase in auto sales in the first five months of 2010 has been driven by higher sales to rental-car companies and other commercial fleets—not sales to consumers, who are now showing signs of more pessimism about the economy, as well as a halting interest in buying new cars. “The industry is on the mend but there are reasons for caution,” said John Hoffecker, a managing director at AlixPartners LLP, a consulting firm that recently surveyed consumers as part of its annual study of auto-industry trends. “We’re still waiting for consumers to come back into dealerships,” Mr. Hoffecker said in an interview.

more commentary after the jump

Read the rest of this entry »

click for interactive graphic

Via Mint

Post-receivership, the GSEs have become a government sanctioned back door bailout of regular banks. Any mortgage that cannot be refi’d or modified ends up on their books. This includes mortgages on the verge of default and foreclosure.

How much is the worst case scenario for the ongoing bailout of the banking sector, plus Fannie’s and Freddie’s own screw ups?

If everything goes precisely wrong, taxpayers are potentially on the hook for another $1 trillion bailout:

The cost of fixing Fannie Mae and Freddie Mac, the mortgage companies that last year bought or guaranteed three-quarters of all U.S. home loans, will be at least $160 billion and could grow to as much as $1 trillion after the biggest bailout in American history.

Fannie and Freddie, now 80 percent owned by U.S. taxpayers, already have drawn $145 billion from an unlimited line of government credit granted to ensure that home buyers can get loans while the private housing-finance industry is moribund. That surpasses the amount spent on rescues of American International Group Inc., General Motors Co. or Citigroup Inc., which have begun repaying their debts.

Its not a coincidence that many of these banks are finding the capital to pay back their bailout loans. The Obama administration is continuing one of the more horrific policies of the Bush administration: Using the GSEs as a back door bailout for the rest of the banking sector: These banks are selling their garbage to the GSEs — and according to some anecdotal evidence, are getting pretty close to full boat (100 cents on the dollar) for these bad loans.

Hence, Fannie and Freddie have become a dumping ground for all manner of bad bank loans.

The GSEs have had their own problems over the years — accounting fraud, recklessly chasing market share, lowering loan quality, etc. — but they have now become are now the last stop for every crappy mortgage ever written:

Fannie and Freddie may suffer additional losses as a result of the Treasury’s effort to prevent foreclosures. Under the program, banks with mortgages owned or guaranteed by the companies must rewrite loan terms to make them easier for borrowers to pay.

The Treasury program is budgeted to cost Fannie and Freddie $20 billion. The companies have already modified about 600,000 delinquent loans and refinanced almost 300,000 more, in some cases for an amount greater than the houses are worth.

The government is using Fannie and Freddie “for a public- policy purpose that may well increase the ultimate cost of the taxpayer rescue,” said Petrou of Federal Financial Analytics. “Treasury is rolling the dice.”

A recent Federal Reserve report pegged the total exposure of Fannie and Freddie at 53% percent of the nation’s $10.7 trillion in residential mortgages. That’s about $5.5 trillion dollars.

How do we get to trillion in losses?

About $1.98 trillion of the loans were made in states with the nation’s highest foreclosure rates — California, Florida, Nevada and Arizona — and $1.13 trillion were issued in 2006 and 2007, when real estate values peaked. Mortgages on which borrowers owe more than 90 percent of a property’s value total $402 billion.

That trillion dollar number has a number of challenging assumptions in it. It assumes a large downleg in housing prices, a continuing foreclosure surge, and ongoing unemployment.

My estimates are for about half of that — between $450-500 billion dollars. But with just the right — or wrong — economic policies, bailouts and bad decisions, I wouldn’t rule out a trillion dollar loss. And if we keep allowing banks to dump all of their bad loans onto the GSE’s books, I would raise my odds of a trillion dollars in losses from 25% to 100% . . .

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Source:
Fannie-Freddie Fix at $160 Billion With $1 Trillion Worst Case
Lorraine Woellert and John Gittelsohn
Bloomberg, June 14 2010
http://www.bloomberg.com/apps/news?pid=20601109&sid=an_hcY9YaJas&