"the more it changes, the more it's the same thing" - Review of the ongoing economic issues

"plus ça change, plus c'est la même chose"—"

Jean-Baptiste Alphonse Karr (November 24, 1808 – September 29, 1890)
French critic, journalist, and novelist.

Ireland 10 year bonds are trading now north of 10% for the first time since December 1992.
As I previously posted, we are in a time machine and just made a quick trip to the past:

European Government Bonds - Back to the Future?
"From 1991 until 2010 Ireland's Government Bond Yield for 10 Year Notes averaged 5.72 percent reaching an historical high of 10.47 percent in December of 1992 and a record low of 3.06 percent in September of 2005."

The yield on Ireland’s two-year securities rose 57 basis points to 10.44 percent. The 10-year yield exceeded 10 percent for the first time since the euro was introduced in 1999.

The problems is that the Irish financial sector troubles are just too big now for the Irish Government to cope with.

According to a recent article in Bloomberg by Joe Brennan published on March 18, "Ireland Said to Weigh Allowing Banks to Set Up Asset Warehouse"
Ireland is finally giving in setting up an Irish "Resolution Trust Corporation".
Joe Brennan commented:

"Irish authorities are considering allowing the country’s debt-laden lenders to set up a company to warehouse more than 60 billion euros ($84.8 billion) of loans that would be wound down or sold over time, according to three people familiar with the matter."

The reality behind this move is that the deposit outflows experienced by Irish banks since last year is making them increasingly dependant on funding from the ECB.
From the same article:
"Irish central bank Governor Patrick Honohan said the ECB wanted to accelerate deleveraging, Ireland has “put in the condition of no fire-sale losses because the state cannot afford it,” he said."

On the 31st of March we will get the results from the capital and liquidity stress tests on Irish Banks.

Joe Brennan added:
"So-called viable lenders, including Bank of Ireland Plc, Allied Irish Banks Plc (ALBK), Irish Life & Permanent Plc and EBS Building Society, need to cut their loan-to-deposit ratios to 122.5 percent, “which is acceptable to Europe,” Finance Minister Michael Noonan said March 14. The average loan-to-deposit ratio is currently about 170 percent."

From TBTF (Too Big To Fail) to TBTB (Too Big To Bail)...

Joe Brennan also indicated in Bloomberg news the following sobering fact:
"Irish Credit Bureau Chief Executive Officer Seamus O’Tighearnaigh said that 9.5 percent of loans registered with the company are at least one month in arrears, up from 0.75 percent in 2006, the Sunday Times reported."

The example of Ireland clearly showed the issue, where Ireland's public finances were put in disarray due to the massive bail out need of its financial sector (please see previous posts on that subject: The European Vortex, The Irish Black Hole, Ireland in the need of a lucky Shamrock).

5 years CDS on Portugal stands at 536 bps and Ireland 5 years CDS increased by eight basis points to a seven-week high of 625 bps, according to CMA.

Portugal's government as well is collapsing, given parliament is not willing to bite the bullet and to accept the latest austerity measures proposed by the government. Another EU member bites the dust as I type this latest post. You can expect another bumpy ride in the Eurozone.

The housing hangover issues are still the biggest problems plaguing not only the Irish economy but the US economy as well.

U.S. New-Home Sales fell to the lowest level on record:

Yes indeed, the more it changes, the more it stays the same...

Bank of America CEO Brian T. Moynihan said:
"The problem of delinquent mortgages and falling home values is the most stubborn, entrenched and damaging economic problem our country faces today."
Bank of America's CEO is correct. I touched on the subject of the impact of real estate on the US economy in my post "Extend and Pretend" - Banks bloated balance sheets and the Impact of Real Estate crisis.

January home prices in the U.S. fell 0.3 percent from December, according to the Federal Housing Finance Agency. Prices nationwide fell 3.9 percent in the 12 months ended in January.

So big is the issue that Bank of America had to segregate almost half of its mortgages Into ‘Bad Bank’ according to Bloomberg report from Dawn Kopecki published on the 8th of March:

"The legacy portfolio will hold 6.7 million loans with outstanding principal balance of about $1 trillion."

"Of the 13.9 million loans Bank of America services, about 3.5 million are held by the company on its balance sheet. The rest are owned by other investors."

Reminder:
"Bank of America services 14 million mortgages, or one out of every five in the U.S., and its loan-servicing portfolio exceeds $2.1 trillion in size. Of its mortgages, 10 million came from its 2008 acquisition of troubled California lender Countrywide Financial Corp. More than 80% of its delinquent loans were acquired through Countrywide."

Bank of America is also actively selling its exposure to commercial real estate:
BofA Is a ‘Very Active’ Seller of Commercial Real Estate to Limit Losses
The US Treasury is as well reducing its portfolio of Mortgage Backed Securities, looking at selling 142 billion USD worth of MBS guaranteed by Fannie Mae and Freddie Mac at the tune of 10 billion per month.

As I wrote in "Resolution Trust Corporation II - the unavoidable Sequel", 1 out of 4 US Household is already in negative equity, "Desperate times need decisive action and setting up a new RTC would definitely be the right move in the right direction".

For more on the difficult situation for the US economy and the impact of households in negative equity please look at the following post:

The end of the American Dream, the call for trade barriers and the rise in populism...

So far 25 banks failed in the US in 2011. 157 banks failed in 2010 according to FDIC. Increasing loan losses on commercial real estate are expected to result in hundreds of bank failures in the coming years.
The Unofficial Problem Bank list on the 19th of March stands at 982 institutions with assets of 430.4 billion USD, up from 964 institutions with assets of 420.7 billion USD as per the excellent CalculatedRisk blog.

For Robert Burney, a banking and finance professor at Coastal Carolina University:
"It's a race between deteriorating portfolios and recovering economies,"
Read more: http://www.thesunnews.com/2011/03/20/2047287/undercapitalized-banks-struggling.html#ixzz1HRrvO1fK

The US need more job creation but negative equity weights heavily on job mobility:
Non Farm Payrolls from 1992 onwards.

At the same time inflation in the UK keeps creeping up, no surprise there. It was expected previously on numerous posts on this blog.

UK inflation from January 1989 until March 2011:

Mervyn King at the Bank of England doesn't seem to be able to keep the ink dry, yet another letter to the Chancellor.

The Bank of England purchased around 165 billion GBP of assets by September 2009 and around 175 GBP billion of assets by end of October 2010.

Any coincidence with the rise in inflation in the UK is of course purely fortuitous given QE started in March 2009...

As a reminder of the risk of QE:
"Quantitative easing may cause higher inflation than desired if it is improperly used, and too much money is created. It can fail if banks are still reluctant to lend money to small business and households in order to spur demands. Quantitative easing can effectively ease the process of deleveraging as it lowers yields. But in the context of a global economy, lower interest rates may contribute to asset bubbles in other economies."

Consumer confidence in the UK is still at the lower end:
January 1992 - March 2011

Are we seeing asset bubbles in other economies? China? Brasil? Etc.
Most certainly. QE is exporting inflation first in emerging markets then back to developped countries:

Both the UK economy and the US economy are in "The Hurt Locker".

As a reminder from previous post The Endgame - Fin de partie:

Inflation, Not Deflation, Mr. Bernanke
By Andy Xie 08.16.2010 18:12

http://english.caing.com/2010-08-16/100171139.html
"The globalization reality is that developed economies like Europe, Japan, and the U.S. will suffer slow growth and high unemployment. Stimulus is the wrong medicine for solving problems. Believing this will lead to excessive stimulus, which causes inflation and bubbles in emerging economies first and inflation in developed economies later. The wrong policy prescription pushes the global economy through unnecessary gyrations, stagflation and possibly another major financial crisis in the emerging economies. It's high time for Mr. Bernanke to wake up from his stimulus obsession."

Can we expect QE3?

Repo Man - The Repo Mess and the Housing Funk

It's 4 AM.
Do you know who owns your house?

Ask the Repo Man...

The big issue of mortgage repurchase obligations for big banks is a hot topic and represents for them serious headwinds.

Bank of America bears the highest mortgage repurchase risk to earnings according to CreditSights, mostly due to the "ill-fated" acquisition of Sunny Subprime-Alt A mortgage player Countrywide (Countrywide was bought for 4 Billion USD in January 2008.). The former Countrywide tanned CEO Mozilo settled for a cool 67.5 millions USD fine with the SEC (although he bailed out early and made a juicy 129 millions USD in 12months in 2007, selling shares). Bank of America shareholders are left on the hook for more pain to come unfortunately. Please also note that out of the 67.5 Millions settlement fine, Countrywide (now Bank of America...) will pay 20 millions USD of it.

http://noir.bloomberg.com/apps/news?pid=20603037&sid=ajkIkoKst7xo


This is what we can read from the Bloomberg article as indicated above regarding the situation for Bank of America and the foreclosure mess they are facing.

"Delinquencies and defaults kept rising through the recession of 2009 and into this year. Today, of the 14 million Bank of America mortgage customers, 1.3 million are in some form of delinquency, including 195,000 who haven’t made a payment in more than 2 years. The troubles prompted the bank to triple its loan workout staff to 18,000 in the 18 months ended in October."

"Fannie Mae, Freddie Mac, mortgage insurers and other investors had made $12.9 billion in claims on BofA as of Sept. 30. Those demands may eventually exceed $35 billion, says Christopher Gamaitoni, vice president at Compass Point Research and Trading LLC in Washington. During the five quarters ended on Sept. 30, the bank had approved repurchase of loans with a face value of $4.9 billion, it announced on Oct. 20."

But it is not only Bank of America who is feeling the heat on the housing funk and the repo mess...JP Morgan Chase is on the hook as well thanks to its acquisition of Washington Mutual (WAMU) in September 2008 according to an article in Bloomberg:

http://noir.bloomberg.com/apps/news?pid=20601109&sid=aBc1G2i8oquE&pos=10

"JPMorgan did buy WaMu in September 2008 after it was seized by the Federal Deposit Insurance Corp., which meant the assets came at a bargain price of $1.9 billion, Bloomberg Markets magazine reports in its December issue.

The 2,200 WaMu branches in California, Washington and 12 other states gave JPMorgan’s consumer bank, Chase, a total of 5,410 branches -- the second-biggest network in the nation. And it moved Chase to first from third in deposits, with $905 billion after the deal closed.

Dimon, 54, got what he wanted -- and a lot that he didn’t want. JPMorgan is now saddled with $74.8 billion in nonperforming home loans inherited from WaMu, a third of the $230.7 billion in mortgages on its books."

"Both the WaMu mortgages and JPMorgan’s own home-equity loans are spilling red ink."

"In addition to the WaMu losses, Dimon has to deal with $113 billion in risky subprime, home-equity and adjustable-rate loans that JPMorgan originated."

The housing funk:

"The debacle in the housing market is still the biggest headache for U.S. banks. Payments on some 8 million U.S. mortgages were delinquent in late September, and almost 7 million of those may end up in foreclosure, says Laurie Goodman, a senior managing director at Austin, Texas-based Amherst Securities Group LP.

11.5 Million Seizures

Those projections exclude the 200,000 additional borrowers that become delinquent each month for the first time, she says.

In total, Goodman estimates that 11.5 million homes could be repossessed by banks during the next five years."

This will keep the Repo Man very busy...



The SEC is stepping in:

http://all247news.com/sec-tells-banks-to-disclose-potential-losses-from-the-mortgage-and-foreclosures-crisis/7194/


“Items that should be considered include, without limitation, the impact of various representations and warranties regarding mortgages made to purchasers of the mortgages (or to purchasers of mortgage-backed securities) including to the government-sponsored entities (GSEs), private-label mortgage-backed security (MBS) investors, financial guarantors and other whole loan purchasers.”

"Investors have been pressuring the banks for refunds on billions of dollars of securities. Earlier, we reported that Bank of America creditors are demanding for a repurchase of mortgage-backed bonds valued at $47 billion which was assembled by Countrywide Financial."

The sharks are circling the wounded banking whale, and they ain't no small sharks: PIMCO, BlackRock (Bank of America owns 34% of BlackRock),as well as the New-York Fed.

http://www.minyanville.com/businessmarkets/articles/foreclosures-mortgages-wall-st-thomas-cox/10/28/2010/id/30831


"In testimony before the Congressional Oversight Panel yesterday, Katherine Porter, a University of Iowa law professor and expert on mortgage servicers, noted that despite banks' attempts to narrowly characterize the problems as minor technicalities, the flaws in the process are far from fixed:

The problems in such cases range from the imposition and collection of improper fees, a lack of standing to foreclose in judicial foreclosure states, the pursuit of foreclosure without rights in the note and mortgage, mortgage origination fraud, or liability to investors for poor underwriting or improper servicing. The key point is that the vast majority of the alleged problems cannot accurately be described as "technicalities."

"Because [the banks] are being allowed to control the definition of error and are being allowed to audit themselves, we cannot have confidence in such reports," Porter noted."

Ouch...

http://moneywatch.bnet.com/economic-news/blog/daily-money/the-foreclosure-mess-the-start-of-another-bank-bailout/1468/


“This isn’t the other shoe dropping,” says Barry Ritholtz, a lawyer and investment expert and the CEO of Fusion IQ. “This is the third iceberg.”

"The ultimate lesson in all this? Ritholtz sees it as further proof that when a firm screws up, taxpayers should not ride to the rescue. “This goes back to why you don’t bail out banks,” he says. “You don’t know what other shortcuts were on the books.”

Will Bank of America be forced to buy back these Mortgage backed securities? The implications for large players in that space (JP Morgan, Wells Fargo, etc.) could be serious. As I previously posted, there is a strong need for a new RTC to be set up. Problems are adding up for banks, faster than the balance sheets are being repaired thanks to zero rate policy and Quantitative Easing. TPC from the excellent Pragmatic Capitalism website, argues that QE2 is aimed at Wall Street, yet again, not Main Street.

Another story to follow closely.

Don't believe the hype - About the reality hiding being some of the economic data...

A lot of the economic data being released is being propped up or gently massaged to look good.

If you look at my favourite links I invite you to have a look at the Shadow Stats:

http://www.shadowstats.com/

I came accross a very interesting read in another blog about new home sales and I invite you to have a look at it:

http://www.nakedcapitalism.com/2009/11/bank-of-america-foreclosure-shenanigans.html

You cannot rely on the recent new home sales data as a positive sign of improvements in the housing market in general and the economy in particular. Tax credits have inflated the results of new home sales. It is the same case with new cars sales. The reality is that the US car industry still has too much capacity for a demand which will be weaker as soon as tax credits will be withdrawn.

From the above article published on the blog www.nakedcapitalism.com you can read the following statement from a contact of the blogger based in Texas relating to what might be happening behind the data relating to new home sales and the picture is not nice at all to say the least if it is true.

"When I went to the bankruptcy / foreclosure auctions here a few weeks ago I found out that the whole thing is a charade. Bank of America (for instance) auctions off houses that have gone into foreclosure for the amount owed plus any carrying costs which usually makes the auction price higher than what was owed. A pre-bid was submitted by Bank of America Home Loan Servicing (the rename for Countrywide) in the exact amount of the auction minimum (mortgage owed plus carrying costs). No one else bids so the house is “sold” by Bank of America to Bank of America Home Loan Servicing. In essence, the property is simply transferred from one division to another so that clear title is established. But this is counted as an existing home sale which artificially inflates existing home sales numbers. This is what was happening for most of the 102 BAC mortgages and the 130 Wells Fargo mortgages. For the house I “rent” where the original mortgage was with Countrywide (and then transferred to B of A when B of A bought the property) this is simply a process for getting the house off of B of A’s books and back on Countrywide’s books (now BAC Home Loan Servicing). As I said, it is all charade or smoke-and-mirrors or a shell game.

Later Bank of America Home Loan Servicing will contact a realtor who will eventually put the house on the market for sale. Let’s say that the auction price was $200,000 but the house is now worth only $150,000. Of course when this house is sold by the realtor it is again counted as an existing home sale."

As well as treating new home sales data with caution, you also need to treat cautiously data relating to unemployment levels.

The big question for 2010 will be around liquidity withdrawals from governments and its impact on current market valuations.