Won’t You Please Come to Chicago?
Here is a direct quote from last Wednesday night from one of the principals embroiled in a conflict the Wall Street Journal reports today is “a firestorm that could cost [National Association of Home Builders CEO Jerry] Mr. Howard his job.”
As a close observer of the recent legislative activities and the subsequent give-and-take that has occurred, I know you can appreciate the importance of unity for the future success of our industry. That’s why we are actively engaged in a constructive dialogue with our trade association. We all want to ensure that home builders are recognized for the important contribution they make to the economy and to our way of life here in America. Having a cohesive voice in Washington has never been more important.
- See two previous Housing Crisis.com posts on the NAHB/big builder struggle over laws that would extend NOL tax carryback provisions. One is “BIG HOME BUILDERS VS. NAHB BRUSH-UP UPDATE,” and the other is “HOME BUILDER TRADE GROUP GOES PUBLIC, OR RATHER, GOES AT ITS PUBLIC MEMBERS.”
Conciliatory, careful almost to the point of mincing, this from-the-horse’s-mouth phrasing–which we believe will rule the day amid more hot-tempered militant voices–concludes with this line:
While we would differ with the approach that was taken and with the characterizations contained in the information published by NAHB recently, we believe it is best to focus on the future and how we can be more effective and successful as an industry. We are looking forward to having solutions-based conversations with the leadership of NAHB and anticipate a productive outcome.
You’d scarcely read into those words the stunning speculation reported by Michael Corkery in the WSJ article:
Executives from some of the trade group’s largest home-building companies are scheduled to meet Monday in Chicago with the NAHB leadership to discuss the possibility of ousting Mr. Howard, according to people familiar with the meeting. An NAHB spokesperson declined to comment.
At the meeting in a private club at Chicago’s O’Hare International Airport, representatives from KB Home, Centex Corp. and Pulte Homes Inc., some of the largest home builders in the U.S., may call for Mr. Howard’s ouster or threaten to break away from the 200,000-member trade group, these people said. A Pulte spokesman declined to comment. Executives from Centex and KB Home couldn’t be reached.
“According to people familiar with the meeting” could mean many things. Last week, we talked to some home building company senior level executives who were so aggrieved by the NAHB leadership’s behavior that they mentioned calling for his ouster as a condition to their agreeing to remain part of the trade association. But as we reported more extensively among public company leaders, we were told calmer heads would prevail, and that a very likely outcome would be a note of compromise.
Among the issues are economics. Association members pay dues according to a sliding scale, which puts a disproportionate onus on larger companies to ante up more for local home builder association and national dues each year. Big companies think that since they pay so heavily into the association’s interest, the last thing they should expect is the kind of treatment they received as the net operating loss tax carryback measure surfaced for final consideration as part of the $787 billion stimulus program passed by Congress and signed into law last month.
What’s more, the association went for a referendum among its 200,000 members last week, seeking support for its lobbying strategy and tactics as a point of proof to the largest companies that rank-and-file builders fear the big guys will get unfair advantages with an extension of carryback allowances to five years.
Ultimately, we believe that the big builders’ conversations with NAHB will be “solutions-based.” We’re just not certain that the solutions can or will be status quo solutions. In so many ways, the top 10 or 11 public company peers in home building resemble other Fortune 500 manufacturing and marketing organizations more than they share kinship with home builders who construct 10 or 12 homes a year.
Now that there’s talk of yet another gargantuan stimulus package in the planning, there’s not a shred of doubt that as one of the key players in the drama says above, “Having a cohesive voice in Washington has never been more important.”
If policy on housing hopes to offer a measurable improvement over the next couple of years, it’s certainly going to need to get high volume home builders back into the business of high volume building and marketing more affordable home products to home buyers. If that means getting rid of land that cost too much before, and buying it back at a lower price later so that the entire cost base of a home can be lower, then that may be what it takes for all of housing to claw its way back.
From Nest Egg to Neg Eq
One in five–a number you can actually count on your fingers–homes bought with a mortgage are under water on the loan.
The Wall Street Journal this morning has a report based on data just released from First American CoreLogic.
That’s more than 8.3 million mortgages that were upside down at the end of the year, compared with 7.6 million three months earlier. It’s a problem that is expected to get worse as home prices continue to fall.
“The accelerating share of negative equity, combined with deteriorating economic conditions, means that mortgage risk will continue to increase until home prices and the economy begin to stabilize,” said Mark Fleming, chief economist of First American CoreLogic, in a news release. First American CoreLogic is a Santa Ana, Calif.-based provider of real estate data and mortgage analytics.
“The worrisome issue is not just the severity of negative equity in the ’sand’ states, but the geographic broadening of negative equity that is expected to occur throughout the year,” he added. “Sand” states include California, Nevada, Arizona and Florida.
What’s the line where correction crosses over to deflation? Will most adverse scenarios model for a contagion in home price declines unchecked?
Who seriously doubts that well-thought out policy needs to play a role in stopping the contagion?
As Toll Rolls, Others May Follow
There are bigger public home builders than Toll Brothers, and there are certainly ones with more mainstream product offerings and conventional business models. Why is it, then, that the financial markets and the media regard Toll as the canary in the coal mine among home builders?
For one, it’s arguably the best known brand name in home building. And if that point is debatable from a national perspective, it’s hardly in question when one shrinks the geography to the northeast corridor of the United States. There’s likely to be a significant correlation between owners of Toll Brothers homes and denizens of Wall Street. It’s a name that simply means home building for many of the investor breed. The world may be Freidman flat, but many of its residents are parochially focused, which still means that West of the Hudson is that wide unknown expanse that is like a foreign concept to many Wall Street players. Which makes Toll the go-to home builder.
What’s more, it has a fiscal year that gets out of the gate Oct. 1, so its financials always seem to be a step ahead of most of the rest of the class. Not to mention Bob Toll, the patriarch of the 42 year old company. Bob opens his mouth, and people listen. Why? He’s funny, and intellectual, and doesn’t seem to be afraid to say what’s really going on. So people listen.
This morning Toll Brothers first quarter financials are out.
The financial media, The Wall Street Journal and CNBC, each sounded the theme that Toll’s performance comped better year on year than the same period in 2008, which echoes the language of the company’s Q1 press release.
HORSHAM, Pa., March 4, 2009 — Toll Brothers, Inc. (NYSE:TOL) (www.tollbrothers.com), the nation’s leading builder of luxury homes, today reported a FY 2009 first quarter net loss of $88.9 million, or $0.55 per share diluted, which included pre-tax write-downs totaling $156.6 million. This compared to FY 2008’s first quarter net loss of $96.0 million, or $0.61 per share diluted, which included pre-tax write-downs totaling $245.5 million.
Excluding write-downs, FY 2009’s first quarter earnings were $9.6 million ($9.55 million of which resulted from the net reversal of a prior tax provision), or $0.06 per share diluted, compared to $57.3 million, or $0.35 per share diluted for FY 2008’s first quarter.
In FY 2009’s first quarter, revenues were $409.0 million, backlog was $1.04 billion and net (after cancellations) signed contracts were $127.8 million. These totals represented declines of 51%, 56%, and 66%, respectively, in dollars, and 45%, 51% and 59%, respectively, in units, compared to FY 2008’s first-quarter results.
The Company ended FY 2009’s first quarter with $1.53 billion in cash, compared to $956.6 million at FY 2008’s first-quarter-end. The Company’s cash position was down slightly from $1.63 billion at FY 2008’s fourth-quarter-end, principally due to the payment in 2009’s first quarter of previously accrued taxes and the retirement of purchase money mortgages and other debt. In addition, the Company had $1.32 billion available under its bank credit facility, which matures in March 2011.
The Company ended 2009’s first quarter with a net-debt-to-capital ratio(1) of 14.5%, its lowest level ever at first-quarter-end, compared to 26.8% at 2008’s first-quarter-end. Stockholders’ Equity at FY 2009’s first-quarter-end of $3.16 billion was down 2% compared to $3.24 billion at FYE 2008 and 7% compared to $3.41 billion at FY 2008’s first-quarter-end.
Big Builder offers a brief post-up of Q1 earnings, quoting the quotable CEO Robert I. Toll in his observation of the primary culprit for continued concern.
“We believe weak buyer confidence still impedes the market,” said Robert I.Toll, chairman and CEO. “We have not yet seen a pick-up in activity at our communities other than ordinary seasonal increases for this time of year.”
In UBS equity research analysis of the sector, analysts Eric Crawford and David Goldberg, note faint silver-lining observations in the data and explication from senior management.
As reported on 2/11, net unit orders -59% YOY, averaging just 1 per community for the Q. Despite this, we are encouraged to hear that mgmt is seeing early indications that pricing on land is becoming increasingly attractive, as we continue to believe this is an early indicator of a trough in housing. With its robust liquidity (the co’s net debt-to-cap was 15% at the end of F1Q), we believe Toll is well positioned to take advantage of these opportunities and gain market share from more capital constrained peers.
Michael Rehaut, executive director for JP Morgan equity research on home building punches the data into his Toll model, and out comes this topline take:
Following its 2/11 release of orders, can rate, closings, backlog, and a charges range of $100-200 mil., TOL reported a 1Q (Jan.-end) loss of -$0.55/share, below the Street’s -$0.41 and our $0.47E, featuring land-related charges of $157 mil., which we note was roughly at the midpoint of guidance, as well as core operating margin of only 1.0%, solidly below our 4.7%E and down sharply from the prior four quarters’ 9-11% range. Additionally, TOL noted that the recent pickup in activity was largely seasonal, which we point out is consistent with our view and most other builders’ view of the recent improvement in activity, and therefore is not indicative of a positive trend in the market, in our opinion. Lastly, it also reiterated limited FY09 guidance featuring ranges for closings (2K to 3K) and ASPs ($600 to $625K). Positively, we do note that TOL continues to maintain a strong balance sheet with strong liquidity. None theless, we continue to look for orders and pricing to remain highly challenged, and given our outlook for continued overall difficult conditions in the housing market well into 2009, we continue to expect large impairment charges for the company and the overall industry. Accordingly, we maintain our Neutral rating on TOL amidst our negative sector stance.
Independent housing and economic analyst, Calculated Risk, has a more stark assessment.
In summary: More losses. More write-downs. More cancellations. No guidance. No pick-up in activity.
Statements from Bob Toll himself focus investors on the company’s balance sheet management strength amid continuing headwinds. But he also took a swing for the political fences with remarks that indicate home building leadership has not by any means abandoned its goal for more decisive government policy intervention aimed at spurring demand for new residential housing.
Click on image for access to Big Builder profile.
“Many experts continue to believe we must first stem home price declines before we can resolve the nation’s economic and financial crisis. The recent stimulus bill shows that Washington is paying greater attention to our industry; however, we think more is needed. We advocate a buyer tax credit of $15,000 to be made available to all buyers of homes, not just first-time buyers: We must motivate the entire food chain of home buyers to stop the decline of home prices. Creating a sense of urgency is necessary to motivate buyers to act now; therefore the credit should only be available for a limited period of time.
“If home prices are stabilized, financial institutions, which today cannot value the mortgage-backed securities on their balance sheets, will once again be able to trade these securities; this, in turn, will help stabilize the financial system.
“Housing starts are at their lowest level since measurement began fifty years ago and the resulting job losses have been brutally damaging to the U.S. economy. The new home industry, combined with the related service, building products and home furnishings industries, are together, perhaps, the largest employer in the United States. If Congress and the Administration can effectively call the bottom and thereby put a floor under home prices, we believe the housing market will recover sooner, jobs will be created, bank balance sheets will improve, and millions of people will be able to return to the workforce.”
No doubt, we’ll hear a similar refrain from home building’s CEO breed as Spring financial results surface in the weeks ahead.
Roubini’s Crystal Ball
The New York Times asked economists it knows well to forecast when recovery will come in its “When Will the Recession Be Over” opinion piece today.
Importantly, though, New York University economist Nouriel Roubini got his own play in the Times. Here’s a bit of it.
Today, as we enter the 15th month, it’s obvious that we are already in a painful U-shaped recession that has become global and will last at least until the end of the year — 24 months, the longest since the Great Depression. Even if the gross domestic product grows in 2010, it is likely to be no higher than 1 percent. And at that rate, with the unemployment rate rising toward 10 percent, we will still be substantially in a recession.
Even if appropriate aggressive policy actions were undertaken — monetary and fiscal stimulus, bank clean-up and credit restoration, mortgage debt reduction for insolvent households — the growth rate would not rise closer to 2 percent until 2011. So this recession may last 36 months.
Remember, though, this is Roubini we’re quoting. His next line is:
And things could get worse.
In his unblinking way, he’ll tell you why that is.
A Nick with the Nack and a Trillion Dollar Bill
Nicholas Retsinas, director of the Harvard Joint Center for Housing Studies, weighs in on President Obama’s $75 billion Homeowner Affordability and Stability Plan, in a posting on the JCHS Web site, as noted in The New York Times yesterday afternoon.
Here’s the Q&A:
I think the plan is balanced and innovative. At the same time one should not overestimate the impact of the plan on the most serious housing crisis this country has faced since the Great Depression.
Click on photo for background on Nicolas Retsinas
1. What is your assessment of the president’s plan?
Retsinas was interviewed on February 26, 2009.
The plan attacks the root of the problem in our economy which is the depressed housing market. This would have been a much better plan had it been put into place a year ago. It does however balance the appropriate role of the government in guiding, motivating and rewarding the private sector to make the right decisions to keep responsible borrowers in their homes. It replaces a flawed policy where government was at worst a spectator, at best a cheerleader, in encouraging loan modifications. This plan gives the government a seat at the table.
2. Will the plan assist only those homeowners who are currently in trouble, or could it also help those facing financial challenges in the future?The plan has several components. One part enables homeowners who are current on their mortgage today to refinance and take advantage of lower interest rates. This makes it less likely that they would become delinquent and default on their mortgage in the future and has the added benefit of providing more income for families that they could spend to help bolster our economy.
The other part of the plan, the interest rate subsidy portion, is more directly aimed at borrowers who are having trouble today. In this part of the plan, the government allocates subsidy dollars to make mortgages more affordable. It is predicated on the premise that the borrower will pay their mortgage if they can afford to pay their mortgage, even if they owed more than the house is worth.
3. What other moves could/should be made to help stabilize the housing market?The most important factor in the housing market is the state of the economy, and in particular, whether people are working. This plan can only succeed if the government stimulus package puts people back to work and stops the widespread job losses we have seen in recent months. In many ways, the housing recovery plan is only a part of the solution. The other part is the intervention in the broader economy.
Again, while I am supportive of the plan, one of the missing ingredients was a way to actively simulate demand. This is a difficult challenge given the state of the economy, but one that I think has to be addressed.
4. Is this a good time for savvy buyers to enter the market? How long in your estimation before the housing market rebounds?That depends. Certainly prices are as low as they have been in most markets for the last five or six years. I think a key question a prospective buyer must address is whether or not they are buying a home they intend to live in for an extended period of time. If they are buying a home primarily for investment purposes, this is a very risky market to participate in.
When the market will rebound will in large measure be a function of when the economy rebounds. So to the extent that we are able to put people back to work and are able to stop the job losses, and if this housing recovery plan begins to slow down the number of foreclosures, the housing market will recover. In those markets where there has not been substantial overbuilding, in the northeast for example, it is plausible (subject to an overall economic recovery) that the bottom could be reached at the end of this year or sometime next year. In those markets like the southwest and south Florida, where there was extensive overbuilding, the recovery will be substantially delayed.
Now, no knock on Nick, whose biggest lament about the Obama plan is that it doesn’t pack a more powerful wallop to stoke home buying demand — a la Fix Housing First’s plan. Still, Big Builder Maine-based sage Trillion-Dollar Bill [William F.] Gloede, who writes the “Wall Street and Maine” column, has a need to vent that sounds like a rant about how Obama’s plan would help the wrong people in the wrong places, … which it is.
So the Obama plan is not a housing market plan at all. It is a $275 billion spending program that will help keep some homes in typical new-home communities from foreclosure but will probably keep as many or more foreclosures from occurring in poor and working class neighborhoods in and right around the big cities. The latter will do nothing for the housing market because home prices there typically have little effect on values elsewhere.
The plan, though, will help to keep urban neighborhoods from the instability caused by vacant foreclosed properties. Which is probably what the Administration intended in the first place. Which is probably why they called it the Homeowner Affordability and Stability Plan.
Some people are born with insight, and some people sweat to find it. Bill’s insights tend to possess him like demons, which makes him a pleasure to work with.
Another Play to Stabilize Home Prices: Uncle Sam Buys 2 Million
The scary part about this idea is that it’s one of the more heavy-handed policy intervention notions one can imagine–the government buys 2 million existing for-sale homes at a mean national pricetag of $170K per, or a total of $340 billion. Only its author claims that it is a free-market plan, because the U.S. Treasury makes its money back from the resale of homes into a putatively stronger selling market.
Here’s the gist:
The US commits to purchase up to two million homes (beginning with the 770,000 currently foreclosed) at the current market price.
This purchase will reduce the inventory of homes on the market to just 1.7 million, which is the correct number for a healthy market (3-4 month supply). Ending the supply glut and removing foreclosed homes from the market will restore the balance between supply and demand, and so restore real estate values and mortgage security, permitting refinancing or sale of homes as necessary. The current median home price nationally is about $170,000, which is a healthy price when measured by both historic trends and median household income. So now is the right time to correct inventory. Purchasing two million homes will cost about $340 billion at the median price, but the homes could be sold again into a healthy market over several years at a likely profit that covers management, maintenance, and policing. Correcting the inventory will also put builders back to work answering renewed demand. Meanwhile, having a reserve of up to two million homes will forestall another round of speculation while we enjoy record-low interest rates.
The theory intrigues one and its designer –Kevin Parcell, who pasted his idea in as a comment to NY Times’ columnist, Princeton economist and Nobel prize winnter Paul Krugman’s “Stress Test This“ blog post yesterday–has a data-rich position that makes this straightforward plan seem almost too simple. Which it is.
It doesn’t count for the stampede of foreclosures that would erupt the moment Uncle Sam started trolling the real estate landscape looking to buy up the deeds, first of foreclosed homes, then of buyers bent on getting out of their obligations.
Our problem is that we need ground-up positive psychology to counter negative sentiment due to worsening economic conditions. What’s coming into focus is that the “if we don’t do something now” line has lost its urgency and bailout fatigue is broad-brushing every initiative that comes along. People can’t keep track of all the programs, and they know that what they’re adding up to is tax Armageddon at some point sooner than later.
Still, ideas shared, and, hopefully, competent execution of one or more of them may begin to ping against the ediface of doubt and uncerainty about a free-falling house price environment. However, it should be noted that Paul Krugman sounds as if all he’s seeing from the new Administration is rearranging deck chairs on the Titanic. Buying 2 million homes, he’d probably say, is one of those deck chairs.
We Ask Why Not?
RGE Monitor, an economics intelligence piece led by New York University econ guru Nouriel Roubini, maps out the math of mortgage stop-loss modification. The piece is entitled “The Housing Crisis and Bankruptcy Reform: The Prepackaged Chapter 13 Approach.”
Since about 10% of the $10 trillion mortgages are currently delinquent or in the foreclosure process, the expected deadweight loss for the delinquency started so far will be at least $300 billion or $1,000 per American. Avoiding this loss should be a top legislative priority. A major puzzle is why the market does not avoid these losses. Lenders can do better if they renegotiate loans rather than foreclose on them. To see why, suppose that the outstanding debt on a house is $200,000, the market value of the house is now $150,000, and the foreclosure value of the house is $100,000. If the lender forecloses, it obtains $100,000 at best. Alternatively, it could renegotiate the loan with the homeowner for, say, $140,000. The homeowner now owns a house worth $150,000, and the bank owns a loan worth $140,000. The homeowner could resell the house and obtain a profit for $10,000, or keep the house—in either case, the foreclosure inefficiency of $50,000 is avoided, as are the negative effects on neighboring houses. With millions of houses currently in foreclosure or close to it, the cost savings from loan renegotiations could be enormous. However, if loan renegotiation is desirable from an ex post perspective, it can nonetheless create problems for banks, which must take into account the effect of loan renegotiations for future credit transactions. If borrowers with outstanding mortgages observe that other borrowers benefit from loan renegotiations, then they will realize that they, too, may be able to renegotiate their mortgage if otherwise they would default. If homeowners anticipate the possibility of renegotiation, they might deliberately maintain thin equity margins so that they can credibly bargain for a loan renegotiation if the value of the house declines. As a result, many banks appear to have a policy of either not renegotiating loans or doing so only in unusual circumstances.
What would become of the Stress Test if a bank adopts this approach? It’s certainly worth exploring. Rescue policy fatigue is setting in big time.
Stop Policy: A Believer in the Free Market
From ProSales, By Greg Gregory: We’ve learned this. Every intervention leads to the need for another intervention. Washington has circled the wagons around Wall Street, and Main Street has been relegated a role as a spectator who’s paid for a scalped ticket.
Greg Gregory, president of Builders Supply Company of Lancaster, S.C., has this idea: How about we just stop with the programs, the plans, the bailouts, the stimuluses, the rescues and the recovery acts? They only make things worse and last longer, he feels. Here’s the lead of a provocative, well-thought out piece as it appears on ProSales magazine’s Web site.
Greg Gregory, president, Builders Supply
Is it more painful to slowly remove a bandage or to rip it off? Policy makers face a similar dilemma in choosing a course of action to arrest the downward spiral of the nation’s housing market. Should housing prices be slowly propped up and foreclosures stalled through government action, or should the free market be allowed to work, regardless of the immediate and collateral damage that such action would precipitate?
Before answering that question, let’s examine what brought our industry to the edge of the abyss. Housing and finance drove much of the growth in jobs and tax collections over the past decade. Unfortunately, easy credit fueled a boom in starts that went on two years too long. Consequently, houses that should have been constructed in 2007 and 2008 were largely completed in 2005 and 2006.
The result of this aberration is that many of these homes are now in foreclosure. This has depressed home prices and flooded the market with inventory. Today’s question is: How can we find a path back to normalcy?
This is the first serious downturn our industry has faced since the early Reagan years, so it’s useful to have some perspective. The building industry has survived tough periods before, including the Great Depression, the shortages of World War II, whipsawing starts in the 1970s and double-digit interest rates in the early 1980s. The causes of each calamity were different, as was the government’s response….(more)
Have a look at where he goes with the piece.
Highlights and Lowlights
This is taken directly from Ben S. Bernanke’s Semiannual Monetary Policy Report to the Congress, Before the Committee on Banking, Housing and Urban Affairs, U.S. Senate. Focus on what’s underlined and in blue (our emphasis):
Recent Economic and Financial Developments and the Policy Responses
As you are aware, the U.S. economy is undergoing a severe contraction. Employment has fallen steeply since last autumn, and the unemployment rate has moved up to 7.6 percent. The deteriorating job market, considerable losses of equity and housing wealth, and tight lending conditions have weighed down consumer sentiment and spending. In addition, businesses have cut back capital outlays in response to the softening outlook for sales as well as the difficulty of obtaining credit. In contrast to the first half of last year, when robust foreign demand for U.S. goods and services provided some offset to weakness in domestic spending, exports slumped in the second half as our major trading partners fell into recession and some measures of global growth turned negative for the first time in more than 25 years. In all, U.S. real gross domestic product (GDP) declined slightly in the third quarter of 2008, and that decline steepened considerably in the fourth quarter. The sharp contraction in economic activity appears to have continued into the first quarter of 2009.…
The principal cause of the economic slowdown was the collapse of the global credit boom and the ensuing financial crisis, which has affected asset values, credit conditions, and consumer and business confidence around the world. The immediate trigger of the crisis was the end of housing booms in the United States and other countries and the associated problems in mortgage markets, notably the collapse of the U.S. subprime mortgage market. Conditions in housing and mortgage markets have proved a serious drag on the broader economy both directly, through their impact on residential construction and related industries and on household wealth, and indirectly, through the effects of rising mortgage delinquencies on the health of financial institutions. Recent data show that residential construction and sales continue to be very weak, house prices continue to fall, and foreclosure starts remain at very high levels.
The financial crisis intensified significantly in September and October. In September, the Treasury and the Federal Housing Finance Agency placed the government-sponsored enterprises, Fannie Mae and Freddie Mac, into conservatorship, and Lehman Brothers Holdings filed for bankruptcy. In the following weeks, several other large financial institutions failed, came to the brink of failure, or were acquired by competitors under distressed circumstances. Losses at a prominent money market mutual fund prompted investors, who had traditionally considered money market mutual funds to be virtually risk-free, to withdraw large amounts from such funds. The resulting outflows threatened the stability of short-term funding markets, particularly the commercial paper market, upon which corporations rely heavily for their short-term borrowing needs. Concerns about potential losses also undermined confidence in wholesale bank funding markets, leading to further increases in bank borrowing costs and a tightening of credit availability from banks.
Recognizing the critical importance of the provision of credit to businesses and households from financial institutions, the Congress passed the Emergency Economic Stabilization Act last fall. Under the authority granted by this act, the Treasury purchased preferred shares in a broad range of depository institutions to shore up their capital bases. During this period, the Federal Deposit Insurance Corporation (FDIC) introduced its Temporary Liquidity Guarantee Program, which expanded its guarantees of bank liabilities to include selected senior unsecured obligations and all non-interest-bearing transactions deposits. The Treasury–in concert with the Federal Reserve and the FDIC–provided packages of loans and guarantees to ensure the continued stability of Citigroup and Bank of America, two of the world’s largest banks. Over this period, governments in many foreign countries also announced plans to stabilize their financial institutions, including through large-scale capital injections, expansions of deposit insurance, and guarantees of some forms of bank debt.
…
With the federal funds rate near its floor, the Federal Reserve has taken additional steps to ease credit conditions. To support housing markets and economic activity more broadly, and to improve mortgage market functioning, the Federal Reserve has begun to purchase large amounts of agency debt and agency mortgage-backed securities. Since the announcement of this program last November, the conforming fixed mortgage rate has fallen nearly 1 percentage point. The Federal Reserve also established new lending facilities and expanded existing facilities to enhance the flow of credit to businesses and households. In response to heightened stress in bank funding markets, we increased the size of the Term Auction Facility to help ensure that banks could obtain the funds they need to provide credit to their customers, and we expanded our network of swap lines with foreign central banks to ease conditions in interconnected dollar funding markets at home and abroad. We also established new lending facilities to support the functioning of the commercial paper market and to ease pressures on money market mutual funds. In an effort to restart securitization markets to support the extension of credit to consumers and small businesses, we joined with the Treasury to announce the Term Asset-Backed Securities Loan Facility (TALF). The TALF is expected to begin extending loans soon.
…
Strains in short-term funding markets have eased notably since the fall, and London interbank offered rates (Libor)–upon which borrowing costs for many households and businesses are based–have decreased sharply. Conditions in the commercial paper market also have improved, even for lower-rated borrowers, and the sharp outflows from money market mutual funds seen in September have been replaced by modest inflows.
…
In light of ongoing concerns over the health of financial institutions, the Secretary of the Treasury recently announced a plan for further actions. This plan includes four principal elements: First, a new capital assistance program will be established to ensure that banks have adequate buffers of high-quality capital, based on the results of comprehensive stress tests to be conducted by the financial regulators, including the Federal Reserve. Second is a public-private investment fund in which private capital will be leveraged with public funds to purchase legacy assets from financial institutions. Third, the Federal Reserve, using capital provided by the Treasury, plans to expand the size and scope of the TALF to include securities backed by commercial real estate loans and potentially other types of asset-backed securities as well. Fourth, the plan includes a range of measures to help prevent unnecessary foreclosures.
…
The Economic Outlook and the FOMC’s Quarterly Projections
… Policy makers substantially marked down their forecasts for real GDP this year relative to the forecasts they had prepared in October. The central tendency of their most recent projections for real GDP implies a decline of 1/2 percent to 1-1/4 percent over the four quarters of 2009. These projections reflect an expected significant contraction in the first half of this year combined with an anticipated gradual resumption of growth in the second half. The central tendency for the unemployment rate in the fourth quarter of 2009 was marked up to a range of 8-1/2 percent to 8-3/4 percent. Federal Reserve policymakers continued to expect moderate expansion next year, with a central tendency of 2-1/2 percent to 3-1/4 percent growth in real GDP and a decline in the unemployment rate by the end of 2010 to a central tendency of 8 percent to 8-1/4 percent.…
This outlook for economic activity is subject to considerable uncertainty, and I believe that, overall, the downside risks probably outweigh those on the upside. One risk arises from the global nature of the slowdown, which could adversely affect U.S. exports and financial conditions to an even greater degree than currently expected. Another risk derives from the destructive power of the so-called adverse feedback loop, in which weakening economic and financial conditions become mutually reinforcing. … If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability–and only if that is the case, in my view–there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery.
…
At the time of our last Monetary Policy Report, the Federal Reserve was confronted with both high inflation and rising unemployment. Since that report, however, inflation pressures have receded dramatically while the rise in the unemployment rate has accelerated and financial conditions have deteriorated. In light of these developments, the Federal Reserve is committed to using all available tools to stimulate economic activity and to improve financial market functioning.
…
Encouraged???
Talk of the Town
Not that there’s really good money around to go after the bad. However, as the federal government eyes converting Citigroup preferred shares into common and taking a 40% stake in the behemoth, folks who eat, sleep, and breathe economics and policy talk as if nationalization is inevitable, whether or not that’s what one calls it.
This video, from Sunday morning television on ABC’s “This Week,” has become the flashpoint of debate.
The Big Picture’s Barry Ritholtz comes across as if he smells blood on this issue. There’s nothing so gratifying in the thankless world of blogging than to have been roundly excoriated for going out on a limb on a theory, only to be proven 100% correct on it.
He draws on Miller Tabak + Co. equity strategist Peter Boockvar’s strong assertion about calling a spade a spade to further his pro-nationalization argument.
“The raging debate over whether to nationalize C and/or BAC is semantics at this point. With politicians in DC dictating executive pay, marketing expenses, employee trips, dividend policy, etc… with their tens of billions of pfd stock (which may now be common with an amazing sleight of hand with no new money) and the guarantee of almost a half trillion $s worth of assets, both are already wards of the state.
But, whatever step the government may or may not take, healing the banks directly is still only dealing with the symptoms and not the disease.
That disease is ‘an overleveraged consumer and falling home prices‘ — when its cured, it will heal the symptoms that is a troubled bank sector. Shifting bad assets from the banks to the govt is just a shell game as we’ll pay for it one way or another. The $64k question is what will happen to bond holders . . .