Financial News Update July 13, 2009

Comment:

I've always thought that "Monday the Thirteenth" must be far worse than some "Friday the Thirteenth", but mine hasn't been bad so far. Hopefully, same for whoever reads this.

Some times I tend to assume things, then I realize that perhaps readers can't read my mind unless I write it down. At the top of the blog I have the statement, "And reporting what people do, not what they say they will do." I always keep this phrase in mind when posting the news for the day, and it often helps me decide to throw articles out. That is why I never report news such as from today's FT, "Geithner and Darling predict growth restart ." Titles similar to this are in the news at least five times every single day. This is nothing more than the powers that be trying to boost the psychology of the masses to turn around spending and borrowing. What I don't understand is the media's role in this. Seems the powers that be and the MSM are joined at the hip.

And, that doesn't mean I want failure. On the contrary, I am always looking for solutions to this mess. But daily propaganda reporting that things are looking up just around the next corner is NOT news. That's why I can't figure out why it gets reported.

I had fun with the 40 some comments so far on my Seeking Alpha piece over the weekend. (11 on the instablog and 31 on the article blog.) If you didn't see the Farmland Real Estate Bubble piece, please scroll down.

Today, there's just as much or more to read in the Opinion Picks Thread as there is in the News Thread.
-Kalpa

U.S. budget deficit rises above $1 trillion

The U.S. recorded a federal budget deficit of $94.3 billion in June, pushing the cumulative deficit so far this year to a record $1.08 trillion, the Treasury Department reported Monday. Outlays rose in June to $309.6 billion, while receipts climbed to $215.3 billion in the month. Among the outlays for June is $11.3 billion in Troubled Asset Relief Program funds, the bailout program for banks and U.S. automakers. At this time last year, the cumulative federal budget deficit was just $285.8 billion. The Obama administration expects a deficit of $1.84 trillion for the full fiscal year, which ends in September.

However, that number is likely to be revised higher later this month, since the economy has been much weaker than when the original estimate was made. The budget deficit for June is down from the $189.7 billion figure in May but was still enough to push the fiscal year-to-date deficit past the $1 trillion mark. For fiscal year 2010, which begins in October, the administration is projecting a $1.26 trillion deficit.

CIT Group Scrambles to Survive, Avoid a Run

CIT Group Inc. officials spent the weekend trying to hash out a plan that would help calm markets and convince customers and investors that it can work its way out of a deepening liquidity crunch. Over the weekend, CIT representatives held discussions with members of Congress, government officials and regulators as they became increasingly nervous hundreds of small and midsize business customers may rush to withdraw funds or try to draw down credit lines. CIT executives were worried that customers would be rattled by reports over the weekend that it hired a prominent law firm to prepare for a possible bankruptcy filing after so far failing to get additional government assistance.........

On Monday, CIT shares sank 22% to $1.20 in early trading as pressures on the lender mounted. CIT had hoped to get some sort of short-term emergency financing from the government. But it was unclear whether government officials would be willing to step up. They have long felt CIT is not a systemic risk to the financial system and other lenders could step in to provide loans and services to small and midsize businesses, a CIT specialty........

While not as well known as the big commercial banks, CIT is an important test case for the Obama administration. It gives indications of the government's willingness to get involved with financial institutions that aren't deemed as too big to fail, but that play a significant role in the economy. CIT is a lender to nearly a million mostly small and midsize businesses and companies, and while its failure may not jolt financial markets in a large way, it could hurt the flow of credit to many businesses to whom banks traditionally won't lend. The government gave the bank-holding company $2.3 billion under the Troubled Asset Relief Program last year but so far hasn't included CIT in a separate program that would allow it to issue debt at low interest rates..........

U.S. Commercial Construction to Drop 16% This Year, Report Says

Construction spending on offices, retail centers and hotels is likely to fall 16 percent this year and 12 percent in 2010, more than previously forecast, the American Institute of Architects said...... Spending on office buildings is forecast to sag 22 percent this year and 17 percent in 2010, while retail construction probably will sink 28 percent this year and 13 percent in 2010, the architects group said...... Hotel construction is likely to decline 26 percent this year and 17 percent in 2010, the institute said. Industrial spending is forecast to dip 0.8 percent this year and 28 percent in 2010, according to the report.....

Germany Must Act to Avoid Its Own 'Lost Decade'

Is Germany the new Japan? Germany, the biggest European economy, is well on its way to making a key mistake blamed for Japan’s “lost decade” of economic stagnation in the 1990s — failing to clean up its banks decisively. The obstacles are political rather than financial. Berlin seems determined to avoid telling voters the bad news before a Sept. 27 general election about banks’ expected losses and the likely cost to the taxpayer. Instead, the government is allowing banks to conceal or defer the full extent of their losses on toxic securities and bad loans and refusing to subject them to public stress tests or to require them to increase their capital. In doing so it risks perpetuating “zombie banks” that are too sick to lend to businesses and households..........

The E.C.B.’s latest Financial Stability Review explains why. It estimates that euro-zone banks face a further $283 billion in write-downs by the end of 2010 on top of the $366 billion in losses written off since the crisis began in mid-2007. Rather than requiring banks to recognize those bad assets and remove them from their balance sheets, most euro-zone governments have been playing for time, seemingly hoping that something will turn up..........

Germany’s bad-bank plan for commercial and state banks is designed to stretch the problem out over the next two decades rather than resolve it. Banks may voluntarily put toxic assets into special purpose vehicles guaranteed by the state until maturity, paying an annual fee. But if the assets are worth less at the end than the price assessed by an independent valuer, the liability rests with the banks, not the taxpayer. Italy, France, the Netherlands, Belgium and, to a lesser extent, Spain are all in denial about the extent of their banking problems, although the Dutch, Belgians and French have had to spend billions of euros of taxpayers’ money to save Fortis, ABN Amro, ING and Dexia.

Spain has been bolder, creating a €99 billion bank rescue fund, which is expected to lead to a wave of restructuring, alliances and bailouts after the country’s housing bubble burst. So what does the euro zone have to do to avoid a Japanese-style prolonged period of stagnation with zombie banks? Governments should start by telling voters and markets the truth about their banks’ exposures. Far from undermining confidence in all banks, as Mr. Steinbrück contends, disclosure would restore trust in sound institutions and dispel general suspicion. They should then compel banks that are found wanting to increase their equity capital, either from private investors if they can, or from the state if they must. This may lead to a temporary nationalization of some sick banks, as Britain did with Royal Bank of Scotland. Ultimately, banks that are not viable must be broken up or closed down.........

As the Japanese example shows, procrastination merely increases the long-term pain.

Banks Stronger But Outlook Clouded by Job Loss: Whitney

Unemployment is likely to rise to 13 percent or higher and will weigh on the economy for several years, countering government efforts to stabilize the banking industry, analyst Meredith Whitney told CNBC. While Whitney raised her short-term outlook for banks, causing stocks to open in positive territory after pointing lower earlier, she said the long-term outlook for the economy remains murky. Consumers will not be able to spend as they continue to lose jobs and credit conditions stay tight, she said in a live interview. The result will provide a vivid display of how critical housing and lending are to economic growth. Unemployment is currently at 9.5 percent but is expected to keep rising.

"We underestimate how much the whole economy is dependent on the mortgage industry, and that has to change," Whitney said. "This is what happens when you delay the inevitable. We're buying time here, but we're not restructuring the economy." Prior to the interview, Whitney raised hopes for banks when she said Goldman Sachs is in for a hugely profitable quarter. She expanded her remarks during her CNBC appearance, saying the Wall Street titan probably will earn $4.65 per share for the second quarter, $20 for the year and more than $22 for 2010. Banking stocks will be good buys at least in the short term as the industry takes advantage of "the mother of all mortgage quarters," Whitney said.

Little-noticed new Safe Harbor Mortgage Modification rules that went into effect May 20 prohibit mortgage investors from suing loan servicers. The legislation is significant in that it offers added protection for large servicers from investor litigation as the institutions modify mortgages for distressed homeowners. President Obama endorsed the changes as part of his administration's efforts to head off foreclosures, protect consumers and support the flailing mortgage industry. Whitney said the new rules will be a boon for larger banks, but the momentum may not last. "It's a trading call," she said, adding that "you don't want to be short these names."

Banks as a whole could see a 15 percent gain in the short term, "then you flatline, then I think you have another leg down." Outside of Goldman, Whitney said Bank of America is "bar none" the cheapest of bank stocks compared to its tangible book value, and said JPMorgan Chase's earnings will provide a bellwether for institutions plagued by large consumer loan losses. It is joblessness, though, that poses the industry's greatest risk. "Unemployment continues to drive higher and the banks are not prepared for double-digit unemployment," she said. "That's going to be an issue for them that doesn't go away for the next year and a half."

Comment: Click on the link to watch the 12 minute video of Meredith. She calls a buy recommendation on GS, a "bearish bullish equity move". She predicts unemployment between 13%-15% and still complains about not addressing banking problems. The article I covered last week included some of these thoughts on the new mortgage modification rules.



Regulators close Bank of Wyoming

Bank of Wyoming was closed Friday by state regulators, bringing the total number of failed banks this year to 53, the Federal Deposit Insurance Corporation said. The Thermopolis, Wyo.-based bank has just one branch, which will reopen Monday as a branch of Central Bank & Trust, which is based in Lander, Wyoming. It was the first bank in that state to fail this year. Central Bank & Trust agreed to assume all of Bank of Wyoming's $67 million in deposits and purchase $55 million of the failed bank's $70 million in assets. The remaining assets will be sold later by the FDIC.

The failed bank had about $8 million in brokered deposits, which the FDIC said it will pay directly to the brokers. Today's failure will cost the FDIC $27 million, bringing the FDIC fund's total cost for failed banks to $12.33 billion this year. That compares with $17.6 billion in all of 2008. The number of bank failures so far this year has more than doubled last year's total of 25, with an average of nearly 9 failures per month. Over the next 5 years, the FDIC expects to incur roughly $70 billion in losses due to the failure of insured institutions. Most of the banks that have failed so far this year were casualties of risky funding strategies, as well as losses on loans issued to local residential and commercial real estate developers, who were hit hard by the flagging economy.

U.S. quarterly drilling activities fall 46%

Oil and natural gas drilling activities in the U.S. fell nearly 46% in the second quarter from a year ago, industry group American Petroleum Institute reported Monday. Drilling levels now stand at the lowest since 2003, the API said. About 8,038 oil wells, natural gas wells and dry holes were completed in the second quarter, the API said.

GM hopes to sell cars on eBay

Fresh out of bankruptcy, the new General Motors hopes to soon start selling its whole line of cars on eBay through a pilot program. While the marketing effort would initially be limited to California, it could go national if it proves to be successful, said GM Chief Executive Fritz Henderson at a news conference Friday. A tie-up with eBay wouldn't be entirely new for GM. The automaker has been placing all of its "GM Certified" used cars on eBay for over a year. Toyota and Chrysler have similar programs for their certified used cars, as well.....Winning bidders, or "Buy it now" buyers, would complete the purchase at the dealership, said Susan Docherty, general manager for GM's Buick, Pontiac and GMC brands. She said GM decided to try selling cars on eBay because 80% to 90% of GM shoppers already spend a lot of time researching their purchase online.....

AIG Plans Millions More in Bonuses

American International Group's recent discussions with President Obama's compensation czar have centered on whether the company should pay about $250 million in promised bonuses that come due during the next nine months. AIG has asked the government to rule on several categories of bonuses, said a person familiar with the discussions. These include millions of dollars in payments owed to top corporate executives in coming days, and the troubled insurer has been seeking senior Treasury official Kenneth R. Feinberg's consent in an effort to provide the company with political cover.

But of greater concern to both sides is what to do about the vastly larger sum that comes due in March 2010, when AIG is scheduled to pay more than $200 million in bonuses aimed at retaining executives at AIG Financial Products, the unit whose complex derivative contracts nearly wrecked the insurance giant last fall. A public furor erupted earlier this year when AIG paid about $165 million in retention bonuses to Financial Products employees. The contracts that guaranteed those awards also promised similar payments in March 2010, and AIG has been examining the issue in hopes of preventing another debacle, company officials have said.......

Overheard

More fodder for Goldman Sachs-rules-the-world conspiracy theorists. Late Thursday, President Obama tapped Philip Murphy, the former Democratic National Committee finance chairman, as his choice as the next ambassador to Germany. The 52-year-old, spent 23 years at Goldman, where he led the firm's Frankfurt office from 1993 to 1997 and sat on its management committee. Ich bin ein investment banker.