We're starting to see some of the first supposedly-"performing," "investment grade" but "illiquid" assets bought by the Fed turn south; these were supposedly going to break even at worst, and even return a profit to taxpayers. Of course, no one should've believed that, but these were the lies told at the time. Anyway, the reality is here, and Bear Stearns commercial holdings (bought at par) have been written down 28%; Bear Stearns home-loan holdings have been written down 38%. Commercial loans made up the majority of the losses.
That's bad, because shopping malls are falling over left and right as retail stores close in large numbers, and office vacancies are at recent highs. Mish has several more links to related stories here.
Sadly, this is not even a little bit over. Continuing and first-time jobless claims continue to rise, which affects the ability of everyone to pay mortgages. Unemployment jumps from a few months ago are showing up in mortgage defaults, as January's default rate on prime Fannie Mae and Freddie Mac-held loans jumped 50% in a single month. Now imagine what near-prime and subprime are doing, and remember that FNM and FRE hold 56% of all mortgages in the US, and remember that the job situation has gotten much worse since January. Mish has more analysis of the numbers, here.
Existing home sales, which had climbed a bit in February, fell 3% in March, and missed expectations to the downside. Inventory in absolute numbers fell a bit, but in months-of-supply (measured against rate of sales) actually rose, and half - half - of all sales are "distressed." KBW thinks that this particular feedback loop will trigger need for an additional US$1T in funding, which would presumably be taxpayer money, or, more accurately, taxpayer debt.
General Motors has announced that it will not make a US$1B debt payment due June 1. GM CFO Ray Young stated that bankruptcy is "probable," but indicated it would be with government backing and as such probably means it'll be prepackaged. Also, almost all GM plants will be idle in late May and/or early July. Chrysler is reported likely to enter bankruptcy protection next week; rumours say that health care and pension benefits will not be cut, which creates a bit of a problem in terms of trying to get them back out. Boldholders are expected to take a 75% haircut.
Microsoft missed earnings estimates badly today, reporting 33¢/share income against expectations of 39¢ and 47¢ one year ago. They anticipate the next quarter to feature similarly poor performance - but they are still making a sizeable profit. Caterpiller, a heavy-industry equipment maker, reported a substantial loss and expects poor results the rest of the year. Nucor Steel, discussing its first quarter, calls the situation "armageddon" and sees no sign of improvement. Second quarter will specifically be worse, citing essentially no demand for steel and the lowest utilisation numbers they've ever seen. Consider them an indicator of future plans by manufacturers. Audit Analytics research indicates that around 23% of publicly-traded companies are not viable.
The IMF is forecasting a deeper recession than previously projected, indicating a global output decline for the first time since World War II, though they are still projecting small overall growth in 2010. Given decline rates - a total of 3.8% in advanced economies - I think a 2010 positive will be a challenge, particularly given the new IMF estimate of USas much as $4 trillion (million million) in losses thanks to the financial crisis. That's even more than Mish Shedlock and Noriel Roubini have been suggesting, which isn't really a good thing.
Banks receiving TARP funds are lending less, not more, than before, analysis shows; they're not expecting things to get better for some time more. Meanwhile, the Fed is throwing another $30B at its favourite money funnel, AIG. Bank of America CEO Ken Lewis says he was threatened with removal if he and his board didn't have BoA buy Merrill Lynch.
Marketwatch's Irwin Keller, like many people, is dubious about the validity of the Treasury's "stress test" process. Many people criticise the assumption of a 10.3% worst-case unemployment rate peak in 2010, suggesting that it should be a higher number. Some outside analysts have done some independent work that projects greater than 56% losses in Tier 1 capital even under the 10.3% parametres. Other tiers would do worse.
And of course the FDIC is now substantially under-funded, which helps explain a bill providing authority for the Treasury to loan to the FDIC. This is reasonable; the last thing that should happen would be FDIC failure to pay out.
The US is experiencing outright price deflation for the first time since 1995. The UK is also encountering this phenomenon. As a variety of us have been saying for some time, the solution is to cram down debt and restore financial system confidence, which can only be done through more transparency, not less. Until that happens, we'll continue to have this mess.
The China-US imbalance is dominating other elements of global capital flow. Business Week worries that we'll see a retreat from a global financial system, which will hurt trade flows that have come to rely on it. Olivier Accominotti compares the China situation to that of France in the 1920s, when that country held a similar reserves position to China today, and how that ended rather badly (a Pound Sterling crisis, the insolvency and technical bankruptcy of the French central bank, and so on).
The Bank of Canada has stated that it does not plan "extraordinary measures" as being seen in the US and UK. The Canadian dollar rallied on the news.
California is asking the Federal government to back the IOUs it expects to have to issue in liu of payments starting in July.
The US dollar is down a bit, but not enough to be interesting; the Baltic Dry Index, ABX, CMBX, and so on, are all hovering in their recent ranges. A lot of people are waiting for stress-test results even as everyone argues over whether they mean anything, and if so, what, exactly. The bear market rally continues, but be warned; these things can and will whip around and take off your head. Be ready, and good luck.