Housing rebound in Canada spurs talk of new bubble (Dvorak, WSJ) Last week Paul Krugman toasted the sobriety of Canadian banks. Among other things, he said that low rates aren’t enough to cause a bubble since Canadian rates are low and, well, they don’t have a bubble. If this article is to be believed, Krugman didn’t look closely enough. Banks may use less leverage in Canada, but low rates are encouraging households to borrow big — debt to disposable income is a bubbly 1.42x. Key quote in this piece is near the bottom, where a real estate agent notes that rising prices mean rents are only barely covering mortgage payments for real estate investments. The best definition of a bubble is when debt service payments finally eclipse rents. Then buyers/lenders are betting on continued appreciation, which can only be driven by still-easier credit. Canadian real estate appears to be headed in that direction.

Fed’s Bullard: Housing should be key in reg reform (Daly, Reuters) A good point. And the Fed should use its authority under HOEPA to make sure all mortgages are underwritten so that borrowers can make a full payment.

Fed group eyes insurance fund for repo market (Cooke/Comlay, Reuters) Insurance funds are dangerous. They have a habit of increasing moral hazard.

Fed to bare tightening plan (Hilsenrath, WSJ) Wouldn’t it be better to increase reserve requirements than to increase interest rates paid on excess reserves? The second plan pays banks to do something the Fed could simply require if it wanted to…

Hedge-funder sues to keep rent at $380 (Dealbook)

Red Mist: Who matters in China’s financial system is barely understood (Economist)

Madison WI bus driver highest paid city employee (Mosiman, WIStJournal) $159k….thanks to a great union contract.

The world capital of killing (Kritsof, NYT)

WW1 camoflauge to defeat Uboats (Twistedsifter) Fascinating.

Worst airline ad ever?

Readers of this blog dating back to its days on ML-Implode, may remember our exposé about former MBA CEO Jonathan Kempner’s misadventures at 1331 L St., NW, in Washington DC. The final chapter was written on Friday when…

…CoStar Group Inc., a provider of commercial real estate data, announced that it had agreed to buy the MBA’s 10-story headquarters building in Washington, D.C., for $41.3 million. The price is far below the $79 million the trade group says it paid for the glass-walled building in 2007, while it was still under construction. The price also is far below the $75 million financing that the MBA received from a group of banks led by PNC Financial Services Group Inc. to finance the purchase.

The 48% loss is a bit worse than average for commercial estate, which has declined 43% from the peak according to the Moody’s/REAL commercial real estate index.

Kempner announced the plans for the new building near the top of the market in January 2007. It quickly proved an albatross. At the time we wrote about it in 2008, MBA hadn’t found any tenants to occupy the 60% of the building it wasn’t using. To date, they’ve filled just a sixth of that space according to the Wall Street Journal.

A few days after our story, Kempner said he would resign.

Though it must have been clear towards the end of 2007 that the building would prove a costly financial mistake, MBA still paid Kempner handsomely.

According to Forms 990 filed by MBA with the IRS, Kempner made $1.4 million in the year ending 9/30/08, down only $50k from the prior year and still $250k above what he made in fiscal 2006.

Just happen to be in DC today — yes, there is A LOT of snow — and 1331L was on my walk to work…

…still lots of space available for anyone interested.

Funny how the market is just waking up to the Euro debt problem. Many have argued that debt levels are unsustainable, yet the IMF has adopted the neo-Keynesian line that governments can spend with impunity so long as unemployment is high. If there are unemployed workers in the economy, then conventional wage-push inflation — i.e. workers negotiating higher wages, which in turn drives up consumer prices — can’t happen. Or so the argument goes.

But this ignores bond market realities. The PIIGS on Europe’s periphery — Portugal, Ireland, Italy, Greece and Spain — have huge budget deficits as a percent of GDP, but don’t have the power to print money to pay it back. So bond markets are bidding up the cost to insure their debt:

Readers should offer their own view, but seems to me there are three options here, two bad and one nuclear.

1) The PIIGS cut their budgets to pay back debt. Such austerity programs are typically very difficult to get done in democracies. Deficit spending stays high long past the point that it’s possible to work off debt over any reasonable period. To successfully dig out of the hole requires cuts so deep, voters never agree to them.

2) Europe bails them out, which is the easiest solution in the short-run. Richer European countries certainly have the wherewithal to bail out a small country like Greece or Portugal. But it’s a dangerous precedent to set. What about Spain? It’s 14% of the Euro economy compared to 6% for Portugal/Ireland/Greece combined. If economies keep spending with an eye towards a bailout from the ECB, eventually you get #3.

3) The monetary union breaks apart. The customary way out of a debt crisis is to devalue one’s currency, see Argentina in 2001. It couldn’t maintain it’s dollar peg and still service its debt, so it devalued its currency and defaulted on debt. But this locked the country out of the international capital markets and drove them into a deep, though brief, Depression. For Greece to devalue, it would have to pull out of the Euro, pass a law that it’s debts are payable in new local currency and then devalue.

Some combination of #2 and #1 is probably the only sustainable solution. And that’s what the market appears to expect, what with Greek 5-yr CDS falling back to $389,000 from $425,000 yesterday.

But any help must come with tough conditions. Cuts must be deep enough that further rounds of bailouts won’t be needed.

UPDATE: Nick Gogerty points out that the IMF is another potential source of rescue funds. But whether bailout cash originates from the Germans or the IMF doesn’t change the fundamental problem, which is that Greek state is living well beyond its means…

Just one small bank this week it appears…

#16

• Failed bank: First American State Bank of Minnesota, Hancock MN
• Acquiring bank: Community Development Bank, Ogema MN
• Vitals: at 12/31/09, assets of $18.2 million, deposits of $16.3 million
• Estimated DIF damage: $3.1 million

Euro debt fears roil global markets (Shah, WSJ) The U.S. is less worse than Euro economies, so Euro trouble causes flight to the dollar. Funny that we’re viewed as quality: When you factor in the debt of state and local governments, we’re in similar trouble….never mind unfunded liabilities for Medicare and SS.

Moody’s warns about U.S. credit rating (FT) These warnings have been fairly frequent.

Bernanke’s exit strategy: tighter reserve requirements (Kessler, WSJ) A good op-ed from yesterday. Another way of sequestering excess reserves, besides paying banks not to lend them out, is to just require them not to.

Unemployment rate falls despite declining payrolls (Mutikani, Reuters) The hard data, for those interested, is here.

How banks can win despite being second (Eavis, WSJ) Modifying the first mortgage frees up homeowner income to service their home equity lines of credit and other second lien mortgages…

Why we keep getting poorer: housing costs rising as % of income (Charles Hugh Smith)

Biggest bubble in history is growing every day (Pesak, Bloomberg) He’s referring to China’s reserves.

13-year-old QB commits to USC (Carrosquillo, FoxNY)

Toyota… (imgur)

New ski warnings (CollegeHumor)

Global air traffic volume (note how it varies with the sun)…

By Rolfe Winkler

Bank of New York Mellon is growing – at a price. The giant trust bank on Tuesday agreed to buy PNC Financial Services’ back-office operations for $2.3 billion. That works out to 23 times annualized fourth-quarter 2009 earnings. That is a heady multiple for only a marginal boost in market share.

PNC’s shareholders seem to be getting the better end of the transaction. The sale of the PNC Global Investment Servicing (GIS) unit boosts its capital and should help it repay $7.6 billion of bailout money received from the government.

Thanks to the deal, PNC’s Tier 1 capital ratio rises to 6.7 percent from 6 percent. PNC probably needs to raise yet more equity to pay back its Troubled Asset Relief Program funds, but this is a good start.

The advantages for BNY Mellon shareholders look less certain. The bank says the acquisition complements multiple business lines. But Robert Kelly, the chief executive, seems to be coughing up too much cash for just a 4 percent gain in assets under administration. The GIS business has been lumpy. And even using last quarter’s earnings as the basis for analysis – the unit’s strongest quarter of 2009 – BNY Mellon is paying a chunky multiple.

The purchaser reckons it can squeeze out $120 million a year of cost cuts. Taxed and capitalized, those savings are worth around $720 million today. Take that off the purchase price, and BNY Mellon is still paying $1.6 billion for the GIS business – a price-to-earnings ratio of 16 times, which still looks a full price. It’s the same multiple that leading rival Northern Trust trades on, while BNY Mellon’s own shares trade at just 12 times this year’s estimated earnings.

So to sell the deal to shareholders, management is talking about between $200 million and $300 million of extra revenue based on integrating GIS into BNY Mellon. But such cross-selling opportunities often turn out to be elusive, and even BNY Mellon acknowledges they could take three to four years to transpire.

If Mr. Kelly and his crew can find a way to produce such revenue benefits, both sides eventually may be able to call the deal a success. But for now, PNC holders have more to cheer.

Homeownership rate falls to 2000 level (CR) At 67.2% it’s still way overstated. Home “ownership” is a misnomer in cases when the owner has withdrawn mortgage equity or when the price of the home has fallen below the principal value of the mortgage. A better measure of homeownership, I think, is just to look at total owner’s equity as a % of household real estate. The most recent Fed Flow of Funds report (page 104, line 50) puts the figure at just 37.6%…

U.S. could extend bank fee beyond 10 years, Geithner says (Di Leo/Crittenden, WSJ) The proposed tax on non-deposit liabilities should be permanent, and should target ALL liabilities, including repos. Deposits are guaranteed via FDIC. While that insurance is dramatically underpriced (witness the cash-strapped state of the DIF) at least banks pay something for it. Non-deposit liabilities are also effectively guaranteed, for the biggest banks anyway, via the promise that none which is too big will be allowed to fail. To counter moral hazard, this implicit guarantee must be taxed in order to offset any benefit derived from lower funding costs.

Must-Read: What’s a college degree really worth? (Pilon, WSJ) A lot less than you think, as argued here before. This piece is well-written with lots of good data!

AIG derivatives staff said to forgo $20 million in retention bonuses (Katz/Son, Bloomberg) They’re still well-paid, but this is better than nothing I suppose.

Deficits as a national security issue — Sanger NYT & Seib WSJ — Good to see prominent columnists picking up the thread. A refresher on the Suez Crisis of 1956 offers helpful background.

Rising FHA default rate foreshadows foreclosure crush (ElBoghdady/Keating, WaPo) Key line: “the FHA projects that it will pay out claims to lenders on one out of every four loans made in 2007 — the worst rate in at least three decades. The claim rate should be nearly the same on the vastly larger volume of loans made in 2008.”

Goldman spokesman’s most withering rebuttals (Daily Intel) Methinks he doth protest too much…

North Korea propaganda, with translations (nikopop)

VIDEO — Reporter filing report on the blindfold half court shot, makes own impossible shot (fox4)

Trader caught taking a break…

President’s budget (gpoaccess.gov)

Barney Frank: The poor should rent, not own (Indiviglio, Atlantic)

Citigroup said to plan sale of private equity unit (Keoun/Keehner, Bloomberg) Citi cites raising cash to pay down debt as the reason to sell this unit. Of course this would also get Pandit some brownie points with Paul Volcker, who wants commercial banks out of private equity, hedge funds and proprietary trading…

HCA owners get $1.75 billion payout (Lattam, WSJ) Speaking of private equity…a nice payout for investors in one of the biggest LBOs in history.

All those little Stuy towns (Morgenson, NYT) Bullying as a business model…

Goldman Sachs and the $100 million question (Times UK) This is a thinly sourced article that claims Lloyd Blankfein will get a blowout $100m bonus for 2009. If true, talk about giving the finger to, well, pretty much everyone.

Five myths about America’s credit card debt (Manning, WaPo)

Happy palindrome day! (imgur)

Barefoot running: How humans ran comfortably, and safely, before the invention of shoes (Science Daily)

Accidental time capsule…

Now that the worst of the financial crisis is behind us, one would think the budget deficit might start to come down. Actually, no. Obama’s proposed budget sets a new deficit record — $1.6 trillion this year compared to $1.4 trillion last year.

The President thinks he can help the economy with more deficit spending. But debt is the reason we have a jobs problem in the first place. We’ve accumulated more debt than our incomes can support (see chart at bottom) so the economy is trying to pay it down, leading to less spending and higher unemployment. Adding to the debt pile only makes the employment picture uglier in the long-run.

In his blog entry introducing the budget, Office of Management and Budget Chief Peter Orszag tries to argue that the administration is working to close the deficit. Meanwhile the spin from the White House is that this budget marks the beginning of a “new era of responsibility.” Of course that’s not at all what we’re getting. Orszag even trots out the line that we can grow our way out of debt:

Economic recovery – on its own – would take our deficits from 10 percent of GDP to 5 percent of GDP.

But GDP — a measure of spending — can’t grow unless we’re spending more. Seems to me the only way for aggregate spending to grow faster than government spending is for the private sector to spend more. But households are tapped out. They’re saving more to repair already busted balance sheets.

We’ve published the following chart here at Reuters, which illustrates a key talking point for deficit doves:

At 10%, the deficit is far smaller as a share of GDP than during WWII. We’ve spent far more before, the argument goes, so it’s no trouble to spend so much today. One problem with this argument is that it ignores unfunded liabilities for Medicare and Social Security. If the budget was calculated according to the same accounting principles that apply to corporations, the deficit would look much worse. We had no such unfunded liabilities in the ’40s.

The argument is also incomplete. Americans’ total debt burden amounts to much more than what the federal government owes. Including private debt makes the picture look far worse than the ’40s:

It was easier to service higher public debt in the ’40s because de-leveraging during the Depression had wiped out most private debts.

Debt is the problem. We (should have) learned that after the Depression, yet we’re piling on more in a misguided effort to prop up an economy that desperately needs to de-lever.

Obama certainly inherited a mess, but driving us deeper into debt only compounds the unemployment problem.

Paulson says Russia urged China to dump Fannie/Freddie holdings (McKee/Nicholson, Bloomberg)

Avatar breaks $2 billion worldwide box office mark (Box Office Mojo) Very impressive of course, though on an inflation-adjusted basis, Avatar ranks just 25th all time. Nothing will ever beat Gone with the Wind.

Volcker Op-Ed: How to reform the financial system (NYT) Unfortunately not a lot of additional detail over his proposed reform plan. But for those not already familiar with it, this does offer a helpful articulation of Volcker’s reform philosophy. Yves is happy Volcker has entered the fray, but believes he needs to go beyond his current thinking.

Frank says banks “recognize reality” by throwing support behind wind-down fund (Howell, Reuters) Am I alone in my fear that a wind-down fund will make matters worse? The idea that new “resolution authority” must be accompanied by a pool of funds to bail out systemic failures compounds moral hazard greatly. Even assuming that banks will be charged high enough insurance premiums to give the fund sufficient financial heft — how well has that worked with the Deposit Insurance Fund? — the very existence of this fund will provide an implicit guarantee to the creditors of the firms’ backed by it. The DIF already creates major moral hazard by removing all depositor incentives to worry about the health of their banks. Now an even larger slice of creditors would be insulated from risk.

PDF — TARP inspector general says program will cost less than expected, warns that little has changed (SIGTARP) In his latest quarterly report, Neil Barofsky acknowledges that TARP won’t cost as much as once expected. But he also warns that “even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car.” Section 3 of the report emphasizes that present government policy risks re-flating the housing bubble.

PDF – Treasury releases first quarterly PPIP report (Treasury) A breakdown of the the legacy securities program, which combined public and private capital in order to support the price of toxic assets. The use of non-recourse government leverage, plus Treasury’s equity investment, shifted principal risk on these assets to the public’s balance sheet. It took a while to get off the ground, and the program isn’t very large — less than $25 billion of investments. So far the funds are breaking even.

Justice, medieval style (Leeson, Boston.com) Interesting article, though the author offers little evidence to support his claim that trials by “ordeal” worked. (e.g. judging innocence/guilt based on whether the accused sank/floated when tied up and thrown in water.) ht reader Paul M.

New amateur video of Challenger disaster (LiveLeak)

Your brain on football (Time) Is brain trauma the rule more than the exception?

Awesome impressions (Funny Ordie) Comedian does DeNiro, Ahnold, Stallone and Morgan Freeman

Actor Rip Torn arrested drunk, armed in bank (Michaud, Reuters)

#10

• Failed bank: First National Bank of Georgia, Carrollton GA
• Acquiring bank: Community & Southern Bank, Carrollton GA
• Vitals: at 9/30/09, assets of $832.6m, deposits of $757.9m
• Estimated DIF damage: $260.4m

#11

• Failed bank: Florida Community Bank, Immokalee FL
• Acquiring bank: Premier American Bank NA, Miami FL
• Vitals: at 9/30/09, assets of $875.5m, depoists of $795.5m
• Estimated DIF damage: $352.6m
  

#12

• Failed bank: Marshall Bank NA, Hallock MN
• Acquiring bank: United Valley Bank, Cavalier ND
• Vitals: at 9/30/09, assets of $59.9m, deposits of $54.7m
• Estimated DIF damage: $4.1m

#13

• Failed bank: Community Bank & Trust, Cornelia GA
• Acquiring bank: SCBT Bank NA, Orangeburg SC
• Vitals: at 9/30/09, assets of $1.21 billion, deposits of $1.11 billion
• Estimated DIF damage: $354.5m

#14

• Failed bank: First Regional Bank, LA CA
• Acquiring bank: First Citizens Bank & Trust, Raleigh NC
• Vitals: assets of $2.18 billion, deposits of $1.87 billion
• Estimated DIF damage: $825.5m

#15

• Failed bank: American Marine Bank, Bainbridge Island WA
• Acquiring bank: Columbia State Bank, Tacoma WA
• Vitals: at 9/30/09, assets of $373.2m, deposits of $308.5m
• Estimated DIF damage: $58.9 m

The quote of the day comes from Marc Chandler, currency strategist at Brown Brothers Harriman, who has graciously offered to let me reprint a note he sent today.

While Greece gets much of the news, Chandler argues that it’s in Spain where the policy dilemma is “most stark.”

Today Spain reported that its unemployment rate in Q4 rose to 18.8% from 17.9% in Q3.  The consensus was for a rise toward 18.5%.  The unemployment rate has doubled in the past two years.  As seems to be typical in  Europe, the unemployment [rate] is especially pronounced for young people. In Spain it’s 40%…

Cyclical forces and the €8 billion public works program pushed Spain’s deficit to around 11.2% of GDP last year according to the EC.  This is almost as large as Greece’s.  One key difference between the two in this context is that Spain’s debt to GDP is considerably lower than Greece, giving it perhaps greater chance to stabilize the debt/GDP ratios before they become ruinous.

In the face of such sobering news on the labor market today, Spain officials have felt compelled to indicate that they are considering increasing their efforts to cut the budget deficit quicker.  The government is contemplating proposals that will cut another €50 billion or 5% of GDP by 2013.

Rolfe here. Victor Mallet at FT has the news: Spain unveils radical austerity budget.

This illustrates the dilemma policy makers face.  The economy does not warrant an end to fiscal support yet.  The IMF has argued this.  The EC has argued this.  But the dramatic market response to Greece has been a siren call, seemingly forcing policy makers–not just in Spain, but Portugal earlier this week and Poland earlier today too–to mitigate the wrath of the bond vigilantes.

By appeasing the vigilantes, officials risk aggravating the economic downturn, which offsets some of the fiscal austerity and spurs social tensions.   [But] if the vigilantes’ concerns are not addressed in a satisfactory fashion, capital will strike, at least partially, and interest rates will rise…also exacerbating the economic downturn.

Many developed economies have borrowed so much, they can borrow no more. While borrowers love to hate their lender, they need him desperately if they’ve levered up their lifestyle past a point supported by their income.

Governments that rely too much on the bond market for funding should expect the market to turn against them eventually.

Kohn, Bair warn banks about interest rate risk at FDIC symposium (Wutkowski, Reuters) The Fed says rates will stay low for an “extended period.” But that doesn’t mean “forever” so the Fed, along with other bank regulators, have warned bankers to prepare their balance sheets for higher rates. The populist line that banks need to “lend more” to get the economy going is just foolish. Regulators know the score: banks that lend too much at these low rates, or are using too much cheap short-term funding, will be caught out when rates head back up. Text of Kohn’s speech here. PDF of Sheila Bair’s here. (Bair’s speech is shorter and less wonkish)

MS looking into legal action against ZeroHedge (Teri Buhl) Will they actually sue? Probably not. Still, ZH’s emphasis on quantity over quality means they too often lift the work of others. Blogs link to content all the time of course, but proper attribution is important. And ZH most certainly DOES NOT have permission to reprint research coming from Wall St. analysts.

Wall St. tries to put price on Volcker rule (Sanati, Dealbook) Goldman is said to be in the most trouble, since a larger piece of its business is driven by proprietary trading. But can’t they just give up the bank charter they got last year in order to avoid any new Volcker-rule regs?

Simon Johnson joins HuffPo (Felix) As part-time biz editor.

GDP grows 5.7% (Mutikani, Reuters) The guys at Variant Perception have been saying to expect blowout growth this year coming off a low number, but they warn that it’s all dependent on government largess, which is not sustainable. The market knows this. Stocks are flat on this news.

Bank sues victim to avoid replacing stolen funds (Consumerist) Hackers got away with $800,000, but the bank can’t make it all up. So it’s pre-emptively suing the victim…

Are they AIG conspiracy theories really so nutty? (Reilly, Bloomberg) Geithner, Paulson and Bernanke have all said they had nothing to do with the decision to make a full pay out to AIG’s CDS counterparties. So who was in charge??

Bin Laden rebukes U.S. on climate change (Healy, NYT) No, really.

Bunch of phonies mourn JD Salinger (The Onion)

Dog saved after floating away on Baltic sea ice (Guardian)

Baby platypi…

Reuters’ super-blogger Felix Salmon will be interviewing Nouriel Dr. Doom Roubini in Davos at 12:20 EST.

The broadcast can be seen here.

For users that are twitterers, you can send questions for Felix to ask Roubini via #askroubini.

Mine: Mr. Roubini, when was the last time you gave a sound bite to the press that didn’t include a letter of the alphabet to describe the economic cycle?

Or: Could the recession, in fact, be Q-shaped instead of W, L or U-shaped?

In the Bernanke confirmation vote this afternoon, seven senators wanted to be seen opposing Bernanke but didn’t actually want to stop his confirmation. In other words, they wanted a campaign talking point, not an actual fight.

Simple maneuver: As with most business in the Senate, Bernanke’s confirmation only required 51 votes. But before getting to the final vote, the Senate must first vote to cut off debate. Cloture, it’s called.

Seven senators, including six Democrats, voted aye on cloture and then flipped to nay on the motion to confirm:

Six Dems: Barbara Boxer (Calif.), Al Franken (Minn.), Tom Harkin (Iowa), Kaufman (Del.), Sheldon Whitehouse (R.I.), and Byron Dorgan (N.D.)

One Rep: George LeMieux (Fla.)