BlogArt: Do Away with (Public) Deposit Insurance

Reuters Staff
Feb 28, 2009 20:37 UTC

This is why publicly-funded deposit insurance should be banned.  GMAC’s ad for high-yield bank CD…

FDIC insurance creates terribly perverse incentives.  GMAC is insolvent.  It continues to exist only because taxpayers pumped $6 billion into the company at the end of December.  In order to survive, GMAC is offering CD rates 80 bps above the national average.  It’s a desperation move, common of banks nearing their end.  Paying above-market rates of return on deposits makes profitability difficult over the long-term.  But a bank like GMAC cares less about profit than it does about survival.  Remember WaMu’s 5% CD offer right before they went bust in the fall?

Why would depositors put their money in an insolvent bank?  Because it’s FDIC insured!  The bank down the block may be much stronger financially, but if they’re only offering 2% on 1-year CDs, might as well put my money in GMAC.  Quoting part of the pitch:

…a CD from GMACbank.com [is] safe, secure and FDIC-insured up to $250,000. Not only that, it also has an incredibly high yield…

Methinks thou dost protest too much, GMAC: “safe,” “secure,” “FDIC-insured” … three adjectives that mean precisely the same thing, all of which designed to conceal the truth, that GMAC is bankrupt.

In the presence of FDIC insurance, most savers see bank deposits as interchangeable commodities.  If they’re all backed by the government, they’re all the same—I might as well go for the one that offers the highest return.

But truth be told, bank deposits are not created equal.  Strong banks deserve your money better than weak banks.  Unfortunately, few bank customers bother to consider this because they don’t think they have to. Their money is “guaranteed.”

No doubt deposit insurance was born of necessity.  Bank runs are to be avoided and most bank customers aren’t sophisticated enough to judge a strong bank from a weak bank.  Hell, given the opacity of banks’ asset values, even sophisticated analysts have difficulty recognizing how weak certain banks are.

The problem with public deposit insurance is two-fold:

  1. It has been MASSIVELY under-priced.  The FDIC’s Deposit Insurance Fund is a tiny fraction of total insured deposits.  0.40% as of December 31st, to be precise.  Banks derive huge value marketing FDIC-guaranteed deposits, for which the FDIC charges FAR too little.   (more on this in a post to come shortly).
  2. Putting the public at risk for the benefit of bankers and their depositors is positively immoral.  If bank depositors want insurance, then have them pay for it themselves.

Heavily-regulated private deposit insurance makes much more sense.  As noted above, deposit insurance is a good thing if it helps to protect the unsophisticated and to stabilize the banking system.  But if folks who take risk wish to be protected from it, they should be the ones to pay for the protection.

Heavy regulation would be necessary to force insurers to maintain substantial capital cushions.  No doubt such a regime would fail from time to time, but that would actually be healthy.  The occassional bank run would remind folks that banks are a risky place to put cash.  It might also prevent banks from growing too large in the first place.

Lunchtime Links 2-28

Reuters Staff
Feb 28, 2009 17:27 UTC

(Send links, videos, pics to optionarmageddon at gmail with subject “link” … Thanks to Dan C.—$25—for the tip!)

Berkshire Hathaway Reports Worst Year Ever (WSJ)

Warren Buffett’s Annual Letter to Shareholders (Berkshire Hathaway)   “…the economy will be in shambles throughout 2009 – and, for that matter, probably well beyond.”  Contrast with his NYT Op-Ed from October: “Today my money and my mouth both say equities.”

More bad news from Asia (Setser)

VIDEO: Roubini says fully nationalizing Citi and BofA would be better (Tech Ticker)

Bank Failures #15 and #16 … two more small banks.  FDIC estimates $101m cost to deposit insurance fund.

Crank call Led KFC Employees to Spray Fire Extinguisher, Disrobe (WMUR New Hampshire)  “The workers said they became suspicious when the caller then told them to urinate on each other.”

Propping Up a House of Cards (NYT)  A must-read piece by Joe Nocera on AIG.  “A bailout of A.I.G. is really a bailout of its trading partners — which essentially constitutes the entire Western banking system.”

Bring on the Auction Hammer (UrbanDigs)

BofA carries loans $44 billion above market value (Reuters)  The fair value of its $886 billion loan book is now $842 billion.

University of Connecticut basketball coach responds angrily to question about his salary.  The reporter asked, since the public university system is facing severe cuts, should Calhoun—the highest paid state employee—give back some of his multi-million dollar contract?  Calhoun comes off as a blowhard, but he has a point about the revenue his program brings in.

GE cuts dividend

Reuters Staff
Feb 27, 2009 18:47 UTC

Breaking news on WSJ.com:

“General Electric to cut dividend to 10 cents a share from 31 cents a share.”

The cut will save the company $9 billion annually according to CNBC.  This should come as no surprise.  As we’ve noted here on OA, GE is starving for capital to shore up its balance sheet.  We’re likely to see more dividend cuts from banks, insurance companies and others.  A great way to raise balance sheet capital is to not bleed it to shareholders in the first place.

Another reason GE needs to protect its balance sheet is to maintain its AAA credit rating.  Everyone knows the rating is fiction; GE can’t raise money on AAA terms.  Still, a downgrade might create panic making it even harder for the company to rollover its debt.  Because GE funds so much of its business with ultra-short term commercial paper, the rollover issue is ever-present.

Lunchtime Links 2-27

Reuters Staff
Feb 27, 2009 17:25 UTC

(Send links, videos, pics to optionarmageddon at gmail with subject “link”)

Rocky Mountain News shuts down (Rocky Mountain News)  CEO of parent company Scripps told the staff of the decision himself: “I could say stupid things like ‘I know how you feel.’  I don’t.  We are just deeply sorry. I hope you will accept that.”  The paper was 150 years old.

AIG Rescue May Include Credit Default Swap Backstop (Bloomberg)  Because the Lehman CDS settlement in late October had all of the build up and all of the impact of Y2K, the WSJ editorial page waxed hysterical that talking heads were overreacting about the CDS market, that it was operating just fine.  Of course they have conveniently ignored the $100b+ bailout of AIG, which is largely tied to the company’s $300 billion credit derivatives portfolio.  Proof, yet again, that the editorial writers at the WSJ have their heads up their ass.

Viagra orgy man dies (The Sun)

Life Insurers Fall on Commercial Mortgage Concerns (Marketwatch)  I’ll have more to say about this over the weekend.

No, Wait! You got it backwards! (Baseline Scenario)  A great tutorial on Treasury’s new “Capital Assistance Program.”

Insight: Time to Expose those CDOs (FT)  WOW!  “With [even AAA-rated] mezzanine CDO’s…recovery rates have been a mere 5 per cent.”  So much for arguments that the market is under-pricing toxic assets.

Arsonists torch Berlin Porsches, BMWs on Economic Woe (Bloomberg)

Tokyo Stock Exchange Saves UBS From $31 Billion Trade Error (WSJ)

Apartment Buyers Abandoning 6-Figure Deposits (NYT)  Can you blame them?  Apt prices have a lot farther to fall in NYC. (hat tip Patrick)

Another view of OptionARMageddon’s bank leverage data, courtesy of iCharts.net.  Toggle the arrows at left to expand/contract the banks listed in the chart.

The Citi Deal: This Solves Nothing

Reuters Staff
Feb 27, 2009 16:05 UTC

Treasury and Citi announced their deal this morning by which the government and other preferred stockholders will convert their shares to common equity.  No more money is being spent by the government, but shareholders are having their stakes cut to 26% and the government now gets a 36% ownership stake in the common.  This solves nothing as the BIG PROBLEM is still on the asset side of the bank’s balance sheet. This does nothing to address that.  (WSJ)

Struggling banking giant Citigroup Inc., moving aggressively to shore up its equity base, announced a stock swap Friday that if successful will leave the government owning more than a third of the company and wipe out nearly three-quarters of existing shareholders’ stake.

The move is an acknowledgment that more than $50 billion in government capital and a backstop on more than $300 billion in troubled Citigroup assets haven’t been enough to stop the bank’s slide. It also represents a deepening of the government’s role in trying to prop up the U.S. banking sector.

Under the deal, Citigroup said it will offer to convert nearly $27.5 billion in preferred stock sold to private investors and the public and up to $25 billion in preferred stock bought by the government into common stock. The exchange, if fully executed, would leave the U.S. government with 36% of the bank’s shares. Existing shareholders’ stake would be cut to 26%. Shareholders will have to approve much of the common stock issuance…

The swap won’t involve any additional investment in Citigroup by either the government or the private shareholders, but will boost the bank’s so-called tangible common equity ratio, which is closely watched by analysts. It will also relieve the bank of the need to pay billions of dollars in annual preferred stock dividends.

“This securities exchange has one goal — to increase our tangible common equity,” Chief Executive Vikram Pandit said.

This changes little.  The point of increasing tangible common equity is to give the company more cushion to absorb losses on the asset side of the balance sheet.  The cushion is meant to protect bondholders and other creditors from loss.  But preferred shares are also subordinate in the capital structure to the creditors.  Shifting their stake to common equity, without increasing the TOTAL amount of equity capital (preferred + common) means creditors have no more cushion today than they did yesterday.

The only differences appear to be that the government now owns 36% of the (worthless) common equity and Citigroup will now save billions they would otherwise have paid preferred stockholders over time.  It’s crucial to understand here that, even if the government takes 100% ownership of the common, the bank will continue to be owned by its bondholders unless and until they are forced to absorb losses.

The REAL problem as we all know is that the value of Citi’s assets still has much further to fall.  If asset values were close to stabilizing, adding equity to the right side of the balance sheet would give you lots of bang for your buck.  The bank would be able to lever up that equity at a 10:1 ratio to increase loans on the left side—the asset side—of the balance sheet.  The math doesn’t work, however, if the equity injection is going to be wiped out dollar-for-dollar by continued decreases in the value of assets.

This is why the only “solution” to keep Citi operating is to actually absorb losses on the left side of the balance sheet.  The government would have to actually take ownership of assets that are losing value.  This was the original idea behind TARP 1.0 and also The Bad Bank.  But those ideas were non-starters because it would be a colossal giveaway to the banks.  Taxpayers would have to absorb over a trillion $ of bank losses all in the name of keeping them in the hands of present ownership.  Not the shareholders, who’ve ostensibly been wiped out….the creditors, who still have priority ownership position over the banks’ remaining assets relative to the government.

Treasury will have to absorb losses no matter what we do, but those losses should be shared with EVERYONE in the banks’ capital structure INCLUDING creditors.  Insolvent banks are indeed taxpayers’ responsibility to resolve (via FDIC).  Society is legally bound to bail out bank DEPOSITORS, yes.  We are not legally bound to bail out bank CREDITORS.  Nor should we.

Today’s announcement changes a little but solves nothing.  Shuffling deck chairs on the Titanic.

————-

My first post on bank leverage is a good tutorial on understanding banks’ balance sheets.  Readers may also find valuable this week’s post on tangible common equity.  And last week’s updating bank leverage data.

Fannie posts $25.2 billion Q4 loss

Reuters Staff
Feb 26, 2009 23:47 UTC

Anyone taking bets on which company will be the single largest money sink for taxpayer cash between now and 2012?  Fannie, Freddie, AIG, Citi, BofA, GE, others?  WSJ:

Fannie Mae said its fourth-quarter net loss widened to $25.2 billion amid massive fair-value losses and credit-related expenses, bringing its net loss for the year to $58.7 billion…

The company submitted a request Wednesday for an additional $15.2 billion from the U.S. Department of the Treasury in order to eliminate its net worth deficit as of Dec. 31. Three months earlier, Fannie has a positive net worth of $9.4 billion.

Fannie, along with Freddie Mac has suffered greatly as the housing bubble burst and in September, the government seized both and agreed to pump $200 billion into them as needed to keep them solvent.

Believe it or not, Q4 was actually an improvement (from a GAAP net income perspective) over Q3, in which Fannie reported a $29 billion loss.  The $200 billion commitment to keep the GSEs solvent was recently doubled to $400 billion in case anyone missed that.  According to the Congressional Budget Office, the Fan/Fred bailout is likely to cost $238 billion this year alone.

Lunchtime Links 2-26

Reuters Staff
Feb 26, 2009 18:28 UTC

(Send links, videos, pics to optionarmageddon at gmail with subject “link” … Thanks to Anonymous—$7—and Vijay C.—$15—for the tips!)

Recipe for Disaster (Wired)  Felix Salmon on “the formula that killed Wall Street”

GM burns $6.2 billion of cash in Q4 (AP)  The automaker’s GAAP accounting loss was $30.9 billion for 2008.

Dangerous Loans (USA Today)  A cool graphic showing “the % of total home mortgages that were at least four times greater than applicants’ annual income by county, 2000 vs. 2007.”  Be sure to use the slider at the bottom of the map.  (hat tip CB)

Tennessee May Reject Stimulus Aid for Jobless (Tennessean.com)

Why More U.S. Banks Aren’t Being Allowed to Fail (CNBC)

Annie Leibovitz pawns life work for loan to pay mortgage (Daily Mail)

Worried Investors Want Gold on Hand (WSJ)  Another way to accumulate gold: buy a futures contract, and take delivery…

Japanese Government may buy stocks in order to support the market (WSJ)

2 Money Managers Held in New Wall Street Fraud Case (NYT)  Another fraud that sounds similar to Madoff, though as the NYT points out, these guys aren’t accussed of running a Ponzi scheme…just stealing their investors’ money.  The duo promised slow/steady returns, and from Jan. 1995 thru Sept. 2008 never reported a down month.

Like Having Medicare, Then Taxes Must Rise (Leonhardt)

Cool bowling trick…

Deficit now projected at $1.75 trillion

Reuters Staff
Feb 26, 2009 16:33 UTC

So much for the CBO’s estimate of $1.3 trillion for this year’s estimate.  Including the stimulus bill and Obama’s new budget, the deficit is not projected to be much higher  (Reuters)

President Barack Obama will forecast the biggest U.S. deficit since World War Two in a budget on Thursday that urges a costly overhaul of the healthcare system and would spend billions to arrest the economy’s freefall.

An eye-popping $1.75 trillion deficit for the 2009 fiscal year is projected in Obama’s first budget, according to U.S. officials who briefed reporters on the numbers.

That is equal to 12.3 percent of U.S. gross domestic product — the largest share since 1945 when the country ran a shortfall of 21.5 percent of GDP.

Obama’s going for the big bath accounting trick.  He vastly expands the deficit in year one, blaming the economy and George Bush for having to do so, and then gets favorable headlines for promising “to cut the deficit in half”—to $533 billion—by the end of his first term.

By the president’s account, the administration inherited a $1.3 trillion deficit for the current fiscal year from the Bush administration — that’s the figure Obama says he’ll cut in half.

Wait a minute.  That $1.3 billion didn’t include the stimulus package, which had already been passed when Obama made his halving-the-deficit vow earlier this week.  By boosting this year’s deficit to $1.75 trillion, should Obama get credit for cutting the deficit 70% by the end of his term?

There is a silver lining here for which Obama should get credit. He is getting rid of the accounting gimmicks that had previously been used to hide the true size of the deficit.  Chief executives, whether politicians or businessmen, are notorious for accounting shenanigans to make their finances look rosier than they actually are.  Lou Gerstner used accounting gimmickry to boost results at IBM.  Sam Palmisano unwound those when he took over in 2002.  More famously of course, Jack Welch’s Wonderland Accounting left Jeff Immelt in an impossible position to grow GE’s earnings.

John Williams at ShadowStats.com has built a thriving consulting business publishing Shadow Government Statistics, which are far more accurate than those published by the government.  Notwithstanding Obama’s changes to the deficit calculation, Williams is at no risk of being put out of business.  There’s so much accounting gimmickry going on that his stats are going to be needed for some time…

JP Morgan cuts dividend, preserves tangible common equity

Reuters Staff
Feb 26, 2009 15:11 UTC

This move was greeted very positively by the market as bank stocks were up on the open.  It is long overdue.  (Marketwatch)

JPMorgan said it expected to save $5 billion in common equity every year after cutting its quarterly dividend Monday to 5 cents a share from 38 cents. JPMorgan made its own decision to cut its dividend, unlike in the case of Bank of America Corp., which last month cut its dividend to 1 cent as a precondition for receiving more government aid.

JPMorgan’s dividend cut comes as executives at many banks are feeling pressure to reconsider their defense of their companies’ dividends as their stock prices fall and the market puts a greater premium on capital preservation.

“Bleeding capital to maintain a dividend is negative,” Goldman Sachs analyst Richard Ramsden wrote in a research note. “If anything, stronger banks are penalized for paying big dividends when capital is so precious.”

Tangible Common Equity is the denominator of the company’s leverage ratio.  Paying cash out to shareholders in the form of dividends effectively “bleeds” common equity off the balance sheet.  As the denominator decreases, the leverage ratio increases.  In other words, paying out dividends reduces equity on the balance sheet that otherwise would be available to absorb losses.

Other banks are likely to follow suit, I’m sure.

According to Ramsden of Goldman Sachs, in the current environment, a bank’s level of tangible common equity – a very conservative measure of a bank’s strength that measures what shareholders would receive in a liquidation – is increasingly more important than maintaining a dividend.

Ramsden said banks that continue to maintain dividend yields of more than 10%, including Wells Fargo, US Bancorp and PNC Financial, would eventually be forced to cave in to pressure to cut their dividends this year.

“JPMorgan Chase’s announcement may increase pressure for them to do this sooner rather than later,” he said.

Another factor that will prompt banks to reconsider their dividends is the potential shareholder dilution that could be caused by the U.S. government taking stakes in banks which the U.S. Treasury Department’s stress tests indicate are weak. Any government stress test would likely take tangible common equity into account, Ramsden said.

Jamie Dimon’s continued insistence that his bank “didn’t need” the TARP money and would like to give it back is kind of disgusting (FT)

He acknowledged public anger at the use of taxpayers’ money to bail out banks.

However, he reiterated that JPMorgan did not need the funds and only accepted them to help out the US banking system.

“The people who took [the funds] and didn’t need it maybe should be treated differently from everybody else,” he said.

Of course TARP isn’t the only form of taxpayer subsidy that has benefited Dimon’s bank.  The Fed absorbed $29 billion of Bear Stearns’ toxic assets as part of its acquisition by Chase.  They also got a sweet deal on WaMu, which was seized by FDIC and handed to Chase on a silver platter.  More importanly, the Fed’s Herculean efforts to keep the financial system functioning benefited Chase as much as anyone else.  Systemic collapse would have brought down Chase along with all of the other big banks.

The point is, all of the big banks have survived courtesy of taxpayer capital.  Continuing to pay dividends is tantamount to looting public funds.

Ron Paul: “We Can’t Reinflate the Bubble”

Reuters Staff
Feb 25, 2009 23:05 UTC

Truth-telling in Congress (hat tip Ronbot)

BlogArt: Dilbert

Reuters Staff
Feb 25, 2009 18:42 UTC

hat tip Nick Gogerty (via Financial Rounds)

Lunchtime Links 2-25

Reuters Staff
Feb 25, 2009 16:47 UTC

(Send links, videos, pics to optionarmageddon at gmail with subject “link” … Thanks to Wendie N.—$20—for the tip!)

Man Living in Cave Hit by Recession (ABC)

Bailout Bank Blows Millions Partying in L.A. (TMZ)

Troubled San Francisco Paper in Danger of Closing (AP)  The newspaper shakeout continues.

Conde Nast also in deep trouble (NY Post)  Magazine publishers are in deep trouble as well.

Citigroup Chafes Under U.S. Overseers (WSJ)  Citi is getting mixed messages from different regulators, each responsible for overseeing a different part of the bank.  The trouble is that no regulatory body has the power to oversee all of Citi’s operations.  I don’t think this means we need a new, behemoth regulator to oversee major banks.  I think it means banks like Citi are way too large in the first place and need to be broken up.

Chicago Condo Sales Sink to -250 in Q4 (SunTimes)  hat tip Patrick

Japan Exports Fall 46% in January, Producing Record Trade Deficit (Naked Capitalism)  Yves notes that Japan can’t buy more U.S. Treasurys if they don’t have a trade surplus in the first place.

The Periodic Table of Doomsday Economic Charts (ZeroHedge)

Also from Z.H. this investor letter by Seth Klarman. (easier to read if you click “full screen”)  Who is Seth Klarman?  He’s CIO of the Baupost Group, a value-oriented investment manager.  He’s also known for having written “Margin of Safety” an out-of-print book that goes for $700 on eBay.  Most library copies were stolen long ago.  I read it “in the cage” at the NYPL once upon a time.  They won’t let you check it out, or make copies, so you have to read it there.  Took me a few hours, but it was worth it.

In Asia, Suicides Rise due to Financial Crisis (The Economic Times)  I know Japan has always been known for high suicide rates.  I sure hope the same doesn’t happen here…

BlogArt: Kinky the Elephant … viewer discretion advised?

Insurers: The Next $0 Trade?

Reuters Staff
Feb 25, 2009 05:52 UTC

Two weeks ago I wrote “With Allstate You’re Not in Good Hands.”  The company had convinced regulators to change capital adequacy requirements to allow, among other things, the inclusion of deferred tax assets as regulatory capital.  I did some digging and, sure enough, Allstate’s story is not unusual.  Lincoln National and Hartford also sought, and received, regulatory dispensation to include DTAs as capital.

The purpose of capital requirements is to protect customers.  Insurers make money by investing the premiums that customers pay.  Their incentive is to maximize profit for shareholders, to put as many premium dollars to work as possible in investments that will generate a return.  So regulators act to protect customers by enforcing risk-based capital requirements.  The Fed is supposed to do the same for commercial banks.  Unfortunately it failed miserably and we see banks that gorged themselves on risky investments dropping like flies.

Anyway, capital adequacy issues aren’t the only sign of the insurance apocalypse: Hartford, Genworth and Lincoln National bought small banks so they could apply for TARP funds.  Principal Financial also applied for TARP.  (Others likely did as well…can’t confirm b/c not all the 10-Ks are out yet) Insurers are also taking advantage of taxpayer-subsidized borrowing via the Fed’s new Commercial Paper Funding Facility…

It occurred to me that if insurers are eating losses, facing liquidity issues, and struggling to meet regulatory capital measures, their leverage ratios, like the banks’, must be terrible.  So I computed tangible common equity* for a handful of the largest insurance companies.  The results, highlighted in yellow in the chart, are ugly. (Click on table to enlarge)

The higher a company’s leverage ratio, the less cushion it has to absorb losses on the asset side of the balance sheet.  And since insurance companies park a big chunk of their assets in risky investments, they are very vulnerable to writedows, especially in this environment.  A recent UBS report noted, for instance, that Principal and Hartford are the two life insurers most exposed to risky commercial mortgage-backed securities.

But it would be unfair to single out Principal and Hartford.  Nearly all of the above are terrible investors, as a recent Alphaville post noted.  Even Berkshire Hathaway’s portfolio, which is largely invested in equities, has been shellacked:  American Express (off 79% from its recent high)…Coke (-34%)…ConoccoPhillips (-59%)…Kraft (-26%)…Moody’s (-76%)…Proctor & Gamble (-34%)…Wells Fargo (-71%)…U.S. Bancorp (-70%).

Buffett’s saving grace is that his balance sheet is bullet-proof.**  He has a mammoth pile of equity to absorb losses before the company’s policy-holders and creditors need worry.  Not so for the others.  And as we know from our experience with the bank industry, high leverage + high risk is a recipe for insolvency.

This clearly isn’t news to the stock market, as the companies’ shares indicate.  And yet, with the possible exception of Genworth, the others still look too expensive even at these prices.  With so little equity left to absorb losses that we know are coming, what’s keeping these stocks from going to $0?

That’s an honest question for any readers that are knowledgeable regarding the insurance industry.  Are there good reasons to believe these stocks aren’t going to $0?  Government intervention on behalf of insurance company equity holders?

It’s a shame that insurance regulators are whitewashing the issue, allowing accounting sleights-of-hand when they should be forcing insurers to raise more capital.  Allstate made a move in this direction yesterday, halving its dividend.  They should have eliminated it altogether.  [Update: just noticed that Lincoln cut its dividend 95% today...]

————

*Why use tangible common equity to measure insurer leverage?  For the same reason TCE is now in vogue among regulators stress-testing banks: it is one of the most conservative ways to measure capital as it gives company’s no credit for assets like DTAs and goodwill that are likely to be worthless in bankruptcy.  If bankruptcy really is a threat, just how much capital does a company have to pay back stakeholders?  This question seems equally applicable to banks as well as insurers.

**Berkshire’s leverage data are as of Sept. 30.  Also, their insurance business is different than the others’.  I just thought readers would want to see how Buffett compares.

Lunchtime Links 2-24

Reuters Staff
Feb 24, 2009 17:01 UTC

(Send links, videos, pics to optionarmageddon at gmail with subject “link” … Thanks to Doug D.—$37—for the tip!)

The Case Against the Mortgage Interest Deduction (NYT Economix)  “Subsidizing interest payments encourages people to leverage themselves to the hilt to bet on housing markets.”  Interesting that in 2007 a French court struck down Pres. Sarkozy’s proposed mortgage deduction as unfair to renters.  The U.S., by contrast, is bending its tax code even more in favor of home buyers.

JP Morgan cuts dividend 87% to preserve capital (CNN Money)  This ridiculously overdue move will, according to JPM, “ensure that our fortress balance sheet remains intact – even if conditions worsen significantly.”  That’s hilarious that they feel the need to add the modifier “fortress.”  When banks feel the need to talk about how well-capitalized they are, it’s time to run for the hills…

House Democrats Propose $410 Billion Spending Bill (Yahoo)  The proposed budget is 8% higher than the previous fiscal year’s.  It includes approximately $3.8 billion worth of earmarks.

Obama Budget Summit Meets with Skepticism (US News)  Nearest I can tell, all that was accomplished at this “summit” was a pledge to reduce the deficit to $533 billion by 2013.  That would be 17% higher that last year’s record budget deficit.  The summit’s participants acknowledged the need to reform health care this year (the present value of our medicare obligations are the primary culprit behind the $60 trillion figure to the right).  I’m skeptical that Congress and the Administration will make any commitments to substantially reduce health care expenses…

Court Orders Thain to Testify about Merrill Bonuses (TradingMarkets.com)

Abu Dhabi’s Tentative Bailout of Dubai (Setser)

Rev. Al Soaks up Boycott Bucks: Biz Giants Pay or Face Race Rallies (NY Post)  Sharpton’s shakedowns aren’t as impressive as Jesse Jackson’s.  Note in the article how Sharpton’s National Action Network has chapters all across the country, but all “donations” still go through his office in NY…

A Dollar Saved is Not a Dollar Hoarded (RealClearMarkets)  “Saving does not mean not spending. It means not spending for purposes of consumption, [which] makes possible equivalent spending for production.”  Echoes Kasriel’s arguments published on OA yesterday.

The Case for Natural Money (Mises.org)

House Prices: Real Prices, Price-to-Rent, and Price-to-Income (CalculatedRisk)  Fantastic analysis of house prices.

House Prices Down 27% From Peak (includes charts)

Reuters Staff
Feb 24, 2009 15:03 UTC

Now that unemployment has kicked into a higher gear, more folks will be defaulting on mortgages, meaning house prices are likely to continue their slide in coming months.  As they do, household and bank balance sheets will continue to deteriorate.  Said another way, their leverage ratios will continue to increase as the falling value of their assets wipes out their equity.

The first chart includes data through Dec ’08., which, if you look closely, extends to the right of the “Oct 08″ label (Click on charts to enlarge):


The WSJ discusses the data:

Home prices continued their multiyear slide in December, according to the S&P/Case-Shiller home-price indexes, as both the 10-city and 20-city index posted record declines, making 2008 the second-straight full year of declining home prices.

The Sun Belt continues to be hit hardest, and nationally, home prices are at levels similar to late 2003…

Both composite indexes and 13 of the 20 metropolitan areas have reported consecutive record year-over-year declines since December 2007.

As of December, average home prices are down 27% from their mid-2006 peak. The 10-city and 20-city indexes have fallen every month since August 2006, 29 straight.

Both the 10-city and 20-city indexes fell 19% in 2008. December’s drop marks the 10-city index’s 15th-straight monthly report of a record decline.

The indexes showed prices in 10 major metropolitan areas fell 2.3% from November, while home prices in 20 major metropolitan areas fell 2.5% from November.

Yet again, none of the regions could stave off a decline from November to December. Month-to-month decliners were led by Phoenix and Las Vegas, which fell 5.1% and 4.8%, respectively, and Minneapolis, which dropped 4.6%.

And for the ninth straight month, no region was able to avoid a year-over-year decline. Phoenix and Las Vegas were again the worst performers, with drops of 34% and 33%, respectively, from a year earlier. San Francisco followed, with a decline of 31%. Phoenix is down 46% from its peak in June 2006.

Compared with a year earlier, Denver and Dallas again had the best relative performance, with annual declines of 4% and 4.3%, respectively.

The data in the charts is published by S&P Case Shiller here.

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