Catching up in more ways than one

[solarbird]

Good evening. This is quite long. Sorry about that.

There were seven bank failures today: Partners Bank, American United, Hillcrest Bank Florida, Flagship National Bank, Bank of Elmwood, Riverview Community Bank, and First Dupage Bank. None of these are particularly large; these are failures 100 though 106 for the year. Karl at Market Ticker is very annoyed that Partners Bank was allowed to degrade so severely before being taken over, and explains why: "the FDIC not only allowed all of the firm's Tier Capital (that is, their EXCESS CAPITAL) to be wiped out, but then allowed the bank to continue to operate until its asset base was destroyed to the tune of 43% of "face value" before stepping in and closing the institution. Prompt Corrective Action - a LAW, not a suggestion - is supposed to prevent this outcome."

FDIC Chairman Sheila C. Bair took the opportunity today to reassure everyone that they're still there, but curiously states that "We are the government... we cannot run out of money." She also talks about the advance in FDIC insurance payments from banks and the "line of credit" they have with the Treasury.

Tonight, I'm trying to take a stab at the actual nonborrowed reserves of banks. As many of you may recall, the BOGNONBR series I used to follow became useless when the Fed conveniently redesignated a lot of borrowed reserves (from the Fed, et al) as nonborrowed. This is what we in the business call "lying." It's on top of a second lie, in that in a very real sense these taxpayer-funded loans aren't really loans. As you can see in these tables, the actual data is... essentially nonsensical. All this has had a lot to do with the various efforts to audit the Federal Reserve, because we genuinely have very little idea what it's really doing.

But if you include all the "nonborrowed" yet "borrowed" yet "not really borrowed" money, you see the banks are stacking up cash at a phenomenal rate - the 21 October preliminary number (not seasonally adjusted) is over US$781B, and total "reserves" (including actual borrowed) is around $1,046B, or nearly$1.05 trillion with a T dollars. Take out the "nonborrowed" "borrowed" money that we know about in very rough terms, and we're still looking at US$80B or so in reserves, a number that looks frankly like peanuts at this point. But for comparison purposes, I point you to the long-lost time of 2007, before all this started to implode, and you can see that the banking system is supposedly at nearly twice the level of actually non-borrowed non-borrowed reserves as normal. At lowest, you're looking at 1.6 times normal. Yet rather than looking at an actual wind down, the Treasury is looking for an unlimited bailout power, with unlimited ability to draw on taxpayer funds.

This ain't right.

Hedgie doesn't think it's right either. He's going at it from the Fed Balance Sheet Assets side, where it looks even stranger. He has a similar amount of total bank borrowings as I do. (His number is a little higher, just over US$1T.) But it's stranger than that. To let Hedgie explain in his own words:

Total bank reserves with the Fed hit an all time high, surpassing $1 trillion, as banks continue to hoard cash. The amount of extra lending that could have taken place but didn't was $65 billion week over week, or a $130 billion increase in just the past month. Keep in mind this is a very confusing datapoint especially in light of recent reports that the Fed's $100 billion reverse repo test was a failure, meaning despite the $1 trillion in cash presumably with the Fed, any liquidity slack in the system does not exist.

Emphasis added. This probably indicates in part that many bank book assets are still marked-to-myth, or rated at values they'll never sustain in order to avoid bankruptcy, but... I don't think that this is all. Partly because the numbers are still climbing.

I think it might have to do with the Commercial Real Estate failure wave that's about to hit. Seattle is the worst in the US, with a 32.7 percent delinquency rate for construction and land loans. We sat out about half the housing bust; we may not do so well in CRE. But everyone knows this is coming; why are so many banks in such a hurry right fucking now to get cash in house?

It might also be commodities. Dr. Roubini at RGE Monitor thinks oil is overpriced, but more importantly, that this is part of a speculative commodities bubble fuelled by the US dollar carry trade, and it'll pop badly, soon. There are persistent rumours that banks have been heavily involved, particularly in oil - as they were a year and a half ago - but we don't know.

This isn't the only way banks are trying to acquire hard cash. I already posted about Citibank and Infibank's shenanigans earlier today, but they aren't alone. Bank of America plans credit card annual fees for borrowers who pay off every month. (Side note: Interestingly, it looks like BoA CEO Ken Lewis lied to the feds to get $20B not to cancel the Merrill Lynch merger. That's fun.) And Citigroup has started levying fees on some cardholders who don't charge $2400 a year or more. Both of these banks have very high exposure to "riskier credit card borrowers," but both also just want a lot more cash any way they can and are willing to lose a lot of customers to do it.

Everybody's preparing for something. I just don't know, exactly, what.

Anyway, here are other items to follow for the weekend. Enjoy:

US Dollar Update:
US dollar bulls, here's your thesis, by Ambrose Evans-Pritchard of the Telegraph. The third attempt by the US dollar index to break substantially below 75 failed, by the way. The Telegraph article talks about Britain being one of the Sick Men of Europe; that's certainly validated by the shock third quarter economic decline in the UK.

Dollar bears, please enjoy Lazard Asset Management dumping the US dollar entirely in favour of Pound Sterling. Oh, and some Latin American countries have put together a regional currency called the Sucre for inter-state trade; The Australian (newspaper) says the "move echoes the European Union's introduction of the euro precursor, the ECU, an account unit designed to tie down stable exchange rates between member states before the national currencies were scraped." This isn't considered a big deal for the US dollar, but I note it.

Housing Update:
Sales of existing houses jumped sharply in September as people rushed to meet the tax credit deadine for purchases. (NAR press release here.) Some call the median price falling to $174,900 the bad news hidden in the report; I don't, since that's getting kinda-sorta close to historical average as a multiple of income. I call that good news. The bad news is that the shrinking reported months of inventory ignores the seven million houses in the foreclosure queue. Everyone's expecting sales to drop though the floor again after tax credit expiration (c.f. auto sales after the end of Cash for Clunkers) so you're seeing calls for an extension and expansion. (See also here.) Next month will be interesting, obviously.

Delinquencies on existing mortgages continue to rise, with Freddie Mac's September delinquency rate at 3.33%, up from 3.13% in August, and from 1.2% in September 2008. Hedgie has more to say on this topic here.

Other notes:
Union Pacific notes that rail traffic has stabilised, but "at very low levels." Still, "not going down" anymore is good.

Mish Shedlock looks at the weekly unemployment claims report, and thinks we're solidly past peak for this cycle - but are still far above the level yet needed to see reductions in even the official unemployment rate.

60% of small businesses report cash flow issues, which is above one year ago. Part of this is decreasing credit availability, part of it is larger firms changing payment schedules from 30 days to 120 days. This is all worse than one year ago.

And that's all for now. Be careful out there, people, and good luck.

Comments

[silussa.livejournal.com]

Despite the reassuring noises from government and the economy, I don't buy it.

We just had a special event here in Daytona Beach, Biketoberfest, which was at best flat compared to last year, with a fair number here because they were unemployed and didn't have anything else to do. Some of the local restaurants are happy because they MADE last year's numbers...which they were not most of the year.

Additionally, rents are still dropping, for sale signs are still rising, bankruptcy signs are still going up, and more and more open store fronts. The only folks opening new places are Dollar General and Family Dollar.

(side note: anybody else think it's a bad sign to see a for sale sign in front of a bank?)

And holiday hiring? There isn't any.

Maybe 2010 will see improvement, but I don't think we've bottomed yet, at least from the general public point of view.

[archanglrobriel.livejournal.com]

I had a new development pop up yesterday regarding my Citibank card and their shenanigans that I thought you'd find interesting. As I mentioned we went to one of those debt management counseling companies to enlist their help in getting rid of our credit card debts now that several of them have lost their damn minds and are charging us rates that would shame Vinnie the Loanshark. Our assigned debt reduction guy told us yesterday that Citibank is refusing the offer regarding our repayment plan and the proposed interest rate reduction. Well, not just ours. Everybody's. He said they were going to proceed anyway as if Citibank hadn't rejected their repayment plans and hopefully they'd "see reason" soon.
As per our debt management guy, the normal procedure is that the credit counseling people make the credit companies an offer to enter into a repayment plan and most of them jump on it because even when the interest rate reduces, the structured repayment plan strikes them as a really good idea. Especially from a creditor who may be getting into "in over their heads" territory where they'll start defaulting or going into bankruptcy proceedings. Citibank isn't playing the game the way it's normally been played right now, so what's going on with that? It doesn't make a bit of long term financial sense...yet clearly there's been a policy change about repayment plans in recent weeks. It definitely makes you want to ask why they're doing this in this way.

[phillipalden.livejournal.com]

Thanks for the update, even if it does piss me off further at these arrogant jerks who think they can do anything they want.

Oh, wait. They can do anything they want!

[peebeebaynut.livejournal.com]

Speculative oil bubble that will pop soon? Um, the last "oil price bubble" didn't pop until the world's economy tanked. Everything we do needs oil.

http://www.youtube.com/watch?v=H0DlMs9KnYg

[solarbird]

I'm well familiar with the oil situation, don't worry. Go check my older posts. However, that said: the last run-up was too fast, even for a bad-case scenario, and I said so at the time, calling it a speculative overshoot. We've since found out that certain large banks were making commodities bets and paying oil supertankers not to deliver, so I think I was probably correct.

[peebeebaynut.livejournal.com]

Why is it so common to explain price in terms of supply and demand when things go the way we want them to, but as "speculative" when they do not?

[peebeebaynut.livejournal.com]

Let me put this another way. How do you determine the difference between very high oil prices set by speculation and very high oil prices set by supply issues? (I doubt you will answer me.)

You cannot address supply by saying "oh, there's endless oil under the sea" because there is also endless pie in the sky. Supply is about oil production rates not volumes of oil you can't have as fast as you need. If you inherit $5 million in a bank but are only permitted to withdraw $100 a month, that won't be enough money to supply your demand. Oil production rates are currently throttled by pipeline capacity, wars (declared and otherwise (http://en.wikipedia.org/wiki/Movement_for_the_Emancipation_of_the_Niger_Delta)) techological complications (http://www.energyandcapital.com/articles/oil+sands-tar-peak+oil/499), etc.

[solarbird]

Perhaps you are failing to understand when I say I am familiar with the oil situation and felt that the last run-up was too fast, even for a bad-case senario. We are at what I thought was a correct run-up value for the current supply-demand matrix, which I think makes my call pretty good. (Yes, there's been some demand drop-off, particularly US, but a chunk of that is balanced by demand rebound in poor countries who were almost entirely excluded from the oil market in the run-up.) While I wasn't the deep-analysis-posting fiend then that I am now, you may wish to look at previous posts such as this one or my explanations on this one or you can do some of your own digging. I didn't post as much about it at the time as I've been posting about this now, but I started tracking oil prices seriously five years ago. I've also read a lot of research on this, including non-peak-oil sources, the US Army report on peak oil, Twilight in the Desert, and so on. I also know energy-materials engineers and have talked with them on this topic in some depth.

And the reason I was initially concerned (back in 2003) because the market was acting, as I thought about it at the time, "funny." I was looking more closely at it because of the Iraq war, of course. The the initial ramp-ups were not following the curves of speculation and were acting like a supply issue was in play. That swapped around in late 2007 and speculation kicked in and you had a classic speculative-bubble asymptotic blow-off into the new year. (Seriously, it was absolutely textbook.) And that's how you know.

Of course, we overshot down, because the economy imploded and oversells always happen after speculative bubbles.

[peebeebaynut.livejournal.com]

See most people I discuss this with go "speculation-speculation!" in order to shield themselves from having to consider that this might be a supply problem.

Then the go "tar sands-tar sands!" to prove to themselves it's not a supply problem but that's nonsense because oil that you can get out of the earth at a crawl is a supply problem.

[peebeebaynut.livejournal.com]

Then they go "credit crisis-credit crisis!" in order to avoid thinking that the world's economy went ka-flooey at $147/barrel oil.

Denial is a defense mechanism. I was watching the price of oil, waiting for that collapse because I'm defenseless from a denial standpoint. Admittedly people at Goldman Sachs felt we could could last until $150 - $200/barrel (http://www.marketwatch.com/story/goldman-sachs-raises-possibility-of-200-a-barrel-oil). Well $147 was a pretty close call. Does the GS report saying "As the lack of supply growth and price-insulated non-OECD demand suggest a future rebound in U.S. gross domestic product growth or a major oil supply disruption could lead to $150-$200 a barrel oil prices," Goldman said.'' sound like speculation to you? GS never explained exactly why they felt the price would go down. They had nothing to gain by pointing out that price would be unbearable.

[solarbird]

Please do not rant at me, I am not part of this problem.

Goldman Sachs was one of the banks participating in strategic supply withholding - very similarly to Enron in California some years before, tho' to a smaller degree and in an actually more-supply-critical backdrop. In short: they were talking their books. In a situation that did not involve regulatory capture, they would be investigated and almost certainly prosecuted for market manipulation.

[peristaltor.livejournal.com]

I heard a rumor that the spike was caused by banks as you say specifically to indebt oil producers like Abu Dabi (sp?), UAE and Kuwait. I give this credence because the woman who related the rumor heard of the plan before the spike had happened.

You can hear it for yourself in a C-Realm podcast interview with ellenbrown. If you like, I'll do some digging and find the link to the episode.

[peebeebaynut.livejournal.com]

Please do not rant at me, I am not part of this problem.

So you don't use any oil?

[solarbird]

Paraphrasing a response to someone else some months ago; the major response is that I use dramatically less than most Westerners. I live where I don't have to drive for the most part, actually don't typically drive. My total energy use as calculated by various estimation systems is much less than half that of the typical North American. I buy produce directly from local farmers, actively work for alternative-energy requirements at the state and local level, improved transit, and improved-density/walkable neighbourhoods and housing. The minor response is go fuck yourself, I don't have any more time for this crap.

[maellenkleth]

Hi, good morning, and all that stuff.

Am getting caught up with some of the backscroll, and concur with you on the approach to reduced personal oil consumption. It dawns on me that the great benefit of life in a compact, dense community (like this little town in the middle of nowhere) is that so many of the daily activities can be conducted at walking scale. The car, nowadays, is seldom driven except to get me to and from the airport (to where, alas, there are no reliable transit facilities in early morning and late evening); the cities to which I must travel all have mass-transit facilities. This is as it should be.

Alternative-energy requirements all come with their own prices; I'd like to dig a little deeper on that with you some time, but for now note that the current British Columbian fascinations with sugar-based ethanol / biodiesel substitution and run-of-the-river hydroelectrics do have non-mitigatable environmental impacts. The whole food/oil tradeoff is an ugly one -- have you noted retail price impacts on corn-based foods lately?

I would like to see more windfarms, and some serious work on coastal marithermal/geothermal systems, but I'm not actively working in those fields, and am only now beginning to gain high-level access to the funding sources.

If we get the chance later this month, I'd like to talk substantive numbers, and trade-offs, with you: I still think that the crunch point will come in finding portable, high-density energy sources for free-steered transport vehicles, and especially worry that we might find ourselves so enmeshed in fear of litigation or sabotage as to lose our access to viable technologies.

Re: Delinquencies on existing mortgages

[peebeebaynut.livejournal.com]

You should take a look at commercial foreclosures.

Foreclosures expected to rise in commercial properties (http://www.nwherald.com/articles/2009/10/12/r_z0twxaz4qkixbxdqncmzhw/index.xml) ``Nationally, the default rate for commercial mortgages held by depository institutions increased more than a half percentage point, from 2.25 percent in the first quarter to 2.88 percent in the second quarter of 2009, according to Real Estate Econometrics. The Wall Street Journal recently reported the delinquency rate was six times higher than last year. And banks are holding about $1.1 trillion in commercial property loans on their books, according to the Federal Deposit Insurance Corp.''

Office vacancy rates in Valley hit record (http://www.azcentral.com/arizonarepublic/business/articles/2009/10/15/20091015biz-vacancy1015.html) ``Commercial-real-estate broker Bret Isbell said the number of foreclosure notices issued has been holding steady at 300 to 400 a month since January...''

etc.

Re: Delinquencies on existing mortgages

[solarbird]

Yes, I know. People have been waiting for CRE to fall over for a couple of years; if you're not familiar with Mish Shedlock and his commentary on what he calls "the death of the shopping mall model," you might enjoy reading up on that.

Re: Delinquencies on existing mortgages

[peebeebaynut.livejournal.com]

"waiting to fall"? If a delinquency rate that is six times higher in a year and 300 - 400 foreclosure notices still leaves one waiting, how is "fall" defined?

Re: Delinquencies on existing mortgages

[solarbird]

Sorry, I'm still in our current context of mostly bank issues; by "CRE to fall" I mean "trigger another round of bank crisis." Hell, if you think a delinquency rate six times higher than year before, you should check out the Manhattan sales numbers. Down 93%! Awesome, is it not?