Will California be bailed out? To Big to Fail? (what about the taxpayer’s? Maybe it’s all getting to big to fail)
Automatic Earth
Friday, June 19, 2009
June 19 2009: Bagmen and Boardroom
Ilargi: Want to go over the math one more time with me?
* According to the latest Case-Shiller Index, US home prices have dropped 32% since their 2006 peak, and 17.8% in the past year. The rate was 19.1% in the first quarter of 2009. The man behind the index, Professor Robert Shiller, expects prices to keep falling for years to come.
* Fannie Mae and Freddie Mac own or guarantee about half of the U.S. residential mortgage debt, for a total amount in the vicinity of $5.5 trillion. It’s good to note that they own a far bigger percentage of loans made in the last few years.
* The two “companies” have lost some $150 billion in the past 18 months, and losses are increasing fast as home prices keep falling, though exact numbers are kept hidden. Their exposure to -potentially toxic- securities is, if possible, even more opaque. The two GSE’s have asked for $84.9 billion in additional aid under a Treasury program that buys preferred shares.
* The Bush administration in late 2008 ordered Fannie and Freddie to buy $40 billion in mortgages from lenders every month. The vast majority of mortgages comes from the 4 biggest banks.
* President Obama has pledged to spend $275 billion to help keep 9 million Americans in their homes. His “Home Affordable” program, announced February 18, is aimed at “saving” 5 million homeowners who owe more on their mortgages than their homes are worth. To date, 4 months after, Fannie Mae and Freddie Mac claim to have refinanced a grand total of 80,000 loans under the program. Call back in 20 years.
* Over 20% of all homeowners who have mortgages already owe more than their homes are worth, and their number grows fast.
* There is presently a program in place that hands $8000 to purchasers, no questions asked. Since it doesn’t work as intended, there is a proposal to raise the amount to $15.000 (which is more than enough to buy a home in Detroit, where the median sales price is $6000).
* Federal Housing Finance Agency Director James Lockhart, who oversees Fannie and Freddie, claimed this week that his “protégés” will need another “year or two” before they return to profitability. Lockhart also said that Fannie Mae and Freddie Mac’s $5.4 trillion in mortgage assets creates “substantial uncertainty” as to their future structure.
* Which must be, don’t you think, why Tim Geithner yesterday refused to commit to anything regarding the future of the two “private hybrids”.
* There are current ideas to wind the companies down and scatter both their assets and their ashes.
* To me, these ideas look absurd. Who’s capable of winding down $5.5 trillion in loans and who knows how much more in securities?
* Two other reasons why it’s highly unlikely that they’ll be forced to close:
1. Losses could well be in the trillions, and don’t look don’t tell certainly would be preferred by many parties.
2. Wall Street would lose the vehicle that allows it to write loans at zero risk, cash in on fees, and transfer them to the government. If possible, all in one day.
I’ve said it before, but let’s do it one more time: think about where US home prices would be today if Fannie and Freddie would not be there to buy up the banks mortgages and finance the home your neighbor buys with your money and your guarantee.
There is a lot of talk, in the aftermath of the botched regulatory reform plans presented this week, about firms that are Too Big To Fail (or as the government calls them now:”Tier 1 Financial Holding Companies”), and whether it’s a good idea to have such firms. Hint: it is for the firms themselves, who successfully use the moniker to get unlimited access to public funds. For the public, it’s not.
If the label “Too Big To Fail” fits anywhere, it’s on the foreheads of Fannie and Freddie. And that’s why they’ll stay. If they fail, the banks would fail. And the construction industry would fail. And the mortgage industry. Home prices would fall across the board to Detroit levels. A large part of the population would go bankrupt, and not just homeowners.
And in the end, the government itself would fail.
Fannie Mae and Freddie Mac are to American society as a whole what bagmen are to its streets corners and boardrooms.
Truck & Rail traffic creeping along
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Saturday, June 20, 2009
Trucks Sit Idle; Rail Traffic Horrific
The weekly Railfax Rail Carloading Report still looks grim. Here are a couple of charts.
Total US Rail Traffic
click on chart for sharper image
Total Industry Charts (US, Canada and Mexico)
Year over Year Percent Change - 13 Week Rolling Averages
click on chart for sharper image
13-week moving averages are still moving lower, with no apparent end in sight. The first chart shows the one relatively bright spot is coal. I hear the same message about coal from trucker friends.
Idle Trucks
“TF” writes:
Mish,
I travel a number of routes regularly with my job and one site I pass amazes me. It is a local trucking company property. In early summer 2008 there were maybe 100 total trucks and trailers. Today, there is not much room left in a 12 acre area with 100s for trucks and trailers can not guess the number of trailers stacked 3 to 4 high.
I had heard through a trailer dealer that this trucking company solely purchased equipment to move wind energy projects for a number of years and this year canceled all equipment orders.
I also pass by a switchyard for a BNSF line between Seattle and Chicago once a month. The switchyard is a transfer point for the main line to a local. Freight would wait until there was an opening on the local line or an available engine. Prior to July/August 2008 the yard would have various car carriers, containers and other freight along side the coal cars destined for the power plants. Today only the coal cars are parked there. There is no waiting, except for coal.
TF
Competition Intense
FleetOwner is reporting Truck Freight Down Until 2010.
Truckers larger and small will need to keep their belts tightened into the early part of next year before they can expect to see freight volumes start increasing, according to the latest industry analysis compiled by FTR Associates.
In a conference call with reporters last week, FTR analysts noted that for freight to start recovering, it must “reach a bottom first” and they predicted the bottom will be reached in the third to fourth quarter of this year. That will lead to a recovery in freight volume to begin sometime in the first quarter of 2010.
“I definitely think we’re approaching the bottom now,” said Noel Perry, founder and principle of Transportation Fundamentals, who also works for FTR Consulting Group as managing director and senior consultant.
The problem, Perry explained, is the issue of “cumulative stress” on the trucking industry. Trucking has actually been in a recession for almost 21 quarters, he pointed out, exacerbated by the “overbuy” or trucks in late 2006 ahead of the 2007 emission regulations.
“Many carriers are now really short of cash due to the length of this recession,” he continued. “Also, there’s almost 250,000 under-used trucks out there competing for freight and that means profit margins will remain under pressure.”
The good news is a bottom might be coming. Unfortunately it will not feel like it because the recovery will be anemic. Moreover, competition for loads will increase as idle and under-used truck capacity starts fighting for loads.
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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