Bad Paper

Shares of UBS fell after reports circulated that the Swiss bank may have to raise capital because of mortgage related losses.   According to Bloomberg, shares dropped as much as 4.8 percent after Merrill Lynch reported that the bank may need to raise $15 billion in new capital to cover writedowns of as much as $21 billion.

According to a Reuters article published on nytimes.com, the bond insurer FGIC has disclosed that its mortgage exposure exceeds legal risk limits. As a result, FGIC may need to raise $2 billion in equity. Rob Haines, a senior insurance analyst at CreditSights is quoted in the article as saying “This is a bombshell. They are actually in violation of New York insurance law. If they don’t remediate this, the state has the ability to take control of the company.”

David Leonhardt writes an article in the NY Times about the illogic of some homeowners who refuse to accept reality when selling their house. Despite ample evidence everywhere that most real estate isn’t worth as much as it was during the peak, some people refuse to budge on the price.

This is even the case in my neck of the woods with some houses on the market for nearly a year. The reason is clear. The owner believes that home values alway appreciate and they now refuse to accept the harsh reality that this isn’t true.

Indictments charge 19 individuals in an alleged scheme to illegally obtain title to more than 100 homes. According to the Los Angeles Times, the defendants have been charged with mail fraud and conspiracy to commit money laundering. The alleged scam involved foreclosure rescue and equity stripping.

This shouldn’t come as much of a surprise, but according to the WSJ the condo situation is about to get worse. Another 10,000 units are due to hit the market in South Florida and 4,000 new condos are expected in both Atlanta and Phoenix. And while the DFW market isn’t mentioned in the article, I am wondering who is supposed to buy all the condo units under construction in the downtown Dallas area.

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According to Bloomberg article this morning, Punk Zeigel and Co. analyst Richard Bove writes that Bank of American may take a record $6.5 billion loan loss provision in the first quarter to cover a possible increase in bad debts. However, he does believe that the bank will remain profitable.

According to this article in the New York Times, British consumers are realizing that they are more in debt than even U.S. consumers. And that says a lot.

The average British adult has 2.8 credit or debit cards, more than any other country in Europe. A growing number are borrowing to pay for vacations, furniture, even plastic surgery. As a result, Britons are spending more than they earn, racking up a household debt-to-income ratio of 1.62 compared with 1.42 in the United States and 1.09 in Germany.

It sounds like a heck of a party! And now here comes the hangover.

Falling home prices are not just bad for the homeowner. Falling real estate prices also result in falling property tax revenue. As reported in the LA Times, tax officials in SoCal are now seeing lower property assessments, which will result in lower taxes. While the lower value assessment may provide some relief to homeowner it will probably won’t last long. The local government will end up with a budget shortfall. And governments usually find a way to make up for lost income.

The Financial Times reports on fears that the efforts by the Fed to address the current market turmoil will stoke inflation. The Fed’s current path will likely result in negative real interest rates.

The term “stagflation” is being kicked around a lot. Most people assumed that stagflation, along with swine flu and disco, were relics of the 70’s. Who knows. Maybe there is still a box of those WIN buttons down in the White House basement.

Fear? Panic? Bloomberg reports that Fed Chairman Bernanke is stepping up efforts to avoid a full-blown financial meltdown. Is this the Wall Street version of China Syndrome? If you see Jane Fonda and Micheal Douglas heading that way with a video camera you know the end is near.

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Bloomberg is reporting today that new home starts have fallen to a 17 year low. The article contains more bad news - factory production is also down.

Bloomberg

Tom Petruno writes in the LA Times that the Bear Stearns bailout might just be the beginning of more. Because of the extent of the mortgage contagion and the scope of the use of derivatives and leverage, this crisis is a long way from over.

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The first big Wall Street firm was bailed out Friday due to apparent liquidity problems. The Fed provided the bailout indirectly through JPMorgan, with the Fed retaining all the risk. The lingering question is whether this will be the first of many to come.

New York Times article

Interesting article in the WaPo on Friday concerning the final last gasps of the hedge fund known as Carlyle Capital. Just further evidence that this is not the best time to be highly leverage.

Pressure on Banks Left an Ailing Fund Exposed

“I thought we were going to come to a restructuring arrangement where we would invest $400 or $500 million to make it work,” Rubenstein said in an interview yesterday. “We had asked them to freeze . . . for a year, giving us a breathing period, and we would put up a lot of money.”

Then the phones started ringing again.

Pressure on Banks Left an Ailing Fund Exposed

This shouldn’t come as a surprise to most folks, but according to this AP article, home prices in California dropped nearly 18% during the 12 months. Even so, I am not sure we have found the bottom (or anywhere near it) yet.

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