US economy: Repayment of bailout profitable

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As Big Banks Repay Bailout Money, U.S. Sees a Profit

Nearly a year after the federal rescue of the nation’s biggest banks, taxpayers have begun seeing profits from the hundreds of billions of dollars in aid that many critics thought might never be seen again.

The profits, collected from eight of the biggest banks that have fully repaid their obligations to the government, come to about $4 billion, or the equivalent of about 15 percent annually, according to calculations compiled for The New York Times.

These early returns are by no means a full accounting of the huge financial rescue undertaken by the federal government last year to stabilize teetering banks and other companies.

The government still faces potentially huge long-term losses from its bailouts of the insurance giant AIG, the mortgage finance companies Fannie Mae and Freddie Mac and the automakers GM and Chrysler. The Treasury Department could also take a hit from its guarantees on billions of dollars of toxic mortgages.

But the mere hint of bailout profits for the nearly year-old TARP has been received as a welcome surprise. It has also spurred hopes that the government could soon get out of the banking business.

“The taxpayers want their money back and they want the government out of our banking system,” Representative Jeb Hensarling, a Texas Republican and a member of the Congressional Oversight Panel examining the relief program, said in an interview.

Profits were hardly high on the list of government priorities last October, when a financial panic was in full swing and the Treasury Department started spending roughly $240 billion to buy preferred shares from hundreds of banks that were facing huge potential losses from troubled mortgages. Bank stocks began teetering after Lehman Brothers collapsed and the government rescued A.I.G., and fear gripped the financial industry around the world.

American taxpayers were told they would eventually make a modest return from these investments, including a 5 percent quarterly dividend on the banks’ preferred shares and warrants to buy stock in the banks at a set price over 10 years.

But critics at the time warned that taxpayers might not see any profits, and that it could take years for the banks to repay the loans.

As Congress debated the bailout bill last September that would authorize the Treasury Department to spend up to $700 billion to stem the finacial crisis Representative Mac Thornberry, Republican of Texas, said: “Seven hundred billion dollars of taxpayer money should not be used as a hopeful experiment.”

So far, that experiment is more than paying off. The government has taken profits of about $1.4 billion on its investment in Goldman Sachs, $1.3 billion on Morgan Stanley and $414 million on American Express. The five other banks that repaid the government — Northern Trust, Bank of New York Mellon, State Street, U.S. Bancorp and BB&T — each brought in $100 million to $334 million in profit.

The figure does not include the roughly $35 million the government has earned from 14 smaller banks that have paid back their loans. The government bought shares in these and many other financial companies last fall, when sinking confidence among investors pushed down many bank stocks to just a few dollars a share. As the banks strengthened and became profitable, the government authorized them to pay back the preferred stock, which had been paying quarterly dividends since October.

But the real profit came as banks were permitted to buy back the so-called warrants, whose low fixed price provided a windfall for the government as the shares of the companies soared.
Despite the early proceeds from the bailout program, a debate remains over whether the government could have done even better with its bank investments.

If private investors had taken a stake in the banks last October on par with the government’s, they would have had profits three times as large — about $12 billion, or 44 percent if tallied on an annual basis, according to Linus Wilson, a finance professor at the University of Louisiana at Lafayette, who analyzed the data for The Times.

Why the discrepancy? Finance experts say the government overpaid for the bank assets it bought, because its chief priority was to stabilize the teetering financial system, not to maximize profit.

“Had these banks tried to raise money any other way, they probably would have had to pay quite a bit more than the government received,” said Espen Robak, head of Pluris Valuation Advisors, which analyzes the value of large financial institutions.

A Congressional oversight panel concluded in February that the Treasury paid an average of 34 percent more than the estimated fair value of the assets it received.

Of course, many finance experts suggest that the comparison is academic at best, because there is no way to know what might have become of the banks or the financial system as a whole had the government not acted.

“Taxpayers should heave a sigh of relief that the investment in the banks protected them from even more catastrophic losses from more bank failures,” said Aswath Damodaran, a finance professor at the Stern School of Business at New York University.

A more direct comparison of profits can be made with the investment performance of other governments that poured money into ailing banks last fall.

The Swiss government, for example, said last week that it had pulled in a handsome profit for taxpayers on a $5.6 billion bailout it gave to UBS, the troubled Swiss bank, at the height of the financial crisis in October. The government netted $1 billion on its investment, a gain equal to a 32 percent annual return.

“They are substantially in the money,” Guy de Blonay, a fund manager at Henderson New Star in London, said after the announcement.

American taxpayers could still collect additional profits on their investments in two other big banks that have repaid their preferred stock but not their warrants: JPMorgan Chase and Capital One. They are expected to yield over $3.1 billion in gains for the Treasury in the next month or so, although the full tally will depend on how much they will pay to buy back their warrants.

And the government is owed about $6.2 billion in interest payments from banks that have not yet repaid their federal money.

But all the profits taxpayers have won could still be wiped out by two deeply troubled institutions. Both Citigroup and Bank of America are still holding mortgages and other loans that were once worth billions of dollars but whose revised values are uncertain. If they prove “toxic” because they cannot attract buyers, they could leave large holes in the banks’ balance sheets.
Neither bank is ready to repay its bailout money anytime soon, even though the banks’ stock prices have surged in the last month, leaving the government sitting on paper profits of about $18 billion between them.

By Zachery Kouwe,
Eric Dash contributed reporting.
Published: August 30, 2009, NY Times

US economy: Banks at Risk of Failure Has Reached 15-Year High

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Banking regulators are warning that the number of banks at risk of failure has reached a fifteen-year high. The Federal Deposit Insurance Corporation said the number of “problem banks” had risen from 305 to 416 during the second quarter. The FDIC has already shut down eighty-one banks this year. This comes at a time when the nation’s largest banks are getting even bigger due to a series of federally arranged mergers and taxpayer bailouts. JPMorgan Chase, Bank of America, Wells Fargo and Citigroup now issue one of every two mortgages and about two of every three credit cards. JPMorgan Chase, Bank of America and Wells Fargo now each hold more than ten percent of the nation’s deposits, despite a rule barring such a practice.

...global equalization payments.

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More on the relationship between the haves and have nots...

Africans Mull Call for Billions in Global Warming Compensation

African leaders are considering a proposal that would demand compensation from leading industrial nations for the devastating effects of climate change on the African continent. The plan calls for annual payments of $67 billion dollars to the African Union. If approved, the proposal could enter the agenda at the world climate summit in Copanhagen later this year.

Canadian economics - equalization payments?

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Equalization payments are comming from the haves...when they don't have so much anymore what will happen to the have nots?



From the Candian Press:

Weak natural gas prices push Alberta's deficit to a record $7 billion.

EDMONTON - Alberta's energy boom gone bust has left the province with projections of a record $7-billion deficit and if natural gas prices continue to fall, there could be even more red ink by the end of the fiscal year.

Finance Minister Iris Evans has ordered provincial bureaucrats to find $430 million in program savings, but deeper cuts are coming as the government scrambles to trim $2 billion from the budget by next year.

"Quite frankly, our earnings took a real kick in the head," Evans told a news conference Wednesday. "We are heavily dependent on our oil and gas revenues."

"Global economic turmoil is deeper and more sustained and natural gas prices are lower than originally forecast and the result is a higher deficit than we predicted."

The new deficit number included in Alberta's first-quarter update is $2 billion more than the original budget forecast. But the latest forecast is based on a prediction that natural gas prices will nearly double to $4 per gigajoule for the remainder of the fiscal year.

Some market analysts are predicting exactly the opposite for natural gas prices in the coming months because of large inventories of gas in storage and a weaker North American economy.
Evans was coy about whether the deficit could get even worse given these dour predictions. When asked if continued weak gas prices could increase the deficit, the minister said flatly: "Not in this forecast."

Scott Hennig of the Canadian Taxpayers Federation said with financial reports this week predicting gas prices falling below $1 per gigajoule, Alberta's deficit projections are overly optimistic.

"I have no confidence that this (deficit) number is going to stay where it is," said Hennig. "I think it could reach $8 billion or even $8.5 billion."

Jack Mintz, former president of the C.D. Howe Institute, also said the deficit could end up being worse if natural gas prices fall lower. But he also said the province may be overly optimistic in its projections for tax revenue....

Total revenue for the year is now forecast at $29.6 billion, while expenses are pegged at $36.4 billion.

US market: Cure Rate plummets

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The Associated Press (J.W. Elphinstone)

A record 12 per cent of U.S. homeowners with a mortgage are behind on their payments or in foreclosure as the housing crisis spreads to borrowers with good credit. And the wave of foreclosures isn't expected to crest until the end of next year, the Mortgage Bankers Association said Thursday.

The U.S. foreclosure rate on prime fixed-rate loans doubled in the last year, and now represents the largest share of new foreclosures. Nearly 6 per cent of fixed-rate mortgages to borrowers with good credit were in the foreclosure process.

At the same time, almost half of all adjustable-rate loans made to borrowers with shaky credit were past due or in foreclosure.

The worst of the trouble continues to be centred in California, Nevada, Arizona and Florida, which accounted for 46 per cent of new foreclosures in the country. There were no signs of improvement.

The pain, however, is spreading throughout the United States as job losses take their toll. The number of newly laid off people requesting jobless benefits fell last week, the U.S government said Thursday, but the number of people receiving unemployment benefits was the highest on record. These borrowers are harder for lenders to help with loan modifications.

President Barack Obama's recent loan modification and refinancing plan might stem some foreclosures, but not enough to significantly alter the crisis.

“It may be too much to say that numbers will fall because of the plan. It's more correct to say that the numbers won't be as high,” said Jay Brinkmann, chief economist for the Mortgage Bankers Association.

Toronto: August, mid-month RESALE figures

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GTA REALTORS® Report August Mid-Month Resale Market Figures.

August 18, 2009 -- In the first two weeks of August, Greater Toronto REALTORS® reported 3,832 sales – up 27 per cent compared to the first two weeks of August 2008. The average price for these transactions was up three per cent year-over-year to $383,796.

US market: Consumer Confidence Index Exceeds Forecast

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The Associated Press:

WASHINGTON (AP) — Consumer sentiment rose more than expected in August, an indication that Americans’ pessimism about the economy may be lifting.

The New York-based Conference Board says its Consumer Confidence Index rose to 54.1 from an upwardly revised 47.4 in July. Economists surveyed by Thomson Reuters had expected a slight increase to 47.5. Still, the index is far below 90, the minimum level associated with a healthy economy.

Economists closely monitor confidence because consumer spending accounts for about 70 percent of United States economic activity. Consumer sentiment — fueled by signs the economy is stabilizing — has recovered a bit since hitting a record-low of 25.3 in February.

US market: Index Shows an Improvement in Home Prices

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From the NY Times.


House prices continued to improve in June as a modest spring recovery started to strengthen, according to data released Tuesday.

The Standard & Poor's Case-Shiller Home Price Index has shown that prices in 20 major cities increased 1.4 percent during the month, nearly triple the rate of growth in May.

“May’s glimmer of stabilization has held up,” said Maureen Maitland, vice president for index services at Standard & Poor’s. She cautioned, however, that “we need a few more months of progress to start talking about a real recovery.”

Housing prices are still down sharply in comparison to last year’s figures. The 20-city composite index is off 15.4 percent. But this too is a marked improvement from its record loss of 19.1 percent last winter. Average home prices are now at the level they were in early 2003.
Eighteen of the cities in the index improved in the month. Cleveland rose 4.2 percent from May, Minneapolis was up 3.1 percent and San Diego was up 1.6 percent.

The two cities that declined were Detroit and Las Vegas, among the most economically troubled places in the country. Las Vegas prices are now down 54.3 percent from its peak. Detroit has fallen 45.3 percent.

The news comes on the heels of a report from the National Association of Realtors that oints to existing home sales in July having risen for the fourth consecutive month, for the first time since 2004. July sales were 5 percent above the pace in July 2008, the first year-over-year gain since the market peaked in November 2005.

Rhode Island: Government Shutdown Planned

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THE ASSOCIATED PRESS:

Rhode Island will shut down its state government for 12 days and trim millions of dollars in financing for local governments under a plan Gov. Donald L. Carcieri proposed to balance a budget hard-hit by surging unemployment and plummeting tax revenue. The shutdown would force 81 percent of the roughly 13,550-member state work force, excluding its college system, to stay home a dozen days without pay before the start of the new fiscal year in July. The closings come as the worst recession in decades has eliminated hundreds of millions of dollars in tax collections and pushed unemployment to 12.7 percent, the second-highest jobless rate in the nation behind Michigan

US: 10 year deficit rises to $9 Trillion from $7.1 Trillion

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From the NY Times.

The US has raised the Estimate for the 10 year Deficit to $9 Million.

The Obama administration blamed an unexpectedly deep downturn for the higher estimate, which rose from $7.1 trillion.

Buying - As the market flexes

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Looking closer at the "purchase investment formula".

Thinking of using low interest rates to purchase? Mortgages are a two part formula...the rate...and the factor of time. And the factor of time is hinged on the expectation of future conditions...or "speculation".


Let’s run this model....

$310,000 purchase with 5% down ($15,500) = $294,500.

Your $310,000 purchase also includes closing costs expenses. With 5% down your CMHC fees are likely to be about $8,000. (If you’re like most you’ll attach this to your mortgage). $294,500 + $8,000 = $302,500 mortgage.

Land transfer tax and closing costs account for a sizable and unrecoverable expense. First time buyers would be looking at an amount no less than $3,500 in this example. Minimum upfront cost, down payment + closing costs: $19,000

Your $302,500 mortgage @ 4% with a 5 year term = $1,591.21 per month. Balance at the end of the 5 year term $263,338.

Paying down $39,162 of your financed principal seems like you are ahead in the equity game...but let’s not forget that time is a factor in this mortgage formula.

Let’s input what the refinancing would look like if the rates were to change, being reasonable of course, using inflationary figure experienced in the past.

Refinancing the balance of $263,338 with a new 5 year term @ 6% = $ 1,684.85 per month...and at 7% = $1,844.46...and at 8% = $2,009.83


What about falling values?

As rates go up values go down. (Buying power is weakened). Picking through the analogues of the cities (Toronto’s) past reveals definitive examples.




Example #1
2 bedroom + den condo. North York.

xx yonge st. unit #101 List Price: $227,900 Sold Price: $212,500 89.3% of list. SOLD 11/27/1989

xx yonge st. unit #101 List Price: $168,800 Sold Price: $163,500 96.8% of list. SOLD 06/27/1997

xx yonge st. unit #101 List Price: $214,900 Sold Price: $204,000 94.9% of list. SOLD 11/27/1989

xx yonge st. unit #101 List Price: $239,000 Sold Price: $235,000 98.3% of list. SOLD 09/01/2007


In the example above we see that between 1989 and 1997 (through an eight year period) the subject lost 26% of its value. Now the interesting part of this observation is that if you go back through the pages of history, and study the sales of homes and condos throughout the GTA, you will find this pattern of value depreciation repeating, in a more or less similarly remedial measure at this time. Like a distinct "ring of deflation".

Now, going back to the $310,000 purchase. Just to entertain the idea of value depreciation, let’s assume that the depreciation is 15% of its purchase price by the end of the 5 year term. That amounts to a “market value” of $263,500 (or a depreciation of $46,500).

If mortgage rates proved unaffordable to refinance, selling at $263,500 would cost $13,175 + GST (or HST) in commission + mortgage discharge penalties.

The key here is NOT to purchase at the TOP END of your affordability/qualification.

Stay tuned for the next BLOG subject. I’ll be dissecting current conditions and weighing them against past.

Canadian economics and coffee

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As coffee is the worlds second largest (legally traded) commodity, this news "factoid" has greater significance than would appear on the surface.

Friday August 14. Canadian Press.


"Second Cup reports drop in second-quarter earnings compared with year ago."

Second Cup Royalty Income Fund (TSX: SCU-UN.TO)

...said Friday it expects to close more coffee shops this year than it had earlier expected (to) as it reported (a) drop in second-quarter earnings compared with a year ago, as sales at its coffee shops fell.

In its outlook for the year, Second Cup said Friday it expects to close 25 to 30 cafes this year, compared with earlier guidance of 15 to 20 cafes as part of an effort to close unprofitable company-owned cafes to improve overall earnings.

Second Cup said it expects to open 10 to 15 new cafes in Canada and to renovate 20 to 24 of its cafes.

There were 359 cafes included in the fund's royalty pool at June 30. Hurt by the downturn in the economy, the coffee shop income trust said it earned $2.3 million or 23 cents per unit for the quarter (that) ended June 30, compared with a profit of $2.9 million or 30 cents per unit a year ago.

Sales of cafes included in the fund's royalty pool totalled $46.5 million, down from $49.1 million.

Same cafe sales were down 4.7 per cent compared with 0.9 per cent growth a year ago. Year-to-day, same cafe sales were down 3.9 per cent compared with 1.1 per cent growth in the first six months of 2008.

"While the impact of the economy in Canada continues to adversely affect same cafe sales for Second Cup, we continue to focus on the outstanding quality of our products." Second Cup president and chief executive Stacey Mowbray said.

some, Euro markets "rebound?"

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Germany and France "exit recession".

BERLIN/PARIS (Reuters) - Germany and France achieved a shock return to economic growth in the second quarter of the year, ending their recessions earlier than many policymakers and economists expected, but failed to drag the euro zone with them.

German gross domestic product rose by 0.3 percent in the second quarter, bringing an end to the country's deepest recession since World War Two.

French GDP also grew by 0.3 percent in the second quarter. The consensus in a Reuters poll of economists had predicted a 0.3 percent quarterly contraction in both countries.

However, in the 16-nation euro zone, GDP slid by 0.1 percent on the quarter, following a 2.5 percent drop in the first quarter. Though this was well above the 0.5 percent fall forecast before the French and German figures were released.

Aside from the euro zone's big two biggest economies, other member nations continue to contract - Italy's economy dropped by 0.5 percent in the second quarter, Austria and Belgium shrank by 0.4 percent and the Netherlands contracted by 0.9.

Greece and Portugal, though, grew by 0.3 percent.

US market: retail & unemployement data for July

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WASHINGTON (Reuters) - Sales at U.S. retailers unexpectedly fell in July and the number of workers filing new claims for jobless benefits rose last week, indicating the recession-hit economy faced a bumpy recovery.

A Commerce Department report on Thursday showed total retail sales edged down 0.1 percent after increasing 0.8 percent in June, compared with market forecasts for a 0.7 percent gain.

A separate report from the Labor Department showed first-time applications for state unemployment insurance benefits climbed 4,000 to a seasonally adjusted 558,000 last week.

The retail sales data cast a shadow over an anticipated rebound in consumer spending in the current quarter. Spending, which accounts for over two-thirds of U.S. economic activity has been pressured by high unemployment.

In the United States, the decline in July retail sales was partially caused by gasoline station sales falling 2.1 percent, reflecting a retreat in gasoline prices during the month, after surging 6.3 percent in June.

Excluding gasoline, retail sales nudged up 0.1 percent.

Consumer spending fell at a 1.2 percent annual rate in the second quarter after edging up 0.6 percent in the January-March period. Despite signs the worst recession in over 60 years was winding down, companies have been reluctant to hire, though the pace of layoffs has slowed down markedly.

US market: foreclosures on the rise, still.

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Foreclosures Rose 7% in July.

Foreclosure activity jumped 7 percent in July from June and 32 percent from a year earlier, as one in every 355 households with a loan got a foreclosure filing, RealtyTrac said.

According to RealtyTrac, more than 360,000 households received foreclosure-related notices in July. Banks also seized 87,000 homes last month, up from 79,000 in June.

Toronto: Housing Starts, preliminary data from CMHC

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The seasonally-adjusted annual rate (SAAR) of total housing starts dipped down to 19,800 units in July according to preliminary housing starts data released today by the Canada Mortgage and Housing Corporation (CMHC) for theToronto Census Metropolitan Area (CMA).

All low-rise housing segments recorded increasesin July, which brought total starts within 20 per cent of last year’s July figure. Strong demand and a fleeting supply of new resale listings have created a spill-over of buyers into the new home market in recent months.

CMHC’s Senior Market Analyst for the GTA, Shaun Hildebrand, stated in this latest report "Look for this sales momentum and a sizeable backlog of high-rise units nearing the construction stage to boost starts in thesecond half (of the period)”

Toronto: July Market Watch, "still climbing?"

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TREB’s (Toronto Real Estate Board) July market watch reports resale record in July.

August, 2009 - In July 2009, Greater Toronto REALTORS® reported a record 9,967 sales, up 28 % from July 2008. The average price for July transactions was $395,414. This figure is up by six per cent in comparison to the same month of last year.

* No data is apparent that indicates what the ratio is for sales of homes v. condos.

US economy: banks, earn record fees "cha-ching"

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Banks to collect a record $38 Billion from overdraft fees.

As an indicator of how people are reaching for assistance and falling further behind doing so...the Financial Times reports US banks stand to collect a record $38 billion in fees for customer overdrafts this year. The bulk of the fees will be paid by the most financially stretched consumers. At Bank of America, a customer overdrawn by as little as $6 could trigger a $35 penalty. If the customer does not realize they have a negative balance and continues spending, they could incur that fee as many as ten times in a single day, for a total of $350.

As a further example of the marketplace of debt servitude, there are more "payday loan" operations in the US today than there are franchises of McDonald's and Starbucks combined. These operations are usually situated in poor urban neighbourhoods, perpetuating a cycle of debt servitude with entrapping interest rates.

US market: property values "predict 2 year slide"

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Study says: 48% of homeowners headed to owe more than the home’s (market) value.

...in the United States, a new study says the number of Americans owing more than their home is worth will see a major rise in the next two years. According to Deutsche Bank, 48 percent of homeowners will have mortgages surpassing their home value by 2011, up from 26 percent this year.