The Wall Street Examiner

Washington Mutual reported results that can only be described as being sandpapered. We are now in a strange brew of continued Ponzi finance, combined with steadily worsening credit conditions, and squeezed financial margins. In WM’s case, nonperforming assets increased to 0.69%, from 0.52% a year ago, and 0.62% in June. 30 day plus delinquencies in credit cards popped to 5.53% from 5.23% in June, and 5.18% in March. Moreover the following item was in the footnotes: ”Without the impact of the planned sale of $403 million of higher risk accounts, managed receivables at period end and the 30+ day managed delinquency rate would have been approximately $22.32 billion and 5.99 percent“. WM also seems to be motivated to get rid of higher risk credits, although gain on sales generally on $30.24 billion in mortgages securitized was down to only $119 million. More color on credit card conditions was also reported by Capital One,  as delinquencies rose to 3.24% in the quarter, up from 2.92% in June. Charge offs rose a similar amount to 2.36% from 2.01%. Bankamerica cards “held 90 days delinquent”: March: 1.94%, June: 2.37%, Sept: 2.50%.

WM indicated that net interest margins fell to 2.53%, down from 2.65% in June, and 2.75% in March. The cost of their total interest bearing liabilities increased to 4.48% from 4.12%. Time deposit costs at 4.77% (from 4.39%) are finally approaching three month t-bill rates, as the cheap rates on older CDs roll off. WM suggested that margins should stabilize as they are “nicely” positioned to pass higher borrowing rates on to Joe Soccer Mom (JSM).  We were also offered generic clues about employment conditions in the financial sector, as WM has eliminated 9,300 jobs in the last six months. They also sent 3,800 jobs to India.  Not much was offered in the conference call about JSM’s ability to absorb the higher pass through rates, fees, and job losses that are so important to WM’s (and others) strategy. . Clues on that are coming from other sources though, as California home-loans defaults are now the highest in four and a half years. A couple key items in this article:

About 19 percent of homeowners who were in default earlier this year lost their homes to foreclosure in the third quarter. That’s up from 6 percent a year earlier, DataQuick said.  The median age of the home loans that went into default in the third quarter was 14 months. More than half the loans were originated in 2005.

Adding fuel to this sticky wicket, aggressive late cycle debt enabler Accredited Home Lending warns this morning, citing “increasing turbulence in the market for home loans to less-creditworthy buyers”.  A few obvious hints mentioned, and I await with baited breath for the details. A glance at this chart from San Diego County, is starting to look like the early parabolic lift off in housing prices up to a year ago.

More now routine “cows already out of the barn” butt covering commentary from the apparatchiks, in this case John Dugan. I would refer you back to the California foreclosure numbers as to who is in trouble first. Answer: 2005 originations, loans made while Mr. Dugan’s agency and others were “monitoring” the situation, and being lobbied and delayed by Pig Men. 

Dugan told members of the American Bankers Association that a recent underwriting survey showed a “significant easing” in residential mortgage lending standards.  The survey showed lenders are doing the opposite of what regulators would expect them to do in a cooling housing market: allow longer interest-only periods, more piggyback loans, higher loan-to-value ratios, and more reduced-documentation loans.  “Frankly, that concerns me.”

This $19-22 billion mutha IPO out of China, ought to suck a lot of hot money out of the western Godfather racket tonight. Proceeds will largely be used to line the pockets of Chinese, not western plutocrats. Perhaps marks the peak of the financial sphere mania and Bubble? On the general topic of developing a Chinese Pig Man to compete with, and pull their own capital back from the West, Australian Treasurer Costello all but calls for it .

Peter Costello has called on East Asia’s central bankers to “telegraph” their intentions to diversify out of American investments and ensure an orderly adjustment. He said underdeveloped financial markets were to blame for the emerging economies of East Asia sending 94 per cent of outward portfolio investment to “ageing” countries outside the region.

Several reports are coming out of Asia, that point to the problems the Wizards there are dealing with. The first one from China is sounding like a broken record, and describes another crackdown on local and provincial officials that won’t play ball. To me, this illustrates that the central government in China is in many respects broken. China has become a nation of economic mafiosos, governed by local elitist Godfathers and their political hacks.  Oh sure, once in awhile Beijing lays a hand on someone, as for instance they aren’t willing to give up Shanghai without a fight, but by and large they are on the defensive. In fact, my suspicion is that these so called crackdowns are largely a facade. On another front, China is moving to take advantage of the break in oil prices to start filling their strategic reserve.

The second report out of Japan reports that several governors expressed concern in their August minutes about the impact of the Yen carry trade. The news report again illustrates, the complete lack of directness in communications out of these Asian countries. They rarely commit themselves, or instead operate as if subtle suggestion will have an effect on the Riskloves that are raiding their currency.  Then when the subtle warning is made, they do an offset when a key official makes a Humpty Dumpty remark like this one. Of course the carry trade Boyz then immediately pile into more Ponzi trades with this kind of perceived green light

It is not true that we’ve recently started a survey specifically on the carry trade,” said Tokiko Shimizu, the head of the bank’s foreign exchange operation division. “The BOJ is monitoring movements of financial markets daily and we are interested in the carry trade too.”

Readers know that of all the housing data noise, I am currently most focused on housing permits. Simply put if permits aren’t taken or aren’t being followed up on, then construction employment will fall fast. Given that construction and financial employment is a major factor in Bubble locales, the fall on effect will be an even greater acceleration of delinquencies and foreclosures than the trend already underway.  Today we see more evidence that the game is up. In my view even this 1.6 million unit pace is still far above what the market can absorb. Obviously, the continued availability of Ponzi finance is distorting market decision making, and encouraging continued “because the money is available” aggressive and unnecessary activity in many sectors.

Permits for future groundbreaking, an indicator of builder confidence, fell 6.3 percent to an annual pace of 1.619 million units, the lowest rate since October 2001, from a 1.727 million rate in August. Economists had expected the Commerce Department to report September permits at a 1.702 million pace. They were down 27.7 percent from the same time a year ago.

I even find this permit report suspect. It just doesn’t hold water, especially given that many builders continue to report 40% cancellation rates. Even outfits like NVR who have been spared this indignity because of higher deposits, or special diligence, or operating in more exclusive high end Bully markets, are falling under the retribution sword as customers bail on them..

New orders in the third quarter decreased 18 percent to 2,378 units from 2,897 units last year. Meanwhile, the cancellation rate jumped to 27 percent from 15 percent last year and 13 percent in the second quarter of 2006.

And a little Bubble mentality humor from Minyanville.

What I’m about to say, may seem wild eyed, but this “stock” market has an almost unprecedented pinned looked, as if there is an historic manipulation going on in the futures pits, or with some type of Robotrader derivative trading. Free, non manipulated markets just don’t act this way. I really don’t think it’s the Fed although they are negligent. It could be a Pig Man operation, they’ve captured the market, at least for now. Maybe some modern day Jay Gould and his henchman Fisk in the garb of electronic trading? Market and banking oversight today has morphed back to 1869 defacto standards for sure.

Another theory, is there might even be a rogue trader or group of rogues, who have been allowed in this unregulated environment to accumulate some massive leveraged equity futures or option position, and in the short term literally hijack or at minimum strongly influence the market? Don’t think so, well it’s happened before. A slightly different twist, is that a thousand Riskloves and crazies are all trading the same black box program at the same time. If that one is valid, someone will trip them, just as sure as the sun goes down at night. When you look at measures such as TRIN, it just doesn’t look like real money is driving this, but more like synthetic trading of some type.

Looking at the early fallout from the New Jersey Bust is this excellent piece of journalism. Key takeaways,

When Kara Homes filed for bankruptcy this month, Amboy National Bank of Old Bridge was listed as the largest creditor with $58.2 million in loans. When local real estate mogul Solomon Dwek’s $400 million empire was frozen by a judge following charges of bank fraud, Amboy was again the largest creditor ? for $49.7 million.

Next the article looked at New Jersey banks exceeding the new Federal guidelines, and found 47 percent of the 95 national- and state-chartered banks are already over the proposed guideline (no more than three times capital in commercial real estate loans). In effect, this means there is a regulatory tightening underway.

Banks in 10 other states have an even greater investment in commercial real estate, the Press’ analysis showed. In Arizona and Washington, more than seven of every 10 banks have more than three times their capital wrapped up in commercial real estate loans.

For the record, two quotes;

– Are we alarmed or very concerned? The short answer is no,” said Steve Fritts, an associate director at the Federal Deposit Insurance Corp.

– It’s a disaster waiting to happen out there,” said Gerard Cassidy, bank analyst for RBC Capital Markets.

Also initial signs that credit conditions are tightening for mortgage purveyors seeking to raise capital. This site also tracks credit swap premiums. Lower levels as seen of late in the A and BBB tranches suggest higher “insurance premiums” necessary for hedging against default.

Banks begin reporting third quarter results this week, and will see how they treat or ignore rising delinquencies and negative surprises. We also continue see a pattern of some black box transactions going awry, as Credit Suisse actually owns up to some losses. A reminder of what bank loan loss reverses now look like.

Finally, a reader, Lee Adler of the Wall Street Examiner points out that there is a footnote in the recent Fed H8 data, that suggests the big surge in real estate and HELOC lending I reported on may be an outlier, caused by the merger of a non-bank player into a reporting bank player. This of course makes the conclusion of my Saturday blog more cloudy, although intuitively I feel the surge in retail sales is fueled by new debt, as we still have the MBAA refi index data showing a boomlet.