“A recession is when your neighbor is out of work, a depression is when you’re out of work.” Economists like to define a recession as, “An extended decline in general business activity, typically two consecutive quarters of falling real gross national product.” But that definition lags real time – what is going on now? Consumer confidence is the lowest it’s been in 5 years, which is easy to understand with food & energy prices heading up, housing in a slump, banks taking losses, and a soft labor market.

U.S. Construction Spending fell 1.7% in January, more than expected, and was the sharpest since a 3.6 percent deceleration in January 1994 and marked the fourth straight monthly drop. The Institute for Supply Management released its manufacturing index, however, which at 48.3 was not as weak as expected. So far this morning things are pretty quiet in Treasury yields (2-yr at 1.64%, 10-yr at 3.55%) but mortgages are worse by roughly .125. There is no scheduled news, but Fed Chairman Ben Bernanke speaks on mortgage foreclosures at the Independent Community Bankers of America’s National Convention Florida, and we also have two other speeches by fed governors speaking later in the day.

The definition of a “margin call” is when a broker, or clearing house, asks a company to increase the margin deposit. Why does anyone need to increase the margin deposit? This would need to be done when the value of the security falls below a certain level. If a borrower bought a house for $100,000 with a 90% LTV loan, and the value of the house decreased to $90,000, then the lender wanted an additional $10,000 to make sure that their loan was secure, that would be a “margin call.” In Thornburg’s case, defaults on their ARM loans are hurting the value of their holdings, as is the general illiquidity of their securities. Investors don’t want to own something that is either difficult to price or may go down in value. They have already come up with $300 million to meet margin calls prior to yesterday, and then yesterday it was announced that Thornburg Mortgage completed a profitable debt sale. The company sold nearly $920 million in adjustable-rate mortgages to investors via collateralized mortgage obligations, a kind of security that offers several levels of risk and reward.

According to a story last week, Merrill Lynch is closing First Franklin, the wholesale subprime lender, and will lay off 400 employees. (M