KeNo's Housing and Economic Portal: Saturday December 26 Housing and Economic stories

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Regulators Pull Plug on Bank - (online.wsj.com) Federal regulators on Friday seized AmTrust Bank, a battered Cleveland thrift kept alive this year after local politicians pleaded with the government for a second chance. AmTrust is the fourth-largest U.S. bank or savings institution to fail so far this year. A total of 130 lenders have collapsed in 2009, the highest number of failures since 1992 as regulators intensified their push to rid the industry of weak institutions. The family-owned AmTrust, with $12 billion in assets and roots back to 1889, had been in trouble for more than a year. Like many other banks during the housing bubble, AmTrust barreled into unfamiliar geographic areas with aggressive mortgage and construction lending. Net losses of about $1 billion since last year's second quarter consumed nearly 80% of its capital. New York Community Bancorp Inc., Westbury, N.Y., is acquiring AmTrust and its 66 branches. The purchase is a dramatic expansion for New York Community, which runs a handful of banks in New York and New Jersey. The company has made seven acquisitions since 2000, none of them outside the New York City metropolitan area, where it has about 212 branches. The Federal Deposit Insurance Corp. said the AmTrust failure was expected to cost its deposit-insurance fund about $2 billion. AmTrust's deterioration over the past year likely resulted in the bank selling for a lower price than it would have fetched if the thrift had been seized earlier, said people familiar with the government-led auction. As part of the deal, the FDIC is shielding New York Community from most losses on $9 billion of AmTrust's assets. AmTrust has been riding a regulatory rollercoaster for the past year. Last fall, its primary regulator, the Office of Thrift Supervision, rejected AmTrust's requests for aid through the federal government's Troubled Asset Relief Program. The OTS then slapped AmTrust with a cease-and-desist order, citing "unsafe and unsound banking practices," and required the thrift shore up its capital, stop making certain loans and rein in the rates being offered for customer deposits. After AmTrust missed a deadline to raise capital, the FDIC in January approached other banks to gauge their takeover interest -- a sign the agency was gearing up to seize the thrift, according to people familiar with the matter. Executives figured it was about to meet the same fate as its cross-street rival, National City Corp., which regulators had forced into a sale to PNC Financial Services Group Inc. But AmTrust benefited from the advocacy of politicians, including Rep. Steven LaTourette (R., Ohio), who pleaded with Treasury and White House officials not to kill a second Cleveland bank. Cleveland's Democratic mayor, Frank Jackson -- a critic of National City's forced sale -- also sought to protect AmTrust. At the same time, regulators were hoping that federal rescue programs being rolled out would stem the number of seized banks. The OTS and FDIC eventually agreed to plans by AmTrust to aggressively shrink its balance sheet, sell branches, and thicken its capital cushions, according to people familiar with the matter. Some banking experts were surprised, since AmTrust appeared in worse shape than National City. Critics viewed the disparate treatment of the two Cleveland banks as an example of inconsistency by regulators. AmTrust's reprieve was short-lived. With home prices falling and commercial real-estate losses mushrooming, AmTrust's finances deteriorated even faster. From March 31 through Sept. 30, AmTrust racked up $418 million in net losses. Its total risk-based capital ratio slumped to 5.44% from 9.28%, leaving AmTrust far below the 8% level needed to be classified as adequately capitalized.

OECD warns public debt jeopardizes recovery: report - (www.reuters.com) Countries with mounting public debt jeopardize the sustainability of their economic recovery from the global financial crisis over the next several years, the OECD's new chief economist said in a interview in an Italian newspaper. "The recovery could be stronger than expected," Pier Carlo Padoan, who is also Vice Director General of the Organization for Economic Co-operation and Development, told Corriere della Sera in the interview, which was published on Sunday. "But it does not mean it will be also more sustainable ... This growth is the result of public support policies of various types, it is not supported by private activity," Padoan said. Global stocks soared and the U.S. dollar jumped on Friday bolstered by hopes the U.S. economy was taking a solid step forward after government data showed fewer jobs were cut in November. Padoan said the debt accumulated by some governments to kick-start economy may become unsustainable, with one reason being the aging of populations. The effects of governments' actions would be felt next year, but private sector demand would be "insufficient" even in 2011, he said. Central banks, which have the difficult task of managing liquidity injected in the global economy to stop the crisis, should act gradually and in the framework of international cooperation, he said. Padoan said Italy's economy, driven by export, may benefit from increasing volumes of international trade. OECD's latest economic outlook has forecast the world gross domestic product to grow 3.4 percent next year and the OECD countries to post a 1.9 percent GDP rise.

Why Treasury Needs a Plan B for Mortgages - (www.nytimes.com) AFTER months of playing pretend, the Treasury Department conceded last week that the Home Affordable Modification Program, its plan to aid troubled homeowners by changing the terms of their mortgages, was a dud. The 10-month-old program is going nowhere, the Treasury said, because big institutions charged with implementing it are dragging their feet. “The banks are not doing a good enough job,” said Michael S. Barr, assistant Treasury secretary for financial institutions, in an article published last Sunday in The New York Times. After the government spent hundreds of billions of dollars bailing out banks, the Obama administration rolled out the $75 billion loan modification plan to show its support for beleaguered homeowners. But if the proof of the pudding is in the eating, homeowners are going hungry. A stalled loan modification plan might not be worrisome if the foreclosure crisis were abating. Yet at the end of September, a record 14.4 percent of borrowers were either in foreclosure or delinquent on their mortgages, the Mortgage Bankers Association reported. It’s time for the government to acknowledge the flaws in its program and create one that might actually succeed. Only then will the supply of homes for sale, and the pressure on prices associated with that overhang, be reduced. The Treasury program has decided to tackle the delinquent mortgage problem by reducing the interest rate on eligible borrowers’ loans to a level that makes monthly payments affordable. But how it calculates affordability is one of the program’s major flaws — at least that’s the view of Laurie Goodman, senior managing director at Amherst Securities Group and head of mortgage strategy at the firm. Her research shows, for instance, that 70 percent of modifications involving only interest rate cuts, rather than reductions in the principal borrowers owe, have failed after 12 months. The Treasury program is likely to have similar outcomes. According to government investigators, the average monthly mortgage payment for a borrower under early plan modifications fell by 34 percent. Assessing for possible success under these terms, Ms. Goodman analyzed past re-default rates on modifications that cut payments by 34 percent. She found that 65 percent of borrowers fell back into delinquency. The terms of loan modifications also make them especially failure-prone because the government calculates “affordability” (how much mortgage debt a borrower can actually manage) in a highly unusual way — raising serious questions for the housing market overall and for the program’s effectiveness for borrowers. Moreover, investors in first liens, like pension funds and mutual funds, also get beaten up in this process.

Geithner Disputes Goldman Sachs Claims It Didn’t Need U.S. Help (www.bloomberg.com) Treasury Secretary Timothy Geithner disputed claims by Goldman Sachs Group Inc. executives that the bank could have survived the financial crisis without government help and said it and other Wall Street firms should show some restraint in handing out bonuses this year. “It is very important that we change the way these executives are paid, the form of compensation, this year,” Geithner said in an interview yesterday for Bloomberg Television’s “Political Capital with Al Hunt,” which is being aired throughout the weekend. “We have to end that era of irresponsibly high bonuses.” President Barack Obama has blamed compensation tied to excessive risk-taking for fueling the deepest financial crisis since the Great Depression. The administration has named a special master to approve compensation packages at firms that have received the biggest government bailouts. Goldman Sachs, Morgan Stanley and JPMorgan Chase & Co.’s investment bank are set to pay record combined bonuses this year, according to analysts’ estimates. Goldman set a Wall Street pay record in 2007 when its compensation totaled $20.2 billion, including $68.5 million for chairman and chief executive officer Lloyd Blankfein. Blankfein told Vanity Fair magazine in an article published online this week that he thought the company could have survived the financial turmoil on its own without government help. Goldman’s president, Gary Cohn, was more definitive. “I think we would not have failed,” he told the magazine. “We had cash.” Geithner, 48, took issue with that, saying that the entire financial system was at risk at the height of the crisis, including Wall Street’s big institutions. ‘Classic Bank Run’: “None of them would have survived” had the government stood aside and let the crisis run its course, he said. “The entire U.S. financial system and all the major firms in the country, and even small banks across the country, were at that moment at the middle of a classic run, a classic bank run.”

Governor to give CalPERS more funds than it asked for - (www.sacbee.com) Gov. Arnold Schwarzenegger, who's crusading to overhaul employee pensions, is choosing to absorb a major increase in the state's contribution to CalPERS next year despite a looming budget deficit. The governor's aides have told the pension fund that Schwarzenegger is willing to raise the state's annual CalPERS contribution to $4.8 billion in the next fiscal year, an increase of about $1.5 billion, even though CalPERS offered a much smaller rate hike. Critics said Schwarzenegger is trying to dramatize his push to rein in pension benefits. But his aides say he believes it's simply more prudent to pay the CalPERS tab as quickly as possible. "You're supposed to pay your bills," said Schwarzenegger adviser David Crane. An increase of that magnitude would likely create additional strain on the state budget. TheLegislative Analyst's Office estimates a $20.7 billion deficit over the next year and a half. The estimate assumes the state's CalPERS bill would rise to only $4.1 billion, said deputy analyst Michael Cohen. The state didn't have to take such a big hit. Even though CalPERS is struggling to recover from record investment losses, the pension fund is able to keep rate hikes relatively modest through a mechanism known as "smoothing." Most pension funds use some form of smoothing to avoid chaotic year-to-year swings in contribution rates. Thanks largely to the pension fund's smoothing system, the hundreds of school districts and local governments that belong to CalPERS will see "little or no impact" on their rates in the coming year, CalPERS senior actuary Ron Seeling told a fund committee last month. The rates would take effect next July for the schools and a year later for the local governments. The city of Sacramento, for instance, expects to pay $4 million more to CalPERS – an increase of about 10 percent. Schwarzenegger, by comparison, is choosing to take a 50 percent increase. Although CalPERS has the authority to set contribution rates, the state is exercising its right to pay more. Schwarzenegger, who has called the pension system unsustainable, has been scornful of CalPERS' smoothing mechanism, which defers costs to later years. He has called it a formula to "pass the buck to our kids." The Republican governor also is pushing a proposal for a two-tier pension system that would provide smaller benefits for newly hired employees. He says his plan would save $90 billion over 30 years. An independent group is pushing a somewhat similar plan, hoping to place the proposal on the November 2010 ballot. Unions and employee groups said Schwarzenegger is deliberately ramping up the state's payment to CalPERS next year to create momentum for his two-tier proposal. He's trying "to build the political case," said Carroll Wills, spokesman for the California Professional Firefighters, which represents local firefighter unions around the state. "This is about making a political point and not a fiscal point."

Feds investigate ex-CalPERS officials’ possible link with fallen financier - (www.sacbee.com) Federal officials are investigating possible ties between CalPERS' former chief executive, a controversial former board member and a financier who just pleaded guilty in a New York pension fund corruption case. Court records show the Securities and Exchange Commission issued a subpoena in June to financier Elliott Broidy, who pleaded guilty Thursday to felony charges that he showered nearly $1 million in illegal gifts on state officials in New York. The federal enforcement agency demanded records of any contacts Broidy had with former CalPERS CEO Fred Buenrostro and former CalPERS board member Alfred Villalobos, among others. Broidy's spokesman, Jim McCarthy, downplayed the significance of the subpoena Friday, saying it merely represents "questions that the SEC asked." The SEC's subpoena and Broidy's plea represent new turns in a multi-state probe of possible influence-peddling at the California Public Employees' Retirement System and other major U.S. public pension funds. CalPERS already has said it is investigating its dealings with Villalobos. Villalobos has earned more than $60 million since leaving the CalPERS board in 1995 by representing private clients seeking investment dollars from the pension fund.Until this week, Broidy was head of Markstone Capital Group, a Los Angeles private equity firm that obtained a $50 million investment commitment from CalPERS in 2004. Markstone specializes in deals in Israel. Following Broidy's guilty plea, CalPERS is reviewing its ties with Markstone, said fund spokeswoman Pat Macht. The pension fund also is broadening its investigation into Villalobos and other so-called "placement agents" to include the fund's dealings with Markstone, she said. "Markstone is now included in the list of topics" being investigated, she said. The Markstone investment has earned a 5 percent return, according to CalPERS records. In an interview Friday, Buenrostro said he recalls meeting Broidy.

OTHER STORIES:

BIS Study Says Low Interest Rates Can Risk Financial Stability - (www.bloomberg.com)

Dollar Fear Trumps Greed in Prices to Protect Against a Rebound (www.bloomberg.com)

Traders facing Fed, dollar questions this week - (finance.yahoo.com)

Doubts still linger over commodities’ counterparty risk - (www.ft.com)

Quarter in U.S. foreclosure plan late on payments - (www.reuters.com)

Geithner Dismisses Tax on Financial Transactions as Unworkable (www.bloomberg.com)

China Lending Boom May Hamper Banks’ Asset Quality, BIS Says (www.bloomberg.com)

Darling Weighs Plans for Further U.K. Taxes on Rich, Bankers (www.bloomberg.com)

Dubai tower, world's tallest, set to open Jan. 4 amid debt woe - (www.marketwatch.com)

Japan to give JAL $7.7 billion loan guarantee: report - (www.reuters.com)

India’s Gokarn Signals Policy Action as Food Prices Increase (www.bloomberg.com)