Thursday October 23 Housing and Economic stories

TOP STORIES:

Fed May Tap $540 Billion To Help Out Money Funds - (www.cnbc.com) WHAT’S ANOTHER $600M AMONG FRIENDS? The Federal Reserve could lend as much as $540 billion in a new facility aimed at restoring liquidity for money market mutual funds, senior Fed officials said. The Fed announced earlier Tuesday that it was launching the new facility to buy certificates of deposit and commercial paper from money market mutual funds, which mave been under pressure as skittish investors demand withdrawals. Many companies rely on commercial paper for short-term funding needs to pay workers and buy supplies. The situation has led to an intense credit crunch for for these companies. The Fed is tapping its Depression-era emergency powers and creating a new facility to buy a vast array of commercial paper from the funds. Five special purpose vehicles set up under the new facility would be authorized to fund up to $600 billion in assets, the officials told reporters. The Fed would provide senior financing up to 90 percent.

Bailed Out UK Bank Will Still Pay Bonuses: Report - (www.cnbc.com) Ken comment: Time to start let these banks go under and let the arrogant banker and leaders of these banks face the public and shareholders. The chief executive of leading UK bank Lloyds TSB has told its staff that they will still get their bonuses this year, reported the Guardian on Tuesday. The paper says that Eric Daniels told employees in a recorded message that the group faced "very very few restrictions," despite the injection of up to 5.5 billion pounds ($9.58 billion) of taxpayers' money. The government last Monday agreed to inject up to 37 billion pounds ($64.45 billion) in Royal Bank of Scotland, HBOS and Lloyds TSB in return for a mix of preference and ordinary shares, under certain conditions. "If you think about it, the first restriction was not to pay bonuses. Well, Lloyds TSB is in fact going to pay bonuses. I think our staff have done a terrific job this year. There is no reason why we shouldn't," the paper cites Daniels as saying.

Kerkorian Cashes In Ford Chips With Losing Hand - (www.cnbc.com) The billionaire investor who said he bought Ford stock as a long term investment is pulling out of the automaker after a short, money losing ride. Kirk Kerkorian still owns more than 6% of Ford's outstanding common shares. But in selling 7 million shares, the legendary investor says he may further liquidate his Ford stake. Back of the envelope math: Kerkorian bought the stock for roughly $8.50 a share and sold at $2.43 a share meaning he lost $44.3 million. So what does all this mean? For the average investor you can take this as a sign that Kerkorian and Jerry York, his chief lieutenant on auto investments, do not see Ford [F 2.26 -0.07 (-3%) ] rebounding anytime soon. In fact, Kerkorian's firm Tracinda Corp believes its money is now better allocated in gaming and hospitality investments. In other words: Ford shares are

Ron Paul: Too Big to Fail? - (Ron Paul at www.house.gov) Another unsatisfying argument is that certain entities have to be bailed out because of their economic importance. Supposedly, some entities can be so big, so important, that no matter what they do, citizens must perpetually sustain them. Even limited government has a basic duty to defend against force and fraud. Some argue that force is somehow permissible just because the entity engaging in it is "economically significant." But one could use this reasoning to prop up slavery. It could be deemed unfortunate but economically beneficial, and indeed these arguments have been used historically to deprive people of their liberty. But slavery should never be tolerated regardless of any economic benefit, just as systemic fraud should not be tolerated. Some banks on Wall Street should fail. Fannie and Freddie should fail. They are perpetrating fraud against the people. Yet, government insists on rewarding behavior which should instead be investigated, prosecuted, and punished. There has been much evidence of fraud at Fannie and Freddie, but when one man, Franklin Raines, defrauded the organization out of millions of dollars through illegal accounting tricks, and ends up agreeing to pay back just a fraction, one could argue that it was well worth it to him. Fannie went on to only get more deeply involved in subprime mortgages after this investigation. Several organizations are suffering right now precisely because the free market is trying to work and punish mismanagement, if only the government would get out of the way and let it. Perhaps banks are not lending to each other because they know that complicated accounting standards, created in part to defend against confiscatory tax policy, enables false fiscal pictures to be presented, which erodes trust. But this is not a time for the government to step in with more burdensome and complicated regulations, or more foolish liquidity injections. This is a time for some banks to fail, and remaining banks to deal honestly and transparently once again. More regulations will only result in more lies. Just as economies that turned away from slave labor had a transition period, our economy would transition as well, but in the end, if we turned to honest, sound money and a truly free market, we would end up with a more just society, founded on truthfulness and decency, not subject to the violence of force or the whims of fraudulent institutions. Unfortunately, it seems we are headed into a new era of slavery, however, where all taxpayers will be forced to render to the Fed and big banking interests the bulk of the fruits of their labor, possibly through higher taxes but definitely through the eroding force of inflation.

Record inflows into money market funds - (www.ft.com) Investors are pumping a record amount of cash into money market funds as they rush to the safest instruments amid the market turmoil. In spite of co-ordinated central bank action to inject liquidity into the markets and sweeping measures from governments to shore up the beleaguered banking sector, investors are still shunning riskier investments. Money market funds, which are considered safe because they tend to buy US Treasuries, absorbed $44.4bn last week, the largest inflow since 2001, according to fund tracker EPFR Global.

Deficit Rises, and the Consensus Is to Let It Grow - (www.nytimes.com) I am very sad to admit this is my country. Many opportunists trying to collect their payments from the Government in time of crisis: Like water rushing over a river’s banks, the federal government’s rapidly mounting expenses are overwhelming the federal budget and increasing an already swollen deficit. The bank bailout, in the latest big outlay, could cost $250 billion in just the next few weeks, and a newly proposed stimulus package would have $150 billion or more flowing from Washington before the next president takes office in January. Adding to the damage is that tax revenues fall as the economy weakens; this is likely just as the government needs hundreds of billions of dollars to repair the financial system. The nation’s wars are growing more costly, as fighting spreads in Afghanistan. And a declining economy swells outlays for unemployment insurance, food stamps and other federal aid. But the extra spending, a sore point in normal times, has been widely accepted on both sides of the political aisle as necessary to salvage the banking system and avert another Great Depression. “Right now would not be the time to balance the budget,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a bipartisan Washington group that normally pushes the opposite message.

Life after the bubble: How Japan lost a decade - (www.iht.com) Is the United States the new Japan? Or more precisely, Japan circa 1990, just as it was staggering into its Lost Decade. As recently as six months ago, the notion that the United States would face a decade or more of Japanese-style economic malaise seemed preposterous. But after the last few weeks of financial turmoil and political ineptitude, you could almost argue that America would be fortunate to end up with a downturn akin to Japan's. That's because in several key ways, Japan was much better equipped to withstand its financial lashing in the 1990s than Americans are today. A little history: During the post-World-War-II era, the Japanese economy often lived up to its Homeric epithet: the Miracle Economy. It rose from the ruins of the war to become the world's second-largest economy. By the mid-1980s, America and Japan accounted for a staggering 40 percent of the global economy. Picture President Ronald Reagan and Prime Minister Yasuhiro Nakasone belting out "We Are the World" in some fancy karaoke bar in the Ginza. My favorite example of how real estate had become an extreme sport: the property that housed the Imperial Palace in central Tokyo was believed to be worth (no one knew for sure because it wasn't really for sale) as much as the entire state of California. Then the double bubble turned into double trouble when both burst at the same time. Denial followed denial. When officials did finally admit there was a problem, policy misstep followed misstep as the clever, selfless and indefatigable Japanese mandarins (our best and brightest went to Wall Street; theirs went to the Ministry of Finance) started acting like fumbling Soviet bureaucrats, minus the corruption. Experts on Japan, watching Tokyo's initial nonresponse to the crisis, smirked that Americans facing a similar mess would have rolled up their sleeves and busted a few heads. Just look at how we had handled our savings and loan debacle.

Is Switzerland the next Iceland? - (www.independent.co.uk) Ukraine and Baltic states also hit hard by the financial crisis. With even the mighty Swiss banking system needing government support, it will come as little surprise that a swathe of emerging market economies are suddenly looking fragile. Ukraine emerged yesterday as the winner of the title "the next Iceland", with the International Monetary Fund offering the former Soviet republic up to $14bn (£8bn) to shore up its financial system. An IMF delegation landed in the country on Wednesday to try to stabilise the country's battered banking sector and ailing currency, hit hard by the global financial crisis. The central bank was forced to impose restrictions on deposit withdrawals and lending after panicked savers rushed to empty their accounts, draining the banking system of more than $1.3bn. The authorities also had to rescue two key banks and battle a sharp fall in the currency as the stock market plunged. Ukraine emerged as the biggest crisis after Hungary agreed to borrow up to €5bn from the European Central Bank. Capital Economics warned that there were risks for a swathe of emerging European economies in the Baltics and the Balkans, including Lithuania and Latvia. Their problem is that they have been living beyond their means by borrowing to finance increases in their standard of living.

Unregulated Market Faces Test as Corporate Defaults Pile Up - (www.washingtonpost.com) The unregulated market where protection against financial defaults is bought and sold will be tested in the coming weeks as never before, as countless claims are settled on a series of expensive corporate casualties at the heart of the credit crisis. Potentially, hundreds of billions of dollars of these contracts are coming due. But it's unclear which firms are on the hook, how much they're on for, and whether they can pay. Firms do not have to disclose whether they hold these contracts, called credit-default swaps. So there's no way to know whether the contracts will be settled smoothly, or whether they will set off a cascade of losses in markets that already have been pushed to the brink. That uncertainty is making investors anxious. Banks, hedge funds, insurance firms and other investors are unwinding an unprecedented number of the contracts following the recent failure of Wall Street investment bank Lehman Brothers, savings-and-loan giant Washington Mutual and three Icelandic lenders. Tomorrow is the deadline for settling the contracts on Lehman.

Even sleazy realtors admit Bay Area high-end prices falling - (www.contracostatimes.com from www.patrick.net) Expensive Bay Area communities — some of the only pockets of California real estate that have remained relatively unscathed by the housing downturn — may see fewer home sales and lower prices next year if mortgage financing for big-ticket homes does not improve, an economist for a real estate trade group said this week. "The higher end of the market may be a little more at risk than in the past because of the question mark about jumbo financing," said Leslie Appleton-Young, chief economist for the California Association of Realtors, in an interview Tuesday, a day before delivering her statewide housing forecast for 2009. Ever since the "credit crunch" began late last year, interest rates for "jumbo" loans — which currently means those of more than about $730,000 — have been significantly higher than rates for smaller, "conforming" loans, leading to fewer sales of expensive homes. And as of January 1, because of economic and housing recovery legislation passed in Congress this summer, it's likely that the higher rates will apply to all loans of more than about $625,000, which may further chill the market for high-end real estate.

Internet firms react fast to avert implosion - (www.sfgate.com) Air is starting to leak from the Internet startup bubble, underscored by a wave of layoffs amid the slumping economy. The job cuts signal an abrupt reversal of fortune for an industry that until recently was flush with investor money and extravagant employee perks. The question on virtually every startup executive's mind is whether the retrenchment is a minor blip or a repeat of the dot-com implosion eight years ago, when sites like Pets.com, Webvan and eToys all went belly-up. So far, most agree that the cuts are proactive rather than a sign of immediate distress. By paring back early, they say, the companies will be able to survive longer if it becomes too difficult to raise more venture capital down the line. "The lesson we learned in 2000 was that the companies that cut deep and cut early are more successful," said Randy Adams, chief executive of Searchme, a Mountain View search engine that cut 11 jobs on Tuesday. "I'm encouraged that that there will be more companies that emerge from this versus the dot-bomb time." Joining Searchme in eliminating staff over the past couple weeks were video comments site Seesmic (7 employees), online advertising network AdBrite (40 employees), music site Pandora (20 employees), adult photo site Zivity (8 employees) and social network Hi5 (12 to 18 employees). Many more companies are expected to join the list.

Corporate governance takes back seat in bank bailouts - (www.marketwatch.com) The U.S. Treasury's plan to invest $125 billion in nine of the country's largest banks will do little to advance the corporate governance movement, experts said on Friday. Some of the corporate governance and executive compensation rules in the original bailout legislation have since been softened by interim final rules drawn up by the Treasury as part of its plan to inject capital into banks, they added. "The rock struck the water and it made a significant splash, but the ripples have been limited by the actual rules," Patrick McGurn, special counsel at corporate governance specialist RiskMetrics Group, said in an interview. "From a corporate standpoint, the fine print has limited some of the impact of the bailout package." To gain support for the bailout plans, the Treasury said financial institutions benefiting from government support would have to adhere to stricter corporate governance rules and executive compensation limits. But now that the details are out, corporate governance experts are mostly unimpressed. The original legislation stated that institutions taking part in the bailout would have to make sure executive compensation didn't act as an incentive to take unnecessary and excessive risks. The Treasury's interim final rule requires that the compensation committee of a company's board of directors review executive pay to make sure it doesn't encourage management to take too many risks. The committee has to meet at least once a year with the bank's chief risk officer to check the relationship between the institution's risk management and executive pay and incentives, according to the rule. But the Treasury isn't replacing any of the directors on the boards of the banks it's investing in, or adding new directors to represent taxpayer interests. That means there's no way for the Treasury to check if executive compensation is encouraging too much risk-taking.

Will U.S. Taxpayers Need A Bailout? - (www.cbsnews.com) Not all the details are clear. It appears as though the Treasury will end up owning sizable chunks of U.S. banks for the foreseeable future, whether bank executives choose to participate or not. The almost-nationalization will happen even if, as the Wall Street Journal delicately put it it, bank executives and shareholders are "unhappy" and oppose the idea. This invites micromanaging from Washington, D.C. Members of Congress will have a strong incentive to demand preferential treatment for borrowers in their home districts or among politically-favored constituencies. Politicians who are members of the committees overseeing the Treasury Department's budget will enjoy outsize influence. So will Treasury and other regulators that banks must please to stay in business. Washington bureaucrats charged with writing billion-dollar checks may be tempted to favor their former banking colleagues, especially if they plan to return to their Wall Street jobs after departing the Bush administration. As the title of this inaugural column on CBSNews.com indicates, they're spending Other People's Money, and nobody is as careful and prudent doing that as they are when their own finances are at risk. Over time, in other words, decisions made for illegitimate political reasons may end up crowding out ones made for legitimate business reasons.

Paulson's Bailout Pays Wall Street Bonuses At Taxpayer Expense - (www.guardian.co.uk) Financial workers at Wall Street's top banks are to receive pay deals worth more than $70bn (£40bn), a substantial proportion of which is expected to be paid in discretionary bonuses, for their work so far this year - despite plunging the global financial system into its worst crisis since the 1929 stock market crash, the Guardian has learned. Staff at six banks including Goldman Sachs and Citigroup are in line to pick up the payouts despite being the beneficiaries of a $700bn bail-out from the US government that has already prompted criticism. The government's cash has been poured in on the condition that excessive executive pay would be curbed. Pay plans for bankers have been disclosed in recent corporate statements. Pressure on the US firms to review preparations for annual bonuses increased yesterday when Germany's Deutsche Bank said many of its leading traders would join Josef Ackermann, its chief executive, in waiving millions of euros in annual payouts. The sums that continue to be spent by Wall Street firms on payroll, payoffs and, most controversially, bonuses appear to bear no relation to the losses incurred by investors in the banks. Shares in Citigroup and Goldman Sachs have declined by more than 45% since the start of the year. Merrill Lynch and Morgan Stanley have fallen by more than 60%. JP MorganChase fell 6.4% and Lehman Brothers has collapsed. At one point last week the Morgan Stanley $10.7bn pay pot for the year to date was greater than the entire stock market value of the business. In effect, staff, on receiving their remuneration, could club together and buy the bank.



OTHER STORIES:

Bernanke says another stimulus plan may be warranted - (www.reuters.com) U.S. Federal Reserve Chairman Ben Bernanke told Congress on Monday that another wave of government spending may be needed as the economy limps through what could be an extended period of subpar growth. It was the first time the central bank chairman had explicitly endorsed a second stimulus package. The government sent out about $100 billion in tax rebate checks over the summer to try to jump-start the economy, but consumer spending has struggled since then. Retail sales fell for three consecutive months through September. At least Bernanke wants to throw bread crumbs back to the while Wall Street gets the real feast!

Whither the tar sands? - (themessthatgreenspanmade.blogspot.com) - One of the unfortunate consequences of plunging crude oil prices is that it throws the recent strategic planning for energy exploration and the development of alternative energy sources on its head. Really. Why would Brazil attempt to develop their newly discovered (and very costly) giant offshore oil find if they can't pump the stuff out at a profit? They've got plenty of sugar cane to run their cars and the rest of the world isn't clamoring for any more black goo at the moment. They're about to cut production at OPEC. While $150 crude oil may have seemed ridiculous over the summer, prices at under $70 seem equally out-of-step in the fall, especially if you're working on a project that requires a price of $80 or $90 to break even. Last week, former CIA director James Woolsey quipped: Every decade or 15 years or so, the Saudis drop the price of oil to where the economic impact wipes out most of the projects in the world that could lead to an alternative for oil. Then, after the projects get canceled, the Saudis let the oil price drift back up.

Goldman Sachs Recommends "Sell" on Citigroup - (www.cnbc.com)
Analyst: TI Seeing "Across the Board Decline" - (www.cnbc.com)
Major Management Changes Seen at Merrill Lynch - (www.cnbc.com)
Buffett's Pro-Stock Stance Backed by Big Short-Seller - (www.cnbc.com)
Chicago Fed Index Falls, Points to Recession - (www.cnbc.com)

Bernanke favors more free cheese - (www.ml-implode.com) - "With the economy likely to be weak for several quarters and with some risk of a protracted slowdown, consideration of a fiscal ...
SoCal Home Sales Up 65 Percent in September - (www.ml-implode.com) - "Southern California home sales surged 65 percent in September compared to the same period a year ago as foreclosure sales accou...
Countrywide Ranked Last in Lender Satisfaction - (www.ml-implode.com) - "While consumers are surprisingly more satisfied with their lender this year than last, according to a study released Monday by ...
What Makes Me Bearish? Hedge Fund Sales on the Horizon - (www.ml-implode.com)
Sept SoCal Home Sales - You Can’t Read the Headlines! - (www.ml-implode.com)
Ginnie Mae's New Chief on Resurgent Risk - (www.ml-implode.com)
22 States Face Tax Shortfalls, Frugality To Hit State Budgets - (Mish at globaleconomicanalysis.blogspot.com) The moribund economy is drying up tax revenues more dramatically than expected, forcing 22 states, including California, to confront growing budget gaps. Some states have already eliminated jobs and services -- and more cuts are likely. The new shortfalls -- totaling at least $11.2 billion -- come just months after numerous states enacted belt-tightening measures while writing their yearly budgets. Officials also adjusted their revenue projections downward to account for the slowing economy. But in many cases, the actual revenue for the first quarter of the fiscal year, which began July 1, has proven to be even lower.
Loan Market Suffering Sharp Writedowns - (www.nakedcapitalism.com) While all eyes have been fixed on the interbank market, and the plunge in the Baltic Dry Index has also garnered some attention, the sudden decay in the loan market (meaning for the most part leveraged loans, the sort used to finance LBOs) has gotten far less commentary. Yet this will wreak havoc on bank balance sheets, as it did last year. Banks have gone to some length to try to reduce their loan inventories, even going so far as to finance sales heavily. But values have continued to erode. Loans were recently trading in the mid 80s,. Some contended those prices were suspect, on small volumes to cooperative counterparties."
US may need a new economic bailout - (www.ml-implode.com)
Turmoil May Make Americans Savers, Worsening `Nasty' Recession - (www.ml-implode.com)

Hedge-fund manager Quits, Thanks "Idiots" for Success - (www.bloomberg.com)
Deception and Self-Deception In America - (www.informationclearinghouse.info)
Bankruptcy law favors the landlord over the houseowner - (www.bloomberg.com)
US house prices face long fall to bottom - (business.inquirer.net)
Fed sees West's housing slump as "severe" - (lansner.freedomblogging.com)
Congress: Anna Schwartz Says You're Wrong - (market-ticker.denninger.net)
A short history of modern finance - (www.economist.com)
The Troubled Future of Toronto Real Estate - (www.greaterfool.ca)

Beyond The Bailout: Whats Next? - (www.newgeography.com)
Recession: A short, sharp shock or armageddon? - (www.guardian.co.uk)
US attorney expects results in mortgage probe - (www.sfgate.com)
NBR's Treasury Commercial - (www.pbs.org)

Joint U.S.-New York Inquiry Into Credit-Default Swaps - (www.nytimes.com)
Bond Risk Rises to Record on Concern of Worst Slump Since '30s - (www.bloomberg.com)
Trouble for Banks, Insurers May Lurk in Synthetic CDOs - (online.wsj.com)
Markets hold breath over Lehman’s unwind - (www.financialweek.com)
Bailout bill hones ax over exec pay - (www.financialweek.com)
European Money-Market Rates Decline on Emergency Bank Support - (www.bloomberg.com)
Synthetic CDOs Stumble - (online.wsj.com)
Pimco Bets on Mortgage-Backed Debt - (online.wsj.com)

CEO apologies soothe investors—stir up tort lawyers - (www.financialweek.com)
Millennium Begins Liquidating Hedge Fund, Report Says - (www.nytimes.com)

Insiders’ Share Sales on Margin on the Rise - (www.nytimes.com)
German bailout sets salary cap for top bank execs - (www.chronicle.com)
Brazil May Extend Disclosure Rules for Derivatives - (www.bloomberg.com)
China’s Economic Growth Is Slowest in 5 Years - (www.nytimes.com)
Rescue loans available to European carmakers - (www.ft.com)

India Lowers Key Rate for the First Time Since 2004 - (www.bloomberg.com)
Bernanke Backs Consideration of Stimulus, Differing From Bush - (www.bloomberg.com)

Credit crunch will last into '09, economists say - (www.signonsandiego.com)
State fiscal problems may worsen - (www.boston.com)
Texas Instruments Net Falls 27%; Forecast Disappoints - (www.bloomberg.com)
Sun Micro Warns of Wider Loss - (online.wsj.com)
Credit crisis hits Japanese car sales in US - (www.ft.com)
Chrysler CEO: Industry mergers ahead - (www.chicagotribune.com)
Merrill Chief Thain Expects `Thousands' of Job Cuts - (www.bloomberg.com)