Wednesday October 22 Housing and Economic stories

TOP STORIES:

Building Flawed American Dreams - (www.nytimes.com) - A grandson of Mexican immigrants and a former mayor of this town, Henry G. Cisneros has spent years trying to make the dream of homeownership come true for low-income families. As the Clinton administration’s top housing official in the mid-1990s, Mr. Cisneros loosened mortgage restrictions so first-time buyers could qualify for loans they could never get before. Then, capitalizing on a housing expansion he helped unleash, he joined the boards of a major builder, KB Home, and the largest mortgage lender in the nation, Countrywide Financial — two companies that rode the housing boom, drawing criticism along the way for abusive business practices. And Mr. Cisneros became a developer himself. The Lago Vista development here in his hometown once stood as a testament to his life’s work. Joining with KB, he built 428 homes for low-income buyers in what was a neglected, industrial neighborhood. He often made the trip from downtown to ask residents if they were happy. “People bought here because of Cisneros,” says Celia Morales, a Lago Vista resident. “There was a feeling of, ‘He’s got our back.’ ” Mr. Cisneros rarely comes around anymore. Lago Vista, like many communities born in the housing boom, is now under stress. Scores of homes have been foreclosed, including one in five over the last six years on the community’s longest street, Sunbend Falls, according to property records. While Mr. Cisneros says he remains proud of his work, he has misgivings over what his passion has wrought. He insists that the worst problems developed only after “bad actors” hijacked his good intentions but acknowledges that “people came to homeownership who should not have been homeowners.” They were lured by “unscrupulous participants — bankers, brokers, secondary market people,” he says. “The country is paying for that, and families are hurt because we as a society did not draw a line.” The causes of the housing implosion are many: lax regulation, financial innovation gone awry, excessive debt, raw greed. The players are also varied: bankers, borrowers, developers, politicians and bureaucrats. Mr. Cisneros, 61, had a foot in a number of those worlds. Despite his qualms, he encouraged the unprepared to buy homes — part of a broad national trend with dire economic consequences.

Banks Furious: Law Says Can't Lie About Bailout Dilution - (www.clusterstock.com) The Federal bank bailout will dilute existing shareholders. The banks, however, are frustrated about having to admit that. Thus, a flurry of angry phone calls demanding that the government issue a special exemption to accounting law. Specifics? The banks are giving the government warrants amounting to 15% of the government's preferred stock investment. Not surprisingly, these warrants have to be accounted for. They can be treated two ways: 1) By issuing stock, which will cause immediate dilution; 2) By remaining as a liability on the balance sheet, which will be re-priced every quarter and could cause a hit to earnings (if the stock increases, the value of the warrant--and the bank's liability--follows it up). The banks don't want either of those things. Instead, they want to pretend the warrants don't exist. So they are petitioning for a special exemption that allows them to book the warrants as equity without issuing new shares.
People involved in the discussions say the issue will be resolved this weekend.

The Pretenders - Wells Fargo Sugarcoats Balance Sheet - (www.nypost.com) "Wells Fargo are pretenders," said a trader at one top hedge fund, who spoke on condition of anonymity because he is afraid of trouble from the Securities and Exchange Commission, in light of the regulatory body's recent threat to prosecute short sellers. The trader said trimming the loan-loss reserves had the effect of boosting profits, which in turn boosted its share price, which in turn made it easier for the bank to successfully move forward with a move it announced this week to raise $20 billion of capital. Meredith Whitney, a banking analyst with Oppenheimer, maintained a sell rating on Wells Fargo, even after the surprise third-quarter profit, in large part because she feels it is not adequately prepared for losses on its residential-mortgage portfolio. The Field Check Group, which measures real-time residential defaults in California - where Wells Fargo has over 30 percent of its $74 billion first-lien mortgage portfolio - reports the default rate on loans originated by Wells Fargo's in 2008 is running 237 percent above last year. That is just under the increases seen by Indymac Bank (239 percent) and over Countrywide (226 percent)... And those are just the first liens. Many (most?) of their seconds are now underwater -- unsecured.

Second Liens Still Lurking at Wells Fargo - (www.housingwire.com) Despite the optimism, a burgeoning portfolio of second-lien mortgages at Wells Fargo that had in recent weeks concerned analysts and investors hasn’t gone anywhere; and, if anything, Wednesday’s quarterly result also holds evidence that the credit losses in that particular portfolio have yet to fully reverberate throughout the bank. Wells has a substantial $84 billion portfolio of home equity loans — and half of those are located in hard hit states like California and Florida; of that total, it has carved out the worst $11 billion for liquidation, with rest remaining as part of its “core” home equity portfolio. In the second lien portfolio set up for liquidation, the percent of loans that saw borrowers miss two or more payments rose during Q2 to 3.6 percent, up from 2.79 percent one quarter earlier. The $73 billion “core” home equity portfolio saw a similar rise to 1.88 percent in 60 day delinquencies, compared with 1.71 percent in Q1. So delinquencies continued to rise during Q2; net credit losses, however, did not. Charge-offs on second liens were actually down $104 million compared with first quarter 2008 — but don’t let that fool you. The improvement was primarily due to a change in how the bank handles its home equity portfolio charge-offs; earlier in Q2, the bank extended its charge-off policy from 120 days to 180 days, in an effort to give troubled borrowers more time to reach a loan workout (or to protect earnings, take your pick). “Although losses declined, the portfolio continued to deteriorate as property values search for a bottom,” Michael Loughlin, the bank’s chief credit officer. “Given the continued decline in home prices, we had more accounts move into the higher combined loan-to-value segments, which directly impacts loss levels.” As second lien borrowers see equity in their homes evaporate due to price depreciation, second liens become extremely vulnerable to loss.

Bernanke Is Fighting the Last War - (online.wsj.com) On Aug. 9, 2007, central banks around the world first intervened to stanch what has become a massive credit crunch. Since then, the Federal Reserve and the Treasury have taken a series of increasingly drastic emergency actions to get lending flowing again. The central bank has lent out hundreds of billions of dollars, accepted collateral that in the past it would never have touched, and opened direct lending to institutions that have never had that privilege. The Treasury has deployed billions more. And yet, "Nothing," Anna Schwartz says, "seems to have quieted the fears of either the investors in the securities markets or the lenders and would-be borrowers in the credit market." The credit markets remain frozen, the stock market continues to get hammered, and deep recession now seems a certainty -- if not a reality already. Most people now living have never seen a credit crunch like the one we are currently enduring. Ms. Schwartz, 92 years old, is one of the exceptions. She's not only old enough to remember the period from 1929 to 1933, she may know more about monetary history and banking than anyone alive. She co-authored, with Milton Friedman, "A Monetary History of the United States" (1963). It's the definitive account of how misguided monetary policy turned the stock-market crash of 1929 into the Great Depression. Since 1941, Ms. Schwartz has reported for work at the National Bureau of Economic Research in New York, where we met Thursday morning for an interview. She is currently using a wheelchair after a recent fall and laments her "many infirmities," but those are all physical; her mind is as sharp as ever. She speaks with passion and just a hint of resignation about the current financial situation. And looking at how the authorities have handled it so far, she doesn't like what she sees. Federal Reserve Chairman Ben Bernanke has called the 888-page "Monetary History" "the leading and most persuasive explanation of the worst economic disaster in American history." Ms. Schwartz thinks that our central bankers and our Treasury Department are getting it wrong again.

'DIP' Loans Are Scarce, Complicating Bankruptcies - (online.wsj.com) - Credit has gotten so tight in recent weeks that companies contemplating a bankruptcy filing can't find the cash needed to get through the process. This multibillion-dollar corner of the lending market -- debtor-in-possession and exit financing -- has been rocked by General Electric Co.'s recent, undisclosed decision to largely halt lending to companies in bankruptcy-court protection or near it, said several bankruptcy lawyers and financial advisers. GE is one of the world's largest such lenders, last year doing $1.75 billion in restructuring loans. Debtor-in-possession, or DIP, financing is essential for the lawyers, layoffs and other restructuring necessary for a company's rebirth. Exit financing is used when a company "exits" reorganization. Banks have been eager to take part in this market because the loans are the first to be paid back and command high interest rates. Without the lending lines, companies that would normally survive bankruptcy will have to quickly sell assets. Potential buyers may not be able to borrow either, meaning companies could be forced to liquidate immediately instead of working out their problems. That could cost tens of thousands of jobs across the economy.

Entrepreneurs Feel Squeeze as Venture Capital Gets Scarce - (online.wsj.com) Venture capitalists are reining in spending amid the financial downturn, a shift that has implications for entrepreneurial activity. According to two sets of data pegged for release Saturday, venture capitalists did fewer new financings of companies and spent less money in the third quarter than they did a year earlier. Venture capitalists typically put money into young companies, with the aim of profiting later when those start-ups ...


OTHER STORIES:

Bond Insurers Need $20 Billion From Bailout: Dinallo - (www.cnbc.com)
Redstone May Be Forced to Sell Viacom/CBS: Report - (www.cnbc.com)
Circuit City to Shut Stores, Cut Jobs: Report - (www.cnbc.com)
Halliburton Posts Loss; Hurt by Debt Settlement - (www.cnbc.com)
Bush to Host Summit of Losers - (Mish at globaleconomicanalysis.blogspot.com) In response to the Credit crisis president Bush is gathering up all the people who did not see what was coming, denied what was happening, and then failed to see the implications of what was indeed happening. Bush Says He'll Host Summit Soon on Financial Crisis. President George W. Bush said he will host a summit on the global financial crisis in the "near future" and he is confident the world's nations will weather the breakdown in credit markets. "For this meeting to be a success, we must welcome good ideas from around the world," Bush said as he welcomed French President Nicolas Sarkozy and European Commission President Jose Barroso to Camp David, the presidential retreat in rural Maryland, for dinner and three hours of talks.

The Guys From ‘Government Sachs’ - (www.nytimes.com) THIS summer, when the Treasury secretary, Henry M. Paulson Jr., sought help navigating the Wall Street meltdown, he turned to his old firm, Goldman Sachs, snagging a handful of former bankers and other experts in corporate restructurings. In September, after the government bailed out the American International Group, the faltering insurance giant, for $85 billion, Mr. Paulson helped select a director from Goldman’s own board to lead A.I.G. And earlier this month, when Mr. Paulson needed someone to oversee the government’s proposed $700 billion bailout fund, he again recruited someone with a Goldman pedigree, giving the post to a 35-year-old former investment banker who, before coming to the Treasury Department, had little background in housing finance. Indeed, Goldman’s presence in the department and around the federal response to the financial crisis is so ubiquitous that other bankers and competitors have given the star-studded firm a new nickname: Government Sachs. The power and influence that Goldman wields at the nexus of politics and finance is no accident. Long regarded as the savviest and most admired firm among the ranks — now decimated — of Wall Street investment banks, it has a history and culture of encouraging its partners to take leadership roles in public service.

ECB's Nowotny Sees Global `Tri-Polar' Currency System Evolving - (www.ml-implode.com) - ``What I see is a system where we have more centers of gravity'' Nowotny said today in an interview with Austrian state broadc...
The Real Debate: Crony Socialism or Economic Sovereignty? - (www.opednews.com) - In 1932, President Hoover set up the Reconstruction Finance Corporation (RFC) as a federally-owned bank that would bail out commercial banks by extending loans to them, much as the privately-owned Federal Reserve is doing today. But like today, Hoover’s plan failed. The banks did not need more loans; they were already drowning in debt. They needed customers with money to spend and to invest. President Roosevelt used Hoover’s new government-owned lending facility to extend loans where they were needed most – for housing, agriculture and industry
Sub-prime Mess Leads to Global Summit - (www.ml-implode.com)
More unhappy numbers - (www.ml-implode.com)
New Age of Frugality - (Mish at globaleconomicanalysis.blogspot.com) Frugality has finally made front page. BusinessWeek is commenting on The New Age of Frugality. On a shady lane in New Hope, Pa., a quiet revolution in American culture may be taking shape. Here, a family of four lives in a white, colonial-style house in a manner that once would have been considered All-American but more recently has been seen as just plain weird: They're frugal.

Swapping Secrecy for Transparency - (www.nytimes.com)
Delinquencies Mount for American Express - (online.wsj.com) Known for pitching cards to affluent customers who were required to pay off their purchases every month, AmEx made a big push in the past couple of years to let many of its customers keep a balance and pay the interest that accumulates. While the company, run since 2001 by Chief Executive Kenneth Chenault, has insisted it didn't lower credit standards, those loans are coming back to haunt AmEx now, analysts say. Figures released last week show that about 4.1% of AmEx loans were at least 30 days late as of last month, up from 2.5% a year earlier. That's still fewer delinquencies than at other large card issuers, including Bank of America Corp.'s rate of 5.9% in the third quarter.

General Growth Wrestles With Its Debt - (online.wsj.com)
NBC Universal Outlines 3% Budget Cut - (online.wsj.com)
Car lending slashed as default threat rises - (www.ft.com) Banks and finance companies in the US are aggressively cutting back on making car loans, as growing numbers of borrowers fall behind on their payments and lenders’ access to funding is squeezed in the credit crunch. Lenders such as Wells Fargo, Capital One and GMAC this week all reported heavy cuts to their auto lending businesses amid signs that borrowers are increasingly affected by the slowing US economy and rising unemployment. Wells cut its $25bn auto loan portfolio by almost 25 per cent in the third quarter as it pulled back from making riskier loans, while Capital One cut back its volume of car loans by more than half.

Nervous times for investors in loan markets - (www.ft.com) Investors in European and US loan markets will enter their offices with great trepidation on Monday morning after a flood of forced selling by hedge funds and other leveraged investors sent prices crashing last week. In Europe, the average price of the most commonly traded large leveraged loans to companies such as Alliance Boots, Ineos, NTL and United Biscuits saw its biggest weekly drop, according to S&P LCD, the market information service, and Markit Group. The US market for such debt, which is mainly used for private equity buy-out deals, has also suffered big falls in recent weeks as hedge funds and other market value sensitive investors have become forced sellers.

OPEC May Cut Production by 2 Million Barrels a Day, Khelil Says - (www.bloomberg.com)
New law stalls foreclosure filings - (www.latimes.com)
Hedge funds hit by 10% asset decline - (www.ft.com)
U.K. Home Prices Drop as Economy Nears `Abyss,' Rightmove Says - (www.bloomberg.com)
Caisse d'Epargne Ousts Chairman, CEO Following Trading Loss - (www.bloomberg.com)