Monday November 3 Housing and Economic stories

TOP STORIES:

From Midwest to M.T.A., Pain From Global Gamble - (www.nytimes.com) “People come up to me in the grocery store and say, ‘How did we get suckered into this?’ ” Skip to next paragraph— Marc Hujik, of the Kenosha, Wis., school board. On a snowy day two years ago, the school board in Whitefish Bay, Wis., gathered to discuss a looming problem: how to plug a gaping hole in the teachers’ retirement plan. It turned to David W. Noack, a trusted local investment banker, who proposed that the district borrow from overseas and use the money for a complex investment that offered big profits. “Every three months you’re going to get a payment,” he promised, according to a tape of the meeting. But would it be risky? “There would need to be 15 Enrons” for the district to lose money, he said. The board and four other nearby districts ultimately invested $200 million in the deal, most of it borrowed from an Irish bank. Without realizing it, the schools were imitating hedge funds. Half a continent away, New York subway officials were also being wooed by bankers. Officials were told that just as home buyers had embraced adjustable-rate loans, New York could save money by borrowing at lower interest rates that changed every day. For some of the deals, the officials were encouraged to rely on the same Irish bank as the Wisconsin schools. During the go-go investing years, school districts, transit agencies and other government entities were quick to jump into the global economy, hoping for fast gains to cover growing pension costs and budgets without raising taxes. Deals were arranged by armies of persuasive financiers who received big paydays. But now, hundreds of cities and government agencies are facing economic turmoil. Far from being isolated examples, the Wisconsin schools and New York’s transportation system are among the many players in a financial fiasco that has ricocheted globally. The Wisconsin schools are on the brink of losing their money, confronting educators with possible budget cuts. Interest rates for New York’s subways are skyrocketing and contributing to budget woes that have transportation officials considering higher fares and delaying long-planned track repairs. And the bank at the center of the saga, named Depfa, is now in trouble, threatening the stability of its parent company in Munich and forcing German officials to intervene with a multibillion-dollar bailout to stop a chain reaction that could freeze Germany’s economic system. “I am really worried,” said Becky Velvikis, a first-grade teacher at Grewenow Elementary in Kenosha, Wis., one of the districts that invested in Mr. Noack’s deal. “If millions of dollars are gone, what happens to my retirement? Or the construction paper and pencils and supplies we need to teach?”

Crooked Morgan Stanley to settle class-action lawsuit for selling precious metals and charging storage fees and never having physical metal - (www.reuters.com) This is an older story, but still worth bringing back again. "Morgan Stanley will pay $4.4 million to settle a class-action lawsuit with brokerage clients who bought precious metals and paid storage fees, according to a court filing. "The proposed settlement, which is subject to approval by the Federal District Court in Manhattan, includes $1.5 million in cash and other benefits valued at about $2.9 million, according to a court filing on Monday. "The suit, filed in August 2005, asserted that Morgan Stanley told clients it was selling them precious metals that they would own in full and that the company would store. "But Morgan Stanley either made no investment specifically on behalf of those clients, or made entirely different investments of lesser value and security, according to the complaint." We are told by sources close to the situation that the case came into existence as a result of an article we wrote in November 2004, entitled "Paper Caper." After this article was published, we received complaints from some of our customers that several big brokerages in New York would not provide proof that their silver existed. The premise of our article was that investors should be wary of silver storage programs that did not provide serial numbers for 1,000 oz. bars. Here’s an excerpt:

Polygon freezes redemptions on $4bn fund - (www.ft.com) Polygon, the Anglo-US hedge fund group which built a name for investor activism at companies such as British Energy, is suspending redemptions in its flagship $4bn Global Opportunities multi-strategy fund while it unwinds the fund and returns money to investors. The restructuring of one of London's best-known hedge funds is the latest sign of the crisis in the industry where client redemptions and a squeeze on funding by banks is forcing funds to sell assets into falling markets. The hedge fund industry faces a brutal readjustment as both investors and the banks acting as prime brokers - the providers of a wide range of key custodial and lending services to hedge funds - have become more risk-averse.

Florida's Freedom Bank Is 17th in U.S. to Be Closed This Year - (www.bloomberg.com) Freedom Bank of Bradenton, Florida, became the 17th U.S. bank seized by regulators this year as the deepest housing slump since the Great Depression triggers record foreclosures and mounting losses. Freedom, with $287 million in assets and $254 million in deposits, was shut yesterday by the Florida Office of Financial Regulation and the Federal Deposit Insurance Corp. was named receiver. Fifth Third Bancorp of Cincinnati will assume the deposits and buy $36 million of assets, the FIDC said. Freedom's four offices will open Nov. 3 as Fifth Third branches. Regulators have closed the most banks this year since 1993, and the collapses of Washington Mutual Inc. and IndyMac Bancorp Inc. were among the biggest in history. The housing slump and tight credit led to enactment of a $700 billion bank-rescue plan and the U.S. Treasury is using the fund to buy $250 billion in preferred shares in banks. Fifth Third will pay a premium of 1.16 percent, or about $2.9 million, to assume the deposits, the FDIC said. The deposit insurance fund, supported by fees on insured banks, will pay an estimated $80 million to $104 million, the agency said.

Was There a Loan It Didn’t Like? - (www.nytimes.com) AS a senior mortgage underwriter, Keysha Cooper was proud of her ability to spot fraud and other problems in a loan application. A decade of vetting mortgage documents had taught her plenty, she says. Skip to next paragraphBut as a senior mortgage underwriter at Washington Mutual during the late, great mortgage boom, Ms. Cooper says she found herself in a vise. Brokers squeezed her from one side, her superiors from the other, she says, and both pressured her to approve loans, no matter what. “At WaMu it wasn’t about the quality of the loans; it was about the numbers,” Ms. Cooper says. “They didn’t care if we were giving loans to people that didn’t qualify. Instead, it was how many loans did you guys close and fund?” Ms. Cooper, 35, was laid off a year ago and is still unemployed. She came forward to discuss her experiences at the bank in order to help shareholders recover money from WaMu executives. Ms. Cooper is one of 89 employees whose stories fill a voluminous complaint filed against officers of the company by the Ontario Teachers’ Pension Plan board, a big shareholder. Topping the list of defendants is Kerry K. Killinger, the WaMu chief executive who was ousted in mid-September.

Are the hedge-funders a spent force? - (www.telegraph.co.uk) Early one morning last week, a young man in his dressing gown was wandering around Chelsea Harbour, the exclusive enclave of penthouse apartments in south-west London, sobbing hysterically into his mobile phone. Asked by a passer-by if he was all right, the man stared at him then bawled: "I've lost everything. Every ****ing thing!" Such Sherman McCoy moments are being reported across the capital's wealthiest zones, but nowhere are the echoes of Tom Wolfe's Bonfire of the Vanities stronger than in Curzon Street in Mayfair – nicknamed "Hedge Fund Alley" after the abundance of multi-billion pound funds that have based themselves in the area over the past 20 years. Right now, it qualifies as London's unhappiest street. Swept up in the global financial meltdown, hedge funds are starting to fall off the endangered species list and into extinction as their clients clamour to cash in, forcing them to sell assets just as share prices have plunged. Nerves were further jangled this week when the covert purchase of Volkswagen by Porsche left some of the world's largest funds nursing losses of £12.6 billion. The "hedgies", famously partial to a Porsche themselves, felt the irony all too keenly.

U.S. Eyeing Troubles Of Insurers - (www.washingtonpost.com) Several big insurance companies this week reported big losses on investments in the last quarter, raising fresh questions about the financial stability of the firms as the U.S. government considers investing in them. Hartford Financial Services Group, a Connecticut insurer, lost $2.63 billion in the third quarter. Prudential Financial, the New Jersey insurer, lost $108 million. Assurant, a New York provider of specialty insurance, lost $111.4 million. The companies saw their investments in mortgage-related securities and other assets suffer with the market downturn. Some analysts have warned that several firms are treading on increasingly weak ground and will have difficulty raising needed cash to continue operations. The companies' shares plunged this week before a modest rally yesterday. The poor financial results came after insurance executives met with Treasury Secretary Henry M. Paulson Jr. to ask for access to a government capital injection program that has already provided $164 billion to the nation's largest banks. Several insurance companies have publicly stated that they are likely to seek government funding should it become available. "We feel very well capitalized," Hartford chief financial officer Lizabeth Zlatkus told analysts on a conference call earlier this week. "But in terms of would we access the [Capital Purchase Program] if that's available? We certainly think there are favorable terms as we see it, and we would look to do that."

Time for the Darwinian flush - (www.ft.com) Highlights from the latest Hayman Advisors letter to clients (i.e. the text in full): What’s Next? It is the “what’s next” that scares us the most. There is no doubt that many books will be written chronicling the times we are living through today. When we wrote to you in July 2007, we really meant “feet first”! The common denominator of everything that has gone wrong so far has been reckless amounts of leverage. The system both nationally and globally is still trying to de-lever as fast as possible, the problem is that everyone is being forced to do it at the same time. 3-month LIBOR is off the charts - not as many believe, because banks don’t trust each other - but because THERE IS NO MONEY LEFT FOR THEM TO LEND TO EACH OTHER. We have argued for years now that there is not enough money at the bottom of the levered pyramid scheme the world has put together. In the U.S. alone, with Lehman, AIG, Bear Stearns, Fannie, Freddie, WaMu, IndyMac, Countrywide, and the rest of the companies that have failed to date (any many more “on deck”), there are $8 TRILLLION of assets already in receivership, conservatorship, liquidation, or “parked” with a big brother. Do you think the Government will be successful in purchasing illiquid assets off of the balance sheets of troubled companies? The odds (and the assets) are against them. Even if the Government invests equity to fill the “hole” that is created upon the sale of these assets, it leaves the same nefarious management teams in place to continue the problem by taking the money and levering it up again. The only way to solve this problem is to go THROUGH IT. We know it isn’t politically popular or even popular on Wall St, but the fact is that the U.S. and the world need a Darwinian flush to rebuild our foundations and become even stronger on the backside of this mess.

For Fortress, big bet on mortgages goes bad - (money.cnn.com) - Among other missteps, the big fund manager tried, and failed, to call a bottom in the market for real-estate securities. Private-equity and hedge-fund manager Fortress Investment Group made a highly-publicized bet several months ago that it could call the bottom on the battered mortgage-backed securities market. What the firm's managers and investors have since "won" is an object lesson on the value of staying on the sidelines during a market rout. With an appreciation - to paraphrase Warren Buffett - for being greedy when others are afraid (Edens and Novogratz had made millions at Black Rock and at Goldman Sachs (GS, Fortune 500) being contrarians during market collapses), Fortress (FIG) raised at least $2 billion to put to work over time. All told, Fortress manages about $35 billion in assets, $18 billion of which is in its hedge fund unit. But in a market without precedent, Edens and Novogratz can be forgiven if they feel like they've jumped into a pool that has no bottom. The Fortress Mortgage Opportunities fund has been walloped as the asset- and mortgage-backed securities markets continue their epoch slides. The fund, with assets of $940 million, is down 47% in one portfolio, 42% in another and 5% in a third, recently launched portfolio, as of the end of September.


OTHER STORIES:

"The Not-So-Invisible Hand" - (www.ml-implode.com) - The difference between an acknowledged socialist state and the stealth socialism we have in the U.S. today is that in a socialis...
JP Morgan's "Mass Mortgage Modifications" - (www.ml-implode.com) - "In a move the stock market greeted with considerable cheer, JP Morgan announced that it was widening its program to modify mort...
Arizona Extorting Banks To Stop Foreclosures? - (www.ml-implode.com)
Mortgage REIT Insider: Dividends Dry Up - (www.ml-implode.com)
The savings rate is rising! - (www.ml-implode.com)
JPM Chase - Major Mortgage Loan Default Spike - (www.ml-implode.com)
Financing gone for Trump-named Baja towers - (www.signonsandiego.com) - A principal shareholder in the company developing the project said yesterday that there are still plans to complete the towers. However, after a construction loan of roughly $150 million from a German bank fell through in late summer, a new lender has yet to be found. “With a name like Trump, we figured it was good,” he said. “There were other developments that we could have paid a quarter of that for, but we figured with Trump, you can't go wrong.” Well, I don't get how they drew that conclusion.

October a cruel month for markets - (www.ft.com)
IndyMac Mod Update - (calculatedrisk.blogspot.com) - The new entity, called IndyMac Federal Bank, has become a laboratory test of whether the FDIC's program can keep people in their homes. While it has already seen some success, the agency has also run into obstacles familiar to private lenders and loan servicers. The upshot: there are no easy solutions to the foreclosure crisis. The agency found plenty of bad loans to work with. IndyMac's specialty was Alt-A mortgages, a category that frequently includes loans made with little or no documentation and exaggerated borrower incomes.
China Manufacturing Contracts as Crisis Trims Exports - (www.bloomberg.com)
India Unexpectedly Cut Interest Rates to Spur Growth - (www.bloomberg.com)
For Asia, Crisis Takes a Different Turn: Not as Deep as '97, but Likely Longer - (online.wsj.com)
Skyscrapers portend doom - (www.ft.com)
Gloom Spreads in EU's Economies - (online.wsj.com)

Rating agencies face EU shake-up - (www.ft.com)
Specter of Deflation Lurks as Global Demand Drops - (www.nytimes.com)
Massive Effort to Save Mortgages - (online.wsj.com)
Bernanke Endorses Some U.S. Backing of Home Loans - (www.washingtonpost.com)
Budgets Squeezed, Some Families Bypass Organics - (www.nytimes.com)

Banks Alter Loan Terms to Head Off Foreclosures - (www.nytimes.com)

The wheels come off - (www.ft.com)
Woes that felled S.F. law firms shake industry - (www.sfgate.com)
A Month-long Walk on the Wildest Side of the Stock Market - (www.nytimes.com)