Monday March 9 Housing and Economic stories

KeNosHousingPortal.blogspot.com

TOP STORIES:

Sallie Mae down 31% on loan move - (www.ft.com) Shares in Sallie Mae, one of the largest US private sector student lenders, fell 31 per cent on Thursday after the Obama administration proposed ending federal subsidies for companies that provide loans to students. The proposal – made in the administration’s 10-year budget blueprint – would in effect put all new student lending into government hands, threatening Sallie Mae’s core business of making loans backed by federal guarantees. “This announcement essentially blindsided the industry,” said Matt Snowling, analyst at Friedman Billings Ramsey. “Budget proposals do not necessarily become law [but] we view this proposal as meaning that lenders such as Sallie Mae will face continuous threats during the current administration’s tenure.” The government currently offers direct loans as well as guarantees for loans made by private lenders such as Sallie Mae. Government support has provided the main incentive for the private sector to take part in the market because high levels of default erode the earnings that lenders derive from student loans.

With Allstate You’re Not in Good Hands - (optionarmageddon.ml-implode.com) Allstate, the big insurer, last week declared that despite unprecedented trouble in the markets, it remains financially strong. But tucked deep inside a company report is evidence that Allstate changed its bookkeeping last year in ways that improve its financial appearance. One accounting change added $347 million. Another delivered a year-end boost of $365 million. Allstate’s actions illustrate a broader risk to investors, policyholders and people looking for insurance. Insurers have been asking regulators to let them operate with thinner financial cushions or to pad those cushions with assets they could not otherwise count. For anyone trying to assess the companies’ financial strength, the changes can cloud the picture. That could make it harder for people to make sound decisions when buying policies or annuities to protect their families. The whole point of insurance regulation is to force insurers to keep adequate capital on hand in case they have to pay claims. The insurance business is not unlike the banking business in that companies maximize profit by taking risk with the capital provided by their customers. In banking, depositors fork over their savings to banks for safe-keeping while the banks put the cash to work making loans. With insurance, policy-holders pay premiums to insurers to protect them from loss while the insurers put the cash to work to make a profit in the market. But the banks and insurers are taking risks with your money. If the bank makes a bunch of bad loans, then your deposits disappear. If an insurance company makes too many crappy investments, they’ll have nothing left over to pay hurricane, car accident or life insurance claims….. So what are the assets Allstate has on its books that may be subject to continued investment losses? Among them are approximately $20 billion of “mortgage-backed securities…commercial mortgage-backed securities…asset-backed residential mortgage-backed securities…[and] asset-backed collateralized debt obligations.” Toxic trash all of it. They also have a couple billion $ invested in equities, the value of which could also decline significantly. It appears Allstate has already taken steep writedowns on all these assets, but my bet is that the writedowns are likely to continue as the economy deteriorates.

FDIC Raising Fees on Banks, Adds Emergency Fee - (www.cnbc.com) Facing a cascade of bank failures depleting the deposit insurance fund, federal regulators on Friday raised the fees paid by U.S. financial institutions and levied an emergency premium in a bid to collect $27 billion this year. The Federal Deposit Insurance Corp. now expects that bank failures will cost the insurance fund around $65 billion through 2013, up from an earlier estimate of $40 billion. The bank failures, 14 already this year following 25 last year, reflect the ravages of rising unemployment and falling home prices that have sent loan defaults soaring. The FDIC said the economic crisis, which has caused the insurance fund to drop to its lowest level in nearly a quarter-century, also warranted extending the plan to rebuild the insurance fund from five years to seven. The emergency premium, to be levied on the roughly 8,500 federally insured institutions on June 30, will be 20 cents for every $100 of their insured deposits. That compares with an average premium of 6.3 cents paid by banks and thrifts last year. In addition, the FDIC raised the regular insurance premiums for banks to between 12 and 16 cents for every $100 in deposits starting in April, up from a range of 12 to 14 cents.

Private equity fights US tax plan - (www.ft.com) Private equity chiefs were scrambling to defend their industry’s tax advantages on Thursday after Barack Obama proposed to more than double the tax rate for carried interest, the profit-share that provides much of their income. Mr Obama’s 2010 budget proposal included a plan to close a tax loophole that allows private equity executives to pay 15 per cent tax on much of their income by changing the treatment of carried interest from capital gains to income. The president promised the move during his campaign but few private equity chiefs took it seriously. He said on Thursday that the change would raise $24bn from venture capitalists, private equity executives and other investment partnerships. Private equity chiefs warned that, if introduced, the proposal would fundamentally change the economic incentives of their industry and could have wider unintended consequences, hitting other industries such as venture capital and property investors.

Choice Homes suspends operations - (www.dallasnews.com) One of North Texas' largest homebuilders is suspending operations because of the tight credit markets. Choice Homes, which has been in business for 21 years, is the latest in a string of local builders forced to shut down because of the lack of lending. The Irving-based high production builder constructed more than 580 houses in the Dallas-Fort Worth area last year. "We are still talking with our lenders, but the likelihood is we will be winding down our operations," Choice Homes president Daniel Couture said Wednesday morning. "We are not filing Chapter 11" bankruptcy protection. Choice Homes on Tuesday informed its employees and vendors of the company's decision. Couture said in a written statement that his firm is "faced with the escalating downturn in the housing market, the likelihood of a deep prolonged recession and very difficult credit markets." "This was not an easy decision, but faced with the unprecedented market conditions we have decided on this course of action," he said. "It is our intent to satisfy our obligations to our subcontractors and suppliers and to work closely with our secured creditors to maximize the proceeds from the sale of the assets of Choice Homes."

Colorado’s oldest newspaper shuts down - (www.ft.com) The Rocky Mountain News will appear on newstands for the last time on Friday, becoming the latest casualty of the newspaper industry’s crumbling business models. Staff learned that they were working to their final deadline on Thursday as Rich Boehne, chief executive of EW Scripps, told the newsroom that after 150 years in operation “Denver can’t support two newspapers any longer.” One potential buyer had come forward after EW Scripps, which also owns local television stations and syndicates cartoons such as Peanuts and Dilbert, put Colorado’s oldest newspaper up for sale in December. It withdrew after realising that it could cost $50m-$100m ”to stay in the game,” Mr Boehne said.

Trouble on the Assembly Line - (www.washingtonpost.com) As Auto Suppliers Seek Their Own Bailout, Detroit Three Face Pressure From the Ground Up. For months Washington has focused on saving Detroit's automakers. But now the auto industry says it could face a bottom-up collapse if the suppliers supporting these automakers don't receive federal aid starting next week. "We're on the cusp of what could be cataclysmic," said Aaron Bragman, an auto analyst with IHS Global Insight. What now looks like a house of cards was built with a complicated trade credit system. Automakers pay their suppliers 45 to 60 days after the car parts are delivered. And these suppliers delay payments to their subcontractors for up to a year. This system worked until credit markets froze and consumer confidence took a nosedive last fall. When people stopped buying cars, the automakers nearly halted vehicle production in December and January. As a result, not only are auto parts suppliers losing work from the carmakers, which include foreign and domestic companies, they will be receiving much smaller paychecks starting March 1. This month cash-strapped suppliers have been struggling to replenish their raw material inventories and meet operating expenses. In the past, suppliers have been able to put their billings, or receivables, up as collateral for loans. But, with bankruptcy still a strong possibility for General Motors and Chrysler, many suppliers have not been able to use those receivables as collateral.

Retirees face uncertain future as nest eggs shrink - (www.chicagotribune.com) Bernard Abrams feels like he's immersed in a landfill of some of the market's most odious investments. And it's keeping him awake at night, as he wonders how he will provide for himself and his wife after losing more than half the value of the investments he hoped would carry them through retirement.At age 83, the Delray Beach, Fla., man is heavily dependent on the fate of stocks, preferred stock and bonds in the most troubled companies in the market, such as Citigroup, Bank of America and General Motors. Each day as he reads the headlines, he debates what to do. Like many retirees, he bought the stocks and bonds of the companies he thought would always be stalwarts. Now, amid a dramatic financial crisis, stocks of Citigroup, Ford, GM and General Electric have traded at their lowest levels in years; preferred stocks in some large banks have sunk from $25 a share a few months ago to less than $6; and bonds in auto companies are worth about a quarter of what they were when they were issued. Selling after such sizable losses may seem like a mistake, but waiting is becoming scarier by the day as automakers plead with the government to help them avoid bankruptcy, and analysts debate whether the ultimate solution to the financial crisis will be nationalizing large banks.

Wall Street Banks Vacate Towers Pushing Empty Space to Record - (www.bloomberg.com) New York’s biggest banks and securities firms may relinquish 8 million square feet of office space this year, deepening the worst commercial property slump in more than a decade as they abandon a record amount of property. JPMorgan Chase & Co., Citigroup Inc., bankrupt Lehman Brothers Holdings Inc. and industry rivals have vacated 4.6 million feet, a figure that may climb by another 4 million as businesses leave or sublet space they no longer need, according CB Richard Ellis Group Inc., the largest commercial property broker. Banks, brokers and insurers have fired more than 177,000 employees in the Americas as the recession and credit crisis battered balance sheets. Financial services firms occupy about a quarter of Manhattan’s 362 million square feet of office space and account for almost 40 percent now available for sublease, CB Richard Ellis data show. “Entire segments of the industry are gone,” said Marisa Di Natale, a senior economist at Moody’s Economy.com in West Chester, Pennsylvania. “We’re talking about the end of 2012 before things actually start to turn up again for the New York office market.” The amount of available space may reach 15.6 percent by the end of the year, the most since 1996, according to Los Angeles- based CB Richard Ellis. Vacancies are already the highest since 2004 and rents are down 5 percent, the biggest drop in at least two decades.

Insurers: The next big financial meltdown? - (articles.moneycentral.msn.com) Two weeks ago I wrote “With Allstate You’re Not in Good Hands.” The company had convinced regulators to change capital adequacy requirements to allow, among other things, the inclusion of deferred tax assets as regulatory capital. I did some digging and, sure enough, Allstate’s story is not unusual. Lincoln National and Hartford also sought, and received, regulatory dispensation to include DTAs as capital. The purpose of capital requirements is to protect customers. Insurers make money by investing the premiums that customers pay. Their incentive is to maximize profit for shareholders, to put as many premium dollars to work as possible in investments that will generate a return. So regulators act to protect customers by enforcing risk-based capital requirements. The Fed is supposed to do the same for commercial banks. Unfortunately it failed miserably and we see banks that gorged themselves on risky investments dropping like flies. Anyway, capital adequacy issues aren’t the only sign of the insurance apocalypse: Hartford, Genworth and Lincoln National bought small banks so they could apply for TARP funds. Principal Financial also applied for TARP. (Others likely did as well…can’t confirm b/c not all the 10-Ks are out yet) Insurers are also taking advantage of taxpayer-subsidized borrowing via the Fed’s new Commercial Paper Funding Facility…




OTHER STORIES:

Citigroup's Latest Bailout Gives the US More Control - (www.cnbc.com)
Citi CFO: Capital Base Still 'Strong' - (www.cnbc.com)
Steep GDP Revision Puts Economic Loss at 6.2% - (www.cnbc.com)
Where Economy is Shrinking Most - (www.cnbc.com)
US Consumers' Mood Sours in February - (www.cnbc.com)
NY's Cuomo Demands Bonus List from BofA's CEO - (www.cnbc.com)
Americans Mixed on Obama Budget, Fret Over Deficit - (www.cnbc.com)
FDIC Raising Fees on Banks, Adds Emergency Fee - (www.cnbc.com)
Morgan Stanley Portfolio Manager Elmasry Quits - (www.cnbc.com)
FBI Makes First Arrest in Stanford Fraud Case - (www.cnbc.com)
Web Extra: How to Deal with a Boss You Can’t Stand - (www.cnbc.com)
Betting on Bureaucracy ... The Donald Trump Way - (www.cnbc.com)

Insurers: The Next $0 Trade? - (optionarmageddon.ml-implode.com)
Obama forecasts $1,750bn deficit - (www.ft.com) Budget heralds massive federal expansion
GM future in doubt after $31bn loss - (www.ft.com) Pension fund in $12.4bn deficit
Fannie to draw further $15bn - (www.ft.com) Net worth falls below zero

U.S. Stocks Slump as Drop in Health-Care Offsets Bank Rally - (www.bloomberg.com)
U.S. Treasuries Fall for Third Day on Supply, Spending Concern - (www.bloomberg.com)
Oil Rises, Gasoline Surges to 3-Month High, on Fuel Demand Gain - (www.bloomberg.com)
Gold Falls for Fourth Day on Equity Rally; Silver Prices Tumble - (www.bloomberg.com)
Big Changes on the Way in Lending to Students - (www.nytimes.com)
F.D.I.C.’s Bank Fund at Lowest Point in 25 Years - (www.nytimes.com)
Obama Seeks $1 Trillion Tax Increase in Budget Plan - (www.bloomberg.com)
Volcker Urges ‘Strong’ Restrictions on Hedge Funds - (www.bloomberg.com)

Japan Recession Deepens as Factory Output Plunges by Record 10% - (www.bloomberg.com)
European Confidence Drops to Record Low as Recession Deepens - (www.bloomberg.com)
Japan’s Recession May Deepen After Exports Drop Record 45.7% - (www.bloomberg.com)
German jobless rate up to 8.5 pct in Feb - (finance.yahoo.com)
Hong Kong exports dive by most in 50 years - (finance.yahoo.com)

Official: Obama budget sees $1.75 trillion deficit - (finance.yahoo.com)
Obama Plans Major Shifts in Spending - (www.nytimes.com)
U.S. Initial Jobless Claims Rose to 667,000 Last Week - (www.bloomberg.com)
Durable Goods Orders Drop for Sixth Consecutive Month - (www.bloomberg.com)
Obama’s Budget Proposes Up to $750 Billion More Bank-Rescue Aid - (www.bloomberg.com)

Fed $1,000bn financing plan nears launch - (www.ft.com)
California Home Sales Double as Prices Plummet 41% - (www.bloomberg.com)
Bankruptcy law may be modified - (www.chicagotribune.com)
Fannie to Draw $15.2 Billion From Treasury After Loss - (www.bloomberg.com)
GM Posts $9.6 Billion 4th-Quarter Loss as Wagoner Seeks New Aid - (www.bloomberg.com)
Liddy Pleads for Taxpayer Forgiveness as AIG Rescue Unravels - (www.bloomberg.com)
US banks post first quarterly loss since 1990 - (finance.yahoo.com)
Ford Lowers U.S. Sales Outlook by 1 Million Vehicles - (www.bloomberg.com)
AIG Said to Consider Handing Main Property Insurer to U.S. - (www.bloomberg.com)
RBS Takes U.K. Insurance, Splits Assets After Losse - (www.bloomberg.com)

Rising costs prompting small businesses to drop health insurance benefits - (www.chicagotribune.com)
At the Fed, Nothing Succeeds Like Failure - (www.nytimes.com)
Bank Nationalization: Who Would Bear the Pain? - (www.businessweek.com)