Saturday April 4 Housing and Economic stories

KeNosHousingPortal.blogspot.com

TOP STORIES:

Putting off Hard Choices with Easy Money - (www.hussmanfunds.com) Brief remark - from early reports regarding the toxic assets plan, it appears that the Treasury envisions allowing private investors to bid for toxic mortgage securities, but only to put up about 7% of the purchase price, with the TARP matching that amount - the remainder being "non-recourse" financing from the Fed and FDIC. This essentially implies that the government would grant bidders a put option against 86% of whatever price is bid. This is not only an invitation for rampant moral hazard, as it would allow the financing of largely speculative and inefficently priced bids with the public bearing the cost of losses, but of much greater concern, it is a likely recipe for the insolvency of the Federal Deposit Insurance Corporation, and represents a major end-run around Congress by unelected bureaucrats. Last week, the Federal Reserve announced its intention to purchase a trillion dollars worth of Treasury debt by creating the little pieces of paper in your pocket that have “Federal Reserve Note” inscribed at the top. In effect, the Fed intends to monetize the Treasury debt in an amount that exceeds the entire pre-2008 monetary base of the United States. Apparently, the Fed believes that absorbing part of the massively expanding government debt and maybe lowering long-term rates by a fraction of a percentage point will increase the capacity and incentive of the markets to purchase risky and toxic debt. Bernanke evidently believes that the choice between a default-free investment and one that is entirely open to principal loss comes down to a few basis points in interest. Even now, the expansion of federal spending as a fraction of GDP has clear inflationary implications looking a few years out, so any expectation that long-term Treasury yields will fall in response to the Fed's buying must be coupled with the belief that investors will ignore those inflation risks. There is no doubt that the Fed also intends for the extra trillion in base money to end up as bank reserves. But think about what this move implies in equilibrium. The largest purchasers of U.S. Treasury bonds at present are foreign central banks. So what the Fed is really doing is printing enough money to crater the exchange value of the U.S. dollar, while leaving foreigners with a trillion dollars of savings that they would otherwise have invested in Treasury bonds, which they will now use, not to buy our lousy, toxic assets, but to acquire our productive assets, and at a steep discount thanks to the currency depreciation. So yes, the extra trillion in dollar bills will ultimately end up as bank reserves (and currency in circulation), but only by encouraging Beijing to go on a shopping spree to acquire a claim on our future production. Ultimately, funding the bailout of lousy assets comes at the cost of debasing our currency and selling our good assets to foreigners. Make no mistake - we are selling off our future and the future of our children to prevent the bondholders of U.S. financial corporations from taking losses. We are using public funds to protect the bondholders of some of the most mismanaged companies in the history of capitalism, instead of allowing them to take losses that should have been their own. All our policy makers have done to date has been to squander public funds to protect the full interests of corporate bondholders. Even Bear Stearns' bondholders can expect to get 100% of their money back, thanks to the generosity of Bernanke, Geithner and other bureaucrats eager to hand out the money of ordinary Americans.

Miami "condo king" hit by boom-to-bust downturn - (www.reuters.com) The once-booming real estate market that made Jorge Perez a billionaire is crumbling around Miami's "condo king" in what may be the biggest U.S. condo glut. The chief executive of the privately held Related Group is South Florida's most prolific developer, a driving force behind a string of high-rises and mixed-use developments from Miami to West Palm Beach who championed the frenetic construction well after the market peaked in late 2005. Today, Perez is trying to ride out a huge inventory buildup and falloff in property values across Florida, long on the frontlines of the U.S. housing and mortgage default crisis. "I think he just kind of went overboard," said Lucas Lechuga, a Miami realtor and blogger. About 45 percent of the nearly 23,000 condo units added to downtown Miami since 2003 remain unsold, said Peter Zalewski, whose Florida-based Condo Vultures Realty firm represents investors looking to buy large blocks of condos and rent them out until the market recovers enough to sell then at a profit. He said many builders were having trouble paying down construction loans.

AIG's state payment flip flop - (money.cnn.com) It seems cash-strapped states didn't make out quite as well in the AIG bailout as the troubled insurer initially claimed. AIG (AIG, Fortune 500) now says that municipalities holding guaranteed investment contracts received $9.5 billion in payments from the company last fall. That's $2.6 billion less than the estimate AIG provided March 15. The new figures appear in a revised document on AIG's Web site. A spokeswoman said the company published the earlier, higher number mistakenly, due to an "administrative error." The company, which is 80% owned by the federal government, had provided that estimate in response to pressure from legislators up in arms about the soaring cost of federal support for the company. Lawmakers were demanding answers about who was ultimately pocketing all those checks from the Federal Reserve and Treasury Department. AIG received an $85 billion loan from the Fed in September. The cost of the bailout has since more than doubled. Insurance companies sell guaranteed investment agreements, or GIAs, to states, as well as to organizations like hospitals and universities, that issue bonds to raise money but don't want to use the cash all at once.

Minnesota's housing wastelands - (www.startribune.com) Lakeland Construction Finance LLC of Eagan, once one of the state’s largest residential-construction lenders, defaulted on more than $400 million in bank loans and is now insolvent. Here is a listing of some Twin Cities-area housing projects that Lakeland financed but were never completed. On a bluff overlooking downtown Cannon Falls, Minn., roads are crumbling on soil that residents say was never fit for development. Near Watertown, bent scaffolding and other construction debris lie amid a field of weeds that was set to be home to rows of Italian-themed townhouses. Outside Dassel, whenever it rains, dirt piled five stories high in a partially completed subdivision flows into driveways and the city's sewer system. It's all stark evidence of the housing bust. And, more precisely, the collapse of an Eagan lender named Lakeland Construction Finance LLC, which loaned hundreds of millions of dollars to developers, sometimes without visiting sites or requiring an appraisal. It's like we're being held hostage," said Aaron Reeves, city administrator for Cannon Falls, as he walked on crumbling asphalt left at Sandstone Ridge, a housing development financed by Lakeland. "The money's gone, and no one seems willing to take responsibility for what's happened." Work at more than a dozen Lakeland projects has screeched to a halt during the past two years as the firm defaulted on more than $400 million in loans from the Bank of Scotland. Local government officials, now owed millions of dollars by the firm, were surprised to learn that specialty lenders such as Lakeland are unregulated. No state or federal agency checks their finances, and there's little recourse when the companies fail.

TARP Funds Get Recycled as Political Contributions - (www.newsweek.com) There was plenty of outrage on Capitol Hill last week over the executive bonuses paid out by AIG after getting federal bailout money. But another money trail could make voters just as angry: the campaign dollars to members of Congress from banks and firms that have received billions via the Troubled Asset Relief Program. A NEWSWEEK review of recent filings with the Federal Election Commission found that the political action committees of five big TARP recipients doled out $85,300 to members in the first two months of this year—with most of the cash going to those who serves on committees who oversee the TARP program. Among them: Bank of America (which got $15 billion in bailout money) sent out $24,500 in the first two months of 2009, including $1,500 to House Majority Leader Steny Hoyer and another $15,000 to members of the House and Senate banking panels. Citigroup ($25 billion) dished out $29,620, including $2,500 to House GOPWhip Eric Cantor, who also got $10,000 from UBS which, while not a TARP recipient, got $5 billion in bailout funds as an AIG "counterparty." "This certainly appears to be a case of TARP funds being recycled into campaign contributions," says Brett Kappel, a D.C. lawyer who tracks donations. (A spokesman for Cantor did not respond to requests for comment. A spokeswoman for Hoyer said it's his "policy to accept legal contributions.") The cash flow is already causing angst inside the Beltway. "The last thing I want to do is wake up one morning and see our PAC check being burned on C-Span," said one bank lobbyist, who asked not to be identified because of the issue's sensitivity. House Speaker Nancy Pelosi and House Financial Services chair Rep. Barney Frank both said recently they won't take donations from TARP recipients. But House Democratic fundraisers have quietly passed the word that the party's campaign committee will resume accepting them—down the road, though; not right now. Said one fundraiser, who also requested anonymity, "These are treacherous waters."

Geithner Plan Will Rob US Taxpayers: Stiglitz - (www.cnbc.com) The U.S. government plan to rid banks of toxic assets will rob American taxpayers by exposing them to too much risk and is unlikely to work as long as the economy remains weak, Nobel Prize-winning economist Joseph Stiglitz said on Tuesday. "The Geithner plan is very badly flawed," Stiglitz told Reuters in an interview during a Credit Suisse Asian Investment Conference in Hong Kong. U.S. Treasury Secretary Timothy Geithner's plan to wipe up to US$1 trillion in bad debt off banks' balance sheets, unveiled on Monday, offered "perverse incentives", Stiglitz said. The U.S. government is basically using the taxpayer to guarantee against downside risk on the value of these assets, while giving the upside, or potential profits, to private investors, he said. "Quite frankly, this amounts to robbery of the American people. I don't think it's going to work because I think there'll be a lot of anger about putting the losses so much on the shoulder of the American taxpayer."

Krugman Trashes Geithner's Bank Plan...And Obama - (www.businessinsider.com) Paul Krugman and other respected observers have come out strongly against Tim Geithner's latest plan to fix the banking system, which is a slightly modified version of Geithner's original plan to fix the banking system. Krugman also lays the blame at Obama's feet and wonders whether it will destroy his political capital. Krugman made his despair known in his blog on Saturday. Today, he lets fly in his New York Times column: [T]he Geithner scheme... isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets... [T]the real problem with this plan is that it won’t work. Yes, troubled assets may be somewhat undervalued. But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus — for that is what the Geithner plan amounts to — will change that fact. Read all > As we explained on Saturday, here's what Krugman is so upset about: Remember the crux of the problem: Banks say their assets are worth 60 cents on the dollar. The market says they are worth 30 cents on the dollar. Geithner continues to accept the banks' argument that this huge bid/ask spread is just a temporary condition: The market just doesn't understand that the assets are actually worth 60 cents on the dollar. When it realizes this, everything will be fine. The majority of smart economists (at least the ones we read) think this is a crock. The banks are hallucinating (or worse), and most of the assets are worth what the market says they are worth. In any event, the only way banks can be induced to sell those assets is if someone agrees to pay 60 cents (or more) on the dollar, because otherwise the banks will have to take more writedowns and require more capital. The only way someone will pay 60 cents or more on the dollar is if someone gives them a boatload of free money to be reckless with. That's where Geithner and the taxpayer come in.

N.Y. governor fires 8,900 state workers – (money.cnn.com) Union refusal of cost-cutting concessions forced governor's hand, David Paterson's office says. New York Governor David Paterson ordered 8,900 state layoffs after employee unions refused concessions. In a time of "unprecedented fiscal emergency," New York state was "left with no other option" than a state workforce reduction of about 8,900 employees to achieve the savings it needed, according to a memo from the governor's office. In October, Paterson reached out to state employee unions to reach cost-cutting concessions together, according to the memo from director of state operations Dennis Whalen. The state looked into a number of ways to deal with the "record budget deficits" and called upon the unions to partner with the state to reduce costs in order to avoid large-scale layoffs, Whalen's memo said.





OTHER STORIES:

Car dealers face extinction - (money.cnn.com)
Washington's reluctant auto bailout - (money.cnn.com)
Love, hate for Geithner plan - (money.cnn.com)
Housing bust a bonus for buyers - (money.cnn.com)

Mortgage deduction is huge subsidy to the rich - (blogs.usatoday.com)
Canada has few foreclosures (and no mortgage deduction) - (www.seekingalpha.com)
Geither Screws The Public To Benefit The Banks, Again - (www.patrick.net)
Why the Banking Crisis Is Far From Over - (www.newsweek.com)
More Lending Won't Help - (jameshowardkunstler.typepad.com)
Chronology of Failed Inititives - (images.businessweek.com)

Protesters Descend on Lavish AIG Execs Houses - (www.nbcphiladelphia.com)
Real estate bust has them filing into bankruptcy hearings - (www.tampabay.com)
If You Rented, You'd Be Home by Now - (www.amazon.com)
Buffett's Goldman Sachs Bet Back 'In The Money' - (www.cnbc.com)
How To Sell Your Home Without A Realtor - (www.cnbc.com)
BofA/Merrill Economist, Strategist Plan to Leave Firm - (www.cnbc.com)
JP Morgan CEO on what went wrong - (www.youtube.com)
LET IT DIE: Rushkoff on the economy - (www.arthurmag.com)
The couple whose mortgage fell from 1,500 a month to a PENNY - (www.dailymail.co.uk)
More Women Going From Jobless to Topless - (money.aol.com)

Geithner, Bernanke Grilled Over AIG, Bank Rescue - (www.cnbc.com)
Goldman to Return TARP Funds In Next Month? - (www.cnbc.com)
Stocks Get Policy Boost, But Economy Lags: Experts - (www.cnbc.com)
Lighten Up Capital Requirements Not Accounting: Chanos - (www.cnbc.com)
SEC Looks to Create New Uptick Rule - (www.cnbc.com)
House Reviews Rules for Retirement Investing Guidance - (www.cnbc.com)
US Recession to Stretch Well into 2010: Feldstein - (www.cnbc.com)