Friday May 8 Housing and Economic stories

KeNosHousingPortal.blogspot.com

TOP STORIES:

Germany's slump risks 'explosive' mood as second banking crisis looms - (www.telegraph.co.uk) A clutch of political and labour leaders in Germany have raised the spectre of civil unrest after the country's leading institutes forecast a 6pc contraction of gross domestic product this year, a slump reminiscent of 1931 and bad enough to drive unemployment to 4.7m by 2010. Michael Sommer, leader of the DGB trade union federation, called the latest wave of sackings a "declaration of war" against Germany's workers. "Social unrest can no longer be ruled out," he said. Gesine Swann, presidential candidate for the Social Democrats, said "the mood could turn explosive" over the next three months unless the government takes drastic action. While authorities have belatedly agreed to create a "bad bank" to absorb toxic loans and stabilise the credit system, further financial troubles are almost certainly in the pipeline. Swiss risk advisers Independent Credit View said a "second wave" of debt stress is likely to hit the UK and Europe this year as the turmoil moves from mortgage securities to old-fashioned bank loans. A detailed "stress test" of 17 lenders worldwide found that European banks have much lower reserve cushions than US banks, leaving them acutely vulnerable to the coming phase of rising defaults. "The biggest risk is in Europe," said Peter Jeggli, Credit View's founder. Deutsche Bank has reserves to cover a default rate of 0.7pc, against non-performing assets (NPAs) of 1.67pc; RBS has 1.23pc against NPAs of 2.43pc, and Credit Agricole has 2.63pc against NPAs 3.64pc. None have put aside enough money.

G-8's first bankruptcy - (www.atimes.com) I cannot forecast to you the action of Russia. It is a riddle, wrapped in a mystery, inside an enigma; but perhaps there is a key. That key is Russian national interest. - Winston Churchill, October 1939. It is ironic that from a strictly economic point of view, the United Kingdom today appears more akin to the Russia of Joseph Stalin that was described by British statesman Winston Churchill in his memorable quote in 1939. Its economy is in the throes of its greatest financial crisis in over two generations, yet the UK shows unmatchable resolve in trying to crash and burn itself faster and with greater impact than any other political economy appears to be even contemplating. From the beginning of the current financial crisis in mid-2007, the UK has been in the forefront of disclosing poor performance from its financial institutions, admitting to significant policy errors, and embarking on reckless monetary expansion. Even forgetting the factors that led the economy into the crisis, it is the combination of factors being put into place today that will ensure that the economy stays down and finally lead to a sovereign bankruptcy; in most likelihood the first one of the Group of Eight countries. Russia brought the number in this select club of so-called leading industrialized nations up to eight when it joined the Group of Seven - the others being the US, Japan, Germany, the UK, France, Italy and Canada. The UK has a higher chance of busting through its debt financing requirements, and so being rejected by the international financial community, than any other G-8 nation. The most recent provocation came from the government's budget announcement for the next fiscal year. London's Financial Times issued the following report on Friday morning in Asia: Gilts prices fell for a second day in a row on Thursday amid increasing alarm over the country's rising debt levels. Investors took fright after the government's annual Budget on Wednesday revealed borrowing would soar to levels not seen since the second world war, with a debt to gross domestic product ratio rising close to 80% from today's 50% . Investors also questioned the credibility of the UK government's growth forecasts, which are far more optimistic than International Monetary Fund estimates. Benchmark 10-year gilt yields, which have an inverse relationship with prices, have risen about a quarter of a point since Alistair Darling, the UK chancellor, unveiled the annual Budget on Wednesday.

The capital well is running dry and some economies will wither - (www.telegraph.co.uk) The world is running out of capital. We cannot take it for granted that the global bond markets will prove deep enough to fund the $6 trillion or so needed for the Obama fiscal package, US-European bank bail-outs, and ballooning deficits almost everywhere. Unless this capital is forthcoming, a clutch of countries will prove unable to roll over their debts at a bearable cost. Those that cannot print money to tide them through, either because they no longer have a national currency (Ireland, Club Med), or because they borrowed abroad (East Europe), run the biggest risk of default. Traders already whisper that some governments are buying their own debt through proxies at bond auctions to keep up illusions – not to be confused with transparent buying by central banks under quantitative easing. This cannot continue for long. Commerzbank said every European bond auction is turning into an "event risk". Britain too finds itself some way down the AAA pecking order as it tries to sell £220bn of Gilts this year to irascible investors, astonished by 5pc deficits into the middle of the next decade. US hedge fund Hayman Advisers is betting on the biggest wave of state bankruptcies and restructurings since 1934. The worst profiles are almost all in Europe – the epicentre of leverage, and denial. As the IMF said last week, Europe's banks have written down 17pc of their losses – American banks have swallowed half. "We have spent a good part of six months combing through the world's sovereign balance sheets to understand how much leverage we are dealing with. The results are shocking," said Hayman's Kyle Bass. It looked easy for Western governments during the credit bubble, when China, Russia, emerging Asia, and petro-powers were accumulating $1.3 trillion a year in reserves, recycling this wealth back into US Treasuries and agency debt, or European bonds. The tap has been turned off. These countries have become net sellers. Central bank holdings have fallen by $248bn to $6.7 trillion over the last six months. The oil crash has forced both Russia and Venezuela to slash reserves by a third. China let slip last week that it would use more of its $40bn monthly surplus to shore up growth at home and invest in harder assets – perhaps mining companies. The National Institute for Economic and Social Research (NIESR) said last week that since UK debt topped 200pc of GDP after the Second World War, we can comfortably manage the debt-load in this debacle (80pc to 100pc). Variants of this argument are often made for the rest of the OECD club. But our world is nothing like the late 1940s, when large families were rearing the workforce that would master the debt. Today we face demographic retreat. West and East are both tipping into old-aged atrophy (though the US is in best shape, nota bene). Japan's $1.5 trillion state pension fund – the world's biggest – dropped a bombshell this month. It will start selling holdings of Japanese state bonds this year to cover a $40bn shortfall on its books. So how is the Ministry of Finance going to fund a sovereign debt expected to reach 200pc of GDP by 2010 – also the world's biggest – even assuming that Japan's industry recovers from its 38pc crash? Japan is the first country to face a shrinking workforce in absolute terms, crossing the dreaded line in 2005. Its army of pensioners is dipping into the collective coffers. Japan's savings rate has fallen from 14pc of GDP to 2pc since 1990. Such a fate looms for Germany, Italy, Korea, Eastern Europe, and eventually China as well.

Bair Seeks Power to Shut ‘Systemically’ Key Companies - (www.bloomberg.com) Federal Deposit Insurance Corp. Chairman Sheila Bair sought authority to close “systemically important” financial firms, marking her boldest attempt yet to expand the agency’s reach. The FDIC should be able to take over and shut bank-holding companies and other large institutions instead of just failed commercial banks, Bair said today in a speech at the Economic Club of New York. Such power would shield taxpayers from losses when government protects companies deemed “too big to fail,” a concept that should be “tossed into the dustbin,” she said. “The FDIC is up to the task, and whether alone or in conjunction with other agencies, the FDIC is central to the solution,” Bair said. “Given our many years of experience resolving banks and closing them, we’re well-suited to run a new resolution program.” The speech represents the first time Bair has said she wants the new power, countering arguments that the Federal Reserve is best equipped to manage the authority as Congress prepares to write legislation on the issue this year. Bair has previously said that some regulator should have resolution authority and suggested her agency could do the job. U.S. regulators have improvised programs in the past year to prop up financial companies hit by the financial crisis by handing out more than $90 billion to Citigroup Inc. and Bank of America Corp., providing more than $180 billion in loans to American International Group Inc. and establishing debt guarantee programs. The FDIC wound down 29 failed banks and thrifts this year.

Geithner, as Member and Overseer, Forged Ties to Finance Club - (www.nytimes.com) Last June, with a financial hurricane gathering force, Treasury Secretary Henry M. Paulson Jr. convened the nation’s economic stewards for a brainstorming session. What emergency powers might the government want at its disposal to confront the crisis? he asked. An examination of Timothy F. Geithner’s schedules from his time as president of the New York Fed offers a rich account of the people and forces that shaped his thinking and action. Timothy F. Geithner, who as president of the New York Federal Reserve Bank oversaw many of the nation’s most powerful financial institutions, stunned the group with the audacity of his answer. He proposed asking Congress to give the president broad power to guarantee all the debt in the banking system, according to two participants, including Michele Davis, then an assistant Treasury secretary. The proposal quickly died amid protests that it was politically untenable because it could put taxpayers on the hook for trillions of dollars. “People thought, ‘Wow, that’s kind of out there,’ ” said John C. Dugan, the comptroller of the currency, who heard about the idea afterward. Mr. Geithner says, “I don’t remember a serious discussion on that proposal then.” But in the 10 months since then, the government has in many ways embraced his blue-sky prescription. Step by step, through an array of new programs, the Federal Reserve and Treasury have assumed an unprecedented role in the banking system, using unprecedented amounts of taxpayer money, to try to save the nation’s financiers from their own mistakes. And more often than not, Mr. Geithner has been a leading architect of those bailouts, the activist at the head of the pack. He was the federal regulator most willing to “push the envelope,” said H. Rodgin Cohen, a prominent Wall Street lawyer who spoke frequently with Mr. Geithner. Today, Mr. Geithner is Treasury secretary, and as he seeks to rebuild the nation’s fractured financial system with more taxpayer assistance and a regulatory overhaul, he finds himself a locus of discontent. Even as banks complain that the government has attached too many intrusive strings to its financial assistance, a range of critics — lawmakers, economists and even former Federal Reserve colleagues — say that the bailout Mr. Geithner has played such a central role in fashioning is overly generous to the financial industry at taxpayer expense.

U.S. toxic-asset plan stirs fears - (www.latimes.com) The government will take on a mountain of risk while trying to create an artificial market for the loans and debt securities. Critics worry about possible fraud and further banking system damage. Reporting from Washington and Los Angeles -- The Obama administration's impending effort to buy about $1 trillion in toxic assets in partnership with private investors -- aimed at solving the most intractable part of the credit crisis -- is now generating widespread fear that it is vulnerable to manipulation and carries sharp risks for taxpayers. The program represents the biggest gamble yet in the federal bailout, but its still-hazy details have prompted bankers, economists, federal investigators and politicians to question whether it will solve the financial crisis. More than 400 written comments were recently submitted to the Treasury Department, many of them sharply negative. The program is trying to create an artificial market for assets that have no known value, something that has never been done before on this scale. The only way to accomplish that is for the government to accept a mountain of risk. In the process, critics fear that the banking system could be further damaged and the program subjected to a boom in fraud. Nobel Prize-winning economist Joseph Stiglitz of Columbia University said the program violated so many laws of economics that it was little more than an "empty box." The toxic assets are a multitrillion-dollar collection of mortgage loans, commercial loans and a variety of complex debt securities, in which many borrowers have stopped making payments and the value of the underlying properties have tumbled. There is so much uncertainty about the value of those loans -- held both by banks and by big institutional investors -- that they have become a black hole in the financial system. Critics say the government's effort to engineer a solution is creating risks similar to the ones that created the financial crisis in the first place.

Irish Banks May Report EU22.5 Billion of Loan Losses - (www.bloomberg.com) Ireland’s government is preparing to buy 90 billion euros ($119 billion) of property loans in a bid to stave off nationalizing its biggest lenders. It may still end up with majority control of the country’s banks. Companies led by Allied Irish Banks Plc may get 25 percent less than the face value of their loans under the proposal from the National Asset Management Agency, according to the median estimate of seven analysts surveyed by Bloomberg News. That implies losses of 22.5 billion euros. Analyst estimates for the discount ranged from 15 percent to 30 percent. “It’ll probably be 30 percent, but it should be 50 percent,” said Brian Lucey, associate professor of finance at Trinity College Dublin. “Either way, it’ll leave the banks in a terrible hole, needing extra capital and effectively nationalize them by the back door.” Finance Minister Brian Lenihan, who said last week he’ll move to set up NAMA “speedily,” wants to cleanse the banks of loans to real-estate developers that have crippled them as the country faces the worst recession in its history. Lenihan has to avoid overpaying for the loans, and at the same time doesn’t want to force the banks into insolvency by paying too little.

Filene’s Basement Said to Prepare for Bankruptcy - (www.bloomberg.com) Filene’s Basement, the century-old clothing chain, may seek bankruptcy protection this week, according to two people with knowledge of the plan. A filing may come as early as tomorrow, said the people, who declined to be identified because the information isn’t public. There are several parties interested in buying assets out of bankruptcy, one person said. This would be the second filing in a decade for Filene’s Basement, which reported declining sales last year as consumers besieged by rising job losses and shrinking home values cut back on non-necessities such as its discounted designer goods. Former owner Retail Ventures Inc. said April 21 that it transferred the unit to Buxbaum Group, a company that appraises and liquidates assets, for no proceeds. Filene’s Basement hired Alan Cohen, chairman of Abacus Advisors, to help restructure. FB II Acquisition, the Buxbaum affiliate formed to acquire Filene’s Basement, said in a statement last week that it was reviewing “all available” options for the chain. Mariellen Burns, a spokeswoman for Filene’s Basement, declined to comment. Buxbaum referred queries to Filene’s. Retail Ventures, based in Columbus, Ohio, said in January it would close 11 of Filene’s Basement’s 36 stores and “aggressively” renegotiate terms on the remaining leases. Filene’s Basement’s sales fell 9.5 percent to $422 million in the year ended Jan. 31.

Home Vacancies Rise in U.S. to Record Amid Recession - (www.bloomberg.com) A record 19.1 million homes stood unoccupied in the first quarter and the U.S. homeownership rate fell as the recession sapped demand for real estate. The number of vacant homes, including foreclosures, properties for sale and vacation properties, jumped from 18.6 million a year earlier, the U.S. Census Bureau said in a report today. Households that own their own residence declined for the third straight quarter to 67.3 percent. The U.S. financial crisis and falling home prices have shattered the confidence of homebuyers. The percentage of people who said they plan to buy a home in the next six months dropped to a 26-year low in March, according to the Conference Board in New York. Job losses will continue to erode real estate demand, according to an April 23 report by Mark Fleming, chief economist for First American CoreLogic Inc. in Santa Ana, California. “We expect home prices to continue to decline into 2010 as economic conditions and excess housing inventories dampen prices,” Fleming said in the report. “Decreases are now being driven by rising unemployment and a high volume of distressed home sales.” The percentage of all U.S. homes empty and for sale, known as the vacancy rate, fell to 2.7 percent in the first quarter. It hit an all-time high of 2.9 percent in the first and fourth quarters of 2008, the Census Bureau said.



OTHER STORIES:

Money for Nothing - (www.nytimes.com)
Losses in Good-Will Values Compound Bank Troubles - (www.nytimes.com)
Mexican, Brazilian equities down as swine-flu impact assessed - (www.marketwatch.com)
U.S. Stocks Fall as Swine Flu Drags Down Travel, Hotel Shares - (www.bloomberg.com)
Treasuries Rise After Auction, Buyback Amid Swine Flu Concern - (www.bloomberg.com)
Yen, Dollar Advance as Swine Flu, Economy Spur Refuge Demand - (www.bloomberg.com)
Gold Falls in N.Y. as Dollar Gains, Oil Slumps on Flu Concerns - (www.bloomberg.com)

Stress Tests May Force Banks to Convert TARP Stock - (www.bloomberg.com)
Default Rates Reach ‘Eye-Popping’ Levels in March, Goldman Says - (www.bloomberg.com)
Swine Flu Outbreak Spurs Asia to Screen Travelers - (www.bloomberg.com)
EU health minister: Don't travel to Mexico or US - (finance.yahoo.com)
Japan revises growth forecasts sharply lower - (www.ft.com)
About 20% of Asia Hedge Funds Shut Since January 2008 - (www.bloomberg.com)
World govts race to contain swine flu outbreak - (finance.yahoo.com)
IMF says national deficits to remain sky-high - (www.ft.com)
Fed study puts ideal US interest rate at -5% - (www.ft.com)
G.M.’s Latest Plan Hinges on Debt Exchange - (www.nytimes.com)
GM Steps Up Job Cuts, Offers Shares to Bondholders - (www.bloomberg.com)
Whirlpool 1Q profit drops on weakening demand - (finance.yahoo.com)
Losses in Good-Will Values Compound Bank Troubles - (www.nytimes.com)
Goldman Sachs Boosts Risk-Taking at Fastest Pace on Wall Street - (www.bloomberg.com)
US newspaper circulation sees steeper decline - (finance.yahoo.com)
B of A rebranding 'toxic' Countrywide lending operation - (www.latimes.com)

US Regulators Tell Citi, BofA to Increase Capital - (www.cnbc.com)
Bonds Show 'Terrifying' Economic Weakness: Hendry - (www.cnbc.com)
Hendry: Why Buffett Is Wrong - (www.cnbc.com)
Bristol Profit Slips, Hurt by Dollar, Erbitux Swoon - (www.cnbc.com)
Chrysler CEO: Daimler Pact Eases Fiat Alliance - (www.cnbc.com)
UAW Leaders Recommend Approval of Chrysler Deal - (www.cnbc.com)
GM Offers Final Survival Plan, Bond Deal - (www.cnbc.com)