Thursday May 14 Housing and Economic stories

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TOP STORIES:

GM Bankruptcy Probable as Obama Favors UAW Against Bondholders - (www.bloomberg.com) General Motors Corp. may be more likely to end up in bankruptcy based on the Obama administration’s willingness to place Chrysler LLC into court protection to safeguard union health-care benefits. With GM and its biggest bondholders at odds over resolving $27 billion in unsecured claims by a June 1 deadline, the Chrysler model indicates that President Barack Obama may resort to bankruptcy to end any impasse over that debt, said Martin Fridson, chief executive officer of New York-based credit investment firm Fridson Investment Advisors. Chrysler filed for protection April 30 after the U.S. was unable to persuade secured lenders to swap $6.9 billion in claims for $2.25 billion in cash. A union retiree health-care trust was offered a 55 percent stake in Chrysler. “This confirms the fear, which right along has been that the Obama administration is more sensitive or beholden to the unions than the bondholders,” Fridson said. “It makes it clear that GM bondholders aren’t likely to be able to work out anything outside of bankruptcy.” GM bondholders proposed April 30 they get a 58 percent ownership stake in the Detroit-based automaker in exchange for their $27 billion in unsecured claims. Bondholders are objecting to GM’s proposal they get a 10 percent share of GM equity while a union health fund would get $10 billion in cash and as much as a 39 percent stake for $20 billion in unsecured claims.

Guide to bad pension policy - (www.contracostatimes.com) CRAIG BOWEN'S SALARY during his final year as chief of the San Ramon Valley Fire Protection District was about $221,000 a year. So how did he end up retiring in December with a tax-advantaged annual pension of $284,000? The answer provides an amazing case study that highlights problems with public employee compensation and reveals tricks that allow workers to spike their pensions at the expense of their fellow employees and taxpayers. The Bowen story has some similarities to the case I examined last month of Peter Nowicki, the chief of the Moraga Orinda Fire District who was able to turn his $185,000 annual salary into a $241,000 yearly pension. While each public agency has different rules that provide new ways to take advantage of retirement systems, many of the lessons can be applied across the board. In Bowen's case, residents of the fire district serving Danville, San Ramon, Alamo, Blackhawk and Diablo should pay close attention because they got shafted. The San Ramon district's flawed compensation system and generous rules for pension calculations allowed Bowen to increase his starting pension from about $193,000 to $284,000 a year — a 47 percent increase. The pension will be increased in future years for inflation. Bowen was only 51 years old when he retired at the end of 2008. If he or his wife lives another 30 years, that bump-up alone would add $2.7 million in today's dollars to his pension. His total retirement payout for the next 30 years would be worth about $8.5 million in today's dollars — far more than most taxpayers have in their 401(k)s when they hit the half-century mark. Bowen is a beneficiary of a system that merits closer scrutiny. His devotion to the job is not at issue. By all accounts, he was a hardworking guy during his 29-year career. Indeed, it apparently took a toll on his health. As he told a reporter in December, a medical condition influenced his decision to retire. In March, the board of the Contra Costa County Employees' Retirement Association, which administers the fire district's pension plan, approved Bowen's request for a service-connected disability. As a result, under state and federal laws, much of his pension payment is exempt from income tax. Moreover, under state rules, if his wife survives him, she will be entitled to 100 percent of his pension for the rest of her life.

JPMorgan May Be Asked to Buy More Banks: CEO Dimon - (www.cnbc.com) JPMorgan Chase may be called on by US regulators to acquire more ailing financial institutions, CEO Jamie Dimon said. The U.S. banking sector is likely to see further consolidation and JPMorgan Chase may be called on by regulators for more acquisitions, Chief Executive Jamie Dimon said on a webcast call Monday. "There are still too many banks in the United States," Dimon told Calyon Securities analyst Mike Mayo on the call. JPMorgan last year purchased Bear Stearns at a fire-sale price and snapped up the assets of failed Seattle thrift Washington Mutual. The second-largest bank is busy absorbing these acquisitions, Dimon said, but added that regulators may still look to JPMorgan to "do something" in terms of acquisitions. JPMorgan is also looking to grow outside of the United States by expanding existing businesses in countries like Brazil, China, India and Russia, he said. Consumer businesses in the United States remain under stress and the credit card business in particular is suffering, according to Dimon.
"Unemployment and home prices (are) driving losses way beyond what we expected, even (with) unemployment like this," he said.

N.Y. Times to File Notice It Will Close Boston Globe - (www.washingtonpost.com) The New York Times Co. said last night that it is notifying federal authorities of its plans to shut down the Boston Globe, raising the possibility that New England's most storied newspaper could cease to exist within weeks. After down-to-the-wire negotiations did not produce millions of dollars in union concessions, the Times Co. said that it will file today a required 60-day notice of the planned shutdown under the Worker Adjustment and Retraining Notification law. The move could amount to a negotiating ploy to extract further concessions from the Globe's unions, since the notice does not require the Times Co. to close the paper after 60 days. The deadline, however, would put the unions under fierce pressure to produce additional savings, and the Boston Newspaper Guild promptly called the step a "bullying" tactic by the company. Some industry observers have expressed skepticism that Times Co. Chairman Arthur Sulzberger Jr. would want his legacy to include the shuttering of the Globe, which his company bought in 1993. But the Times Co. itself is under strong financial pressure. It recently mortgaged its new Manhattan headquarters, borrowed $250 million from a Mexican billionaire at 14 percent interest, laid off 100 newsroom staffers and cut salaries by 5 percent. Globe management said in a toughly worded statement: "Filing the WARN notice is a difficult step that we would like to avoid. But, unfortunately, given the state of the negotiations, it is one we must be prepared to take." The paper's circulation dropped 14 percent in the most recent six-month period. The Globe is expected to lose $85 million this year, the company says.

Banks Are Prevailing in a Tug of War - (www.nytimes.com) Informed debate is a crucial part of public policy development. But the behind-the-scenes tug of war between banks and the government over the results of their recent stress tests strains the already tenuous credibility of the exercise. It also shows that banks have become too powerful. Skip to next paragraphHow so? First, banks and their regulators run stress tests all the time, on individual products, divisions and the institutions as a whole. Without them, it would be very difficult to manage risk or allocate capital among business lines. The current crisis proved these tests were inadequate — or in some cases, ignored by bank managers. But that’s largely because of management incentives to take excessive risks, and the failure of the tests to use sufficiently grim projections. So it’s curious that regulators have put so much stock in the tests they announced in February. The release of their results has been delayed while banks ask for clemency. Since the results will determine which institutions will be forced to raise private capital or take further government infusions, the stakes are high. But like the banks’ earlier and insufficiently stressful stress tests, the government’s worst-case outlooks aren’t all that far-fetched. They also use banks’ own estimates, meaning unscrupulous managers could tweak them to get a better grade. And bankers say they’ll produce very little information that regulators don’t already have. Because of this, bank risk managers (not the most credible group these days) tend to view these tests as a public relations stunt that regulators will use to force their institutions to toe Uncle Sam’s line. That, in itself, is worrying. Regulators shouldn’t have to invent justifications for regulating properly. The right response by a bank when its overseer says jump is, “How high?”

Buffett Says Insurers Took ‘Ungodly Amount of Risk’ - (www.bloomberg.com) Berkshire Hathaway Inc. Chairman Warren Buffett said that life insurers, a group led by MetLife Inc. and Prudential Financial Inc. in the U.S., “took on an ungodly amount of risk.” The industry’s retirement products guaranteeing minimum returns on equity-based investments were “crazy,” Buffett said today at a press conference in Omaha, Nebraska. Berkshire gets about half its profit from insurance, mostly from property and casualty coverage. When insurers “tell the policyholder that he gets some of the up side and you take all the down side, that’s poison,” Buffett said. “That would be like a stockbroker telling you that he’ll pay you back if your stocks lose money.” The Standard & Poor’s Supercomposite Life & Health Insurance Index plunged 60 percent in the past year on costs to back retirement products known as variable annuities and the declining value of assets. North American insurers posted more than $190 billion of writedowns and unrealized losses since the beginning of 2007 tied to the collapse of the mortgage market. “If you are inclined to be dumb on the asset side, you are inclined to be dumb on the liability side too,” Buffett said.

Obama Wants to End Tax Rules That Save Companies $190 Billion - (www.bloomberg.com) President Barack Obama proposed to raise about $190 billion over the next decade by outlawing three offshore tax-avoidance techniques used by U.S. companies such as Caterpillar Inc. and Procter & Gamble Co. He also would make it riskier for Americans to stash money in tax-haven banks. The tax system is “full of corporate loopholes,” Obama said at the White House today, as he outlined the plan along with Treasury Secretary Timothy Geithner. The tax proposals, which will be part of a detailed budget the administration releases later this week, would raise a total of about $210 billion over the next decade. Geithner said that in addition to the tax changes, the Internal Revenue Service is “making an unprecedented effort to strengthen” enforcement. The administration is going after a strategy that allows U.S.-based multinational companies to effectively hide from the Internal Revenue Service the role their foreign subsidiaries play in shifting profits into low-tax jurisdictions such as the Cayman Islands, according to the administration. The proposal, affecting tax rules known as “check the box,” would net $86.5 billion in revenue between 2011-2019 by overhauling regulations created in Democrat Bill Clinton’s administration and later written into law by a Republican- controlled Congress after Clinton tried to withdraw the rules. Tax Changes: The proposal, combined with a $60.1 billion plan to limit many expense deductions for American companies that take advantage of laws allowing them to defer tax on foreign profits and a $43 billion crackdown on abusive foreign tax credits, would be the biggest tax increase on U.S. corporations since 1986. Obama also would shift the burden of proof to individuals when the IRS alleges assets are being hidden in certain offshore bank accounts, the White House said in a statement. “This is bad stuff,” Kenneth Kies, a tax lobbyist at the Washington firm Federal Policy Group, said of Obama’s plans. “This is going to be the biggest fight for the corporate community in the next two years.” Kies represents General Electric Co., Anheuser-Busch Cos. and Microsoft Corp., among others. While the administration expects companies to lobby against the proposals, the president said his plan strikes loopholes that give multinational companies an unfair advantage over companies that operate only within the U.S.

Worries Rise on the Size of U.S. Debt - (www.nytimes.com) The nation’s debt clock is ticking faster than ever — and Wall Street is getting worried. Skip to next paragraphAs the Obama administration racks up an unprecedented spending bill for bank bailouts, Detroit rescues, health care overhauls and stimulus plans, the bond market is starting to push up the cost of trillions of dollars in borrowing for the government. Last week, the yield on 10-year Treasury notes rose to its highest level since November, briefly touching 3.17 percent, a sign that investors are demanding larger returns on the masses of United States debt being issued to finance an economic recovery. While that is still low by historical standards — it averaged about 5.7 percent in the late 1990s, as deficits turned to surpluses under President Bill Clinton — investors are starting to wonder whether the United States is headed for a new era of rising market interest rates as the government borrows, borrows and borrows some more. Already, in the first six months of this fiscal year, the federal deficit is running at $956.8 billion, or nearly one seventh of gross domestic product — levels not seen since World War II, according to Wrightson ICAP, a research firm.

‘Great Recession’ Will Redefine Full Employment as Jobs Vanish - (www.bloomberg.com) Post-recession America may be saddled with high unemployment even after good times finally return. Hundreds of thousands of jobs have vanished forever in industries such as auto manufacturing and financial services. Millions of people who were fired or laid off will find it harder to get hired again and for years may have to accept lower earnings than they enjoyed before the slump. This restructuring -- in what former Federal Reserve Chairman Paul Volcker calls “the Great Recession” -- is causing some economists to reconsider what might be the “natural” rate of unemployment: a level that neither accelerates nor decelerates inflation. This state of equilibrium is often described as “full” employment. Fallout from the recession implies a “markedly higher” natural rate of unemployment, says Edmund Phelps, a professor at Columbia University in New York and winner of the 2006 Nobel Prize in economics. “It was 5.5 percent; maybe it will be 6.5 percent, maybe 7 percent.” That has implications for policy makers as well as workers. The Obama administration and the Federal Reserve are counting on the jobless rate to fall to a medium-term equilibrium of about 5 percent as the economy recovers. A natural rate significantly above that would drive up the annual budget deficit -- which will top $1 trillion for the first time this year -- by reducing tax revenue and pushing up spending on unemployment benefits. A higher rate would also require the Fed to make a choice: Accept an economy with more Americans permanently out of work, or try to boost employment at the risk of heating up inflation.

Lenders move to block Chrysler’s restructuring - (www.ft.com) Lenders say process ‘patently illegal’. A group of Chrysler lenders asked a New York bankruptcy court on Monday to block the restructuring of the ailing Detroit carmaker, contending that the process was “patently illegal”. The dissident group, calling themselves the “non-Tarp lenders”, drew President Barack Obama’s ire last week after refusing to sign on to a deal under which Chrysler offered to swap $6.9bn of secured debt for $2.25bn in cash. The four banks that hold the bulk of the debt – JPMorgan, Citigroup, Morgan Stanley and Goldman Sachs – accepted the offer under strong political pressure. All four have received emergency government aid from the Tarp fund. The dissident group includes about 20 money managers, among them Oppenheimer Funds and Stairway Capital Management. Mr Obama accused the group of forcing Chrysler into Chapter 11 bankruptcy protection on Thursday. Chrysler asked a New York bankruptcy court on Monday to start the process of splitting it into “old” and “new” companies. In theory, a bidding process would take place for the new company on May 21 under section 363 of the US bankruptcy code. But with no other prospective buyers in sight, the carmaker would almost certainly be sold to the United Auto Workers union’s healthcare fund, Italian carmaker Fiat, and the US and Canadian governments. Assets in the old Chrysler would either be sold or closed down. According to a court filing, Chrysler will not survive if the transaction is not completed within 60 days.



OTHER STORIES:

Wells Fargo Is Asked to Raise More Capital After Stress Test - (www.cnbc.com) Regulators have told Wells Fargo to shore up its finances after government "stress tests" showed the bank would have trouble surviving a deeper recession.
Obama Seeks End of Tax Breaks for US Firms Overseas - (www.cnbc.com)
Pending Home Sales Rise, Signaling Market Bottom - (www.cnbc.com)
The New Rules of Real Estate Closing- (www.cnbc.com)
Chrysler Asset Transfer Decision Delayed by Judge - (www.cnbc.com)
More Consumers Fall Behind on Credit Card Payments - (www.cnbc.com)
Is 'Grand Theft Auto' Running Out of Gas? - (www.cnbc.com)

Gold, Silver Gain Before Release of Banks’ Stress-Test Results - (www.bloomberg.com)
Treasury yields reach highest since November after home data - (www.marketwatch.com)
Oil nears $54 on indications demand is up overseas - (finance.yahoo.com)
Stocks jump as home sales, construction increase - (finance.yahoo.com)

Tests of Banks May Bring Hope More Than Fear - (www.nytimes.com)
Bonds Show Lehman Fades in History as Spreads Narrow - (www.bloomberg.com)
Tension on rise in Pakistan’s Swat valley - (www.ft.com)
Asia’s $120 Billion Reserve Fund to Boost Investor Confidence - (www.bloomberg.com)
China Manufacturing Rebounds as Stimulus Plan Spurs Investment - (www.bloomberg.com)

U.S. Economy: Pending Home Resales, Construction Spending Rise - (www.bloomberg.com)
Bernanke To Face Tension On the Hill - (www.washintonpost.com)
Citigroup Said to Weigh Capital Boost That Averts U.S. Control - (www.bloomberg.com)
Swine Flu Spreads to Most U.S. States as Cases Grow - (www.bloomberg.com)