KeNo's Housing and Economic Portal: Friday June 26 Housing and Economic stories

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TOP STORIES:

Peter Schiff: U.S. Political Risk a Reality - (www.wealthdaily.com) "Crony capitalism" is a term often applied to foreign nations where government interference circumvents market forces. The practice is widely associated with tin-pot dictators and second-rate economies. In such a system, support for the ruling regime is the best and only path to economic success. Who you know supersedes what you know, and favoritism trumps the rule of law. Unfortunately, last week's events demonstrate that the phrase now more aptly describes our own country. On Monday, the Supreme Court refused to hear an appeal from Chrysler's secured creditors based on the government's argument that the needs of other stakeholders outweighed those of a few creditors. In this case, the Administration concluded the interests of the United Auto Workers outweighed the interests of the Indiana teachers and firemen whose pension fund sued to block the restructuring. Given the enormous financial support that the UAW poured into the Obama campaign, such partiality is hardly surprising. When making their investment in Chrysler just a few months ago, the Indiana pension fund agreed to commit capital because of the specific assurances received from the company. In allowing this sham bankruptcy to be crammed through the courts, we have shredded the vital principal of the rule of law, and have become a nation of men, rather than one of laws. The risk that legal contracts can now be arbitrarily set aside will make investors think twice before committing capital to distressed corporations. Oftentimes enforcing contracts imposes hardships. That's precisely why we have contracts. Without absolute faith that deals will be honored, it will be extremely difficult for U.S. companies to borrow money. This will be particularly true for those companies already struggling with too much debt. Without the ability to issue secured debt, how will such companies access the necessary capital to turn around? If secured creditors cannot count on the courts to enforce their claims, they will not put their capital at risk. What good is being a secured creditor if courts can allow the assets securing your claim to be sold for the benefit of others? Another problem with the government imposing losses on secured Chrysler creditors is that in its bailouts of financial companies (like Citigroup and AIG), the government took steps to specifically pay back creditors, even when those creditors should have been wiped out. This inconsistency and lack of equal protection further undermines faith in our economy.

Insurance Giant A.I.G. Takes Ex-Chief (and crook who got them into their current predicament) to Court - (www.nytimes.com) The latest act in the drama of the American International Groupopens Monday when the ailing insurance giant takes its former chief executive to court, accusing him of plundering a trust that it says was set up to pay top performers. A.I.G. contends Maurice R. Greenberg, 84, who ran the company for decades, unlawfully took $4.3 billion in stock in 2005, the year he was forced out as chief executive. Mr. Greenberg and his lawyers say that those A.I.G. shares — owned by Starr International, a privately held company, of which he is chairman — were not held in a trust at all. As Starr’s chairman, they say, Mr. Greenberg had the authority to sell the shares and invest the proceeds in new offshore insurance businesses and in a new charitable arm. The government bailout of A.I.G. occurred after the main events in the case, which revolve around the intricacies of trust and securities law. But the trial may delve into the broader questions of who is responsible for A.I.G’s near collapse and whether, as chief executive of A.I.G., Mr. Greenberg was more preoccupied with financial maneuvers than with fostering sound risk management. For his part, he has accused the government of destroying a company that he nurtured. Though Mr. Greenberg sold the $4.3 billion block of stock in 2005, long before the price crashed, he kept much of his personal fortune in A.I.G. shares. When the government stepped in last fall, taking a 79.9 percent stake in the company, Mr. Greenberg and other shareholders were essentially wiped out. The dispute over the Starr International stock sale began with a complaint filed by Mr. Greenberg that A.I.G. was holding an art collection that belonged to Starr. A.I.G. countersued, denying Mr. Greenberg’s accusations and saying he had promised to pay its employees hundreds of millions of dollars and needed to make good.

Video: Government's Largesse Spreads - (online.wsj.com) As part of the government's intervention during the economic crisis, federal money has gone to a surprising number of unlikely candidates. Bob Davis reports.

Bankruptcy Filings Reach 6,000 A Day - (Mish at globaleconomicanalysis.blogspot.com) The USA Today is reporting Bankruptcy filings rise to 6,000 a day as job losses take toll. Consumer and commercial bankruptcy filings are on pace to reach a stunning 1.5 million this year, according to a report from Automated Access to Court Electronic Records. While well below the record 2 million filings in 2005, the number of filings is up sharply from last year's 1.1 million, says Robert Lawless, professor of law at the University of Illinois. Bankruptcy filings took a dramatic nose dive after a 2005 bankruptcy reform measure was signed into law to curb bankruptcy abuse and make it harder to erase debts. "People are coming to us in much worse shape than they used to be," says David Jones, president of the non-profit Association of Independent Consumer Credit Counseling Agencies. "We used to be able to help 20% to 25% of people who came to us, and now we can only help 7% to 8%." Last month, commercial filings hit 376 a day, up from 255 in May 2008. Hartmarx, which manufactures and markets apparel, and Silicon Graphics, a manufacturer of computer workstations and storage products, were among the filers. The wave of corporate bankruptcies will cause a secondary wave in consumer filings, says John Pottow, University of Michigan bankruptcy law professor. Bankruptcy filings are apt to exceed the 2005 number eventually, given data like Jobs Contract 17th Straight Month; Unemployment Rate Soars to 9.4%. What set 2005 apart was Hurricane Katrina filers rushing to beat the deadline of Bush's Debt Slave Act officially known as the Bankruptcy Reform Act of 2005. One of the consequences of that act was banks lent with impunity to the worst credit risks thinking that debts could not easily be discharged in bankruptcy. Those banks and other institutions that lent recklessly are now about to find out otherwise. Moreover, I expect walking away to start picking up steam as well. Please see Walking Away Revisited for the Moral Dilemma that many are facing.

High-end homeowners now feeling the pinch: While cheaper houses sell, ‘market is terrible’ for multimillion-dollar properties in county - (www.signonsandiego.com) “Wealthy folks have taken huge hits that they haven't taken in a long time, if ever.” The real estate slump has arrived in La Jolla, Rancho Santa Fe and other high-end San Diego County neighborhoods. After holding their own in sales strength, sales of homes priced at $1 million or more started to fall a year after lower-priced homes hit the skids. Now, instead of selling their multimillion-dollar homes at multimillion-dollar profits, some sellers are taking a bath or renting their properties while they wait for a sunnier day. “The market is terrible,” said Jan Paulin, 58, who bought his 4,164-square-foot home on Hillside Drive in La Jolla for $2 million in 2000, put it on the market for $4.5 million last year and is now hoping to get $3.8 million. If Paulin doesn't get what he wants, he plans to rent it for $10,000 a month. Other high-end owners are following the same strategy, area agents say. “I'd rather hold on to it for a while and wait it out until the market turns, and we can get some revenue in the meantime and at least cover the carrying costs,” Paulin said. Yesterday in the Cielo project east of Rancho Santa Fe, Bill Menish, a former local TV anchor turned auctioneer, conducted an auction for a 5,000-square-foot home bought for $2.65 million in 2001. The highest bid was $1.965 million, which took 20 minutes to reach and was close to the seller's reserve. “The owners have a lot of equity in it, have moved into another house and would like to take their capital and move it into an alternative investment,” said listing agent Bill Taylor. Through the first four months of the year, 337 homes priced at $1 million or more closed escrow, down 52.4 percent from the same time last year, according to MDA DataQuick. Over the same period, sales of homes less than $1 million totaled 10,987, up 37.5 percent. The overall median price in April was $290,000, down 44 percent from the peak of $517,500 in November 2005. “The low end has been driving the county sales higher, while the luxury market has typically remained extremely sluggish,” said DataQuick analyst Andrew LePage, adding, “Wealthy folks have taken huge hits that they haven't taken in a long time, if ever.” At the current rate, it would take nearly four months to sell all homes listed for less than $1 million. For homes priced at $1 million or more, the backlog stands at about 30 months, according to the San Diego Association of Realtors. Obviously, the top end represents a small fraction of the local inventory. According to Zillow.com , 44,500, or 5.9 percent of the nearly 750,000 homes the online company tracks locally are worth $1 million or more. They are generally concentrated in coastal communities with a few scattered throughout the rest of the county. But of the 13,010 homes on the local multiple listing service last week, 2,537, or 19.5 percent, carry asking prices in the seven figures. The National Association of Realtors reports that the national share of sales above $750,000 is half of what it was two years ago. In San Diego County, the drop-off of sales of homes at $1 million or more is even more dramatic, down from 73 percent this year from 2006's peak rate. “I've been doing this since 1975 and never seen anything quite as volatile,” said Willis-Allen Real Estate agent Linda Daniels.

MBA Backs Proposal for $15,000 Homebuyer Credit Across the Board - (www.realestaterama.com) - David G. Kittle, CMB, Chairman of the Mortgage Bankers Association issued the following statement today in support of S. 1230, The Homebuyer Tax Credit Act of 2009.“Stimulating the housing market is one of the best ways Congress can help accelerate the recovery of our national economy. Offering $15,000 to potential homebuyers is a powerful incentive that I believe will jumpstart the housing market. “The current $8,000 credit for first-time buyers has had a positive effect on the housing market this year. Increasing the amount and expanding the benefit to include all homebuyers will have an even larger impact in spurring the housing market and stabilizing the economy.“As this bipartisan proposal moves forward, we hope that policy makers will make the tax credit refundable as a tax refund if the person’s tax liability is less than the amount of the credit, so borrowers can take full advantage of this benefit. In addition, we believe that the tax credit ought to be made available at the closing table. One of the greatest hurdles for many homebuyers is saving money for their down payment. If this money could be made available at the closing table, as FHA has done with the existing tax credit for first-time homebuyers, it will have the potential to help even more borrowers.” A letter to U.S. Senator Johnny Isakson (R-GA), who introduced S. 1230, can be found on www.mortgagebankers.org.

Foreign Direct Investment in China Tumbles on Crisis - (www.bloomberg.com) Foreign direct investment in China fell for an eighth month from a year earlier as companies cut spending to weather the worst economic slump since the Great Depression. Investment slid 17.8 percent in May to $6.38 billion, the commerce ministry said at a briefing in Beijing today, after falling 22.5 percent in April. China is relying on government-led spending under a 4 trillion yuan ($586 billion) stimulus plan to revive growth. Investment from abroad may increase when the global economy recovers from what the World Bank forecasts will be a contraction of almost 3 percent this year. “Companies have just been trying to survive the crisis, I don’t think they’re in the mood for aggressive overseas expansion,” said Wang Qing, chief Asia economist for Morgan Stanley in Hong Kong. “It’s too soon to see a pick-up.” For the first five months of the year, foreign direct investment declined 20.4 percent. Premier Wen Jiabao cautioned during a tour of Hunan province on June 12 and 13 that the world economic outlook remains unclear, the government said in a statement on its Web site yesterday. China has yet to establish solid foundations for a recovery, he added. The Chinese economy expanded 6.1 percent in the first quarter from a year earlier, the slowest pace in almost a decade. Full-year growth may be 7.5 percent, according to a Bloomberg News survey of economists last month.

Europe Payrolls Contract by Record as Recession Forces Job Cuts - (www.bloomberg.com) Europe’s economy lost a record 1.22 million jobs in the first quarter as companies cut spending to survive the worst global economic slump in more than six decades. Employment payrolls in the 16-member euro region fell 0.8 percent from the fourth quarter, when they declined 0.4 percent, the European Union statistics office in Luxembourg said today. The first-quarter drop was the biggest decline since the data series started in 1995. From a year earlier, payrolls contracted1.2 percent, the first annual decline on record. The euro-area economy may struggle to gather strength after shrinking at the fastest pace in at least 15 years in the first quarter. Even as indications mount that the worst of the recession may be over, unemployment is near a 10-year high and forecast to rise more as industries from auto makers to airlines reduce output and staffing to weather the economic crisis. “Companies will continue to cut jobs well into 2010, pushing up unemployment across the region,” said Stefan Bielmeier, an economist at Deutsche Bank AG in Frankfurt. “While the economy may start to stabilize, the worst is still ahead in terms of the labor market.” Continental AG, the second-largest car-parts maker in Europe, said this month that it may fire as many as 2,600 workers in Germany. Air France-KLM Group, Europe’s biggest airline, last month said it will deepen job cuts after reporting its first annual loss since 1996.

States consider college aid cuts; student programs at risk - (www.usatoday.com) At a time when many students and parents are struggling to pay for college, several cash-starved states are considering reducing funds for grants and scholarships for thousands of low- and middle-income students. In California, Gov. Arnold Schwarzenegger's plan to close the state's $24 billion deficit includes sharp cuts in the state's Cal Grants program, which provides up to $9,700 a year for eligible college students. Schwarzenegger has proposed eliminating Cal Grants for new students and reducing grants for some existing students. The plan would have an impact on more than 200,000 students, according to the Institute for College Access and Success, an advocacy group. Democrats have vowed to fight the proposal, but for some prospective students, the damage has already been done, says acting institute Director Lauren Asher. "The risk of losing Cal Grants could easily lead some students to decide they can't afford" to go to college, she says. Other proposals to reduce or restructure state financial aid programs: •Ohio's education chancellor has proposed a new formula for its Ohio College Opportunity Grant program that would reduce financial aid for some community college students. Students wouldn't receive any OCOG money if federal Pell grants — which are provided to low-income students — covered the full cost of their tuition and a portion of other expenses. The change would reduce the amount of money community college students receive for living expenses, such as child care, says Ronald Abrams, president of the Ohio Association of Community Colleges. The state's Board of Regents estimates the change would reduce the average community college student's financial aid by $1,500 a year. The proposal would also eliminate OCOG grants for students who attend private colleges or for-profit career colleges.

OTHER STORIES:

U.S. Intervention Pits 'Gets' vs. 'Get-Nots' - (online.wsj.com) The government's massive intervention has shifted the way companies do business. Many are now are competing on the basis of their ability to tap government money, opening a divide between the gets and get-nots.

Citi and IFC in global trade funding alliance - (www.ft.com) Move part of $50bn World Bank initiative

Opposition grows to Ping An’s TPG deal - (www.ft.com) US group stands to earn hefty profit on bank stake sale

Buy-out investors at risk of default - (www.ft.com)

US broker in landmark Baghdad move - (www.ft.com) Auerbach Grayson to sell Iraqi securities

Novartis rejects call for vaccine donations - (www.ft.com) Rebuff to WHO call on swine flu

M Stanley and Citi venture keeps brokers waiting - (www.ft.com) Full integration to take up to two years

Hospital Industry Bristles at Cuts - (online.wsj.com)

Lawmaker Wants Expats Counted - (online.wsj.com)

States' Budget Gaps Test Washington - (online.wsj.com)

Auto Suppliers Attempt Reinvention - (online.wsj.com)

European, Asian Stocks Decline; U.S. Index Futures Retreat - (www.bloomberg.com)

Treasuries Climb After Russia Says It Has Confidence in Dollar - (www.bloomberg.com)