Friday June 5 Housing and Economic stories

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TOP STORIES:

Lowest Libor Hides ‘Exceptionally Wide’ Bank Spreads - (www.bloomberg.com) The drop in the London interbank offered rate, the benchmark for $360 trillion of financial products, to a record low masks a growing gap between the rates that the biggest banks charge each other for credit. The difference between the highest and lowest interest rates banks say they pay for three-month dollar-denominated loans is near the widest this year, according to data compiled by the British Bankers’ Association. The spread signals that lenders still lack confidence in each other, even though measures ranging from the so-called Libor-OIS spread to corporate bond sales show credit markets have recovered from the freeze caused by the Sept. 15 collapse of Lehman Brothers Holdings Inc. “It’s premature to judge that the credit meltdown is fully over,” said Kazuto Uchida, chief economist in Tokyo at Bank of Tokyo Mitsubishi UFJ Ltd., a unit of Japan’s largest bank. “Banks remain wary of extending credit to each other due to strenuous concerns about counterparty risk.” While the spread, calculated by discarding the highest and lowest four quotes before determining the mean of the remaining eight, equates to about $76,000 of interest on a $100 million loan, it represents a growing proportion of Libor as the rate declines. On every day but 11 in the past three months, London- based Royal Bank of Scotland Group Plc, which is under government control, submitted the highest rate in the daily survey, according to data compiled by Bloomberg. “The dispersion of Libor submissions seems to be exceptionally wide,” said Marc Chandler, the global head of currency strategy at Brown Brothers Harriman & Co. in New York. “There is potential for bifurcation of the financial system between banks perceived to be healthier than others.”

The Crisis Isn't California's Alone - (www.businessweek.com) Forty-seven states face budget gaps, according to a study, and there aren't a lot of good solutions. It's been a tough week for the Terminator everywhere but the box office. On May 19, California voters solidly rejected a series of ballot initiatives that would have provided Governor Arnold Schwarzenegger with short-term fixes to help patch the state's $21 billion budget deficit. Then, while in Washington, Schwarzenegger got the cold shoulder from Treasury Secretary Timothy Geithner and legislative leaders when he asked the federal government to help guarantee some of the state's future borrowings. Back in California on May 21, Schwarzenegger said he'd gotten the message and was asking his budget team to go back to the cutting board. "The people want Sacramento to live within its means," he said. It's a message politicians across the country have to come to grips with. According to the nonprofit Center on Budget & Policy Priorities, some 47 states face budget gaps in the 2010 and 2011 fiscal years. (Hats off to you Montana, Wyoming, and North Dakota.) The collective shortfall is a staggering $350 billion. Congress offered some relief with $140 billion in state funding packed into the $787 billion stimulus bill passed in Februrary. California is set to receive $8 billion of that. But the appetite in Washington to work out additional funding for the true basket cases like California is nil. "They all got something in the stimulus bill," says Brian Riedel, a senior policy analyst at the Heritage Foundation. "No other state has requested a special bailout." That leaves states turning to a mixed bag of revenue hikes and expense cuts. Governors have announced furloughs of state workers, layoffs, fee hikes, and across-the-board spending cuts. Sixteen states are enacting tax hikes and 17 others are considering doing so. "The size of the gap puts everything on the table," says Arturo Perez, a fiscal analyst at the National Conference of State Legislators. The California state legislature will now have to consider many more cuts. They'll range from relatively smaller items—a $4 million-a-year poison-control hotline that gets 900 calls a day—to sweeping cuts in health-care spending that will reduce coverage for 2 million poor state residents. "These are folks who may go to the emergency room, but they'll face the bills afterward," says Anthony Wright, executive director of advocacy group Health Access California. "If you're trying to lift yourself out of poverty, that won't help you." Tax Oil Producers Instead?: California legislators had already passed $16 billion in spending cuts and $12 billion in fee hikes to tackle the current fiscal year's budget. Schwarzenegger says his own office has been reduced by 27 positions, to 147 people, and remaining staffers are taking a 9% pay cut. State legislators, though, say the governor's decision this week to stop pursuing short-term borrowings came as a surprise to them. Noreen Evans, a Democrat who chairs the budget committee in the State Assembly, says she was against borrowing more money to begin with. She thinks the fix lies in a number of spending cuts and tax increases—everything from putting a sales tax on tickets to sporting events to the $750 million a year that could be gained from taxing oil production in the state. "We should think about taxing oil producers before we cut health care coverage to 200,000 children," she says. Some see California's fiscal crisis as an opportunity to address structural problems with the state's government. California is one of only three states that requires its legislature to pass laws by a two-thirds vote rather than by a simple majority. That leaves it subject to recurring stalemates and compromises with the Republican minority. "If the legislature can pass a majority rule, it can more easily cut spending and raise taxes," says Rick Jacobs, whose Courage Campaign is pushing to eliminate the two-thirds rule. "Right now it is not responsible to the people of California," he says. "It's hamstrung."

Fitch expresses concern about China's loan cascade - (www.financeasia.com) The ratings agency points to early warning signs that indicate asset quality is deteriorating. This year, China's banks have opened the floodgates of credit: between January and the end of April, $757 billion worth of new loans were dished out, equivalent to 17% of the GDP in 2008. As such, China's banks are enjoying a rate of growth that their Western peers would kill for. The increase in lending is the government's doing, since it has given banks the task of financing the infrastructure spending that forms a large part of China's stimulus package. Looking to the medium- to long-term, however, analysts are beginning to air concerns about what effect such a rapid increase in lending could have on the quality of the banks' loan portfolios. A report released yesterday by Fitch Ratings highlights issues with the banking sector's $4.2 trillion corporate loan portfolio. The worry arises from the fact that China's banks are increasing their corporate exposure at a time when corporate profits are declining. "Ordinarily, falling corporate earnings are met with tightened lending, but in China precisely the reverse is happening," said the report. This illustrates that "despite years of reform Chinese banks still retain an important policy function in upholding local enterprises". Infrastructure spending is not the only thing underlying the loan growth, according to the report. All the banks set a profit growth target. Since interest rates are down, the only way that banks can possibly meet their targets is by focusing purely on volumes. In the process of increasing the number of loans, it is more likely that money will be lent to commercially unviable projects. However, the banks don't see this as a problem, since there is an implicit assumption that any coming losses will be paid for by the government. Although bank earnings have held up well so far, Fitch points to what it calls "early warning signals" that indicate asset quality could be deteriorating. One sign is that the banks are increasing the assessment rate for how much money should be kept aside for losses against unimpaired loans, which suggests that they expect greater losses to come from the loans that are currently considered performing. The banks are also reclassifying more special mention loans, a category of weak loans just one step from being a non-performing loan (NPL), into NPLs. Finally, the foreign banks, which have better risk management systems than the local banks, saw a rise in their NPLs in the first quarter.

Fitch expects CA real estate to decline another 36% - (www.businesswire.com) Home prices in hard hit states like California, Arizona and Florida still have a considerable way to fall before stabilizing in late 2010, according to the latest U.S. home price forecast from Fitch Ratings. Importantly, however, these additional declines remain within the ranges assumed previously in Fitch's RMBS rating actions. Therefore, the new data, in and of itself, is not expected to lead directly to any widespread negative rating actions. Fitch expects that California will lead the way with an additional 36% decline in home prices from current levels over the next 12 to 18 months. Florida and Arizona are forecast to see declines of over 20% from today's levels in the same period. Not surprisingly, these states saw the largest run up in prices, with them more than doubling in the 2002-2006 period. To date, home prices in these three states have already fallen by 40% on average. "Though substantial further home price declines are still to occur, it does appear that the new data is not indicating declines beyond those already anticipated," said Group Managing Director and U.S. RMBS group head Huxley Somerville. "Fitch expects that declines will continue for at least a year before home prices reach bottom." California, Arizona and Florida account for approximately 50% of the overall non-agency mortgage origination volume by dollar over the past four years. New York has averaged approximately five percent of the dollar volume with New Jersey, Texas and Illinois accounting for three to five percent on average. Home price declines in the higher volume states outside of California, Arizona and Florida have fared substantially better and are expected to see more moderate further declines. Among these, Texas and Illinois are anticipated to see further declines of 1% and 9% respectively and New York and New Jersey are expected to see further declines of 11% and 20% respectively. Fitch believes that most of the home price correction will occur in the next eighteen months, with prices exhibiting more stability beginning in late 2010. Fitch's forecast analysis assumes a 1.5% inflation rate for 2009 and 2010 and 3% for the following three years. Nationally, Fitch expects home prices to fall a further 12.5% on average. Fitch's forecast is primarily based on its expectation that home prices will return closer to the inflation-adjusted long-term historical mean, which has been the pattern of prior home price cycles. However, given the volatile economic conditions, Fitch will continue to actively review its forecasts. Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

German Export Plunge Sparked Record Economic Slump - (www.bloomberg.com) German exports and company spending plunged in the first quarter, dragging Europe’s largest economy into its deepest slump on record. Exports dropped 9.7 percent from the fourth quarter and company investment declined 7.9 percent, the Federal Statistics Office in Wiesbaden said today. Gross domestic product fell a seasonally adjusted 3.8 percent from the previous three months, the office said, confirming an initial estimate from May 15. That’s the steepest drop since quarterly data were first compiled in 1970. The worst global recession since World War II has exposed Germany’s reliance on exports as an Achilles Heel, forcing companies to slash output and cut jobs. Chancellor Angela Merkel’s government will spend about 82 billion euros ($115 billion) to fight the crisis, and the European Central Bank has cut borrowing costs to a record low. German business confidence rose for a second month in May and investors also grew more optimistic, suggesting the economic slump is bottoming out. “Recent indicators give hope that the worst is behind us,” said Carsten Brzeski, an economist at ING Groep NV in Brussels. “The German economy should stabilize in the coming quarters, backed by the ECB’s aggressive monetary easing and the government’s stimulus package. A recovery in the truest sense of the word will only materialize in 2010.” The government expects the economy to contract 6 percent this year.

Manhattan’s Sublet Office Market Is Bursting - (www.nytimes.com) Few office towers have been left untouched by the flood of sublet space that has recently inundated the New York office market. In Midtown Manhattan — where many of the world’s largest financial companies are headquartered — three out of every four office towers now have sublet space available. Skip to next paragraphBrokers say that many sublandlords will probably need to bend over backward to sublease their space, given the sharp rise in vacancies. In Midtown Manhattan, for example, 13 percent of prime, modern, well-located offices — which brokers often refer to as Class A space — was available in April, up from 6.5 percent a year earlier, according to Colliers ABR, a commercial real estate services company. And sublets now account for some 40 percent of the space available in Midtown, compared with 30 percent of the much smaller total that was available a year ago, the company said. In some cases, the ink was barely dry on the original lease before the space went back on the market for sublet. For example, Dechert, a global corporate law firm, has completed one year of a 15-year lease for the 25th through 31st floors at 1095 Avenue of the Americas, a 41-story office tower between 41st and 42nd Street, overlooking Bryant Park. When the firm moved in last year, it intentionally took an extra floor, which it planned to use for future expansion, and from the start it has had a subtenant on the whole 31st floor. But that sublease expires in July, and the subtenant does not plan to renew. Since last year, the law firm has also had several rounds of layoffs, and it needs less space. Judith B. Tellefsen, the director of real estate and purchasing for Dechert, said the firm would like to sublet two floors, preferably lower floors, which are each 37,000 square feet. “We are only partially occupying the 25th and 26th floors, and we could easily consolidate those lawyers on other floors,” she said. Ms. Tellefsen said that the firm would be flexible, though, if a subtenant wanted the 31st floor instead.

Peter Schiff: Is the Financial Media Freezing Him Out? - (online.wsj.com) That’s the question Time magazine’s Justin Fox raises in a piece in the June 1 edition of the newsweekly. The story notes that Schiff’s accurate predictions on the economy — check out this YouTube video for a smattering — haven’t always been turned into profits for his clients. (See this January story from The Journal for more) But Fox suggests that there may be other reasons at play. He writes: The main issue with Schiff seems to be that he hasn’t changed his tune–and it isn’t a pleasant tune to listen to. He thinks the “phony economy” of the U.S. is headed for even harder times. He believes that the crisis-fighting measures coming out of Washington are merely delaying the inevitable, debasing the dollar and loading future taxpayers with huge debts. For his part, Schiff concurs, telling Time in a video interview: “I think maybe the media, is fallen into this concept of ‘We can’t be negative.’ I say, ‘No. Things are going to get very bad and that’s precisely why the government has stay out of it. We need the free market to correct these problems, that’s the only way to do it.” It’d take a while to quantify Fox’s assertion that, barring a few exceptions, “he’s no longer invited to mainstream discussions of the economy and economic policy.” Schiff did pen an op-ed piece on The Journal’s editorial page back in January, for example. And the same late-January story we noted earlier, mentioned that at time that Schiff was speaking at “a global competitiveness conference in Riyadh, Saudi Arabia, alongside former heads of state, prime ministers and American gold-medal swimmer Michael Phelps.” (No, we’re not sure of Phelps’ views on quantitative easing.) What do you guys think? Do particularly dour talking heads like Schiff — and for that matter other doomsayers such money manager Jeremy Grantham and mutual-fund manager Bob Rodriguez — get their share of the spotlight for pundits?






OTHER STORIES:

Homes: Almost 20% cheaper - (money.cnn.com)
Budget crises swamp state after state - (www.msnbc.msn.com)
Signs of more trouble ahead for housing market - (www.sfgate.com)
Job Losses Push Safer Mortgages to Foreclosure - (www.nytimes.com)
Wall Street nervously awaits data on home sales, consumer confidence - (www.latimes.com)
Britain looks to the land of the rising sun with envy - (www.telegraph.co.uk)
European Slump May Stall Global Rebound - (www.washingtonpost.com)
U.S. Jobless Rate Likely to Pass Europe’s - (www.nytimes.com)
Lowest Libor Hides ‘Exceptionally Wide’ Bank Spreads - (www.bloomberg.com)
Europe Looks to Tighten Banking Supervision - (www.nytimes.com)

Europe Feels the Strain of Protecting Workers and Plants - (www.nytimes.com)
Home Prices in 20 U.S. Cities Fall More Than Forecast - (www.bloomberg.com)
US consumer confidence surges - (www.ft.com)
Fed's Next Task: Reeling In Lifelines - (www.washingtonpost.com)
Obama urged to curb Buy American measures - (www.ft.com)
Signs of more trouble ahead for housing market - (www.sfgate.com)
U.S. Expected to Own 70% of Restructured G.M. - (www.nytimes.com)
GM bankruptcy nears as bondholders shun tender offer - (www.bloomberg.com)
Crunch time looms for GM, Chrysler restructuring - (www.reuters.com)
JPMorgan $29 Billion WaMu Windfall Turned Bad Loans Into Income - (www.bloomberg.com)
Exploding debt threatens America - (www.ft.com)
Meltdown 101: Deficits raise financing worries - (finance.yahoo.com)
America’s governance reform must not be ducked - (www.ft.com)