KeNo's Housing and Economic Portal: Friday July 24 Housing and Economic stories

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TOP STORIES:

The Man Who Crashed the World - (www.vanityfair.com) Almost a year after A.I.G.’s collapse, despite a tidal wave of outrage, there still has been no clear explanation of what toppled the insurance giant. The author decides to ask the people involved—the silent, shell-shocked traders of the A.I.G. Financial Products unit—and finds that the story may have a villain, whose reign of terror over 400 employees brought the company, the U.S. economy, and the global financial system to their knees. Six months ago, I received an odd phone call from a man named Jake DeSantis at A.I.G. Financial Products—the infamous unit of the doomed insurance company, staffed by expensively educated, highly paid traders, whose financial ineptitude is widely suspected of costing the U.S. taxpayer $182.5 billion and counting. At the time A.I.G. F.P.’s losses were reported, it became known that a handful of traders in this curious unit had sold trillions of dollars of credit-default swaps (essentially unregulated insurance policies) on piles of U.S. subprime mortgages, but its employees hadn’t yet become the leading examples of Wall Street greed. And so this was before Jake DeSantis and his colleagues found themselves suburban-Connecticut outcasts, before their first death threats, before the House of Representatives passed a bill because of them (taxing 90 percent of their large bonuses), before New York attorney general Andrew Cuomo announced he was going after their paychecks, and before Iowa senator Charles Grassley said that A.I.G.’s leaders should follow the Japanese example and “either do one of two things, resign or go commit suicide.” DeSantis turned out to be a friend of a friend. He’d called because he didn’t know anyone else “in the media.” As a type he was instantly recognizable: a “quant,” a numbers guy who was allowed to take financial risks because of his superior math skills, but who had no taste for company politics or public exposure. He’d grown up in the Midwest, the son of schoolteachers, and discovered Wall Street as a scholarship student at M.I.T. The previous seven years he’d spent running A.I.G. F.P.’s profitable stock-market-related trades. He wasn’t looking for me to write about him or about A.I.G. F.P. He just wanted to know why the public perception of what had happened inside his unit, and the larger company, was so different from the private perception of the people inside it, who actually knew what had happened. The idea that the employees of A.I.G. F.P. had conspired to maximize their short-term gains at the company’s longer-term expense, for instance. He and the other traders had been required to defer about half of their pay for years, and intertwine their long-term interests with their firm’s. The people who lost the most when A.I.G. F.P. went down were the employees of A.I.G. F.P.: DeSantis himself had just watched more than half of what he’d made over the previous nine years vanish. The incentive system at A.I.G. F.P., created in the mid-1990s, wasn’t the short-term-oriented racket that helped doom the Wall Street investment bank as we knew it. It was the very system that U.S. Treasury secretary Timothy Geithner, among others, had proposed as a solution to the problem of Wall Street pay. Even more oddly, the public explanation of A.I.G.’s failure focused on the credit-default swaps sold by traders at A.I.G. F.P., when A.I.G.’s problems were clearly broader. There was the mortgage-insurance unit in North Carolina, United Guaranty, that had taken on all sorts of silly risks in the past two years, lost several billion dollars, and replaced their C.E.O. There were the fund managers at A.I.G., the parent company, who had blown nearly $50 billion on trades in subprime mortgages—that is, they had lost more than A.I.G. F.P., whose losses stood around $45 billion. And there was a pattern: all of this stuff had happened since 2005, after an accounting scandal forced C.E.O. Maurice “Hank” Greenberg to resign. Greenberg, who had headed A.I.G. since 1968, was a bullying, omnipotent ruler—one of those bosses who did not so much build a company as tailor it to his character and render it incapable of being run by anyone else. After he was forced out, Greenberg said, “The new management wanted to prove that they could continue to grow without former management” and so turned a blind eye to all sorts of risks. So how come most of the senior management at A.I.G. was left in place by the U.S. Treasury after the bailout? Why were officials, both public and private, so intent on leading others to believe all the losses at A.I.G. had been caused by a few dozen traders in this fringe unit in London and Connecticut?

Hotel foreclosures spread throughout California - (www.sfgate.com) The "challenges" for San Francisco's biggest business are coming thick and fast. That oft-used word at last Tuesday's San Francisco Visitors & Convention Bureau luncheon rang loud and clear two days later when the Four Seasons Hotel on Market Street defaulted on a $90 million loan. Those who might have forgotten were reminded that Nob Hill's famed Stanford Court Hotel had gone into receivership two weeks earlier, owing $89 million after its new owners bought the place for $93 million two years ago and spent $32 million in renovations. But wait, there's more. Says Joe D'Alessandro, the bureau's CEO: "I would not be surprised to see at least a couple more go in the next few months." There's a wave of hotel defaults and foreclosures sweeping up and down California, say D'Alessandro and other industry experts. Currently, 32 hotels are in foreclosure and 174 in default statewide, according to a June 28 report by the Atlas Hospitality Group in Irvine ( www.atlashospitality.com). Listed among the more recent ones are a Hawthorne Suites and a Residence Inn in Sacramento. "The bright spot is that this is going to be the best buying opportunity since the Great Depression," said Alan Reay, the group's founder. Opportunity costs: That presumably is what Hong Kong's Keck Seng Investments Ltd. saw when it agreed to buy the San Francisco W last week for $90 million. As The Chronicle's James Temple pointed out, the price represents a 50 percent drop from peak values two years ago. The seller, Starwood Hotels & Resorts Worldwide Inc., which owns numerous hotels in the Bay Area, including the recently opened four-star Rosewood Sand Hill in Silicon Valley, said the sale is one of those the company "is pursuing to further reduce its debt levels." To D'Alessandro, the sale is a welcome bright spot on the local scene. But it doesn't fix the real dilemma the hotel business here faces. Yes, the city can boast an 80 percent vacancy rate, up there with New York's. And there are all those great room deals for recession-pinched tourists. Unfortunately, those deals have pushed room revenue down 35 percent, an underlying cause of the industry's financial woes. "I don't see rates returning to what they were for two or three years," says D'Alessandro. OK, what about a time-share? Just west of Union Square, where my colleague Chuck Nevius recommends you check out those bargain "boutique hotels for less than $150 a night," sits the Wyndham Canterbury San Francisco. The 70-year-old Canterbury Hotel and its adjoining Whitehall Inn were officially reincarnated earlier this month by their new owner, Wyndham Worldwide Inc., a big-time time-share developer that also owns the nearby World Mark San Francisco. The two-year makeover brought 70 new jobs to the city, according to the New Jersey company, "and promises a steady stream of commerce to local businesses." The newly named urban "resort" is already 80 percent sold out, said a company spokeswoman.

Boulder Dam Hotel forced to close doors‎ - (www.lvrj.com) Property behind on mortgage; pleas for aid fail. Barring a miracle worthy of a Frank Capra script, the historic Boulder Dam Hotel won't open for guests, diners and history buffs Sunday. The 20-room hotel and museum in downtown Boulder City is three months behind on its mortgage and last-minute appeals for money from the local government failed. That leaves operators no choice but to shut down at midnight, which means the 76-year-old hotel, restaurant and museum will become a dark spot in the middle of Boulder City's historic district. It also will leave 22 mostly part-time workers without jobs and two on-site caretakers looking for a new place to live. "I got a 30-day notice, too," said innkeeper Roger Shoaff who, along with his wife, Roseanne, runs day-to-day operations on behalf of the Boulder City Museum and Historical Association. Some independent small businesses and offices inside will remain open for now. The nonprofit association that owns the property hopes to raise $250,000 by Sept. 10 to reopen the property. But Shoaff was planning to lay off staff, close the restaurant and shutter the guest rooms by midnight. The two-story, white-brick structure, with 10 stately wood columns and green trim, originally opened in 1933, two years before Hoover Dam was complete. In addition to housing famous guests such as James Cagney, Bette Davis and Howard Hughes, the property houses much of Boulder City's past as well in the form of journals, personal photographs, tools and supplies related to the construction of Hoover Dam -- the Great Depression-era edifice that altered the flow of the Colorado River, brought electricity and reliable irrigation supplies to much of the desert Southwest and put Boulder City on the map. Those treasures, as Shoaff calls the artifacts, and the fact the hotel serves as a tourist attraction and community gathering place for Boulder City cultural events, aren't enough to keep the property viable through the current recession. The hotel-museum has about $8,000 in monthly mortgage obligations, Shoaff said, and the occupancy rate has fallen from about 68 percent to 57 percent since the national economy went into a tailspin last year. The historical association sought to raise private money before turning, unsuccessfully, to Boulder City's redevelopment agency on Monday to ask for about $135,000. The group is also seeking grants from the federal government, but now that it is 90 days past-due on the mortgage, foreclosure appears imminent. "We can't compare ourselves to a casino that can give away a room for $9 and make money from other things," said Shoaff of the historic property's niche in the marketplace. Shoaff and others say characterizing their request to the city as a ploy to prop up a business with government money is unfair. They say the hotel is merely one asset of a beloved local institution that has seen other sources of funding, such as grants from Clark County, dry up in hard times. "That is really what I find offensive, this isn't about making a multimillion-dollar mortgage payment or paying off big bondholders," said Michael Green, a history professor at College of Southern Nevada.

CIT Hires Bankruptcy Specialist Skadden as Bond Access Wanes - (www.bloomberg.com) CIT Group Inc., the century-old lender to 950,000 businesses that has been unable to persuade the Federal Deposit Insurance Corp. to guarantee its debt sales, hired bankruptcy specialist Skadden, Arps, Slate, Meagher & Flom LLP as an adviser amid a plunge in its stock and bonds. The FDIC is concerned that standing behind CIT debt would put taxpayer money at risk because the company’s credit quality is worsening, said people familiar with the regulator’s thinking who declined to be identified because the talks are private. The FDIC has backed $274 billion in bond sales under its Temporary Liquidity Guarantee Program since Nov. 25. “Skadden is one of the principal law firms representing CIT,” Curt Ritter, a spokesman for New York-based CIT, said in an e-mail. “They represent the firm on a wide variety of corporate matters. CIT will not comment on any specific aspect of their engagement.” The Wall Street Journal, citing people it didn’t identify, said the hiring comes as CIT prepares for a possible bankruptcy filing. New York-based Skadden is known for its work in mergers and acquisitions and bankruptcies. The firm represented BHP Biliton Ltd., the world’s largest mining company, in its $150 billion proposed acquisition of Rio Tinto, and advised Circuit City Stores Inc. in its bankruptcy. Raising Capital: The federal agency, run by Chairman Sheila Bair, is in discussions with CIT about how the lender can strengthen its financial position to get approval, including raising capital, said one of the people. CIT’s measures to improve its credit quality, such as by transferring assets to its bank, have been insufficient, the person said. CIT’s $500 million of floating-rate notes due in November 2010 fell 3.5 cents on the dollar yesterday to 70 cents, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Credit-default swaps on CIT rose 2.5 percentage points to 37 percent upfront, and earlier reached 38 percent, according to broker Phoenix Partners Group. That’s in addition to 5 percent a year, meaning it would cost $3.7 million initially and $500,000 annually to protect $10 million of CIT debt for five years. The upfront cost reached the highest since Oct. 17, when it climbed to a record 41.5 percent, according to CMA DataVision prices. Maturing Debt: The stock fell 33 cents, or 17.7 percent, to $1.53 in New York Stock Exchange composite trading yesterday, after earlier falling to $1.13, the lowest in seven years. CIT’s stock plunged 59 percent this year through yesterday, underperforming the Russell 1000 Financial Services Index by 50 percentage points.

Sales tax revenues fall sharply in Texas - (finance.yahoo.com) The state's most recent monthly sales tax revenues dropped 11.2 percent from a year ago, the latest sign that the recession is infecting Texas. The $1.57 billion collected in June, which reflects sales in May, is off from the $1.77 billion collected in the same month a year ago. One budget official estimates that sales tax collections are $100 million below projections and could fall $550 million short when the fiscal year ends in two months. Eva DeLuna Castro of the nonpartisan Center for Public Policy Priorities says weak consumer spending is the cause of the shortfall. Sales tax payments to local cities and counties also declined 8.8 percent for July to $426.7 million. The payments were based on May sales. These numbers put Texas "firmly on the list with other states that have revenue problems," DeLuna Castro said in Saturday's Austin American-Statesman. In a statement, Texas Comptroller Susan Combs said the figures also reflected strong tax collections from a year ago, when higher oil and gas prices spurred companies to buy more equipment. The affluent Dallas-Fort Worth suburb of Southlake was among the hardest hit, seeing a 21.7 percent drop to $919,792. University of North Texas economist Bernard Weinstein said that reflected the trend of high-end retail stores feeling the recession more than other areas. "Like it or not, we have joined the national recession," Weinstein told the Fort Worth Star-Telegram. "It's not surprising that people are spending less." Taxes on the sales of cars and trucks, projected to generate $2.6 billion this year, are down more than 22 percent from a year ago. The $4.4 billion in business taxes are off almost 4 percent. However, Combs spokesman R.J. DeSilva said falling revenue was taken into account last month when the comptroller certified that the state would have enough money to cover the current budget and the next one. DeSilva said the downturn in sales tax revenue is expected to last the remainder of the calendar year.

Credit scoring - should it be killed? - (www.examiner.com) Now that lending standards have gotten tougher and people’s credit scores are going down, they are petitioning congress to change the rules. The key to mitigating borrower risk could be in more detailed payment analysis. In the years that the mortgage industry has used credit-scoring as a tool to determine borrowers' creditworthiness, or a borrowers' ability to pay back a mortgage, the industry has not experienced a market like this. Even the historical data used to create the scoring model does not date back to a market like this. Therein lies the problem. In the 1990s, the mortgage industry began using credit scores uniformly as part of loan decisions. These scores were designed to determine the probability of a borrower having a 90-day late payment in the next 24 months on any account. Millions of credit profiles from borrowers across the country were used to compile these scoring models. Credit scores removed a number of risk determination factors from the underwriting process, which may have led to the disastrous default situation we are facing today. On top of that, these scores are becoming out of date because they were not designed for a depreciating market. It may be time to abandon the credit score and return to a more detailed risk-analysis system - and at the least, safer loan programs. What changed?: Before credit-scoring, trained underwriters examined borrowers' credit profiles objectively to determine borrowers' financial strength and their ability to pay back mortgage debt. Underwriters established this by verifying borrowers' assets, savings patterns, credit depth and increasing credit limits, as well as determining the probability of mortgage payment "shock." If borrowers didn't have ever increasing credit limits, which show a proven track record to pay back larger and larger debts, they were less likely to gain approval for maximum-financing loans. Today, borrowers with three credit cards with a minimum of six months of activity and credit limits between $500 and $1,000 can have a credit score in the mid-700s. This allows borrowers to qualify for large loans without that track record of increasing credit limits.

Bank Loan Mod Re-Defaults: A Horrible Record (Barron's) - (www.barrons.com) Moreover, housing is still in deep doo-doo, as evidenced by the graphic on this page. The telling tables are the handiwork of Amherst and come to us via Mark Hanson of Hanson Advisors, whose pithy analyses we've quoted on more than one recent occasion. The table on the left shows the re-default rates of homeowners who were current on their loans when they defaulted for the first time and have again defaulted 10 months after their loans were modified; the table to the right shows the re-default rates of homeowners who had defaulted when they were seriously delinquent and defaulted again 10 months after their loans were modified. They illustrate the fundamental flaw in the notion, widely embraced, not least by the by the Obama administration, that loan modifications is salvation for troubled homeowners, beleaguered builders and lenders. Bull, says Mark. "Loan Mods," he contends, "are designed to keep the unpaid principal balances of the lender's loans in tact while re-levering the borrower"... Mortgage modifications, he thunders, turn "homeowners into underwater, over-levered renters for life, unable to sell, re-buy, refi, shop or save. They turn homeowners into economic zombies." Unfortunately, Mark is right with regards to the vast majority of modifications that have been done to date. They are little more than forbearances, with a hope that the home valuation and hence loan principal are appropriate, and that the economic position of the typical homeowner will soon improve, rather than deteriorate. In other words, they're totally inappropriate for the bubble valuations, and for the economic downturn we are now solidly enmeshed in (and will be facing for quite a while, all of which we predicted here well before-the-fact). Around here, the house view is that loan modifications indeed are what is sorely needed -- but those must involve hefty principal write-downs by the note holders, or they simply will not be sustainable. And unfortunately, the vast majority of mods to date avoid this kind of reckoning like the plague. The reasoning is obvious: keeping the values pegged high and just extending forebearance allows the assets to continue to be booked unrealistically high, and banks (and other financial firms) can avoid taking the full brunt of the write-downs they need to. This would harm bank valuations, you see, and they feel they've already had "enough hurt". The government has made things vastly worse by not only propping these firms up, but giving them a green light to continue with the fictional valuations. At the same time, it is now whining that they won't do more meaningful write-down. Here's a simple message for the Obama administration: pick one, meaningful and sustainable writedowns for distressed homeowners, or elevated bank valuations.

OTHER STORIES:

On Wall Street: Credit crisis is far from over - (www.ft.com)

Tight Mortgage Rules Exclude Even Good Risks - (www.nytimes.com)

Bank of the West, Citibank to keep accepting California IOUs - (www.latimes.com)

SEC May Gain Expanded Powers to Prohibit Broker Pay, Wrongdoers - (www.bloomberg.com)

Securing a Jumbo: No Small Task - (www.nytimes.com)

Hedge-Fund Manager Fed to Ponzi Scheme, U.S. Claims - (www.bloomberg.com)

Espionage Charges in China May Be Linked to Negotiations Over Iron Ore Prices - (www.nytimes.com)

Talks intensify over closing Calif.'s $26B deficit - (finance.yahoo.com)

Obama rejects 2nd stimulus: Give recovery time - (news.yahoo.com/s/ap)

White House Eyes Bailout Funds to Aid Small Firms - (www.washingtonpost.com)

Governator plays it cool over IOUs - (www.ft.com)