KeNo's Housing and Economic Portal: Friday July 31 Housing and Economic stories

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TOP STORIES:

Corrupt California Pension fund (CalPERS) trying to deflect blame for their massive $60B in losses on credit rating agencies. Largely due to their own lack of due-diligence, paying friends and politically connected Obama officials.

· CalPERS sues credit-rating firms over $1 billion in investment losses - (www.latimes.com) California's giant public pension fund is suing the nation's three top bond credit-rating companies for issuing "wildly inaccurate" rankings on investments that it said cost pensioners "perhaps more than $1 billion." The California Public Employees' Retirement System on Wednesday drew plaudits and skepticism for raising legal questions about the firms' gold-plated AAA rankings for investment funds that collapsed in 2007 and 2008. "It's very exciting when someone has the fortitude and the capital to pursue these kind of claims," said Paul Lapides, director of the Corporate Governance Center at Kennesaw State University in Georgia. "If in fact there's a pattern and practice of bad behavior that they knew or should have known about, then the rating agencies should be held accountable in state court." But critics wondered whether CalPERS, the nation's largest pension fund, might be trying to evade responsibility for failing to perform enough of its own diligence before sinking $1.6 billion into so-called structured investment vehicles that held mainly mortgage-backed securities. Spokesmen for the rating firms -- Standard & Poor's, Moody's Investors Service and Fitch Ratings -- called the allegations in the lawsuit filed last week in San Francisco Superior Court meritless and said they would seek a dismissal as quickly as possible. The CalPERS suit alleges that the rating firms negligently misrepresented the financial strength of three structured investment vehicles the companies oversaw. The rating firms, which were compensated by the investment funds they rated, gave the vehicles -- Cheyne Finance, Stanfield Victoria Funding and Sigma Finance Inc. -- top scores that "ultimately proved to be wildly inaccurate and unreasonably high," the lawsuit said. The ratings relied on "flawed assumptions" and failed to note the potential danger that "the underlying assets consisted in large part of risky subprime mortgages," the lawsuit said. What's more, the rating firms played important roles in "the creation and ongoing operation" of the investment funds and commanded steep fees for giving them high marks, the lawsuit said. A Moody's executive, Anthony Mirenda, countered that his firm does not "engage in designing, structuring or marketing securities of any type," and that its "role in the market is simply to offer reasoned, forward-looking opinions on credit risk." Markets are paying attention to the suit because CalPERS is "a 600-pound gorilla" with a $178-billion portfolio, said John Jay, senior analyst for Aite Group, a Boston-based independent financial research and accounting firm. But the pension fund's complaint about "misrepresentation comes way after the fact," Jay said. "There should have been some sort of validation along the way" to make sure that the triple A rating was deserved. CalPERS' lawsuit, if it survives early dismissal efforts, could face an uphill battle. Litigants have had a poor record of collecting losses from rating firms after investments have soured. "The whole rating industry has gotten off pretty much scot-free, but they are under so much scrutiny right now that the courts may be rougher on them," said Alan Bromberg, a securities law professor at Southern Methodist University. CalPERS' chances of collecting any money would improve if it could get the case to a jury trial, Bromberg said. Jurors, influenced by the poor economy and public angst over Wall Street's role in the financial collapse, might be a sympathetic audience, he said. The pension fund also was smart to file the lawsuit in a state court, which "may be more skeptical" of the rating firms than federal courts would be, Bromberg said.

· CalPers losing 103% on its housing bets - Lansner on Real Estate ... - (www.ocregister.com) Yes, 103% No typo! Yes, 3% more than the government-employee pension giant invested! Officials at Calpers confirm that it currently expects to report paper losses of 103% on its housing investments in the fiscal year ended June 30. The Wall Street Journal has a gripping story today detailing CalPers bad bets on real estate. In part, it says … Calpers is now warning California’s cities, towns and schools that they may have to cough up more money to cover the retirement and other benefits the fund provides for 1.6 million state workers. Some towns are already cutting municipal services, and at least one is partly blaming the Calpers fees. Calpers in recent weeks said it expects to report paper losses of 103% on its housing investments in the fiscal year ended June 30. That’s because Calpers invested not only its own money, but billions of dollars of borrowed money that must be repaid even if the investment fails. In some deals, as much as 80% of the money invested by Calpers was borrowed. In the latest wrinkle: To generate sorely needed cash, a troubled Calpers venture known as LandSource recently started the process of selling land during the worst property market in a generation. Calpers could potentially lose nearly $1 billion on LandSource, a $2.5 billion deal completed early last year, and one of the priciest U.S. residential-land transactions ever. LandSource is now under bankruptcy-court protection.

· CalPERS invested more than $110 million with Obama 'car czar ... - (www.sacbee.com) CalPERS has invested more than $110 million with financier Steven Rattner, who resigned as President Barack Obama's "car czar" this week amid an investigation into his dealings with New York's public employee pension fund. Rattner, founder of a New York private equity firm called the Quadrangle Group, has been linked to the corruption investigation that started in New York and has spread to California and other states. While he gave no reason for his resignation as the head of Obama's auto-industry task force, the New York Times and Associated Press reported that New York Attorney General Andrew Cuomo is stepping up his investigation into Quadrangle's practices. Although it hasn't been charged with any crime, Quadrangle paid fees to a pair of New Yorkpolitical operatives who've been indicted for selling access to the state's big public pension fund, according to the indictment. A spokesman for Quadrangle couldn't be reached for comment. The indictment has spawned an investigation into the role of placement agents – highly paid middlemen who help private equity firms and others secure investments from public pension funds. The Quadrangle firm used two placement-agent firms to obtain a $100 million investment commitment in 2005 from the California Public Employees' Retirement System, according to CalPERS records. Of the $100 million, CalPERS has invested $71 million so far. The two placement agents, Monument Group and Helix Associates, haven't been charged with any wrongdoing. CalPERS and the California State Teachers' Retirement System have said placement agents are little more than door openers who have no influence on the pension funds' investment decisions. Still, the work can be lucrative; a $100 million investment will typically earn the placement agent a $2 million fee from the private equity firm. CalPERS records show the 2005 investment with Quadrangle Capital Partners II, an investment fund established by Rattner's firm, had broken even as of Dec. 31. CalPERS also invested in an earlier Quadrangle fund, in 2000. That $42 million investment generated a 10 percent return through Dec. 31. It wasn't known if Quadrangle employed a placement agent on that investment. Pat Macht, a CalPERS spokeswoman, wouldn't comment on Quadrangle's relationship with placement agents.

· CalPERS suit follows $60 billion in market losses - Sacramento ... – (www.sacbee.com) CalPERS' lawsuit over a $1 billion investment loss represents its latest attempt to deal with market chaos that shrank its portfolio by 25 percent in the past year and will translate into higher pension contributions from the state and municipalities. The lawsuit blames the three big Wall Street credit rating agencies – Moody's Investors Service, Standard & Poor's and Fitch Ratings – for effectively luring CalPERS into a series of disastrous 2006 deals by giving the investments "wildly inaccurate and unreasonably high" grades. The investments have gone bust at a cost of "perhaps more than $1 billion," said the California Public Employees' Retirement System in the suit, filed last Thursday in San Francisco Superior Court. The losses represent a small portion of the roughly $60 billion CalPERS has lost in the past year due to declines in its stocks, real estate and other holdings. The losses are so steep that CalPERS has served notice that it will demand higher contributions from the state and the local governments that rely on the fund for pensions. The exact amount of the increases won't be known until late October or early November, said CalPERS spokeswoman Pat Macht. The CalPERS board voted in June to "smooth" out the investment losses so the higher rates will phase in more slowly for the local governments. It will decide in September whether to do the same for the state. In any event, the higher rates will kick in next July for the state and a year later for the local governments, Macht said. Seeking to regroup in the wake of heavy losses, CalPERS is tweaking its investment strategy. In June, it agreed to shift money out of stocks and into private equity – investments in companies that aren't publicly traded. It has been working to overhaul some of its real estate partnerships.

Unemployment "main cause" of foreclosures - (www.What about foolish debt?) - (www.sun-sentinel.com) The number of U.S. households on the verge of losing their homes soared by nearly 15 percent in the first half of the year as more people lost their jobs and were unable to pay their monthly mortgage bills. The mushrooming foreclosure crisis affected more than 1.5 million homes in the first six months of the year, according to a report released Thursday by foreclosure listing service RealtyTrac Inc. The data show that, despite the Obama administration's plan to encourage the lending industry to prevent foreclosures by handing out $50 billion in subsidies, the nation's housing woes continue to spread. Experts don't expect foreclosures to peak until the middle of next year. Foreclosure filings rose more than 33 percent in June compared with the same month last year and were up nearly 5 percent from May, RealtyTrac said. "Despite all the efforts to date, we clearly haven't got a handle on how to address the situation," said Rick Sharga, RealtyTrac's senior vice president for marketing. More than 336,000 households received at least one foreclosure-related notice in June, according to the foreclosure listing firm's report. That works out to one in every 380 U.S. homes. It was the fourth-straight month in which more than 300,000 households receiving a foreclosure filing, which includes default notices and several other legal notices that homeowners receive before they finally lose their homes. Banks repossessed more than 79,000 homes in June, up from about 65,000 a month earlier. On a state-by-state basis, Nevada had the nation's highest foreclosure rate in the first half of the year, with more than 6 percent of all households receiving a filing. Arizona was No. 2, followed by Florida, California and Utah. Rounding out the top 10 were Georgia, Michigan, Illinois, Idaho and Colorado. The Obama administration in March launched a $50 billion plan to give the lending industry financial incentives to modify mortgages to lower payments, but it's off to a slow start. As of early July, about 130,000 borrowers were enrolled in three-month trial modifications under the plan, and 25 mortgage companies have signed up to receive potential payments of up to $18.6 billion, according to theTreasury Department. But analysts and housing counselors say it isn't having much of an impact. "The plan isn't going well, at least not yet," said Mark Zandi, chief economist at Moody's Economy.com. "It's a creative plan with lots of incentives, but it's very complex." In testimony prepared for delivery at a Senate hearing on Thursday, Bank of America executive Allen Jones said the company has about 80,000 loan modifications in the works under the new government guidelines, including some that aren't in the three-month trial phase yet.

Global Economic Meltdown, Political Unrest - (www.globalpost.com) Political unrest occurs when a people's rising expectations — about how much money they can make, what they can buy, whether they have enough food or medicine — are suddenly dashed by, let's say, a global economic crisis that follows the longest expansion in decades. Here's how professor Davies put it, in that special language of academia: "Revolutions are most likely to occur when a prolonged period of objective economic and social development is followed by a short period of sharp reversal. People then subjectively fear that ground gained with great effort will be quite lost; their mood becomes revolutionary." Since those dark days of winter, the global meltdown — while moving out of the panic stages — has shown very few signs of recovery. Meanwhile political violence and turmoil has blossomed in nearly every corner of the world. In many places, the mood has become quite revolutionary. First, the economics: The U.S. unemployment rate — the key figure underlying confidence in the world's largest economy — is at a 26-year high of 9.5 percent, and President Barack Obama this week warned it's still rising. Larry Summers, the director of the president's National Economic Council, was even gloomier, telling the Financial Times: “I don’t think the worst is over. It would not be surprising if GDP has not yet reached its low." As for the global economy, World Bank President Robert Zoellick has warned 2009 remains a "dangerous year." Recent gains could be reversed easily, Zoellick said, and the pace of recovery in 2010 is "far from certain." So much for economic cheer. As for the unrest part, it's been even worse. Here's a quick rundown of some of the trouble we've been following at GlobalPost the past few days, weeks and months. And this list of woes is by no means complete:

· China this month suffered its worst political violence since the Tiananmen Square crackdown, as tensions between Muslim Uighurs and ethnic Han Chinese exploded in the northwestern province of Xinjiang, killing nearly 200 people. A reported 1,400 people have been arrested in China, and Al Qaeda is now threatening to target Chinese working in North Africa and the Middle East in retaliation for the deaths of 46 Uighurs. At the heart of these escalating ethnic and religious tensions? A battle over money and resources.

· The bloody uprising in Iran has been about a lot of things — the limits of political expression, underlying tension between conservative and more liberal values, the role of Shia Islam in Iran's political process, charges of official corruption, the legitimacy of a ruling political elite in the face of changing demographics, and plenty more. Buteconomic insecurity has played perhaps the biggest role. A faltering economy was the key issue in the June 12 election, with Iran's unemployment rate estimated to be above 20 percent and inflation hovering near 25 percent. Declining oil prices, too, are hurting the government's budget. The International Monetary Fund says Tehran needs oil prices of $90 to stay in the black; light sweet crude this week fell below $60 a barrel. This economic unease became clear during the uprising when street protesters openly mocked President Mahmoud Amadinejad's (mis)handling of Iran's economy.

· On June 28, Honduran soldiers stormed the bedroom of President Manuel Zelaya and — at gunpoint, with Zalaya still in his pajamas — forced him to flee to Costa Rica. While the coup was largely a power play over constitutional reform, Honduras is one of the poorest countries in Latin America. Many of its 8 million citizens, particularly the Zelaya supporters who subsist on shrinking banana, coffee, apparel and other low-value exports, are growing increasingly restless.

OTHER STORIES:

Bay Area prices plummet 29% in year, but seasonal blip gets headline! - (www.sfgate.com)

Upward blip in Inland area housing prices draws mixed reactions - (www.pe.com)

No media bias here... - (www.patrick.net)

First half foreclosures break records - (www.money.cnn.com)

Foreclosures at record high in first half 2009 despite aid - (www.reuters.com)

Rising unemployment accelerates foreclosure crisis - (www.news.yahoo.com)

Cisco cutting 700 employees at HQ - (www.marketwatch.com)

House Ownership Was Never a Road to Riches - (www.online.wsj.com)

'Unknown' bank CIT could go bust - making the US recession worse - (www.moneyweek.com)

Gov't is not going to rescue CIT again - (www.blogs.reuters.com)

Taxes pay Goldman bonuses: Ain't life grand? - (www.theautomaticearth.blogspot.com)