Saturday July 18 Housing and Economic stories

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TOP STORIES:

Obama plan could trim back financial powerhouses - (www.sfgate.com) They are the biggest of the big — the Citigroups, the Goldman Sachses, the AIGs and other financial behemoths. The Obama administration doesn't want so many around anymore. Financial regulations proposed by the president would result in leaner and simpler institutions that don't carry the weight of the system on their marble columns. Around Washington and Wall Street they have come to be known as TBTF — too big to fail. It's not just size, though. These companies are so far-flung, so intertwined and so precariously leveraged that a single one's collapse can create systemwide tremors that imperil the finances of millions of Americans. With that fear in mind, the government stepped in to bail out Citigroup Inc., Bank of America Corp. and American International Group Inc. with tens of billions of public money last year. Looking to avoid such a costly intervention, President Barack Obama's regulatory plan calls for large, interconnected companies to pay a heavy price for the system-wide risk they pose. So far, however, congressional debate has centered on the administration's plan to put the Federal Reserve in charge of these "systemically significant" companies. Less attention has focused on the potential effect on the institutions and the financial system's hierarchy. Under the administration's proposal, companies such as Citi, Goldman Sachs and others in a broad top tier engaged in complex transactions would face stricter scrutiny and have to hold more assets and more cash as cushions against a downturn. They also would have to anticipate their own demise, drafting detailed descriptions of how they could be dismantled quickly without causing damaging repercussions. Think of it as planning their own funerals — and burials.

Wall Street gears up to trade California IOUs - (www.ft.com) Amid the vacation rentals and used cars for sale, browsers of the website Craigslist will now find a unique offer: for California IOUs. “If you are receiving a Cali fornia IOU and you need cash immediately, please contact me. I may be of assistance,” reads one posting. Wall Street, quick to spot an opportunity, is also gearing up to trade the payment promises. “We have a whole team working on it,” said Barry Silbert, chief executive of Second Market, a company that trades illiquid assets such as bankruptcy claims, private company stock and toxic assets. Mr Silbert said hedge funds, municipal bond investors and other institutions were interested. Trading volume will depend on how many IOUs the state issues and how long banks accept IOUs for deposit at face value. A stalemate over how to close a $24bn (£14.7 bn) budget gap has left California short of cash. The state last week issued $53m of registered warrants, or old-fashioned IOUs. If the budget impasse persists, it could issue more than $3bn IOUs by the end of July for payments such as tax refunds, welfare and vendor bills. The IOUs are due on or before October 2 and pay an annual rate of 3.75 per cent. They are transferable, which means anyone can buy or sell them. Brandon Schlichter, a 23-year-old self-employed online marketer and blogger from Columbus, Ohio, is among those advertising on Craigslist. He is hoping to buy the IOUs for about half face value and has set up a website to connect buyers and sellers for 5-10 per cent commission. “As long as California keeps issuing these, buying and selling could become commonplace,” Mr Schlichter said. Because the IOUs are to be repaid in just a few months, a buyer now at even 99 cents on the dollar would get an annual yield of more than 7 per cent, said Matt Fabian, managing director at Municipal Market Advisors. If California borrowed short term in the capital markets, it would probably pay a 5 per cent yield, he said. Mr Fabian cautioned, however, about minimising the risk in California’s obligations. Institutional investors are likely to demand significant discounts to compensate.

Lehman CEO: Firm Deserved Bailout or 'Wind Down' - (www.cnbc.com) Video clip: Bryan Marsal, CEO of Lehman Brothers Holdings, said the government should have acted to prevent the damage the firm's collapse caused to the financial markets. "It should have been an orderly wind-down or a bailout. It should not have been a freefall," he said. Marsal has been unwinding Lehman Brothers since the firm's historic collapse. He discusses the process with CNBC.

Profiting from an Irvine bank failure - (mortgage.freedombloggingcom) Glenn Gray discovered a way for his bank to grow amid the deepest recession in decades. The chief executive of Sunwest Bank in Tustin decided to expand his company by buying the operations of a failed rival. Gray, 55, explains how the Federal Deposit Insurance Corporation selected his business bank to buy most of the $73 million in deposits and $80 million in assets of Irvine-based MetroPacific Bank, which failed on June 26. Q. How did you learn a bank was going to fail and its assets be sold? A. It first starts with us, or any bank, that wants to be a bidder letting the FDIC know that. The FDIC goes through a process; I can assume they review our financials. They examine banks, so they likely look at the last examination schedule, and then they either put you on an approved bidders list or they don’t. We did that several months ago, when we anticipated that, unfortunately, bank failures were going to be an ongoing occurrence. Then we turn the clock back to about four weeks ago. The FDIC notified us of a potential failed bank situation. They spoke in very general terms, describing a business bank with about $80 million in assets in Orange County with a single branch. They asked, ‘Are you interested?. Well, yes, that fits our profile: community banks in Orange County or North San Diego. Next they say here’s your password, go to a secure Web site and find more information. Once we visit the site we understand which bank it is; the bank is identified but not the identity of employees. The site has portfolio level statistics; you don’t get a break down of every single loan. The data are macro level. But there is enough information for you to start to form an opinion, and you don’t have to put in bid yet. Next they told us we would have two days of due diligence. We came on site, visiting the bank in an area segregated from the rest of the employees. Most employees didn’t know we were on site. There was an FDIC representative there. Now we start to get into more micro level detail. You have to cover whatever you want to cover in those two days, looking at loans, deposits, financials etc. We met some people, but couldn’t get into their background or interview them. Once the on-site review was done, we got a couple of days to form a bid. We finished up on a Thursday and had to provide a bid the following Tuesday. The next day (Wednesday June 24) they asked for some clarification and a little negotiation. Thursday (June 25) they notified us that our bid was accepted. Friday morning (June 26) we met with a larger group of FDIC employees and they did a walk through of what was going to happen. Then it happened that Friday at 4 p.m. They went in and took over the bank and we followed them. Q. I saw something like that on the TV show 60 Minutes. But on that show and in your case a buyer (your bank) was lined up in advance of a bank being seized. I hear a takeover is messier if the FDIC can’t find a buyer… A. Yes, it must be messier without a buyer. That’s what I hear also. In this case it worked out. We worked through a weekend, and we opened the following Monday morning: ‘Here’s Sunwest Bank.’ Q. Where did MetroPacific go wrong? A. I think you can put that down to a combination of three things. They didn’t hit sufficient size or critical mass soon enough. This bank was a little over four years old with about 22 employees. They needed to reach a certain mass to cover fixed costs. The second problem: they had too many loans go bad, which was partially due to some choices they made in underwriting, but also largely the affects of the economy. Third, their deposit base. What you pay for deposits is part of your cost structure, and their deposit base was expensive relative to many banks. Their deposit base was predominantly CDs. You pay more for CDs than checking accounts. Q. Why did you buy most of MetroPacific’s deposits and assets? A. We want to expand. In this particular economy organic growth is slower, loan demand is sluggish. There are going to be opportunities like this; it’s a very efficient way for us to grow, to pick up customers and employees. And there aren’t as many healthy banks like us, so the competition is less. You have to be a healthy bank, have to have a board that supports this type of strategic growth, and you need staff on hand to execute it.

America's Most Troubled Luxury Neighborhoods - (abcnews.go.com) Has the housing market scraped bottom? Not in some of the wealthier neighborhoods -- places like New York City's Greenwich Village, Santa Monica, Calif. and Chicago's Lincoln Park. They held up nicely while the rest of the country slumped last year. This year such Tiffany zip codes are on track to fall 15 percent to 25 percent. Why haven't you heard about this? Statistics lag. With relatively low unemployment, high-end addresses don't have foreclosures to hasten capitulation. If they've attracted luxury high-rise developers, these markets may be propped up by recent condo closings at foolish prices agreed to two years ago. But talk to experts who know the regions block by block -- or to people who've sold (or tried to sell) a home or co-op. There is a still-growing supply of wildly overpriced, unsold homes--60,000 U.S. properties priced above $2 million listed on Realtor.com. Experts get these gloomy vibes by dividing inventory by the current monthly rate of purchases. "Any result over seven months generally means falling prices," says David Stiff, chief economist at Fiserv in Brookfield, Wis. In some tony neighborhoods the level of glut is higher than the national average of ten months. Unsold inventories in Manhattan are at their highest levels in a decade. You can't tell by looking at data about its condo market. According to Radar Logic, which generates national realty info from its New York City office, condo values fell only 4 percent last year -- far less than the 12 percent drop for the city as a whole. It's been held aloft by new-construction condo sales above the $1,200-per-square-foot level, says Radar Logic founder Michael Feder, reflecting deals struck a year or two ago. Once they pass through the system, the average price of a condo will plummet to $900 a square foot, reckons Feder. In addition to the 10,500 properties already listed, there are another 9,500 in the wings, estimates Manhattan appraiser Jonathan Miller. Some 2,500 of these shadow listings belong to sellers who have some flexibility to keep their listings off the market in hopes of better pricing. Developers hold the rest. Both groups are likely to rush their listings onto the market once it's clear prices are falling. Some folks can't wait. Françoise Pourcel, 62, listed her 2,100-square-foot Tribeca loft last August at $3.5 million, in line with the sale price of a similar unit on a lower floor of her building. In June she accepted a bid for $2.5 million. Condo prices in Manhattan would have to fall 50 percent to return to values relative to rents they had in 1999, a relatively sane year in real estate. A condo owner could then lease his home and garner net rental income (rent minus property taxes, insurance and fix-up costs) equal to about 7 percent of the property's fair market value. The current yield is around 3.3 percent. Far too low. It's a similar story in Lincoln Park, where single-family home prices slipped only 2.2 percent last year, far less than in the rest of Chicago. But inventory has since tripled. Wagner Appraisal Group figures there's a 16-month supply. A year ago "I was almost cocky about our position compared to the rest of the market," says Jennifer Ames. No longer. After 11 months of lowering the $2.1 million asking price on her 3,400-square-foot house, Ames sold it in June for $1.6 million.

California General Obligation Bond Rating Cut - (www.cnbc.com) Fitch Ratings cut its rating on California's long-term general obligation bonds Monday to "BBB," two notches above speculative grade, citing the state's budget and cash crisis. The credit ratings agency also kept the debt of the most populous state on watch for additional downgrades. In a statement, Fitch said it cut its "A-" rating "based on the state's continued inability to achieve timely agreement on budgetary and cash flow solutions to its severe fiscal crisis." California faces a $26.3 billion budget deficit for its fiscal year that began on July 1. Talks between Governor Arnold Schwarzenegger and lawmakers to balance the state's books are plodding along as state finance officials began issuing IOUs promising payments to taxpayers owed refunds to preserve the state's dwindling cash for priority bills, including payments to investors holding the state's debt. "The 'BBB' rating indicates that expectations of default risk remain low, although the rating is well below that of most other tax supported issuers," Fitch said. The ratings agency said California needs a balanced budget agreement quickly because it will need to sell short-term debt for cash-flow purposes once it has a spending plan. "With issuance of IOUs for non-priority payments, margins for meeting constitutional and court-required contractual commitments are narrowing," Fitch said. "After September 2009, absent any proposed budget and payment adjustments, cash deficits will expand dramatically. Cash flow solutions, including the ability to access short-term borrowing, are inextricably tied to reaching timely agreement on effective and credible budget solutions," Fitch said.

Fiscal crisis tarnishes Golden State's image - (www.sfgate.com) he optimistic, golden-glow appeal that symbolizes California is enshrined in the state's official seal - an elegant icon starring Minerva, the Roman goddess of wisdom, surrounded by bounties of food and natural wealth, and the Gold Rush motto: "Eureka!" But it seems the state has lost its way, with Minerva getting mugged by California's multibillion-dollar deficit, billions of dollars in IOUs to cover debt, financial mismanagement, legislative constipation and warring special interests. California's current fiscal troubles are not only beginning to define the place - but turning it into a late-night comedy routine punch line. Jay Leno ribbed that the state motto is now closer to "Welcome to California ... now available on eBay!" Even President Obama, at a recent radio and TV correspondents' dinner, joked that "given the fiscal crisis in California," his TV air time is "competing directly with Governor Schwarzenegger's new reality series, 'I'm a Celebrity... Get Me Out of Here!' " With a state of emergency declared and IOUs going out, the state's fiscal fiasco could threaten one of California's most valuable assets - its brand as the capital of can-do, a place of fresh ideas and innovation, where businesses and residents thrive. "There's a great beauty to the state, the dynamism of the people, the inherent optimism and the 'glass-half-full' view that says our best days are ahead of us," insists crisis communications consultant Chris Lehane, the former Clinton White House spokesman known as the "Master of Disaster." "And the people who find themselves here have that in their DNA," he said. But lately, he said, "the state has taken a hit."

OTHER STORIES:

Bank of America Topples UBS as World Wealth Manager - (www.cnbc.com)

End of too Big to Fail Banks? - (www.cnbc.com)

Obama's Russia Visit to Bring Over $1.5 Billion in Deals - (www.cnbc.com)

Deere To Build Factory - (www.cnbc.com)

Pepsi Unveils Russia Investment - (www.cnbc.com)

UBS Says It Stays Committed to US Brokerage - (www.cnbc.com)

Oil Falls as Equities Slide, Dollar Rises on Economy Concerns - (www.bloomberg.com)

Futures point lower; crude oil down sharply - (www.marketwatch.com)

Volatile Swings in Price of Oil Stir Fears on Recovery - (www.nytimes.com)

China's elderly will overwhelm the nation - (www.latimes.com)

Russia, India Question Dollar Reliance Before Summit - (www.bloomberg.com)

India’s Mukherjee to Borrow Record to Fund Budget; Stocks Slump - (www.bloomberg.com)

Shanghai Companies Sign First Yuan Settlement Deals - (www.bloomberg.com)

Earnings Drop Worldwide as Job Losses Hurt Consumers - (www.bloomberg.com)

Judge approves sale of GM assets - (www.reuters.com)

Mid-to-High End Housing Capitulates in CA - (www.fieldcheckgroup.com)

Upscale San Diego Neighborhoods See More Defaults - (www.directoryofsandiego.com)

Eight reasons why CA budget's in bad shape - (www.venturacountystar.com)

OK, Lets Talk Prop 13 - (www.citywatchla.com)

Zero money down, not subprime loans, led to the mortgage meltdown - (online.wsj.com)

Another wave of foreclosures is poised to strike - (www.latimes.com)

So Many Foreclosures, So Little Logic - (www.nytimes.com)

Vacancies give renters room to negotiate - (www.latimes.com)