KeNo's Housing and Economic Portal: Tuesday July 14 Housing and Economic stories

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Bank Run Teaches Amish About the Risks of Modernity - (online.wsj.com) Some Amish Lived It Up Until Hard Times Hit; Dinners Out and LED-Appointed Carriages. Dan Bontrager is a 54-year-old Amish man with flecks of gray in his long beard. He's also treasurer of the Tri-County Land Trust, an Amish lending cooperative created to support the Amish maxim that community enhances faith in God. This past spring, Mr. Bontrager was startled when a number of men he has known most of his life tied their horses to the hitching post outside his office and came inside to withdraw their money from the Land Trust. "We had a run," Mr. Bontrager says. "I don't know if you know anything about the Amish grapevine, but word travels fast. Somebody assumed it was going to happen, and it started a panic." In Amish country, a bank run is about as familiar as a Hummer or a flat-screen TV. For decades, the more than 200,000 Amish in the U.S. have largely lived apart from the mainstream, emphasizing humility, simplicity and thrift. Known as "the plain people," they travel by horse-drawn buggy, wear homemade clothing and live with very little electricity. But the Amish in northern Indiana edged into the conventional economy, lured by the high wages of the recreational-vehicle and modular-homes industries. And they wound up experiencing the same economic whiplash millions of other Americans did. There has been some fraying of the ties that bind the Amish, many in the community say. "When you have plenty of money, you have a tendency to slowly drift away," says Steve Raber, 37, an Amish owner of a furniture-manufacturing business in Shipshewana, near Topeka. "I think people begin to forget who's really in control." The Amish in northern Indiana date their community to about 1850. About 20,000 of them live on the flat, fertile farmland 120 miles east of Chicago below Michigan's southern border. Like Amish in other parts of the U.S., the Indiana community strayed from their traditional reliance on farming in recent decades as their numbers grew and land prices rose. Many opened family businesses, often in furniture and other wood crafts. By 2007, more than half of Amish men in these parts were working full time in manufacturing, and earning, on average, $30 an hour, says Steven Nolt, a professor at Goshen College in Goshen, Ind., who studies the community. The great increase in discretionary income spawned a "keeping-up-with-the-Joneses mentality," says Mervin Lehman, 39, an Amish father of four who says he was making more than $50-an-hour and working up to 60 hours a week as an RV plant supervisor before he was laid off in November.

Obama Administration Expands and Paves the Way for Future Foreclosures - (www.washingtonpost.com) The Obama administration announced yesterday that it would loosen the eligibility requirements for a program aimed at helping borrowers with no equity in their homes to refinance into cheaper mortgages. Acknowledging that falling housing prices have made it increasingly difficult for borrowers to qualify, officials said the program would now be open to those whose mortgage debt is up to 125 percent of their home value. The program, launched in February, was initially open only to those borrowers who owed no more than 105 percent of their home value. The program targets the growing number of borrowers -- one in five according to recent research -- who owe more than their home is worth, a situation known as "being underwater." These homeowners are considered at a higher risk of foreclosure and have been targeted by the Obama administration under its Making Home Affordable program. Borrowers have traditionally been prevented from refinancing if they had less than 20 percent equity in their home. Under the initial program, that requirement was significantly modified so that for a home worth $200,000, for example, the borrower's mortgage could not exceed $210,000. Now, the mortgage on that house could be as much as $250,000 and still qualify for refinancing. "By expanding refinance eligibility, we can bring relief to more struggling homeowners more quickly. It's a crucial step in our broader efforts to get America's housing market and economy on the path to recovery," Treasury Secretary Timothy F. Geithner said in a statement. The administration initially estimated in February, when the program was first announced, that 4 million to 5 million borrowers would be eligible. More recently, administration officials have said that "tens of thousands" of homeowners have been helped so far. An additional 2 million borrowers could be eligible after the program is revamped, though not all would qualify for or even benefit from refinancing, according to the Federal Housing Finance Agency. The expanded program is expected to have the greatest impact in regions where home prices have fallen the most from their peak, including California, Nevada and Florida, which have the highest rates of foreclosure. "To the extent you are able to lower their mortgage payments and their debt burden, homeowners are less likely to default," said Steve O'Connor, senior vice president of government affairs at the Mortgage Bankers Association, an industry lobby group that pushed for the change. "It's a net positive for efforts to stabilize the markets." The refinancing program is central to President Obama's broader housing plan, which also includes measures to help distressed borrowers stay in their homes by paying lenders to modify their loans. The refinancing effort focuses on borrowers who have not missed any mortgage payments, but are unable to take advantage of historically low mortgage rates because their home values have fallen.

Corrupt SEIU hope to rape (organize and gain dues from) Inland Empire warehouse workers - (www.latimes.com) A labor coalition known as Change to Win is focusing on the vast warehouse and distribution hub in the region, which handles goods from the ports of Los Angeles and Long Beach. The Inland Empire has become a new battleground for unions looking to organize warehouse workers and broaden labor's clout in international trade, a $300-billion industry in the Southland. The fledgling movement is backed by a coalition of unions with more than 6 million members known as Change to Win. That's the national labor group that broke with the AFL-CIO in 2005 and includes the Service Employees International Union, the United Food and Commercial Workers International Union, the United Farm Workers of America and the International Brotherhood of Teamsters, among others. The unions' targets are warehouse and distribution centers in the Inland Empire counties of San Bernardino and Riverside, which together make up one of the nation's biggest logistics networks. The facilities handle much of the container cargo that moves through the ports of Los Angeles and Long Beach, the busiest trade gateway in the United States. "They want to start here because there is such a large concentration of the industry here. It's a great sandbox and it would be a real coup if they do it," said John Husing, an economist who specializes in the Inland Empire goods-movement industry. Nearly 2,900 warehouses of at least 50,000 square feet each dot the Inland Empire. The facilities, which employ nearly 113,000 people, are operated by hundreds of companies, including some of the nation's largest retailers. The unions' strategy is to try to build broad-based community support for better working conditions for warehouse workers, much in the way that labor was able to convince businesses that janitors were being treated unfairly. "It is a huge, monumental task. You cannot do this one warehouse at a time," Tom Woodruff, organizing director of Change to Win, said from his office in Washington. "There needs to be a general union movement. We expect to have a long-term campaign there." Retailers said the best way to raise living standards for workers is through a strong industry and a vibrant U.S. economy. "If we are concerned, we are concerned about efforts in Washington that would change the rules for union organization," said Rob Green, vice president for government and political affairs at the National Retail Federation. Green was referring to federal legislation backed by Change to Win that would make it far easier for workers to join unions. The organizing effort comes at a tough time for the warehouse and distribution industry, which has long been one of the region's most dependable sources of jobs. Warehouses in the Inland Empire added nearly 40,000 positions from 2000 to 2007, Husing said. But international trade has been slammed by the recession, and Husing said warehouse employment has fallen 6.7% from the peak in 2007, with most of those losses coming this year.

A Fake Financial Fix - (www.cato.org) The Obama administration yesterday presented a misguided, ill-informed remake of our financial regulatory system that will make crises more likely and more costly. Our financial system, particularly our mortgage system, is broken — but the Obama plan ignores the real flaws to focus on more convenient targets. Instead of putting an end to bank bailouts, the plan makes bailouts a permanent feature of our regulatory landscape. In fact, it extends the possibility of taxpayer-funded bailouts to any company choosing to become a financial-holding company. This will likely include every large insurer, as well as major consumer-finance companies like GMAC. Of course, the administration tells us that bailouts won't be needed — because the same regulators who missed the signs of the current crisis will get added powers to prevent the next one. We're supposed to believe that, if only the Federal Reserve had the same oversight powers over AIG as it now has over Citibank and Bank of America, that the bailout of AIG would have been avoided. Just think: If only AIG had been managed and regulated as well as Citibank — because Citi is in such great shape now. In the wake of this crisis, it's understandable that the Obama plan increases regulation and oversight of the largest financial institutions — but why do it in ways that reduce the market discipline on those same companies? By assembling a list of institutions deemed "too big to fail," the president is announcing that any of these select corporations will be bailed out if it fails. As a result, these institutions will face lower funding costs than smaller lenders — which will allow them to gain market share. That is, the Obama plan guarantees increased concentration of our financial markets: We'll have fewer banks, but larger ones — insulated from market pressures. In short, the Obama plan puts the entire safety of financial system on hoping that regulators at the Fed get everything right. Meanwhile, the plan barely mentions two institutions at the very heart of the mortgage-market meltdown — Fannie Mae and Freddie Mac. Instead, the administration tells us that it will study the issue and come back with alternatives at a later date. Yet Fannie and Freddie were the single largest source of funding for the subprime market during its height, buying more than 40 percent of all subprime securities at the market peak, while also leading the market in the reduction of credit quality. In all likelihood, their ultimate cost to the taxpayer will be greater than that of the bank bailouts known as TARP. Combined taxpayer losses from Fannie and Freddie could well exceed $300 billion — twice the expected cost of bailing out AIG. Any reform plan that leaves out Fannie and Freddie can't be taken seriously. Even when it gets things right, the plan gets it wrong: It recognizes the failure of the credit-rating agencies, but misses the source of that failure — namely, the fact that those agencies are a government-created monopoly. So it insists on more disclosure — which won't solve the problem. What's needed is an end to the exclusive government privileges that have been granted to the rating agencies — and an end to the practice of having government regulators outsource their jobs to these companies. Then there's the mortgage section of the plan. Naturally, the Obama team doesn't address the largest single problem — the federal government's obsession with extending homeownership to households that can't sustain it. Instead, it calls for increased "consumer protections" in the mortgage industry. Sadly, the administration can't confront the basic fact that the most important mortgage indicator is the borrower's equity: How much of its own money a household puts into the home tells us far more about probable default than whether the loan was adjustable-rate or has a prepayment penalty.

Executive Enrichment Rules Doomed by Naivete - (www.bloomberg.com) The Obama administration’s plans to regulate executive pay for companies on the Federal dole is a decent idea. Last week, the U.S. Treasury Department went further, recommending in areport that Congress intervene in the pay process for every company in the land. “To facilitate greater communication between shareholders and management over executive compensation, public companies should include on their proxies a nonbinding shareholder vote on executive compensation,” the report states. Too bad the proposal won’t do a thing to restrain unbridled corporate compensation gluttony. The problematic word in that passage is “nonbinding.” Lawyers call that a precatory resolution, derived from the Latin precatio, meaning begging, a request or prayer. This so-called say-on-pay policy is being pushed by the high priests and priestesses of the corporate governance movement. Their desire to do good is exceeded only by their naivete. If a board compensation committee has a record of giving top executives the moon, what makes you think they will be cowed by a group of unlettered shareholders, who can only pray for relief? The pay proposal isn’t worthless. But it’s not going to fix a broken system that lavishes unjustified rewards on top executives at hundred of major U.S. companies, no matter how well they perform for their true owners, the shareholders. Ending the abuses will require adopting measures that have real teeth, not merely gums. Here are my favorites, based on 50 years of studying, and for half those years, designing executive pay plans: - Keep excessively paid chief executives off other companies’ compensation committees. Someone like Lloyd Blankfein, CEO of Goldman Sachs Group Inc.who made about $80 million last year, must consider a top executive earning $30 million annually to be a hardship case in need of a little extra motivation to keep plugging away. My own research of CEOs who sit on compensation committees shows that the most highly paid executives award the fattest packages to the CEOs whose pay they regulate. Here’s an even better idea: bar CEOs from serving on comp committees. -- Require true shareholder approval of all pay plans. Don’t limit approval to stock option plans or free share plans. Extend it to cover every plan, whether payable in cash or stock, for the highest-ranking officers in the company. This would be real, binding approval, not one of those namby-pamby predatory ones. -- Fund the CEO’s annual bonus through a shareholder- approved formula. In other words, take away the discretion of the comp committee to rationalize huge year-end payouts, e.g., by pointing to adverse exogenous events over which the executive has no control but failing to note those same exogenous events when they prove helpful to the bottom line.

Crabtree & Evelyn files for Chapter 11 bankruptcy protection - (www.latimes.com) Crabtree & Evelyn Ltd., maker of soaps and other bath and body products, filed for Chapter 11 bankruptcy protection today. The Woodstock, Conn., company, which operates 125 retail stores in the U.S., said day-to-day retail operations in its stores and on its website would continue as usual. It also said it was hoping to reevaluate its real estate portfolio, strengthen its brand strategies and restructure its debt. The filing does not include the company's international affiliates. Crabtree & Evelyn joins a growing list of retailers that have had to seek bankruptcy protection in recent months amid the economic downturn. "The Crabtree & Evelyn brand remains strong," said Stephen Bestwick, acting president of the company. "We are confident that Chapter 11 gives us the opportunity to restructure the company with a business model that will be sustainable for long-term growth." The privately held company reported in a court filing that it had debt totaling $10 million to $50 million and assets in the same range

How to Steal Billions in Plain View - (www.lewrockwell.com) The Federal Reserve is living up to its purpose, which is to enrich bankers at the expense of everyone else. Ben Bernanke, who chairs the Federal Reserve Board, is to be congratulated for his open call for the banks under his tutelage to receive billions more of our tribute. Let us understand the matter clearly. We have exited a significant boom period. During the boom, the bankers made large and very large profits. The managements took home very large pay and bonuses. The stockholders (including officers and managers of the banks) had, for a time, very large wealth in the stocks they held. The bondholders of the banks had, for a time, very secure debts. But the bankers over-reached for business in several ways. They extended a slew of bad loans during the lately departed boom. The stocks and bonds fell in price, reflecting the lower worth of the bank assets, these bad loans. And now that the boom is over, the bankers, led by Mr. Bernanke, want us to eat their losses. Bernanke urges Congress to absorb the bad loans. The details of his three alternative plans are secondary to the fact that they all ask that others pay for the losses that the bankers caused, or else they involve the government in a variety of complicated maneuvers by which the government ends up shoring up these banks and bankers while taking on various risks of owning portfolios of bad loans. The idea is for the bankers to offload their mistakes onto taxpayers. One plan has the government buy the bad loans. Why? Why don’t the bankers reveal what these loans are and sell them in the market? Such sales will reveal that their assets are worth even less than what the market now thinks. The insolvency of the banks will not only be revealed but it will trigger legal ramifications. The banks will have to be re-organized. This will mean breaking them up. It will mean that the holders of the securities of the banks will face large losses, even larger than are now being reflected in the current market prices. A government bailout does the following. It preserves the bank organization. It preserves the current bank management. It transfers taxpayer wealth to the security holders of the bank (bondholders, preferred stockholders, and stockholders). It transfers wealth to counterparties to other contracts that the bankers entered into. Why is any of this necessary? What is so precious about these banks? Haven’t they demonstrated a level of high incompetence? Shouldn’t that spell their doom? Heads I win, tails I win. That is the deal that Bernanke wants for the banks and these associated parties. Tails – they should be losing. No one else should be footing the bills. Citibank or Citigroup is emblematic of the whole tawdry affair. Why in the world should we be saving Citibank? I have been wondering about this for some time before Bernanke’s latest salvo. The government already made a complex deal involving over $300 billion of this company’s loans. What is so special about this bank, other than it has attempted to become a world-girdling enterprise and is failing badly in this endeavor? It even has an office two miles from where I write that usually looks barren. Why should we support the ambitions of a bank like this that is competing with a myriad of other banks in this area alone? The reasons given by Bernanke are absurd ("to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system,..."). Promoting overcapacity and singling out inefficient banks for the grace of taxpayer dollars does not promote a lasting recovery and it surely does not strengthen the financial system. Shifting the assets of Citibank, such as they are, to higher-valued uses through re-organization is a sound way to promote recovery and strengthen the economy. But this path would require that a lot of Bernanke’s favorites would bear losses. It would mean a rather different banking system might emerge that influential members of the Fed, who apparently shape its recommendations and bailouts, do not want. What cheek! What effrontery! What brazen thievery! How disgusting!