KeNo's Housing and Economic Portal: Friday August 7 Housing and Economic stories

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California Pension Fund Hopes Riskier Bets Will Restore Its Health – (www.nytimes.com) Calpers, lost nearly $60 billion in the financial markets last year. Though it has more than enough money to make its payments to retirees for many years, it has a serious long-term shortfall. Those problems now rest largely on the slim shoulders of Joseph A. Dear, the fund’s new head of investments. He is not an investment seer by training, but he thinks he has the cure for what ails Calpers, or the California Public Employees’ Retirement System, the largest in the nation with $180 billion in assets. Mr. Dear wants to embrace some potentially high-risk investments in hopes of higher returns. He aims to pour billions more into beaten-down private equity and hedge funds. Junk bonds and California real estate also ride high on his list. And then there are timber, commodities and infrastructure. That’s right, he wants to load up on many of the very assets that have been responsible for the fund’s recent plunge. Calpers’s real estate portfolio has tumbled 35 percent, and its private equity holdings are down 31 percent. What is more, under Mr. Dear’s predecessor, Calpers had to sell stocks in a falling market last year to fulfill calls for cash from its private equity and real estate partnerships. That led to bigger losses in its stock portfolio. Gov. Arnold Schwarzenegger, who is on the Calpers board, has called the fund “unsustainable.” He has specifically criticized a decision by Calpers last month to give California municipalities a break on their required contributions. Rather than stepping up contribution rates to 5 percent to cover investment losses, Calpers set a maximum increase of 1.1 percent — saving municipalities hundreds of millions of dollars. Mr. Schwarzenegger called it a “pass the buck to our kids idea.” Calpers says municipalities, which pay 15 percent of their payroll — or about $11 billion a year — into the fund, needed the help. In the end, Mr. Dear, who will get $408,000 to $612,000 in salary and can qualify for a performance bonus of up to 75 percent of that salary, will be judged by portfolio returns.

Detroit Heads For Bankruptcy; 50 Cities Must "Shrink to Survive" - (Mish - globaleconomicanalysis.blogspot.com) For Detroit, as with GM, bankruptcy has always been a question of when, not if. Detroit's time is nearly up even as Mayor Dave Bing says I’m fighting to keep city from going broke. Detroit is in danger of running out of cash if the city doesn’t take steps to eliminate a $20-million to $25-million budget shortfall before Oct. 1, Mayor Dave Bing told the Free Press on Thursday. After spending most of his first two months in office poring over Detroit’s financial books and organizational structure, Bing said the city is so deeply in the red that the following measures must be taken to avoid bankruptcy: • The consolidation and elimination of some city departments. • A reduction in nonessential city services. • Concessions by city employees, including job losses in some cases. • The hiring of an outside emergency collection agency to help recoup some of the debt owed to the city. Bing said the city cannot afford to continue operating the way it has for generations, nor can it afford to keep all of its 13,000 employees. Bing said Thursday there are no more creative moves to make -- those budgetary tricks were all tapped by previous administrations -- and the city is up against a wall financially. The only answer, he said, is to change how the city functions. To start, he said, these are his priorities: • Bing said city workers must accept some concessions, and end contract negotiations within the next 30 days. "Every day that we go forward without understanding what our labor costs are is a missed opportunity. ... There are financial consequences for the city," he said. • Reach out to Lansing legislators for ideas and help in tackling the city's accumulated debt, especially as it relates to revenue sharing. • Determine which city services can be cut or eliminated all together. Bing said he has some ideas, but he couldn't be more specific because of the ongoing labor negotiations. "There are going to be services we can't provide anymore -- we can't afford it," he said. .... The mayor said this year's budget is padded with soft or unrealistic revenue, including money from plans to sell the rights to the profit generated by the city's parking system, lighting system and the Detroit-Windsor Tunnel. John Riehl, president of AFSCME Local 207, which represents water and sewer employees, said Bing's plans to consolidate or eliminate city departments is "just a way to mess with the unions," and said he's certain city residents won't tolerate having more city services cut. "It's not our role to give anymore concessions -- we've heard the same crying for 30 years that they don't have money for us," Riehl said. "He needs to find another way to solve the budget problem."

California Budget Resolution puts Band-Aid on Failing Dike - (Mish - globaleconomicanalysis.blogspot.com) After months of political wrangling between Democrats, Republicans, and the governor, California Approves Budget, Sends Bills to Governor. California Governor Arnold Schwarzenegger said he supports the plan the Legislature approved today to erase a $26 billion deficit that pushed the most-populous U.S. state to the brink of insolvency. The Senate and Assembly passed the package of more than two-dozen bills though a marathon 18-hour session. Schwarzenegger told reporters afterwards that he will sign the budget reduction plan within days after using his line-item veto authority to trim spending and bolster state reserves. The package cuts spending by $15 billion, including $6 billion from schools and community colleges, $3 billion from universities and $1.2 billion from prisons. It also raises $4 billion, in part by accelerating personal and corporate income- tax withholding and increasing the amount withheld by 10 percent. The passage will allow the state to use $2 billion of local property taxes meant for cities and other local jurisdictions and some $1.7 billion earmarked for redevelopment agencies. The deficit plan also shifts $1.5 billion between accounts and moves the last payday for workers this fiscal year to the next 12-month period. Hollingsworth, the Republican leader, said he hopes that lawmakers don’t have to redraw the budget yet again should the state’s revenue keep falling. Budget Incorporates Fiscally Unsound, Possibly Illegal Budget Gimmicks: For starters, the much ballyhooed budged is not even balanced. Borrowing money from local governments is fiscally unsound and possibly illegal. Please consider California Cities Knock State Budget, Wary of Bonds. California local governments criticized the budget deal struck last night and expressed doubts about plans to tap $2 billion of their property taxes to close the $26 billion state deficit. McKenzie and Paul McIntosh, the executive director of the California State Association of Counties, said localities may file a lawsuit challenging the use of their gasoline tax and redevelopment funds, which they said violates the state constitution. “They don’t want to cut spending and they don’t want to raise taxes,” said McKenzie. “They find it’s easier to steal the money.” The Los Angeles County supervisors voted unanimously today to sue the state if $400 million of funds it expected are withheld, the Associated Press reported. Numerous Unsolved Structural Defects: California has numerous unsolved structural defects that are going to come back time and time again to haunt its citizens. “We had a deficit,” said Assembly speaker Karen Bass, a Los Angeles Democrat. “We fixed the problem. The IOUs should stop soon.” California Treasurer Bill Lockyer said the new budget plan addresses the state’s structural deficit. Speaker Karen Bass and Treasurer Bill Lockyer are sadly mistaken, assuming they even believe the nonsense they are spouting. This bill solves nothing. Not a single structural problem was addressed.

· Ongoing Structural Defects: An ever increasing demand for free services by an influx of illegal aliens

· Too many free social programs in general

· Massive underfunding of pension plans especially CALPers

· An untenable pension system in general based on defined benefits on too few years of service

· Structurally unfair property tax system

· Union contracts the state cannot afford

· A bloated prison system.

Report: 30,000 China steelworkers in deadly clash - (finance.yahoo.com) Some 30,000 Chinese steelworkers clashed with police in a protest over plans to merge their mill with another company and beat the company's general manager to death, a human rights monitor said Saturday. Several hundred people were injured in the clash Friday in the northeastern city of Tonghua, the Hong Kong-based Information Center for Human Rights and Democracy said in a faxed statement. Employees of Tonghua Iron and Steel Group object to plans for Jianlong Steel take control of the company, the center said. It said Beijing-based Jianlong controlled the company temporarily last year, and employees blame Jianlong for financial problems suffered at the time. Angry Tonghua employees attacked Jianlong general manager Chen Guojun during the protest and beat him to death, the center said. It said friends of Chen confirmed he was dead. Workers were angry that Chen was paid some 3 million yuan ($438,000) last year while some retirees received as little as 200 yuan ($29) a month, the center said. Beijing is trying to streamline China's sprawling steel industry, the world's largest, by orchestrating a series of mergers aimed at creating globally competitive producers. The mergers often are accompanied by layoffs that sometimes spark complaints that workers receive too little severance pay. A woman who answered the phone Saturday at the government office for the Tonghua district where the steel company is located confirmed a protest occurred Friday but said she had no details of deaths or arrests. She refused to give her name. A man who answered the phone at the Tonghua city hall said provincial government and Communist Party leaders had taken charge of handling complaints by Tonghua employees. He would give only his surname, Xu. Phone calls to the Tonghua company headquarters and local party offices were not answered. Jianlong took over Tonghua last year but suffered losses after steel prices dropped and jettisoned the company, the human rights monitor said. It said Jianlong revived the takeover plan this year after steel prices rebounded, making the business profitable again.

Questions for a Custodian After Scams Hit I.R.A.’s - (www.nytimes.com) Three unrelated Ponzi schemes, including Bernard L. Madoff’s, erased more than $1 billion from hundreds of individual retirement accountsset up through a single financial company. At a minimum, this coincidence would appear to be a mystery worthy of investigation by regulators. After all, that financial company is part of an important industry that is supposed to help keep America’s retirement savings safe from crooks like Mr. Madoff. But so far, no one prosecuting those three giant frauds appears to be asking why Mr. Madoff and two other large-scale swindlers steered virtually all of their victims to a single company:Fiserv, a giant in the I.R.A. service industry until it sold the business last year and still a prominent provider of bank and credit technology services. The company, which is still responsible for legal issues that arose during its ownership, said it bore no blame at all for the losses its customers incurred in these various Ponzi schemes. But the relative silence on the matter from a variety of financial regulators suggests how little attention government watchdogs have paid to a business whose protections many Americans take for granted. “If you had asked me, point-blank, whether there could be any I.R.A. money lost in these Ponzi schemes, I’d have said ‘no,’ ” said Mercer Bullard, a law professor at the University of Mississippi. Given the protections he assumed would be in place, he said, tapping into I.R.A. accounts “would be almost like running your Ponzi scheme through the police department.” Mr. Madoff was not the only criminal who ripped off I.R.A. accounts set up through various units of Fiserv. Fiserv customers were also victims of a Florida con artist, Louis J. Pearlman, a music impresario who ran the Backstreet Boys and N’Sync before being jailed last year for a huge fraud he ran largely through a company called Transcontinental Airlines. And other Fiserv clients were swindled by Daniel Heath, a Bible-quoting promoter in Southern California, who was convicted early last year after defrauding hundreds of elderly churchgoers attracted to his seminars by offers of a free lunch. All three con artists preyed on an increasingly popular kind of retirement account, the self-directed I.R.A. — a misnomer that usually refers to I.R.A.’s that are invested in a range of assets beyond traditional stocks, bonds and mutual funds. A person who sets up a self-directed I.R.A. picks the investments — anything from real estate to hedge funds to commodities. The investor then typically relies on a support firm, called an I.R.A. custodian, to follow those directions, make the purchases and do the administrative work.

Guaranty Financial, No.2 Texas bank, says may fail‎ - (www.reuters.com) Guaranty Financial Group Inc (GFG.N), the second-largest publicly traded bank in Texas, said it will probably fail after loan losses and write-downs left it "critically" short of capital. The bank, whose investors include Carl Icahn and Robert Rowling, is in talks with at least one investor group for a possible recapitalization, said a source familiar with the situation. The source requested anonymity because the talks are not public. "The company believes that it is probable that it will not be able to continue as a going concern," Guaranty said in a regulatory filing. The Austin-based lender has about $16 billion of assets and more than 150 branches in Texas and California, according to its website. On that basis, if it were to fail, Guaranty would be the largest U.S. bank to collapse in 2009. Guaranty is about half the size of IndyMac Bancorp Inc (IDMCQ.PK), which failed last July. So far 64 banks have failed this year, including seven on Friday, according to the Federal Deposit Insurance Corp. Friday's failures include six bank subsidiaries of Security Bank Corp of Macon, Georgia. In a regulatory filing late on Thursday, Guaranty said it has been unable to obtain new capital from shareholders, and believes it will be ineligible for help from U.S. regulators. Its largest investors include companies run by billionaire Carl Icahn and by Rowling, whose investment firm owns the Omni Hotels chain. Guaranty said it does not expect to raise enough capital to comply with an April cease-and-desist order from the federal Office of Thrift Supervision (OTS). It said losses and write-downs have left it "critically undercapitalized," with negative capital ratios.