KeNo's Housing and Economic Portal: Monday August 24 Housing and Economic stories

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Maguire to Surrender Buildings, Says No Bankruptcy - (www.bloomberg.com) Maguire Properties Inc. the largest office landlord in downtown Los Angeles, may relinquish control of seven Southern California buildings with $1.06 billion of debt and said it’s not planning on filing for bankruptcy. The company told lenders “it will no longer continue to fund the cash shortfall” on the mortgages for six properties, Los Angeles-based Maguire said in a statement today. Two properties are in default and Maguire said it already surrendered one building to a lender. “We are not considering bankruptcy,” Chief Executive Officer Nelson Risingsaid today on a conference call. “And we feel the course we’re on is a far better course of action.” Maguire’s decision is a sign that landlords in Southern California’s overleveraged office market can no longer make payments and may be forced to abandon properties. Maguire has been trying to sell buildings to pay debt incurred in 2007 when it purchased properties from Blackstone Group LP. Loans against six properties were split up into commercial mortgage-backed securities and resold to investors. “It does highlight the credit problems associated with recent vintage CMBS loans and a trend in borrower behavior to increasingly walk away,” said Barclays Capital Research analysts Aaron Bryson and Tee Yong Chew in a research note today. Equity Office Deal: Maguire paid $2.88 billion in 2007 for 24 office properties and 11 development sites. The purchase, from Blackstone Group, encompassed all of the real estate in downtown Los Angeles and Orange County that Blackstone acquired in its acquisition of billionaire Sam Zell’s Equity Office Properties Trust. The subsequent credit-market freeze blocked Maguire’s plans to refinance. The seven properties are: Stadium Towers Plaza in Anaheim; Park Place I and II in Irvine; 2600 Michelson in Irvine; Pacific Arts Plaza in Costa Mesa; 500 Orange Tower in Orange; and 550 S. Hope in Los Angeles. Six of the seven buildings are located in Orange County, formerly headquarters to some of the nation’s biggest subprime mortgage lenders including New Century Financial Corp. and Ameriquest Mortgage Co. Several of the loans on properties Maguire is handing over to lenders were written assuming rents would rise, Barclays said today. Owners of real estate under pressure are likely to be on the agenda when Federal Reserve Chairman Ben S. Bernanke and the Federal Open Market Committee meet tomorrow on monetary policy.

Good Riddance, Ben Stein – (www.ritholtz.com) Ginormous money losing tool Ben Stein finally got shit canned by the New York Times. Too bad it wasn’t for being the “world’s worst financial columnist.” The commentary he produced at the Times was amongst the most irresponsible, poorly researched, and just goddammed wrong stuff ever to grace the business pages of the Grey Lady. As I previously whined 18 months ago, “we’ve reached the point where Stein’s commentary has become detached from reality, so ridiculously fabricated, that it can no longer be read. Indeed, its become so absurd that not only have I decided to skip reading him, I am immediately making the public commitment to stop commenting on his Tom Foolery.”The low point of Ben Steinery was his August 12 2007, column, Chicken Little’s Brethren, on the Trading Floor. Stein made the absurd argument that because sub-prime was so tiny relative to the US Economy, it was meaningless. Those who followed his advice lost millions. It is actually kinda sad that rather being being expelled for being a really bad commentator, he was tossed out for being a shameless shill for a sleazy outfit.

Right result, wrong reason.

Commentary from Ben Stein in August 2007 Showing he is clueless: Chicken Little’s Brethren, on the Trading Floor – (www.nytimes.com) From August 2007. THE job of an economist, among many other duties, is to put things into perspective. So, because I am an economist, among other duties, here is a little perspective on the recent turmoil in the stock and bond markets. First, when the story of this turbulence is reported, the usual explanation mainly has to do with some new loss in the subprime mortgage world — the universe of mortgages and mortgage-backed instruments related to buyers with poor credit histories or none at all. Here is the first instance in which proportion tells us that something is out of whack: The total mortgage market in the United States is roughly $10.4 trillion. Of that, a little over 13 percent, or about $1.35 trillion, is subprime — certainly a large sum. Of this, nearly 14 percent is delinquent, meaning late in payment or in foreclosure. Of this amount, about 5 percent is actually in foreclosure, or about $67 billion. Of this amount, according to my friends in real estate, at least about half will be recovered in foreclosure. So now we are down to losses of about $33 billion to $34 billion. The rate of loss in subprime mortgages keeps climbing. In time, perhaps it will double, maybe back to $67 billion. This is a large sum by absolute standards, and I would sure like to have it in my bank account. But by the metrics of a large economy, it is nothing. The total wealth of the United States is about $70 trillion. The value of the stocks listed in the United States is very roughly $15 trillion to $20 trillion. The bond market is even larger. Much more to the point, the fears and terrors about subprime mortgages have helped knock off 6.7 percent of the stock market’s value in recent weeks. This amounts to about $1.1 trillion, or more than 30 times the losses so far in the subprime market. In other words, these subprime losses are wildly out of all proportion to the likely damage to the economy from the subprime problems. The disconnect goes even further. The Dow Jones industrial average has been heavily moved by fears about the subprime market. But how are most of the Dow 30 affected by subprime mortgages in any meaningful way? No Dow company is short of liquidity, and consumer spending is still strong. Foreign stocks, especially in developing countries, have been hard hit, and this is supposedly connected with a “repricing of risk,” which in turn is connected with subprime mortgages. But how are the risks in Thailand or Brazil or Indonesia intrinsically related to problems in a housing tract in Las Vegas? The developing countries are fantastically strong and liquid. Why should problems at a mortgage company in Long Island have anything to do with them? European stocks have also been hard hit, and this has to do with relatively small amounts of subprime in some European banks. On a global scale, the numbers in Germany and France are minuscule for subprime exposure. For European markets to fall on subprime issues makes no sense.

Zombie Subdivisions and "Pig In The Python" Shadow Inventory - (Mish at globaleconomicanalysis.blogspot.com) The Atlanta Journal Constitution is reporting fire-sale prices on some lots have dipped to 20 to 30 cents on the dollar as the Volume of 'subdivision' vacant lots overwhelms banks. You think it’s hard selling a house these days? Try unloading a subdivision. And not just any subdivision, but one with few if any completed homes and a weedy patch where the swim-and-tennis center was planned. That’s the reality many Georgia banks find themselves in amid a foreclosure crisis that has claimed not only individual homes but also entire failed developments. These idled, “zombie” subdivisions can be found across metro Atlanta, but they’re most prevalent in outer-ring suburban areas. Selling them has proven tough, with some properties sitting on the market for months on end without even a nibble. In the past year, 16 Georgia banks have failed, more than in any other state, largely because of residential real estate losses. Dozens more are struggling. To say the market has been sluggish would be an understatement. The main problem is sheer volume – a staggering 150,000 vacant housing lots across metro Atlanta are available, more than a decade’s supply at current absorption rates. The flood of distressed subdivisions is unprecedented and has given banks numerous headaches. Is it more cost-effective to complete half-finished homes before selling or to put them on the market as-is? Should they sell lots in a distressed market or hold onto them until prices rebound? Complicating matters, subdivisions often were financed by more than one bank. And different lenders frequently disagree on what steps to take when problems arise. Shadow Inventory Is "Pig In The Python": RealtyCheck asks the question How big is the Shadow Housing Inventory? For the past few months I've talked a little bit about so-called "shadow inventory." These are the homes that banks have taken back after foreclosures (known as REO properties). In normal times banks immediately turn REOs around and up them up for sale, but that's not happening at a very fast clip these days. The Realtor's chief economist, Lawrence Yun, called it a "business decision" by the banks: "I believe that many banks including Fannie and Freddie, who are also holding onto some properties, are releasing foreclosed properties in a measured way so as to not to flood the market which they perceive then perhaps could lead them to even more drastic price cuts. So they are releasing properties on a measured pace as a business decision to minimize losses." So what exactly is the size of this shadow inventory? Hard to say, but estimates are that it could be around 700,000. This of course does not include the foreclosures that are still in process, which builder analyst Ivy Zelman refers to as "the pig in the python." Builders are concerned that if these properties suddenly flood the market, their new high hopes could turn right back around.

Fed Manipulating Demand For US Treasuries - (www.zerohedge.com) In a brilliant piece of investigative reporting, Chris Martenson (original article here) has uncovered that the Fed, merely a week after issuing $28 billion in 7 year bonds (which Zero Hedge discussed previously) via its puppet, the US Treasury, of which $10 billion ended up being purchased by primary dealers,has turned and bought 47% of the primary allocated bonds in Open Market Purchases. This is undisputed monetization removed simply via one primary dealer and less than 5 days of temporal separation in order to leave no easy trace. As Martenson points out: "A more honest and open approach would have been for the Fed to simply buy them outright at the auction but this way, using "primary dealers" and "POMOs" and all these other extra steps the basic fact that the Fed is openly monetizing US government debt is effectively hidden from a not-too-terribly inquisitive US press and public." The question is did the Fed implicitly tell the primary dealers they are merely holding the treasuries for a flip, and that it would acquire them immediately. Absent this $4.8 billion in effectively monetized bonds, what would the Bid To Cover have been for the primaries? Would this have been the second practically failed auction for USTs after the deplorable 5 year auction results a day prior? One wonders if there would have been 62% indirect interest in these bonds (which the day before had a measly 32.5% indirect bid) if the purchasers were aware of the Fed's immediate prompt monetization of a large part of the directs' balance. It is truly a sad state of affairs when the Fed has to manipulate public and media perception in this way, and has to cover up for the complete lack of interest in US Treasuries.

Falling Valuations Poison for VC's and Silicon Valley Real Estate - (www.nytimes.com) Here’s more proof that Silicon Valley’s financing ecosystem is under assault: the value of the start-ups they are investing in just keeps dropping. In a quarterly study of venture financings published Friday,Fenwick & West, a Silicon Valley law firm, found that so-called “down rounds” in the second quarter of 2009 exceeded “up rounds,” 46 percent to 32 percent. Last quarter was similarly bad – with 46 percent down rounds and 25 percent up rounds. In a down round, a start-up issues more stock with a lower valuation than in previous rounds, which means that the equity of previous investors has shrunk. This is poison for the V.C. industry, which depends on returning large bounties to its investors, who have plenty of safer asset classes in which to invest their money. For context: in the salad days of 2007’s third quarter, there were some 79 percent up rounds and only 14 percent down rounds. “These two previous quarters were by far the worst quarters for valuations in a good number of years, going back to the dot-com bubble bursting,” said Barry Kramer, a partner at Fenwick & West. “For the venture capital environment to work, you are supposed to have nontrivially more up-rounds than down-rounds. This is depressing to venture capitalists.” The law firm, which surveyed 89 deals, or around half of the financings in the Valley last quarter, also found that the average valuation for companies receiving venture capital during the quarter decreased by 6 percent from the companies’ prior financing round. That’s slightly more of a drop than the 3 percent decrease the survey reported in the first quarter. These are the only two negative quarters since the law firm began reporting these statistics in 2004. The VC industry has other, related problems. The shortage of I.P.O.’s and M&A deals is killing liquidity and reducing the ability V.C. firms have to make other investments. As my colleague Claire Cain Miller also recently reported, venture funds have grown too large and older partners have lost touch with what’s new in technology. But Mr. Kramer sees some reasons for hope, with the Nasdaq rallying since the start of the year. “Corporate America is going to be more willing to make acquisitions when their stock price is higher,” he said. “And hopefully people are more willing to reconsider I.P.O.’s and maybe the windows open a little more. That is the potential light I see here.”

Goldman Must Release Info in Trade-Secret Case - (www.cnbc.com) Goldman Sachs Group will have to give up its personnel information on a former employee accused of stealing trade secrets, after a U.S. judge on Monday denied the firm's motion to quash a request by the computer programmer's lawyer. The firm must provide the lawyer with documents from the personnel file of its former programmer Sergey Aleynikov, who faces criminal charges of stealing Goldman code used in trading, Judge Paul Crotty ordered in Manhattan federal court. The lawyer subpoenaed Goldman for the file last week and the firm submitted a motion to quash the request. Crotty ordered Goldman to provide documents including Aleynikov's job application, interview, job offer letter, performance reviews, progress reports and any training. Aleynikov is free on $750,000 bail. He was detained for several days following his arrest by the FBI at Newark Liberty International Airport on the night of July 3. He was charged in a criminal complaint of stealing code used for trading from Goldman. The government said he downloaded the code onto a home computer. He has not been indicted and court documents show his lawyer and U.S. prosecutors are in talks "on a possible resolution of the case" — a legal term that often, but not always, indicates a defendant may plead guilty.