KeNo's Housing and Economic Portal: Thursday August 6 Housing and Economic stories

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Ex-Lehman Trader Says Fuld Snubbed Warnings on Housing Bubble - (www.bloomberg.com) On the morning of June 7, 2005, some 45 traders and researchers gathered in a third-floor conference room at Lehman Brothers Holdings Inc. for a 7 o’clock briefing fromMichael Gelband. The global head of fixed income introduced himself and proceeded to drop a bombshell, writes Lawrence G. McDonald in “A Colossal Failure of Common Sense,” a scathing and sadly overheated inside account of how Lehman became a house divided that could not long stand. “Mike said flatly that in his opinion the U.S. real-estate market was pumped up like an athlete on steroids,” says McDonald, a former Lehman vice president of distressed debt and convertible securities trading who says he was in the room that day. This was not what Chief Executive Officer Richard S. Fuld Jr. wanted to hear. At the time, Lehman was still making a fortune by buying up mortgages, packaging them into collateralized debt obligations and selling them off. Yet Gelband was daring to broach an “unspoken question,” McDonald says: What if the property market crashes and we get stuck holding billions of dollars in securitizations we can’t sell? Fuld refused to listen, either then or later, as danger drew ever nearer, according to this understandably one-sided account. “King Richard,” as McDonald calls him, was too busy up in his 31st-floor office spending billions of dollars to buy commercial real-estate and stakes in hedge funds. Pounding the Table: Time and again, Fuld refused to heed compelling evidence gathered by his own staff that the U.S. real-estate market was living on borrowed time, McDonald says. By the end of 2007, Lehman’s liabilities had swelled to 44 times its worth. And still, McDonald says, Fuld wouldn’t listen. McDonald says that Gelband, a member of the executive committee, pounded the table at one meeting that took place while Lehman was considering buying yet another hedge fund. “This is going to be the granddaddy of all credit crunches,” Gelband shouted. “And you’re trying to buy into a giant global asset bubble.” Fuld, true to form, later responded to Gelband’s concerns by bullying him. “I don’t want you to tell me why we can’t,” Fuld told Gelband by this account. “I want you to be creative, and tell me how we can. You’re much too cautious.” We don’t get Fuld’s side of the story in this book -- just page after page of his reported rants, threats and bad judgment with no rebuttal in sight. Anger and Sorrow: In 2007, Gelband quit, to be followed by others who had uttered similar warnings, including Lawrence McCarthy, head of distressed bond trading, then Alex Kirk, head of distressed trading research and sales. McDonald lost his own position at Lehman amid a bloodletting in March 2008. McDonald’s anger and sorrow seethe throughout this book, which opens with some 80 pages of autobiography describing his climb into the securities business through stints selling pork chops, equities and bonds.

United States Postal Service Faces October Default Along With... - (www.jessescrossroadscafe) USPS May Be Unable to Make Payroll in October and Retiree Health Plan Costs, Unions' Letter to White House Says. On July 14, unions representing United States Postal Service (USPS) workers wrote the White House with "extreme urgency" asking for a meeting to address lack of funding for both employee payroll in October and health benefits for retired employees. The letter, which the FederalTimes.com blog provided a scanned copy late last week, says: "[USPS] top executives are now saying that the USPS will default on a $5.4 billion payment to prefund future retiree health benefits on September 30, 2009. And its government affairs representative are now telling Congressional staff that the Postal Service may not be able to make payroll in October and will be forced to issue IOUs instead." The letter was co-signed by the presidents of the American Postal Workers Union, National Rural Letter Carriers' Association, National Association of Letter Carriers and National Postal Mailhandlers Union, and sent to White House Deputy Chief of Staff, Jim Messina. GovExec.com reported more on the letter in this column on July 17 which is included here below: Postal unions seek White House help on pay, benefits: Four unions representing the nation's postal workers are pleading for a meeting with the White House to address possible funding shortfalls for workers' payroll and retiree health benefits, according to a letter obtained by CongressDaily. The presidents of the American Postal Workers Union, National Rural Letter Carriers' Association, National Association of Letter Carriers and National Postal Mailhandlers Union co-signed the Tuesday letter to White House Deputy Chief of Staff Jim Messina, warning that the U.S. Postal Service is at risk of defaulting on a $5.4 billion payment to prefund retiree health benefits at the end of September. The letter alleges that USPS "may not be able to make payroll in October and will be forced to issue IOUs instead." Yvonne Yoerger, a spokeswoman for USPS, confirmed that the unions wrote the letter but disputed the claim that payroll deadlines will be missed. "That's not something that's been discussed at all," she said. "We are committed to making payroll." Yoerger said USPS will continue to work with OMB and the Office of Personnel Management to determine if and how the Postal Service can meet the Sept. 30 deadline to pay forward $5.4 billion in future health liability costs. The Postal Service is required by law to set aside funds for future retiree health care costs, rather than paying recipients as costs are incurred as other government agencies do. As a result of a $3 billion loss to date this year, the unions wrote, no money is available for those future payments, and regular payroll deadlines may not be met unless other funds are tapped. "Such a [financial] collapse can be averted without resort to a taxpayer bailout by reforming the retiree health prefunding provisions of the law and [by] giving the Postal Service access to its own resources in the Postal Service Retiree Health Benefits Fund, which now has a balance of $32 billion," the unions wrote.

Stores Go Dark Where Buyers Once Roamed - (www.nytimes.com) Among the marks of Manhattan’s prosperity in recent years were the thousands of restaurants and shops that opened to meet an ever-growing demand. Confident in the appetite for spending — on expensive shampoo at 24-hour drugstores, cheese plates at sleek wine bars and clothes at minimalist boutiques — store owners signed high-rent leases with little haggling. But as New Yorkers have drastically cut back, the shops that line the streets, from chain outlets to family-run shops, have started to disappear. The storefront vacancy rate in Manhattan is now at its highest point since the early 1990s — an estimated 6.5 percent — and is expected to exceed 10 percent by the middle of next year, according to data gathered by Marcus & Millichap Research Services, a national real estate investment brokerage based in Encino, Calif. And those numbers do not capture the full story. Some of the more desirable shopping districts are littered with empty storefronts. For example, Fifth Avenue between 42nd Street and 49th Street, the stretch just south of Saks Fifth Avenue, has a vacancy rate of 15.3 percent, according to the brokerage Cushman & Wakefield. In SoHo, from West Houston Street to Grand Street and Broadway to West Broadway, among the high-end boutiques, art galleries and restaurants, 1 in 10 retail spaces are now empty or about to be. “I’ve never seen such an across-the-board problem,” saidLorraine Nadel, a lawyer who has represented tenants and landlords for 18 years. “Store owners can’t pay their rent, and they can’t keep their businesses going.” It has long been difficult to run a small business in Manhattan, but a number of struggling store owners cite high rents and their landlords’ unwillingness to negotiate as the leading obstacles to their survival. “It’s a crisis,” said Stephen Null, director of the Coalition for Fair Business Rents, which has been promoting legislationto protect small businesses in lease negotiations since 1984. “Lease renewals are the single biggest killer of small businesses in New York City.” Manhattan, with its high density, high incomes and near-constant foot traffic, has maintained a strong storefront culture while other urban areas have seen their downtowns empty out and lose customers to suburban malls. Stores and restaurants in New York are open longer hours, increasing the potential for revenue, and residents tend to shop near where they live, if just by necessity. But because stores are such a part of their neighborhoods, the closings can have more of an emotional impact on residents. “New York is different than the rest of America because it is the last bastion of storefronts,” said Kenneth T. Jackson, a historian at Columbia University. “You don’t live in a city of eight and a half million people. You live in a city of neighborhoods.” “We feel a loss when the store is gone,” he added. In one block alone, on the west side of Lexington Avenue between 74th and 75th Streets, three stores have closed in the past few months: a women’s clothing shop called Cantaloup, a luggage shop and a design store — places that the locals say had thrived for years. Those closings followed that of a sandwich shop across the street.

Toyota Said to Decide to Shut California Car Plant - (www.bloomberg.com) Toyota Motor Corp. will shut a California auto-assembly plant that operated as a joint venture with General Motors Corp. for 25 years, the first time Japan’s largest carmaker has closed a factory at home or abroad, according to two people familiar with its plan. The company will negotiate the timing of the closing with Motors Liquidation Co., an entity responsible for the disposal of the assets GM shed in bankruptcy, said the people yesterday. They declined to be identified because the information wasn’t public. A collapse in U.S. auto sales to their lowest since 1976 has left Toyota, the world’s largest automaker, struggling to keep North American plants running at capacity and avoid factory closings and job cuts. GM in June said it would end assembly of Pontiac Vibes at New United Motor Manufacturing Inc., known as Nummi, and quit the venture as part of its reorganization. “Without GM’s volume the plant is simply not cost effective,” said Aaron Bragman, an analyst at IHS Global Insight Inc. in Troy, Michigan. “They have other facilities that could easily accommodate the production that’s there.” Bragman said that should the plant close, it would mark a shift for Toyota because the automaker typically doesn’t “respond to changes in the market on a short term.” California Governor Arnold Schwarzenegger has asked Toyota to continue operations at the plant and has spoken to Akio Toyoda, the carmaker’s president, according to the state government’s Web site. Extensive Review: “We’re conducting an extensive review,” Paul Nolasco, a Toyota spokesman, said yesterday. “There are a number of difficult and complex issues we need to address with regard to a final decision.” Yoshimi Inaba, Toyota’s North American chief executive, said July 20 its decision depended on possible aid from California lawmakers, labor contracts for the factory’s union workers that expire in August and Nummi’s financial viability. It’s the only large auto-assembly plant on the U.S. West Coast. Toyota gained 2.5 percent to 3,750 yen at the close of trading in Tokyo. In the U.S., the carmaker’s largest source of revenue, the Toyota City, Japan-based company’s sales fell 38 percent in the first half, following a 15 percent decline last year. Toyota had a record 436.9 billion yen ($4.6 billion) loss in the fiscal year that ended in March, its first in six decades, and forecasts an even bigger 550 billion yen loss in the current business year.

California Pension Fund Hopes Riskier Bets Will Restore Its Health - (www.nytimes.com) Big as California’s budget woes are today, so are the problems lurking in its biggest pension fund. The fund, known as 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. Meanwhile, local governments in the state are pleading poverty and saying they cannot make the contributions that would be needed to shore it up. 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 sellstocks 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. Mr. Dear remains a believer. Private investments, he asserts, will over the long haul outperform stocks by three percentage points a year, and that is necessary to keep Calpers on track to returning its goal of 7.75 percent annual returns. “Three percent on a portfolio as large as ours makes a material difference,” he said. If he can inch Calpers’s investment performance up, many problems will disappear. If not, Calpers may end up in an even bigger financial squeeze than it is today. The scope of his task elicits sympathy from one of Calpers’s harshest critics, Marcia Fritz, a Sacramento lawyer and vice president of the California Foundation for Fiscal Responsibility, which has led a loud campaign over the rich benefits received by some Calpers retirees. “Joe Dear has got a tough job,” Ms. Fritz said. “I wouldn’t wish it on anyone. There’s so much pressure. It’s horrible.”