KeNo's Housing and Economic Portal: Sunday September 13 Housing and Economic stories

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TOP STORIES:

Price Deflation Hitting Canada: Tickets To See Bill Clinton Slashed To $5 - (www.citytv.com) A much-hyped appearance by a certain charismatic former U.S. President is receiving a cool reception in the city. After two weeks of sluggish ticket sales to hear Bill Clinton speak, the Canadian National Exhibition has slashed prices from $20 to five dollars plus admission. “I guess I was over optimistic in the initial phases,” noted the CNE’s David Bednar. “But if you get ten or 11 thousand people in one place for one thing, that’s still a lot of people.” Organizers were hoping to fill the 25,000-seat BMO Field, but to-date have only sold 7,000. Now, for the price of a corn dog or a bag of Tiny Tom donuts, people can gain access to the marquee event, paid for in part by federal stimulus dollars. Those who did pay full price - or even more to scalpers - were a bit steamed.

Paul Krugman: "Deficits Saved The World" - (Mish at http://globaleconomicanalysis.blogspot.com) Dateline August 27, 2009: Paul Krugman: "Deficits Saved The World" Inquiring minds are reading Till Debt Does Its Part. So new budget projections show a cumulative deficit of $9 trillion over the next decade. According to many commentators, that’s a terrifying number, requiring drastic action — in particular, of course, canceling efforts to boost the economy and calling off health care reform. The truth is more complicated and less frightening. Right now deficits are actually helping the economy. In fact, deficits here and in other major economies saved the world from a much deeper slump. The longer-term outlook is worrying, but it’s not catastrophic. If governments had raised taxes or slashed spending in the face of the slump, if they had refused to rescue distressed financial institutions, we could all too easily have seen a full replay of the Great Depression. As I said, deficits saved the world. In fact, we would be better off if governments were willing to run even larger deficits over the next year or two. The official White House forecast shows a nation stuck in purgatory for a prolonged period, with high unemployment persisting for years. If that’s at all correct — and I fear that it will be — we should be doing more, not less, to support the economy. But what about all that debt we’re incurring? That’s a bad thing, but it’s important to have some perspective. Economists normally assess the sustainability of debt by looking at the ratio of debt to G.D.P. And while $9 trillion is a huge sum, we also have a huge economy, which means that things aren’t as scary as you might think. ....

Dateline November 3, 2004: Paul Krugman: "[The Budget Deficit] is comparable to the worst we've ever seen in this country. It's bigge[r] than Argentina in 2001." Inquiring minds are reading Krugman calls on Bush to reign in the red. TONY JONES: Well, the US is not just labouring under a record trade deficit, there are warnings tonight that its budget deficit could precipitate a Latin American style financial crisis. Influential economist Paul Krugman says the US will face a severe downturn before the end of the decade unless the $500 billion fiscal debt is rectified. In his latest book, The Great Unravelling, the Princeton University economist is calling on President Bush to abandon his program of trillion dollar tax cuts, otherwise, he claims, there may not be enough funds to pay for the waves of baby boomers who will soon retire. I spoke to Paul Krugman a short time ago. TONY JONES: Paul Krugman, history proved your predictions right over the Asian financial crisis. You're now warning essentially that the engine of the world economy, the United States itself, is heading for a South American style financial crisis. What's the evidence for that? PROFESSOR PAUL KRUGMAN, PRINCETON ECONOMIST: Well, basically we have a world-class budget deficit not just as in absolute terms of course - it's the biggest budget deficit in the history of the world - but it's a budget deficit that as a share of GDP is right up there. It's comparable to the worst we've ever seen in this country. It's biggest than Argentina in 2001. .... TONY JONES: It's a bit more than arithmetic though, isn't it? Would you agree with the proposition that you're slowly transforming yourself, in a way, from a pure economist into also something of a political activist? PROFESSOR PAUL KRUGMAN: Well, yeah, I mean, it's not what I intended. But I came in writing as a journalist, writing occasional columns in the 90s, mostly about economical fears with a political tinge. I came to the New York Times intending to do pretty much the same thing. But then it became clear very early on that the President of the United States was irresponsible and dishonest on matters economic and it turned out that what I learned there was true of other kind of policies as well. So, I was forced, if you like, just by the arithmetic of understanding how the budget works into a much broader critique of this really kind of scary thing that's happening to my country.

Q. What's different? A: Politics: a democrat ultra-liberal is in the White House. Krugman is not only a Keynesian Clown, but a hypocrite.

Raft of Deals for Failed Banks Puts U.S. on Hook for Billions - (online.wsj.com) The biggest spur to deal-making among banks isn't private-equity cash or foreign investors. It is the federal government. To encourage banks to pick through the wreckage of their collapsed competitors, the Federal Deposit Insurance Corp. has agreed to assume most of the risk on $80 billion in loans and other assets. The agency expects it will eventually have to cover $14 billion in future losses on deals cut so far. The initiative amounts to a subsidy for dozens of hand-picked banks. Through more than 50 deals known as "loss shares," the FDIC has agreed to absorb losses on the detritus of the financial crisis -- from loans on two log cabins in the woods of northwestern Illinois to hundreds of millions of dollars in busted condominium loans in Florida. The agency's total exposure is about six times the amount remaining in its fund that guarantees consumers' deposits, exposing taxpayers to a big, new risk. As financial markets heal and the economy appears to be pulling out of recession, the federal government is shifting from crisis to cleanup mode. But as the loss-share deals show, its potential financial burden isn't receding. So far, the FDIC has paid out $300 million to a handful of banks under the loss-share agreements. The practice is largely a response to the number of bank failures of the past 18 months, which has stretched the FDIC's financial and logistical resources. The FDIC had just $10.4 billion in its deposit-insurance fund at the end of June, down from more than $50 billion last year. The agency said Thursday it had 416 banks on its "problem" list at the end of the second quarter, which means the list of banks at a higher risk of insolvency has been growing. Many of the government programs aimed at attacking the financial crisis have carried high price tags, including the Treasury Department's $700 billion Troubled Asset Relief Program, which includes major government investments in American International Group, Inc., Citigroup Inc., Bank of America Corp., and the U.S. auto industry. But federal money isn't just going one way. Some of the emergency programs put in place last year, including TARP, have brought in billions of dollars for the government. On a range of rescue programs run by the Federal Reserve, such as loans to investment banks and purchases of mortgage-backed securities, the Fed earned $16.4 billion through the first six months of 2009. The FDIC said earlier this year that it earned more than $7 billion on the fees it charged through a program that guaranteed debt issued by banks. On Aug. 14, Alabama's Colonial Bank collapsed, felled by bad commercial-real-estate lending. The FDIC, assuming its traditional role, brokered a sale of the bank's deposits to BB&T Corp., ensuring that customers wouldn't see any interruption. It also agreed to help BB&T buy a $15 billion portfolio of Colonial's loans and other assets by agreeing to absorb more than 80% of future losses. Under the deal, the most BB&T can lose is $500 million, the bank says, and that is only in the unlikely event that the entire portfolio becomes worthless. The FDIC is on the hook to cover the rest. In June, Wilshire State Bank, a division of Wilshire Bancorp Inc. in Los Angeles, agreed to buy $362 million in deposits and $449 million of assets from failed Mirae Bank, also of Los Angeles. The FDIC agreed to assume most future losses on roughly $341 million of those assets, largely commercial real estate and construction loans in Southern California. "After we understood how [the loss-share] works, we were literally overjoyed," says Joanne Kim, chief executive of Wilshire State Bank. Loss-share agreements made a brief appearance in the early 1990s during the savings-and-loan crisis, but haven't been used this extensively before. The FDIC sees the deals as a way to keep bank loans and other assets in the private sector. More importantly, it believes such deals mitigate the cost of cleaning up the industry.

Cautiously, Private Equity Looks for Exits - (online.wsj.com) As private-equity firms test the IPO waters for a way to exit from their investments, one thing is clear: They are treading cautiously in the way they are structuring their deals. Private-equity-backed companies accounted for close to half the initial public offerings launched in busier years such as 2006 and 2007, but when the IPO market effectively closed down in the second half of 2008, all types of deals were shut out. As broader stock gauges have picked up in recent months, so has activity among private-equity IPOs, beginning with Bridgepoint Education Inc. and Rosetta Stone Inc. in April, and more recently, with deals from semiconductor maker Avago Technologies Ltd. and electronic-health-care-claims processor Emdeon Inc. More are expected. Of the 10 IPOs filed in August, five are majority-owned by private-equity shops, according to data from Dealogic. (Data exclude deals raising less than $10 million, companies that refreshed existing filings, real-estate investment trusts and shell companies.) Private-equity-backed offerings in the pipeline include genealogical Web site Ancestry.com and utility-services contractor InfrastruX Group Inc., owned by Spectrum Equity Investors and Tenaska Capital Management, respectively. Kohlberg Kravis Roberts & Co., one of the most acquisitive firms in the buyout boom, is preparing several stock offerings, including one of discount retailer Dollar General Corp. But this year's crop of private-equity-backed IPOs are holding back from some of the more aggressive strategies from the past. No one is trying to flip out of an investment made within the past 12 months, not only because prospective buyers would balk, but also because there haven't been many private-equity-financed purchases in the past year. Gone are the days when the bulk of the money raised went toward a big special dividend to private-equity owners; now, the money is being used to pare debt, redeem preferred stock and for general corporate purposes. "The activity we may be seeing in the future will be largely related to gaining some liquidity through an IPO exit as opposed to paying a dividend," says Kevin O'Mara, a partner in the private-equity practice of the law firm Jones Day. "Private-equity funds that were raised in 2003 and 2004 are getting near the end of their investment period, and they need to exit because money has to start being returned to their investors in the seventh and eighth year." Just because they aren't drawing hefty dividends or flipping for quick profits, private-equity shops aren't exactly leaving the IPO banquet hungry. In every deal this year, at least 40% -- and more often, half -- of the shares sold in the offerings have been from private-equity owners, so those dollars don't go into the company's coffers.

Mortgage Firms Struggle to Redo Hard-Hit Loans - (online.wsj.com) Morgan Stanley chief John Mack recently made a new friend, he told shareholders in April -- a Southern woman who had benefited from the big bank's stepped-up efforts to modify loans under a new federal program aimed at keeping borrowers in their homes. "I'm now invited -- if I ever visit Memphis, Tennessee -- to drive two hours south to have dinner with her and her family," Mr. Mack said. But by some measures, Morgan Stanley's mortgage-loan servicing firm, Saxon Mortgage Services Inc., has a long road to go. An April Credit Suisse Group analysis of how quickly companies have renegotiated loans ranked Saxon last among 18 mortgage-servicing firms. Saxon has modified just 6% of the loans it oversees that originated between 2005 and 2007. By contrast, Litton Loan Servicing, a Goldman Sachs Group Inc. unit, modified 28% of its loans. Such firms are at the center of a grand government experiment aimed at halting foreclosures and the collateral damage they cause neighboring homes. New foreclosure notices will total 2.4 million this year, which could trigger price drops in 69.5 million nearby homes, estimates the Center for Responsible Lending, a financial-services research and policy firm. At an average decline of $7,200 a house, that translates to a potential drop of $502 billion in total U.S. property values. The government plan, rolled out in February and called the Home Affordable Modification Program, or HAMP, will pay mortgage-servicing firms to modify mortgages and find other ways to keep people in their homes. But the program's sheer scale and the speed with which it was rolled out has created a new set of problems for some of the 27 firms charged with carrying it out. A look at Saxon provides a window into the challenges these mortgage servicers now face as they attempt to salvage the loans of three million to four million Americans. Mr. Mack declined to comment through a spokeswoman, but Saxon says that as soon as HAMP launched, it was flooded with requests from borrowers. The company, based in Irving, Texas, has hired or expanded contracts with four outside companies to help handle the influx, and it recently added a late shift from 4 p.m. to 11 p.m. to manage the extra work. Even the volume of paperwork at one point grew unwieldy -- an internal audit in mid-May found that Saxon's scanning equipment was overloaded with materials sent in by borrowers, leading to delays and lost documents. Staff lacked the training and experience to modify so many sour loans. During the housing boom, Saxon's mortgage-servicing employees did little more than send monthly statements in the mail and track down delinquent borrowers. Like other mortgage servicers, Saxon was essentially the link between borrowers and the investors who owned pools of mortgages. It handled the day-to-day business of collecting payments on behalf of those investors, and when borrowers fell behind, of covering the payments until it could collect. When borrowers defaulted, Saxon would either modify the loans or foreclose.

Congress Helped Banks Limit Rule - (online.wsj.com) Not long after the bottom fell out of the market for mortgage securities last fall, a group of financial firms took aim at an accounting rule that forced them to report billions of dollars of losses on those assets. Marshalling a multimillion-dollar lobbying campaign, these firms persuaded key members of Congress to pressure the accounting industry to change the rule in April. The payoff is likely to be fatter bottom lines in the second quarter. The accounting issue lies at the heart of the financial crisis: Are the hardest-to-value securities worth no more than what the market is willing to pay, or did the market grow too dysfunctional to properly set values? The rule change angered some investor advocates. "This is political interference on a major issue, and it raises questions about whether accounting standards going forward will have the quality and integrity that the market needs," says Patrick Finnegan, director of financial-reporting policy for CFA Institute Centre for Financial Market Integrity, an investor trade group. Backers of the change say it was necessary because existing accounting rules never contemplated the kind of market turmoil that unfolded last year. The rules had required banks, securities firms and insurers to use market prices to help assign values to mortgage securities and other assets that don't trade on exchanges -- to "mark to market." But when markets went haywire last fall, financial firms complained that the rules forced them to slash the value of many assets based on fire-sale prices. That contributed to big losses that depleted their capital and left several of the nation's largest firms on the brink of failure. Earlier this year, financial-services organizations put their lobbyists on the case. Thirty-one financial firms and trade groups formed a coalition and spent $27.6 million in the first quarter lobbying Washington about the rule and other issues, according to a Wall Street Journal analysis of public filings. They also directed campaign contributions totaling $286,000 to legislators on a key committee, many of whom pushed for the rule change, the filings indicate. Rep. Paul Kanjorski, a Pennsylvania Democrat who heads the House Financial Services subcommittee that pressed for the accounting change, received $18,500 from coalition members in the first quarter, the second-highest total among committee members, according to Federal Election Commission records. Over the past two years, Mr. Kanjorski received $704,000 in contributions from banking and insurance firms, the third-highest total among members of Congress, according to the FEC and the Center for Responsive Politics.

OTHER STORIES:

Federal Intervention Pits 'Gets' vs. 'Get-Nots' - (online.wsj.com)
Some Analysts See an End to Market Rally - (www.nytimes.com)

Can Rally Run Without Revenue? - (online.wsj.com)

Bond Market Eyeing 10% Jobless Rate Rejects Recovery - (www.bloomberg.com)

As hybrid cars gobble rare metals, shortage looms - (www.reuters.com)

China’s Stocks Slump Most Since June 2008, Cap Monthly Loss - (www.bloomberg.com)

New era for Japan as DPJ triumphs - (www.ft.com)

Central Banks Should Aim to Check Asset Bubbles, Flaherty Says - (www.bloomberg.com)

Japan’s Unemployment May Shorten ‘Honeymoon’ for DPJ - (www.bloomberg.com)

India’s GDP Grew 6.1 Percent in April-June Quarter - (www.nytimes.com)

Chicago Purchasers’ Index Rose More Than Forecast - (www.bloomberg.com)

Rep. Frank eyes Fed audit, emergency lending curbs - (www.reuters.com)