KeNo's Housing and Economic Portal: Wednesday September 30 Housing and Economic stories

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TOP STORIES:

Stiglitz Says Banking Problems Are Now Bigger Than Pre-Lehman - (www.bloomberg.com) Joseph Stiglitz, the Nobel Prize- winning economist, said the U.S. has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers Holdings Inc. “In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview yesterday in Paris. “The problems are worse than they were in 2007 before the crisis.” Stiglitz’s views echo those of former Federal Reserve Chairman Paul Volcker, who has advised President Barack Obama’s administration to curtail the size of banks, and Bank of Israel Governor Stanley Fischer, who suggested last month that governments may want to discourage financial institutions from growing “excessively.” A year after the demise of Lehman forced the Treasury Department to spend billions to shore up the financial system, Bank of America Corp.’s assets have grown and Citigroup Inc. remains intact. In the U.K., Lloyds Banking Group Plc, 43 percent owned by the government, has taken over the activities of HBOS Plc, and in France BNP Paribas SA now owns the Belgian and Luxembourg banking assets of insurer Fortis. Obama’s Plan: While Obama wants to name some banks as “systemically important” and subject them to stricter oversight, his plan wouldn’t force them to shrink or simplify their structure. Stiglitz said the U.S. government is wary of challenging the financial industry because it is politically difficult, and that he hopes the Group of 20 leaders will cajole the U.S. into tougher action. “We aren’t doing anything significant so far, and the banks are pushing back,” said Stiglitz, a Columbia University professor. “The leaders of the G-20 will make some small steps forward, given the power of the banks” and “any step forward is a move in the right direction.”

Pension Plan Shocker Dead Ahead! – (www.moneyandmarkets.com) I’ve talked about corporate pension plans before, but in a few short weeks I think we’re going to get some shocking news. Namely, that the government backup for failed pension plans is more underfunded than it has ever been before. Back in April, I told you a bit about the Pension Benefit Guaranty Corporation and its decade of running in the red. But just to recap: The PBGC is there for workers when their companies break retirement promises, and yet ironically, the PBGC itself has been underfunded every year since 2002! To its credit, the organization was doing a decent job of getting back toward the black lately. It cut its deficit slightly in 2005, then made major strides in 2006 … 2007 … and 2008. Now that streak looks ready to end — in a BIG way — when the PBGC reports its full-year financial results at the end of this month. I’m basing that on what the group’s acting director Vince Snowbarger told a Senate Special Committee on Aging back in May. At that point, he said the PBGC was running a $33.5 billion deficit in 2009. "But really … the PBGC simply needs to get more money into its coffers. A lot of experts are calling for higher premiums being charged to member pension plans. And that may certainly happen. Yet there are two big drawbacks to this approach, as I see it: First, as previously noted, there are already fewer and fewer companies offering defined benefit pension plans. Second, charging the good plans higher premiums will only give companies one more reason to STOP providing defined benefit pension plans, which would exacerbate the existing problem. That leaves just one place for the PBGC to get its money … you and me!"

The Disappearance of America's Middle Class - (www.nytimes.com) Millions of Americans have lost homes, jobs and savings to the financial crisis and recession. While greed and extravagance played roles, many lived beyond their means because their paychecks shrank. This article is adapted from “Past Due: The End of Easy Money and the Renewal of the American Economy,” by Peter S. Goodman, a reporter for The New York Times. The book, to be published Tuesday by Times Books, explores the origins of the crisis and suggests ways to reinvigorate the economy. ONE afternoon in November 2006, a policeman spotted an expired license plate on Dorothy Thomas’s 10-year-old Toyota Corolla as she drove through San Jose, Calif. He ordered her to pull over. Struggling under the weight of thousands of dollars in credit card bills, Ms. Thomas was perpetually short of cash. She had not bought a $10 auto registration sticker. The officer checked his database and recognized that she had already been ticketed once before for the same thing. He arranged to have her car towed away. “I got down on my knees and begged that officer,” Ms. Thomas recalled. As she watched her car being hauled off, she sensed that this was the beginning of a descent into a crisis from which she might not easily escape. Without money to pay the towing and storage fees, she could not extract her car from the lot, and the tab soon grew to $1,600. Without a car, she could not reach the hospital where she worked in the administrative offices, so she lost her $16-an-hour job. Without a paycheck, she could no longer pay the rent on her modest home. She moved to Oakland, where a friend lived in a beaten-down, rented house on a street they called Crack Avenue. By year’s end, Ms. Thomas, then 49, was occupying a bunk at a homeless shelter, searching in vain for a job in an economy plagued by unemployment. Across the United States a sense has taken hold that the Great Recession and the financial crisis are predominantly a result of national profligacy, as if the economy had been undone by insatiable shoppers, foolhardy home buyers and greedy investment bankers. Extravagance and recklessness certainly played crucial roles, and yet they are only part of the explanation. Many have lived beyond their incomes simply because incomes have been outstripped by the costs of middle-class life. By the fall of 2008, most American workers were bringing home roughly the same weekly wages they had earned in 1983, after accounting for inflation. “For middle- and low-wage workers, the median wage basically went nowhere over these years,” said the economist Jared Bernstein. Spirited and eloquent, Ms. Thomas had worked her way up from rural Oklahoma poverty, enduring the strains of forcibly integrated schools, before settling in California. She had become one of the first African-Americans to sell cosmetics at a Sacramento department store. Then, she forged a career in medical billing, at one point making $22 an hour. She had lived beyond her means, but not out of decadence. For years, she had rented homes in better neighborhoods than she could afford in order to send her two daughters to quality schools. She had run up credit card balances to pay for summer science camps and school supplies. She had never earned more than a high school diploma, but one of her daughters already had a master’s in education; the other was about to start college.

Fannie, Freddie struggle a year after takeover - (finance.yahoo.com) A year after the near-collapse of Fannie Mae and Freddie Mac, the mortgage giants remain dependent on the government for survival and there is no end in sight. The companies, created by the government to ensure the availability of home loans, have tapped about $96 billion in government aid since they were seized a year ago this weekend. Without that money, the firms could have gone broke, leaving millions of people unable to get a mortgage. Many questions remain about Fannie and Freddie's future, but several things are clear: The companies are unlikely to return to their former power and influence, the bailout is sure to cost taxpayers even more money and the government will have a big role in the U.S. mortgage market for years to come. Fannie Mae was created in 1938 in the aftermath of the Great Depression. It was privatized 30 years later to limit budget deficits during the Vietnam War. In 1970, the government formed its sibling and competitor Freddie Mac. The companies boomed over the past decade, buying mortgages from lenders, pooling them into bonds and selling them to investors. But critics called them unnecessary, arguing that Wall Street could support the mortgage market itself. That argument has faded in the wreckage of the failed loans that led to the housing bust. Investors have fled any mortgage investment that doesn't have the government standing behind it. "No longer is anyone arguing that the private sector can handle this on its own," said Jaret Seiberg, an analyst at Washington Research Group. The government stepped in to take control of the two companies on the weekend of Sept. 6, after they were unable to raise money to cover soaring losses and their stock prices plunged. A year later, the government controls nearly 80 percent of each company, and their problems are growing as defaults and foreclosures continue to skyrocket. The percentage of homeowners who have missed at least three months of payments is normally under 1 percent for both companies. Now it's nearly 4 percent for Fannie and 3 percent for Freddie. Fannie had nearly $171 billion in troubled loans as of June and had set aside $55 billion to cover those losses, while Freddie had nearly $78 billion in troubled loans and reserves of only $25 billion."It's much worse than anybody thought," said Paul Miller, an analyst with FBR Capital Markets. It could be another year before the final taxpayer tab for Fannie and Freddie is known, and that outcome will depend on when delinquencies and foreclosures finally crest. Barclays Capital predicts the companies will need anywhere from $160 billion to $200 billion out of a potential $400 billion lifeline, which the Obama administration expanded from the original $200 billion set last fall. Most analysts don't expect the money to be returned anytime soon, if at all. "What will ultimately end up happening," said Barclays analyst Ajay Rajadhyaksha, "is that the U.S. taxpayer swallows the bill."

Big Corporations Want to Buy Your Congressman - (www.newsweek.com) Money talks. In Washington, it shouts. But the question is: do we have to let money jack itself into stadium-size loudspeakers? As I made my rounds in the capital the other day, I could hear the rustling of corporate cash everywhere I went. In the august hearing room of the U.S. Supreme Court, I listened to the conservative majority—Chief Justice John Roberts's Gang of Five—seethe with skepticism as they considered arguments about limiting corporate spending in elections. Later, across First Street in the U.S. Capitol, Senate Minority Leader Mitch McConnell explained to me how Barack Obama's health-care plan would ruin the health-care industry—an industry, not coincidentally, that McConnell believes should be set free to dump its treasury into the political campaigns of obliging politicians. In a White House briefing room later that day, I listened to a top official sketch his game plan for countering corporate clout in the health-care debate. And then I saw Obama himself try to do just that, at least rhetorically, in a speech to Congress. No, you are not reading a screed against corporations. I work for them, as do many of us. I give speeches to them. I am sort of one myself, sole proprietor of a boutique Beltway blab factory. Nor am I a foe of free speech; just the opposite. I am a devout believer in the sanctity—and even the economic utility—of the First Amendment. There's a reason why the Founders put it first. But do corporations have the same free-speech rights as individuals? Do they have the right, confirmed for real persons by the court in 1976, to spend as much as they want for or against a political candidate, as long as they do it "independently"? Is it constitutional for Congress, as it did in the McCain-Feingoldlaw, to limit when they can speak (not right before an election) and what media they can use (not TV or cable)? That's the issue the court wrestled with last week. I'm wrestling, too. I understand the arguments for unleashing corporations (and unions, which face the same limits). In this country we have a long history of honoring the legal prerogatives of corporations. Many of our earliest explorers and settlers were working for joint-stock companies founded in the coffeehouses of London and Amsterdam. And while corporations are legal fictions, created and sanctioned by law, they have long been considered to have some people like rights and responsibilities. They can borrow money and sign contracts; they have reputations that can be harmed and that they can sue to protect.

"Some didn't know they were getting a loan" - (news.bbc.co.uk) It would make some eye-popping reading. Loiacono was a mortgage underwriter - deciding who her firm should lend to - at the height of the subprime lending bonanza. What's more, she was working in Orange County in southern California, once the subprime capital of the US. Five years ago, most of the leading subprime lenders had their headquarters in the area. The county was stuffed with banks specialising in risky loans to people with little or no income and bad credit histories. Eileen Loiacono saw how they did it. It was her job to look at the prospective borrowers' files and assess whether they'd be able to repay their loans. Lending frenzy: How many of the applications that crossed her desk looked like good prospects? "About 30%," she says. As for the rest: "There were people who didn't even understand they were getting a loan. They couldn't read the documents, somebody had just approached them and said hey, do you want a home?" Now working for a bank in Corona, a small town in the parched brown hills east of Orange County, Ms Loiacono says she did her best to bring some sense to the lending frenzy. She would try to turn down loan applications that looked too risky but the pressure from mortgage brokers and bank bosses was overwhelming. They started offering incentives to the wavering underwriters. Promises of trips to resorts on the California coast were common. "They offered cars and watches and purses," she says, "the list goes on". Did she ever succumb to temptation? Eileen Loiacono throws back her head with a loud laugh. "I was probably threatened more than I was offered anything" she says. And not just threatened with losing her job. It was more menacing than that. She was told her car would be vandalised if she tried to reject an applicant. And worse. "They said things like 'if you decline this mortgage I'll have you taken care of'. And some underwriters cars were scratched and stuff like that". 'Chain of blame': Eventually the FBI were called in to investigate. Ms Loiacono left in disgust. But she says what she experienced was common in an industry she describes as having "no morals at all". It was an industry that thrived in southern California while a buoyant economy attracted new residents in search of homes. And in Orange County, one of the wealthiest parts of the state, there were plenty of entrepreneurs ready to give anything a try. According to Mathew Padilla, author of a book on the birth of subprime - Chain Of Blame - the East Coast had Wall Street and its established means of making money. The financial innovators of southern California were looking for their own cut of the action.

OTHER STORIES:

China Mulls Sanctions - (www.marketwatch.com)
Shift: Wall Street Goes to Washington - (www.washingtonpost.com)
How IRAs Can Tie Investors' Hands -- and What To Do About It - (www.elliottwave.com)
Jim Rogers: Zombie Capitalism for the Next 15-20 Years - (www.bi-me.com)
Interest Only Mortgage Time Bomb: $71 billion in Loans will Reset in next 12 Months. - (www.mybudget360.com)
Nobel Winner Stiglits: Bank Problems Now Bigger than Pre-Lehman - (www.bloomberg.com)