KeNo's Housing and Economic Portal: Tuesday October 13 Housing and Economic stories

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TOP STORIES:

FDIC considers calling for bank advances - (www.ft.com) US banks will have to advance tens of billions of dollars to the cash-strapped fund protecting depositors at the Federal Deposit Insurance Corporation under a proposal to be to be put forward by regulators on Tuesday. The fund, which insures up to $250,000 per depositor in each bank, has been depleted this year after the failure of 95 lenders. It now stands at about $10.4bn, the lowest since the peak of the savings and loan crisis in 1993. Sheila Bair, FDIC chairman, has said the agency is considering “all options’’ to restore the fund, including tapping its credit line with the US Treasury of up to $500bn, imposing emergency fees on banks and asking banks to pre-pay industry fees. The FDIC’s board, which meets on Tuesday to discuss options, is currently leaning towards asking banks to pay three years’ worth of its fees in advance, say people briefed on the discussions. For 2009, banks are set to pay an annual fee of about $12bn and a one-off emergency charge of $5.6bn. The plan would allow the agency to get the cash it needs now while allowing the banks to avoid another big one-off charge. The banks would not have to recognise the charges on their balance sheets until the quarter when the fees were due. The proposal, which would be presented for public comment, is still under discussion. But it comes amid growing resistance by the industry as well as some regulators against one-off fees. US banks have steered clear of public comments on this issue. In private, many executives have complained that the FDIC’s drive to replenish the fund would drain much-needed resources from banks just as they are trying to rebound from the financial crisis.

Puerto Rico asks Washington for federal aid US territory battles $3.2bn budget deficit - (www.ft.com) Puerto Rico has appealed to the Obama administration for federal assistance as it battles a $3.2bn budget deficit, a three-year recession and the worst credit rating of any state or territory in the US. Luis Fortuño, governor of the territory, met Lawrence Summers, chief economic adviser to President Barack Obama, and Treasury officials last week. He told the Financial Times the administration had been “shocked” at the state of Puerto Rico’s finances. The US Treasury and a spokesman for Mr Summers both confirmed that they had met Mr Fortuño last week. They declined to comment on the detail of the talks. While California’s much bigger nominal debt has worried creditors and the federal government, Puerto Rico’s deficit for 2009 of $3.2bn (€2.2bn, £2bn) ranked the highest as a percentage of the general fund, at 29 per cent. Mr Fortuño, a Republican who took office in January, also visited credit rating agencies in New York during his trip to the US mainland as part of an effort to preserve his territory’s investment grade status. Moody’s and Standard & Poor’s rank Puerto Rico’s debt just one notch above “junk”, although the outlook is “stable”. Carlos Garcia, president of the Government Development Bank of Puerto Rico, warned of devastating consequences if the investment grade were lost. “We modelled what that would mean and we were talking about unemployment going to 25 per cent,” he said. Like other territories and states, Puerto Rico is receiving federal stimulus money but Mr Fortuño is also requesting help shoring up the banking sector and reforming a local Medicaid programme that covers 1.5m of the territory’s 4m population and costs more than $1bn. “We need assistance from the federal government to ensure that we have a strong banking sector to support both the fiscal and economic measures that the government is introducing,” said Mr Garcia. However, in spite of efforts to win what he can in terms of additional federal support, the governor is determined to enact a largely homegrown solution to the deficit. “The credit ratings agencies can’t believe we’re doing what we’re doing but we’re serious about this: we’re going to bring Puerto Rico back to growth,” said Mr Fortuño. “I told them we’re going to address this this next year.”

Massive debts crush Roseville businessman's empire - (www.sacbee.com) Abolghassem "Abe" Alizadeh owes a lot of money. At least $318 million and counting. That's the bottom line now for the Roseville developer and fast-food magnate who amassed a billion-dollar-plus empire of restaurants and real estate in three decades. Even as the economic downturn is thinning the fortunes of developers, the collapse of Alizadeh's finances stands out for its scope and audacity, say other developers and brokers. A week ago, a group of Alizadeh companies that owns 70 Jack in the Box restaurants in the Central Valley filed for bankruptcy protection. That follows the November bankruptcy filing of his commercial real estate arm, Kobra Properties. Court records for Kobra Properties detail at least $300 million in debt. Alizadeh, 51, literally had to ask the court to keep the lights on for tenants. Court records show he owes money to dozens of banks, utility companies and municipalities. His restaurant company also owes $18 million to soda companies, bakeries, businesses that haul away kitchen grease, and trash collectors. Kobra Associates and several of his other businesses that together own the Jack in the Box franchises lost a state permit to sell on Sept. 16 because he owed $1.5 million in back taxes. The Jack in the Boxes closed briefly and immediately filed for bankruptcy protection from creditors - including the state - that would allow Alizadeh to keep the restaurants open. Other creditors have filed dozens of civil suits in Sacramento Superior Court against Alizadeh personally and his businesses, claiming they are owed money. Alizadeh's Stonegate Construction Inc. of Roseville was sued more than 20 times in the past three years by contractors and others seeking payment on projects. This year alone, lawsuits against Stonegate in Sacramento Superior Court came from a deck builder, engineering company, trucking firm, equipment rental company and interior design firm, among others. About 30 suits name Kobra Properties. And a half dozen name Alizadeh and his sister, Kobra Alizadeh, who also runs the restaurant business. Most of the suits were filed in 2008, when Alizadeh companies' financial problems apparently began to spiral out of control. Alizadeh declined to comment, and attorneys representing him did not return phone calls. But a number of developers and commercial real estate brokers who are familiar with Alizadeh said the rapid pace of his acquisitions, combined with loose lending practices during the building boom earlier this decade, made him particularly vulnerable. Most of those interviewed by The Bee were unwilling to speak publicly - either because they are owed money, or because they are reluctant to criticize a colleague. "Abe's massive amount of debt is as much systemic of the credit market's willingness to put out money for projects that were not necessarily sound due to the protracted upswing in the market, as it is anything else," said Paul Petrovich, the region's largest retail developer. A tangled web of deals: Alizadeh has suffered the same fate as other developers: the loss of once-stable tenants, leaving gaping vacancies. But some developers say Alizadeh steamrolled too fast and too broadly, dangerously leveraging himself. At times, they say, he failed to focus on completing projects that might have yielded needed income. According to Alizadeh's own declaration filed in bankruptcy court, he used earnings from Jack in the Box restaurants to help prop up unprofitable real estate ventures. Alizadeh is also being sued for fraud by a former dentist who claims in 2008 he was swindled out of $3 million by Alizadeh in a real estate deal. A host of attorneys will begin dissecting Alizadeh's vast holdings for the bankruptcy proceedings. For the novice, it's like trying to unravel a bird's nest: he is operating at least 30 different California corporations, and those corporations owned at least 621 properties, including the 70 Jack in the Box franchises and a large condominium complex on Antelope Creek Drive in Roseville.

State Housing Agencies in U.S. Said Slated for Treasury Help - (www.bloomberg.com) State housing agencies in the U.S. that provide mortgages to low-income borrowers would get as much as $35 billion in federal aid under a new U.S. Treasury Department program, people familiar with the matter said. The program would provide up to $15 billion in fresh funding for as long as three years and would purchase as much as $20 billion in tax-exempt mortgage bonds issued by state- sponsored housing finance agencies through the end of this year, a person familiar with the matter said. The program may be announced as early as Sept. 30, said the person, who didn’t want to be named because the plans haven’t been made public. The Treasury effort would be administered by federally controlled mortgage-finance companies Fannie Mae and Freddie Mac, which would also purchase the bonds, the person said. Those purchases would provide enough financing to restart and to fund the state home loan programs through the end of next year, according to the person. The California Housing Finance Agency and other state programs have suffered along with the rest of the mortgage industry with higher funding costs and restricted liquidity over the last 18 months. ‘Prime the Pump’: “The tax-exempt market for HFA bonds dried up; this will prime the pump,” said Mortgage Bankers Association Chief Executive Officer John Courson, who is a former chairman of the California Housing Finance Agency. “It’s secured bonds, it’s going to provide liquidity, Fannie Mae and Freddie Mac will get a market return.” Many of the state programs, which have financed more than 2.6 million first-time homebuyers, have been shuttered as investors recoiled from the market and demand for their mortgage bonds faltered amid the worst housing market since the Great Depression, according to the National Council of State Housing Agencies. Higher debt costs, record-high foreclosure rates and lower investment income contributed to a broad-based decline in profitability across the sector last year, according to Moody’s Investors Service. To reduce funding costs, the Treasury will provide a federal backstop for several liquidity facilities, the person familiar with the matter said. Administration officials are still hammering out the plan’s final details, which may change, Treasury officials said. No Buyers: One in 10 mortgage borrowers in the U.S. is behind on their loan payments and one in every 25 homes is in foreclosure, Fannie Mae Chief Executive OfficerMichael Williams said in a Sept. 9 speech in Washington. Homeowners across the country have lost an average of 40 percent of their equity, making refinancing more difficult, he said.

Money figures show there's trouble ahead - (www.telegraph.co.uk) Private credit is contracting on both sides of the Atlantic. The M3 money data is flashing early warning signals of a deflation crisis next year in nearly half the world economy. Emergency schemes that have propped up spending are being withdrawn, gently or otherwise. Unemployment benefits have masked social hardship unto now but these are starting to expire with cliff-edge effects.The jobless army in Spain will be reduced to €100 a week; in Estonia to €15. Whoever wins today's elections in Germany will face the reckoning so deftly dodged before. Kurzarbeit, that subsidises firms not to fire workers, is running out. The cash-for-clunkers scheme ended this month. It certainly "worked". Car sales were up 28pc in August, but only by stealing from the future. The Center for Automotive Research says sales will fall by a million next year: "It will be the largest downturn ever suffered by the German car industry." Fiat's Sergio Marchionne warns of "disaster" for Italy unless Rome renews its car scrappage subsidies. Chrysler too will see some "harsh reality" following the expiry of America's scheme this month. Some expect US car sales to slump 40pc in September. Weaker US data is starting to trickle in. Shipments of capital goods fell by 1.9pc in August. New house sales are stuck near 430,000 – down 70pc from their peak – despite an $8,000 tax credit for first-time buyers. It expires in November. We are moving into a phase when most OECD states must retrench to head off debt-compound traps. Britain faces the broad sword; Spain has told ministries to slash 8pc of discretionary spending; the IMF says Japan risks a funding crisis. If you look at the sheer scale of global stimulus this year, what shocks is how little has been achieved. China's exports were down 23pc in August; Japan's were down 36pc; industrial production has dropped by 23pc in Japan, 18pc in Italy, 17pc in Germany, 13pc in France and Russia and 11pc in the US. Call this a "V-shaped" recovery if you want. Markets are pricing in economic growth that is not occurring. The overwhelming fact is that private spending has slumped in the deficit countries of the Anglosphere, Club Med, and East Europe but has not risen enough in the surplus countries (East Asia and Germany) to compensate. Excess capacity remains near post-war highs across the world. Yet hawks are already stamping feet at key central banks. Are they about to repeat the errors made in early 2007, and then again in the summer of 2008, when they tightened – or made hawkish noises – even as the underlying credit system fell apart? Fed chairman Ben Bernanke spoke in April 2008 of "a return to growth in the second half of this year", and again in July 2008 that growth would "pick up gradually over the next two years". He could only have thought such a thing if he was ignoring the money data. Key aggregates had been in free-fall for months.

OTHER STORIES:

Negative Bond Returns Converge With Mortgage Miracle - (www.bloomberg.com)

Allen Stanford Back in Jail After Being Beaten by Inmate - (www.cnbc.com)

Dow 10,000: Morale Boost But Probably Not Much More - (www.cnbc.com)

Bond Traders Are Doubters, Lemmings or Sissies: Caroline Baum - (www.bloomberg.com)

Everyone Thinks Interest Rates Are Going Higher - (finance.yahoo.com)

Merkel promises swift tax cuts - (www.ft.com)

Rally in ‘toxic’ securities set to boost banks - (www.ft.com)

Japan Fujii Says Forex Intervention Possible: Report - (www.cnbc.com)

September Auto Sales Seen Slumping Post-'Clunkers' - (www.cnbc.com)

Employers Cut Back on Layoffs but Still Aren't Hiring - (www.cnbc.com)

Central Figure in AIG Collapse Quietly Slips Back Into US - (www.cnbc.com)