KeNo's Housing and Economic Portal: Sunday November 15 Housing and Economic stories

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New York Feds Secret Choice to Pay for Swaps Hits Taxpayers - (www.bloomberg.com) In the months leading up to the September 2008 collapse of giant insurer American International Group Inc., Elias Habayeb and his colleagues worked nights and weekends negotiating with banks that had bought $62 billion of credit-default swaps from AIG, according to a person who has worked with Habayeb. Habayeb, 37, was chief financial officer for the AIG division that oversaw AIG Financial Products, the unit that had sold the swaps to the banks. One of his goals was to persuade the banks to accept discounts of as much as 40 cents on the dollar, according to people familiar with the matter. Among AIG’s bank counterparties were New York-based Goldman Sachs Group Inc. and Merrill Lynch & Co., Paris-based Societe Generale SA andFrankfurt-based Deutsche Bank AG. By Sept. 16, 2008, AIG, once the world’s largest insurer, was running out of cash, and the U.S. government stepped in with a rescue plan. The Federal Reserve Bank of New York, the regional Fed office with special responsibility for Wall Street, opened an $85 billion credit line for New York-based AIG. That bought it 77.9 percent of AIG and effective control of the insurer. The government’s commitment to AIG through credit facilities and investments would eventually add up to $182.3 billion. Beginning late in the week of Nov. 3, the New York Fed, led by President Timothy Geithner, took over negotiations with the banks from AIG, together with the Treasury Department and Chairman Ben S. Bernanke’s Federal Reserve. Geithner’s team circulated a draft term sheet outlining how the New York Fed wanted to deal with the swaps -- insurance-like contracts that backed soured collateralized-debt obligations. Subprime Mortgages: CDOs are bundles of debt including subprime mortgages and corporate loans sold to investors by banks. Part of a sentence in the document was crossed out. It contained a blank space that was intended to show the amount of the haircut the banks would take, according to people who saw the term sheet. After less than a week of private negotiations with the banks, the New York Fed instructed AIG to pay them par, or 100 cents on the dollar. The content of its deliberations has never been made public. The New York Fed’s decision to pay the banks in full cost AIG -- and thus American taxpayers -- at least $13 billion. That’s 40 percent of the $32.5 billion AIG paid to retire the swaps. Under the agreement, the government and its taxpayers became owners of the dubious CDOs, whose face value was $62 billion and for which AIG paid the market price of $29.6 billion. The CDOs were shunted into a Fed-run entity called Maiden Lane III. Habayeb, who left AIG in May, did not return phone calls and an e-mail. Goldman Sachs: The deal contributed to the more than $14 billion that over 18 months was handed to Goldman Sachs, whose former chairman, Stephen Friedman, was chairman of the board of directors of the New York Fed when the decision was made. Friedman, 71, resigned in May, days after it was disclosed by the Wall Street Journal that he had bought more than 50,000 shares of Goldman Sachs stock following the takeover of AIG. He declined to comment for this article. In his resignation letter, Friedman said his continued role as chairman had been mischaracterized as improper. Goldman Sachs spokesman Michael DuVally declined to comment.

GMAC wants fresh lifeline: WSJ - (online.wsj.com) GMAC Financial Services Inc. is in advanced talks with the Treasury Department to receive a third round of taxpayer money, according to a Wall Street Journal report Tuesday. Citing unnamed sources, the report said the U.S. government is likely to inject between $2.8 billion and $5.6 billion in additional capital into the troubled lender. GMAC has already received $12.5 billion since December, the report said. The government's willingness to deepen taxpayer exposure to GMAC reflects its importance to the revival of the U.S. auto industry, according to the report.

City of Houston is Bankrupt (So are California, Oregon, and Pension Plans in General) – (Mish at globaleconomicanalysis.blogspot.com/) Houston, we have a problem. We are bankrupt. That is the finding of Bob Lemer, CPA, Retired Partner at Ernst & Young; Aubrey M. Farb, CPA, Retired Partner at Grant Thornton; and Tom Roberts, CPA, Retired Partner at Fitts Roberts.
Executive Summary: City of Houston, Disturbing Financial Facts---October 2009, The City of Houston is financially broke and it appears that the mayor who takes office in January 2010 may have to captain the City through bankruptcy procedures. The City’s unrestricted assets were $1.2 billion short of the already recorded corresponding liabilities these assets were needed to pay as of fiscal year end June 30, 2008,according to the City’s latest publicly available audited Comprehensive Annual Financial Report (CAFR). The $1.2 billion shortfall was a result of operating losses totaling $1.5 billion for fiscal years 2004-2008, applying the full accrual basis of accounting used in the private sector. Apparently the City has no idea as to what has transpired financially since June 30, 2008 or will transpire this fiscal year ending June 30, 2010, on the full accrual basis of accounting. But even on the modified accrual basis of accounting (essentially cash basis) followed by the City and all other municipalities, the $236.8 million fund balance in the City’s general fund as of July 1, 2009 (the beginning of this current fiscal year) would not exist except for the City having deposited the proceeds of pension obligation bonds into the City’s general fund instead of depositing them in their legally required immediate destination, the pension plans’ bank accounts. The City is in this dangerous financial position because its total spending since fiscal year 2003 has greatly outstripped its total revenues in that period. And the rate of growth in the City’s total revenues since 2003 has, in turn, greatly outstripped the City’s rate of growth in population plus inflation. Thus the City’s problems are a result of greatly overspending and not a result of insufficient revenues. All of this occurred before the current severe recession. Now the City has the added burden of the recession. The City is in a real financial dilemma, because now its two principal sources of general fund revenues are in trouble---sales taxes and property taxes. Sales tax revenues already are dropping significantly and property tax revenues will commence dropping at an even more rapid rate after the next annual appraisal and assessment process. And the City will have to go to the voters for any contemplated rate increases in either the sales tax rate or the portion of the property tax rate allocable to operations. It appears to us that there may be no viable alternative to bankruptcy proceedings and thereby positioning the City to regain control over its overspending, through addressing structural spending problems such as overstaffing and overly generous employee benefits. Pension Plans and Government Salaries To Blame: According to the report, pension plans and government salaries are at the heart of the matter. Here are a few select details.

Climbing PERS expenses face Oregon pension board, agency budget writers - (www.oregonlive.com) The cost of Oregon's Public Employees Retirement System is about to skyrocket to budget-busting levels. As a result of PERS' $17 billion investment loss in 2008, every state agency, municipality and school district that participates in the system is staring at an average 50 percent increase in the base rates PERS charges to fund their employees' retirement benefits in 2011 and 2012. That's not a doomsday scenario. Unless the pension fund's board changes its rate-setting rules, or its investment portfolio generates a 26 percent return in 2009, these rate increases are guaranteed. What does that mean to you? Fewer teachers, cops and firefighters. Less of every service that government provides. Higher fees and taxes. Perhaps all of the above. Consider financially strapped Bend, which just completed its fifth round of layoffs since 2007. Projected increases in Bend's PERS costs for public safety employees alone are equal to paying 17 police officers. That's in a department that is currently considered understaffed with 86. For Salem-Keizer Public Schools, which pared $27 million in costs from its latest budget, the looming PERS increases equal almost 220 teachers, or 16 school days. Looking at it another way, state agencies' new PERS costs next biennium would equal nearly 60 percent of the $733 million in corporate and personal income tax increases that voters will be asked to approve in January. Statewide, it's at least a $1 billion problem in the next biennium. After that, it gets worse. The base rate that public agencies pay to support employees' retirement benefits could double in the next five years, according to the PERS actuary, Mercer Inc. If rates reach that level, the retirement system will gobble one quarter of every tax dollar that goes into a public agency to support payrolls.

Fantasy Housing Numbers a Prelude to the Next U.S. Crash - (www.seekingalpha.com) There are two sources for most housing data in the United States. One source is the National Association of Realtors (NAR). Given that this organization represents only people who sell U.S. residential real estate for their livelihood, this is an extremely biased entity – with an obvious agenda. They represent the more reliable source for data. The other major source of data is the U.S. government, itself. I have written volumes on the legendary excesses of the U.S. government in manufacturing numbers which are ever-further divorced from the real world. As an example, at the beginning of this year, when the Case-Shiller index was reporting that the collapse in U.S. housing prices had reached their most extreme level (a year-over-year decline of 19%), the U.S. government was reporting that U.S. home prices were rising. As with many other U.S. government “statistics”, I now pay absolutely no attention to government housing propaganda. While it is possible to critically analyze mere exaggerations, there is no analytical value to numbers which are simply invented – and in direct contradiction with what is actually happening in markets. This leaves the biased NAR as the “best” source for most U.S. housing data. In a report released Friday, the NAR stated that existing home sales had increased to a level of 5.57 million units – the highest since July 2007, crowed the NAR. That was right about the time that the U.S. housing crash first turned really ugly. However, those days are already long-forgotten by the NAR. Lawrence Yun, the giddy “chief economist” of this organization is claiming that U.S. “housing inventories” have now fallen to a level equal to 7.8 months of supply – and a supposed 15% decline from just the beginning of this year. This is where the NAR severs all ties with reality. The NAR also acknowledged that “distressed sales” which include foreclosure sales, sales of “repossessed” homes (i.e. “walk-aways”) and “short sales” accounted for just 29% of all sales in its latest report (similar to numbers reported for most of this year). Thus, with U.S. housing sales at their highest level in more than two years, the banks controlling all this “distressed” real estate are on pace to sell only about 1.5 million “distressed properties” this year. In fact, foreclosures alone are on pace to hit about 4 million units this year – after more than one million foreclosures in the third quarter alone. “Repossessed” homes are on pace to add roughly an additional half-million “distressed properties” to this inventory. I'm unaware of any aggregate statistics on “short sales”, but as a favored choice for both homeowners and banks (versus the alternative of foreclosure), these also obviously total in the hundreds of thousands (at least).

Rich tax cheats: Be afraid, very afraid - (www.mone.cnn.com) The Internal Revenue Service detailed plans on Monday to weed out wealthy, international tax cheats with renewed urgency. IRS Commissioner Douglas Shulman said the agency recently formed the Global High Wealth Industry task force to target investors with assets "in the neighborhood of $30 million." Shulman, as he addressed members of the American Institute of Certified Public Accountants in Washington, DC., said that a more "holistic" approach was necessary to find international tax cheats, given the growth in Americans investing overseas, and the broad and complicated nature of modern financing. "Our goal is to better understand the entire economic picture of the enterprise controlled by the wealthy individual and to assess the tax compliances of that overall enterprise," he said. "We cannot do this by continuing to approach each tax return in the enterprise as a single and separate entity. We must understand and analyze the complete picture."

Beneficiary of Bernard Madoff scheme found dead - (www.guardian.co.uk) JUSTICE IS SERVED!!!