KeNo's Housing and Economic Portal: Thursday November 19 Housing and Economic stories

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Manhattan default could rock California: CAs Two Biggest Pension Funds Could Lose Big in Manhattan Real Estate Deal - (www.insidebayarea.com) A multibillion dollar real estate deal in New York City gone sour could send shock waves through California. The states's two biggest retirement pension funds, the California State Public Employees Retirement System and the California State Teachers Retirement System, stand to lose a combined $600 million invested in one of the boldest real estate ventures in history. At the height of the real estate bubble in 2006, an investment group led by New York City real estate firm Tishman Speyer Properties and BlackRock Realty Advisors paid $5.4 billion for a pair of gigantic Manhattan apartment complexes known as Stuyvesant Town and Peter Cooper Village. The price seemed outrageous to many, but the company believed it had a winning strategy: It would aggressively convert thousands of rent-regulated apartments occupied by middle-class families into luxury units that would fetch top dollar. Three years later, to the glee of many New York renters, the tactic has been a bust. Tenants fought back, conversions happened much slower than expected and a state court ruled Thursday that about $200 million in the company's new rent increases were improper. Default looming: Real estate analysts say the ownership group is now just two to three months away from a likely default on the $3 billion mortgage it used, along with a $1.4 billion secondary loan, to buy the property. Foreclosure looms as a strong possibility. Even before the state Court of Appeals ruling on a lawsuit filed by the apartment complex tenants, ratings firms had estimated that the value of the 80-acre property, home to 25,000 people, had fallen to as little as $2 billion — far less than the outstanding loan balance. Given the math involved, "I wouldn't be surprised if they just want to walk on it," said Steve Kiritz, a senior vice president at the credit ratings agency Realpoint LLC. "The whole master plan with this project had been for Tishman to come in and ramp up the number of units that were paying market rent," he said. Regular folks — especially those who have had home financing problems of their own — might laugh at the folly until they realize that some of their own money might be tied up in the deal. Some of the biggest equity investors in the deal are public pension funds that manage retirement system benefits for millions of government employees. Florida's State Board of Administration had put $250 million into the project. It has already written off the entire investment as a loss. CalSTRS has already written off its $100 million stake, while CalPERS is still on the hook for $500 million. Future uncertain: Tishman, by comparison, stands to lose much less. Its share was $112 million, less than 2 percent of the purchase price. A spokesman for the company declined to comment Friday on the project's future. Tishman Speyer's co-chief executive, Rob Speyer, told The New York Times in a recent interview that win or lose on the court case, "the asset is going to require a restructuring." "Once the court case is resolved," he said, "we'll speak to our debt holders as well as our fellow equity investors." Teams of lawyers will likely spend the next few months fighting over who gets control of the complex and which lenders are entitled to get some money back, said Dan Fasulo, a managing director of Real Capital Analytics. How much they recover, and who is wiped out, may come down to how much appraisers decide the building is really worth, based on more realistic rent projections. "I had a number, put together last week, that I thought was fair. I don't think that number is fair anymore," Fasulo said. "No one could give you an honest appraisal right now."

How Goldman secretly bet on the U.S. housing crash - (www.therealnews.com) Goldman didn’t tell buyers of $40 billion in securities it was secretly betting the other way. In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting. Goldman's sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation's premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies. Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk. Now, pension funds, insurance companies, labor unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation has found that Goldman's failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws. "The Securities and Exchange Commission should be very interested in any financial company that secretly decides a financial product is a loser and then goes out and actively markets that product or very similar products to unsuspecting customers without disclosing its true opinion," said Laurence Kotlikoff, a Boston University economics professor who's proposed a massive overhaul of the nation's banks. "This is fraud and should be prosecuted." John Coffee, a Columbia University law professor who served on an advisory committee to the New York Stock Exchange, said that investment banks have wide latitude to manage their assets, and so the legality of Goldman's maneuvers depends on what its executives knew at the time. "It would look much more damaging," Coffee said, "if it appeared that the firm was dumping these investments because it saw them as toxic waste and virtually worthless." Lloyd Blankfein, Goldman's chairman and chief executive, declined to be interviewed for this article. A Goldman spokesman, Michael DuVally, said that the firm decided in December 2006 to reduce its mortgage risks and did so by selling off subprime-related securities and making myriad insurance-like bets, called credit-default swaps, to "hedge" against a housing downturn. DuVally told McClatchy that Goldman "had no obligation to disclose how it was managing its risk, nor would investors have expected us to do so ... other market participants had access to the same information we did." For the past year, Goldman has been on the defensive over its Washington connections and the billions in federal bailout funds it received. Scant attention has been paid, however, to how it became the only major Wall Street player to extricate itself from the subprime securities market before the housing bubble burst. Goldman remains, along with Morgan Stanley, one of two venerable Wall Street investment banks still standing. Their grievously wounded peers Bear Stearns and Merrill Lynch fell into the arms of retail banks, while another, Lehman Brothers, folded. To piece together Goldman's role in the subprime meltdown, McClatchy reviewed hundreds of documents, SEC filings, copies of secret investment circulars, lawsuits and interviewed numerous people familiar with the firm's activities. McClatchy's inquiry found that Goldman Sachs:

· Bought and converted into high-yield bonds tens of thousands of mortgages from subprime lenders that became the subjects of FBI investigations into whether they'd misled borrowers or exaggerated applicants' incomes to justify making hefty loans.

· Used offshore tax havens to shuffle its mortgage-backed securities to institutions worldwide, including European and Asian banks, often in secret deals run through the Cayman Islands, a British territory in the Caribbean that companies use to bypass U.S. disclosure requirements.

· Has dispatched lawyers across the country to repossess homes from bankrupt or financially struggling individuals, many of whom lacked sufficient credit or income but got subprime mortgages anyway because Wall Street made it easy for them to qualify.

· Was buoyed last fall by key federal bailout decisions, at least two of which involved then-Treasury Secretary Henry Paulson, a former Goldman chief executive whose staff at Treasury included several other Goldman alumni.

Obama Signs Law Giving Defense Department Authority to Exempt Photos From Freedom of Information Act - (www.commondreams.org) President Signs Law Giving Defense Department Authority to Exempt Photos From Freedom of Information Act. ACLU Renews Call for Secretary Gates Not to Block Release of Torture Photos. President Obama today signed into law a Homeland Security appropriations bill that grants the Department of Defense (DOD) the authority to continue suppressing photos of prisoner abuse. The amendment, which would allow the DOD to exempt photos from the Freedom Of Information Act (FOIA), is aimed at photos ordered released by a federal appeals court as part of an American Civil Liberties Union FOIA lawsuit for photos and other records related to detainee abuse in U.S. custody overseas, although it would apply to other photos in government custody as well. Earlier this month, the ACLU sent a letter to Secretary Robert Gates urging him not to exercise the authority to suppress the photos in their case, stating that the photos "are of critical relevance to an ongoing national debate about accountability." "We are disappointed that the president has signed a law giving the Defense Department the authority to hide evidence of its own misconduct, and we hope the defense secretary will not take advantage of that authority by suppressing photos related to the abuse of prisoners," said Jameel Jaffer, Director of the ACLU National Security Project. "Secretary Gates should be guided by the importance of transparency to the democratic process, the extraordinary importance of these photos to the ongoing debate about the treatment of prisoners and the likelihood that the suppression of these photos would ultimately be far more damaging to national security than their disclosure. The last administration's decision to endorse torture undermined the United States' moral authority and compromised its security. A failure to fully confront the abuses of the last administration will only compound these harms." Another provision contained in the new law allows the transfer of detainees from Guantánamo Bay to the U.S. for prosecution. "This law allows the administration to transfer prisoners to the U.S. for criminal trials in the federal courts, and the administration should now do exactly that," said Jaffer. "The military commissions at Guantánamo are not just unlawful but unnecessary. The federal courts are fully capable of prosecuting terrorism suspects while protecting both national security interests and fundamental due process. It's time to shut down Guantánamo, transfer the military commissions trials to federal courts that uphold the rule of law, and transfer prisoners whom the administration does not intend to charge to countries where they won't be in danger of being tortured. Indefinite detention without charge or trial undermines the most basic values of justice and fairness."

State's tax withholding bump-up starts today - Sacramento Business ... - (www.sacbee.com) Some call it California's cash advance. Effective today, the amount of state income taxes withheld from California workers' paychecks will increase 10 percent. That might sound like a tax increase, but state officials insist that's not the case. Tax experts agree, saying this bump up in withholding taxes gives the state some wiggle room in managing California's treasury in a year that saw a titanic political battle to get a handle on the state's budget. The increased withholding comes on top of a 0.25 percent state income tax increase and a reduction in the dependent credit, also enacted as part of the state budget. Essentially, the accelerated withholding program does not generate additional tax revenue. Instead, it front-loads it, bringing cash in more quickly in an effort to keep the state treasury stocked with funds, which is where the "cash advance" tag comes in. State officials have estimated that the move will generate an additional $1.7 billion in the current fiscal year. The bottom line is that a worker's total annual income tax bill won't rise, and the amount owed at April 2010 tax time will be adjusted accordingly. Simply put, if you owe taxes when April 15 comes along, the balance due will be less based on what was withheld from your paycheck in the last two months of the year. If you're due a refund, you can expect a little more. Taxpayers can evade the accelerated withholding schedules simply by increasing the number of allowances on the withholding forms filed with their employers. That won't make much difference for the calendar 2009 tax year, but it will have a bigger impact for 2010 and perhaps beyond. "The changes that are happening are only for about nine weeks for 2009, so the impact for 2009 is minor," said Brenda Voet, spokeswoman for the state Franchise Tax Board. "But we're trying to warn people to go to their personnel and human resources departments for 2010 to make sure they have the proper amount of tax withheld and make any adjustments they need to make. We don't want people to be surprised by anything." For low-income earners, the withholding change has minor effects. FTB said a single person earning $17,000 annually with no dependents and one withholding allowance will see his or her weekly withholding rate go to $2.68 compared with $2.44 prior to the change, a difference of 24 cents. That same person with five or 10 withholding allowances will see no change. Those with higher wages will experience bigger impacts.

CIT Bankruptcy to Leave Small Businesses Stumped - (www.cnbc.com) CIT Group bankruptcy filing could push at least some small businesses it finances to look for a new lender, but finding new credit will be tough. CIT filed for bankruptcy protection on Sunday, and said its creditors have already approved its reorganization plan. The bankruptcy was long expected and followed a struggle to deal with its debt burden amid the credit crunch and recession, and paves the way for it to restructure its liabilities. Under the plan announced on Sunday, CIT expects to reduce total debt by about $10 billion. The company's operating units are not in bankruptcy, and plan to continue lending. But the company's long-term prospects are uncertain and the bankruptcy could leave more than one million small and medium-sized businesses looking for another source of funding, even if CIT's doors are still open, lawyers said. Clients for CIT's factoring business are in a particular bind when it comes to finding alternative financing since CIT is by far the biggest company in the sector, where lenders buy unpaid customer bills from companies. What's more, many of the factoring clients are in the garment industry, where they already face a bleak holiday season and where credit is generally tight. "In the best of times you would have seen a situation where other lenders would certainly have been willing to consider getting into this business," said Mark Jacobs, a partner in law firm Pryor Cashman's bankruptcy group. "In the current environment, given the constraints on credit generally, there's not enough capacity out there," he added. In the first six months of the year, CIT lent just $65 million in Small Business Administration loans, one percent of the total lent in this category over that time period. In 2008, CIT was the top SBA lender in dollar terms, providing 6 percent of all SBA lending, according to the National Small Business Association. At the same time, banks are also broadly cutting back on lending to small and medium-sized businesses. Banks' lending to small companies fell by about 2 percent, or $14.8 billion, for the year through June, according to data from the Federal Deposit Insurance Corp. The NSBA had expressed its concern about a potential CIT bankruptcy and in July wrote to U.S. Treasury Secretary Timothy Geithner to ask the government to consider assisting CIT. It may discuss a similar lobbying effort again, spokeswoman Molly Brogan said in an interview before the bankruptcy filing.