KeNo's Housing and Economic Portal: Friday December 4 Housing and Economic stories

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Taxpayers on hook as some bailed-out firms prove frail - (www.washingtonpost.com) A year ago, the financial system was tottering and government officials arranged a $2.3 billion emergency cash infusion into CIT Group, a troubled lender to small businesses. Today, CIT is in bankruptcy court, and the taxpayers' investment is on the brink of being wiped out. It would be the largest loss so far from the government's massive rescue of the financial system, but it isn't likely to be the last. Officials poured about $700 billion into investments in scores of companies, from giants such as the automaker General Motors and the insurer American International Group to smaller regional banks. Of them, 46 had missed required dividend payments to the government as of the end of September, according to the inspector general overseeing the program. On Nov. 6, United Commercial Bank of San Francisco failed, becoming the first recipient of the Troubled Assets Relief Program, or TARP, to collapse. The cost to taxpayers: $299 million. Analysts expect more bailed-out firms to fail in the months ahead. Others may survive but will struggle to repay the government. Steven Rattner, the former head of the government's efforts to bail out the auto industry, said recently that the full public investment in GM is unlikely to be repaid. Meanwhile, AIG is dismantling itself, selling healthy subsidiaries at what critics say are bargain prices in an all-out effort to get cash to repay the government.

NUMMI auto factory closing: End of the line - (www.mercurynews.com) This has been a year of blows to the thousands of workers at the giant NUMMI auto factory — and there's more to come. Compounding the news earlier this year that the plant will close in March, the unionized work force confronts an additional bit of cruel fortune. Unlike other members of the United Auto Workers nationwide, the Fremont workers have no rights to transfer to other GM or Toyota vehicle factories. That's because of NUMMI's status as a joint venture of General Motors and Toyota. NUMMI is outside the GM network of union plants. Toyota doesn't employ union workers, other than at NUMMI. Amid the gloom, though, some workers still hold out hope — hope the factory will stay open, or hope they'll land a job at another Toyota plant. Many also take pride in the work they did, and the time they put into the plant, which was once considered a cutting-edge experiment with the potential to revolutionize how cars are made in this country. Ron Lopez will believe the NUMMI auto factory is closing only when the last Toyota rolls off the assembly line March 31, he says. "As long as we are still building cars in that plant, I have to think there is still hope," said Lopez, an ergonomics and truck paint shop veteran at the plant who lives in San Jose. "I always believe it's not over until it's over. But we are preparing for the worst." "A lot of other people at the plant don't have hope, but I still have hope," said Maricela Alvarez, a Ceres resident and quality control worker at NUMMI. "There is still hope until we come in one day and the doors are shut." The UAW hopes for a transfer deal with Toyota, but it's an "uphill fight" like everything else for the workers now, said Sergio Santos, president of UAW Local 2244, which represents NUMMI's union members. "This is one blow that's coming before the big blow when the plant closes," Santos said. Nevertheless, it appears the end of the line beckons for a bold experiment in American manufacturing. GM and Toyota both abandoned the factory this summer. That will force the plant's shutdown by April 1. "I had tears in my eyes when I heard the plant was closing," said Rosemary Montiel, a NUMMI production worker and San Jose resident. "For a while, my reaction was: 'Wow, what am I going to do?' But as April gets closer and closer, it's starting to hit me harder." The workers helped the factory become a milestone for corporate America as the nation's first automaking joint venture. GM hoped it could learn new tricks from Toyota and revive GM's ossified procedures. Toyota wanted a factory beachhead in America. Now, NUMMI is an emblem of the wreckage from the Great Recession that has unleashed job cuts, foreclosures, factory shutdowns, bank failures and market meltdowns.

Home Builders (You Heard That Right) Get a Gift - (www.nytimes.com) On Nov. 6, President Obama signed the Worker, Homeownership and Business Assistance Act of 2009 into law, extending unemployment benefits by 20 weeks and renewing the first-time homebuyer tax credit until next April. But tucked inside the law was another prize: a tax break that lets big companies offset losses incurred in 2008 and 2009 against profits booked as far back as 2004. The tax cuts will generate corporate refunds or relief worth about $33 billion, according to an administration estimate. Before the bill became law, the so-called look-back on losses was limited to small businesses and could be used to counterbalance just two years of profits. Now the profit offset goes back five years, and the law allows big companies to take advantage of it, too. The only companies that can’t participate are Fannie Mae and Freddie Mac and any institution that took money under the Troubled Asset Relief Program. Among the biggest beneficiaries are home builders, analysts say. Once again, at the front of the government assistance line, stand some of the very companies that contributed mightily to the credit crisis by building and financing too many homes. This is getting to be a habit: companies that participated on the upside and are now reaping rewards from the taxpayers on the downside. The banks that underwrote so many dubious loans, for example, received government aid to get them lending again. Unfortunately, that hasn’t been the result. One can make an argument that throwing money at the banking system is necessary if we are to jump-start the economy. And banks need a bigger capital cushion to protect against future losses. But dropping helicopter money on the home builders — the folks who massively overbuilt in community after community — seems decidedly less urgent (unless you are one of these companies, of course). Given that the supply of housing far outstrips demand, it is unlikely that these companies will use these tax breaks to hire workers (unless they go into a completely new line of business). “I am surprised that home builders are getting hundreds of millions of dollars given that many have very strong balance sheets,” said Ivy Zelman, chief executive at Zelman & Associates, a research firm. “We question the public policy decision to gift home builders with capital that many will not use to create jobs, since they admit that job growth will be dependent not on capital, but on improving demand.” When Mr. Obama signed the law, his administration said the tax break would help “struggling businesses.” But as Ms. Zelman pointed out, many large home builders are sitting atop mountains of cash. Pulte Homes, which will receive refunds exceeding $450 million under the new law, has $1.5 billion in cash and cash equivalents on its balance sheet, according to its most recent financial statement.

GM Posts $1.15 Billion Loss After Leaving Bankruptcy - (www.bloomberg.com) he biggest U.S. automaker said today it lost $1.15 billion after its July 10 exit from a restructuring engineered by the Obama administration. Cash on hand totaled $42.6 billion at the end of the quarter, and GM reported progress in cutting jobs and shutting dealers. The results offered Detroit-based GM’s first glimpse of its financial performance since emerging from Chapter 11 and shedding the remnants of the old General Motors Corp. on July 10 under the stewardship of Chairman Ed Whitacre, 68, and Chief Executive Officer Fritz Henderson, 50. “The numbers are encouraging,” Maryann Keller, president of consultant Maryann Keller & Associates in Stamford, Connecticut, said in a Bloomberg Television interview. “What it demonstrates is that the government gave GM a reorganized balance sheet that made them more competitive.” GM reported unaudited data for July 1 through July 9, for the pre-bankruptcy company, and for the period since July 10. Revenue was $28 billion for the full three months. “We are ahead of the bankruptcy plan, not only in operations, but with some contingencies we provided for that we have been able to manage,” Henderson said in a Bloomberg Television interview.

Hedge Funds Struggle - (online.wsj.com) The hedge-fund industry may be on track to deliver its best annual returns in years, but many managers still aren't in a position to collect performance fees. Most hedge-fund fortunes were earned through the collection of performance fees, typically 20% of any profit. The fee structure gives managers an incentive to outperform and provides some protection for their investors. But in the third quarter, roughly two-thirds of funds globally still hadn't recovered from the steep declines of 2008, estimates Chicago data tracker Hedge Fund Research Inc., or HFR. About a quarter of funds were more than 20% below their previous high point, or high-water mark, and thus couldn't charge performance fees for this year's gains. Clawing back to the point at which a fund can charge such fees again requires having a percentage increase that is larger than past percentage losses. A client with $1 million at a fund that falls 50% would be left with a balance of $500,000, so the fund would have to rise 100% before the manager could start charging incentive fees again. Hedge funds as a group were up about 17% on average this year through the end of October, following losses of roughly 19%, according to HFR. The industry "is recovering, but not yet recovered," said Kenneth Heinz, HFR's president. London hedge fund GLG Partners LLP, whose shares are traded in U.S., says its funds posted returns of about 25% on average in the first nine months of this year but about $7.6 billion of assets remain below their high-water marks. That is more than half of the $14.1 billion of assets at the firm that are eligible for performance fees. Of that, about $3.9 billion is more than 30% below. That has helped trigger a 72% drop in performance fees for the three months ended September, to $1.9 million from $6.8 million a year earlier, according to GLG. Co-Chief Executive Noam Gottesman, on a Nov. 5 call with analysts, said "the outlook for performance fees at GLG has brightened significantly with our strong investment performance over the course of 2009." In total, GLG manages $21.6 billion of assets, including in mutual funds as well as hedge funds.

Small U.S. Cities Lose Luster in Downturn America's small cities are losing some of their traditional appeal to upwardly mobile families seeking wholesome neighborhoods, a stable economy and affordable living. A review of newly released census data shows, for example, that cities of between 20,000 and 50,000 residents have lagged behind their larger counterparts in attracting higher-educated residents in this decade. In 2000, small cities, which include remote towns and the distant suburbs known as "exurbs," ranked at the top in the share of people with college diplomas. They slipped to No. 2 last year with 30 percent holding degrees — in between medium-sized cities, which had 31 percent, and big cities, at 29.8 percent. Poverty is growing in the small cities, fueled partly by population growth, although average median income of $60,294 in those communities is still higher than other places. Small cities looking more and more like bigger cities over the decade ranged from places like Hobart, Ind., and Mount Pleasant, Mich., to Anniston, Ala., and Greenville, Miss. Compared with previous years, they had smaller incomes, higher housing costs, longer commutes, more poverty and more single-parent families.