KeNo's Housing and Economic Portal: Saturday January 2 Housing and Economic stories

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Bad to Worse: Dubai's Palm Island May Be Sinking - (www.cnbc.com) Dubai has been going through a tough period lately, with debt delays from one of its leading companies and rattled investors selling down stocks, but things could be getting even worse for the sunshine emirate. One of the crown jewels of its real estate empire, The Palm Jumeirah, is literally sinking into the ocean, one scientist told the Wall Street Journal. The man-made island, which was dredged from seabed and shaped into a palm for luxury housing, is sinking by an average of 5 millimeters a year, an executive at leading European ground survey company Fugro NPAtold the paper. The beach-front properties could be flooded if sea levels rise, as predicted by many climate-change experts, the executive added. "We're seeing across the island, at a number of locations, ground is moving downwards," Adam Thomas, InSar surveying project manager at Fugro, told the paper. "In the future, sea levels are predicted to rise and if this goes on then it could pose a flood risk," he added. The claims have been firmly rebuked by the Dubai-based developer that created the island, Nakheel, the report said. This is the latest headache forNakheel and its parent company Dubai World which has been forced to restructure its debt after delaying bond repayments. "Speculative reports suggesting Palm Jumeirah is sinking and vulnerable to flooding are wholly inaccurate," the company said, according to the report.

Commercial-property blues: Lenders' dilemma - (www.economist.com) A FRISSON of fear touched the London property market briefly on news that Dubai World was delaying repayment of some of its $60 billion (£36 billion) in debt. A subsidiary, Istithmar, owns three landmark London office buildings, including the Adelphi near the Strand. Not until Dubai World made it clear, on December 1st, that Istithmar would not be part of the restructuring did nerves recover. But there is a bigger spectre stalking the commercial-property market, and one with dire consequences for the rest of the economy. A giant overhang of loans, many of them in the hands of two bailed-out British banks, needs refinancing—£35 billion next year alone, and up to £120 billion more by 2013. Few of the usual equity investors, such as real-estate investment trusts and private-equity funds, will come in at today’s prices, given how little is on offer and how hard it is to get credit. So the banks are hanging on, able to do so only because low interest rates mean their funding cost is low. Meanwhile, other parts of the economy, especially cash-strapped firms, are being starved of the loans they need. Next year, things could get worse. Commercial-property values in central London have fallen by as much as 50% since the financial crisis hit. Although office-vacancy rates have improved slightly—to around 8.8% in the City and 6.7% in the West End—there are fears that a fresh wave of business failures and firings will occur next year. According to HSBC, a bank, some 85% of the bank debt extended since the start of 2004 and secured against commercial property in Britain has breached loan covenants (requiring a loan-to-value ratio of 75% or less) or debt-service requirements. On another measure, £40 billion is in negative equity—ie, the property is worth less than the outstanding loan. Banks in this situation face a stark choice: foreclose on the loan and trigger a fire sale, or hang on in the hope that the market will improve. Most are hanging on, as the chart shows: outstanding property loans to British entities have stuck above £250 billion since the end of 2008. Royal Bank of Scotland (RBS), the biggest property lender, is in an especially peculiar position. Rescued by the government in October 2008, it will soon be 84% state-owned. Of RBS’s roughly £58 billion of loans on British commercial property, it regards £18 billion as “non-core”, to be disposed of over the next three to five years. So the bank is a seller, but it is waiting for the market to get better first. HBOS, now part of Lloyds Banking Group (LBG), had what is probably the worst commercial-property portfolio of any British bank. Had it not been taken over by Lloyds TSB its property loans might well have been dumped at rock-bottom prices. LBG, which has around £42 billion of British commercial-property loans, took a £9.7 billion charge for property- and corporate-loan impairments in the first half of 2009, largely attributable to HBOS.

Congressmen To Call For Break-Up Of Biggest Banks - (www.huffingtonpost.com) Five House Democrats will call this week for a return to a Depression-era law that separated Wall Street investment banking from Main Street commercial banking. If adopted, the measure would give banks one year to choose between being commercial banks or investment banks. The nation's biggest -- those now commonly referred to as "too big to fail" -- would be broken up. The Obama administration opposes the measure. The amendment's five co-sponsors -- Maurice Hinchey of New York, John Conyers of Michigan, Peter DeFazio of Oregon, Jay Inslee of Washington, and John Tierney of Massachusetts - want to restore the Glass-Steagall Act of 1933, which prohibited commercial banks from underwriting stocks and bonds. The act was repealed in 1999 at the urging of, among others, Larry Summers, now President Barack Obama's chief economic adviser. The five congressman all voted against the repeal then -- and now they want it back. Former Federal Reserve Chairman Paul Volcker is one of a number of financial luminaries calling for at least a partial return to Glass-Steagall. The Wall Street Journal's editorial page also endorsed the concept in a recent editorial as a way to "reduce moral hazard" and "limit certain kinds of risk-taking by institutions that hold taxpayer-insured deposits." The law's repeal ushered in an era marked by big banks getting even bigger. The country's four largest -- Bank of America, JPMorgan Chase, Citigroup and Wells Fargo - now control more than half of the nation's mortgages, two-thirds of credit cards and two-fifths of all bank deposits. And because their deposits are taxpayer-insured, there's a growing concern that they will feel overly confident about making risky bets through their investment arms because they know that should they suffer huge losses, taxpayers will ultimately be there to bail them out. The five Democrats face big obstacles, including their own leadership and the Obama administration.

Unemployment numbers don't tell the real jobs crisis story - (ebn.benefitnews.com) While the drop in unemployment rate in November from 10.2% to 10% was welcome news, the fact remains that economy is still in crisis mode. The United States is coping with 15.7 million unemployed and 7.3 million jobs lost between December 2007 and October 2009. And, despite November’s jobless claims dip, we’re not likely to see real improvement anytime soon. In a recent New York Times column, Thomas Friedman suggested that a critical reason for the Great Recession is “an education breakdown on Main Street” that has undermined the ability of the average American worker to compete in the global arena. While financial disasters and job losses have grabbed the headlines, there is credible evidence supporting Friedman’s contention. Manpower’s 2009 Talent Shortage Survey (June 2009) of 39,000 employers in 33 nations reported that 30% of employers were still experiencing difficulties in filling jobs. In the European Union, this represented 2.3 million jobs and in the United States, about two million vacant positions, i.e., jobs unfilled for six months or longer. This was confirmed by two additional reports. A National Federation of Independent Businesses 2009 survey indicated that 23% of small businesses had few or no qualified applicants for job openings, and 8% had vacant positions. The September 2009 Employment Dynamics and Growth Expectations Report from the staffing firms Robert Half International and Career Builder also reported that human resource managers judged 47% of their applicants unqualified. Many of these vacant positions were STEM jobs or those that are in science, technology, engineering, or mathematically-related areas. For the United States to retain its competitive edge, it must build up its technological and scientific talent in such high-tech areas.

No Escape From TARP for Banks Choking on Real Estate Loans - (www.bloomberg.com) As the U.S. economy pulls out of a recession and the biggest banks return to profitability, mounting defaults on commercial property may keep regional lenders from repaying bailout funds until at least 2011. Unpaid loans on malls, hotels, apartments and home developments stood at a 16-year high of 3.4 percent in the third quarter and may reach 5.3 percent in two years, according to Real Estate Econometrics LLC, a property research firm in New York. That’s a bigger threat to regional banks, which are almost four times more concentrated in commercial property loans than the nation’s biggest lenders, according to data compiled by Bloomberg on bailout recipients. The concentration makes regulators less likely to let regional lenders likeSynovus Financial Corp. and Zions Bancorporation leave the Troubled Asset Relief Program, analysts said. Smaller banks would remain stuck in TARP, while bigger lenders, including Bank of America Corp., repay the government and free themselves to set their own policies on executive pay. “Community and regional banks basically became real estate banks in the past 25 years, and now real estate is on its back,” said Jeff Davis, an analyst at FTN Equity Capital Markets Corp. in Nashville, Tennessee. “The largest banks have other areas where they can make money, be it consumer lending, capital markets and asset management.”

Volker: "Little evidence innovation in financial markets has had a visible effect on the productivities of the economy" - (www.telegraph.co.uk) Paul Volcker, the chairman of President Obama's Economic Recovery Advisory Board, stunned a business conference in Sussex yesterday, saying there is "little evidence innovation in financial markets has had a visible effect on the productivities of the economy". The former US Federal Reserve chairman told an audience that included some of the world's most senior financiers that their industry's "single most important" contribution in the last 25 years has been automatic telling machines, which he said had at least proved "useful". Echoing FSA chairman Lord Turner's comments that banks are "socially useless", Mr Volcker told delegates who had been discussing how to rebuild the financial system to "wake up". He said credit default swaps and collateralised debt obligations had taken the economy "right to the brink of disaster" and added that the economy had grown at "greater rates of speed" during the 1960s without such products. When one stunned audience member suggested that Mr Volcker did not really mean bond markets and securitisations had contributed "nothing at all", he replied: "You can innovate as much as you like, but do it within a structure that doesn't put the whole economy at risk." He said he agreed with George Soros, the billionaire investor, who said investment banks must stick to serving clients and "proprietary trading should be pushed out of investment banks and to hedge funds where they belong". Mr Volcker argued that banks did have a vital role to play as holders of deposits and providers of credit. This importance meant it was correct that they should be "regulated on one side and protected on the other". He said riskier financial activities should be limited to hedge funds to whom society could say: "If you fail, fail. I'm not going to help you. Your stock is gone, creditors are at risk, but no one else is affected."

The Coming Wave of Debt Defaults - (www.forbes.com) The worst is not yet past. Be prepared. The trouble in the commercial real estate markets is getting ugly, as the precarious situation of Dubai World has made all too clear. Expect many more unpleasant situations like that one. Speculative-grade debt issuers are bracing for the default rate to hit 12% to 14% by the end of 2009, according to our projections at Bain & Company. The last time the U.S. economy experienced default rates of that magnitude was 28 years ago. The current long-term average default rate is 4.5%; as recently as 2007, it was just under 1%. These failures are not limited to small or marginal firms; they are happening at large companies with at least $100 million in assets, and have, after all, already hit legendary businesses like General Motors, Lehman Brothers and General Growth Properties. What's significant is not just that big, high-profile companies have defaulted--by missing a payment, making a distressed exchange with lenders to buy time or filing for bankruptcy--but that virtually every sector of the U.S. economy has been touched, including automotive, home building, industrial products, entertainment, media and financial services. Now watch for commercial real estate. In aggregate, default rates will probably peak this year, but above-average default rates will last through 2011, since defaults historically lag changes in gross domestic product by 12 to 18 months. Like depth charges, defaults will continue to explode as cash positions sink, even as the economy recovers. By the end of this year, we will have seen nearly 300 speculative-grade issuers default on their debt in 2008 and 2009; only 116 did in the four years between 2004 and 2007. Yet as many as 300 more companies are likely to default by the end of 2011, and that could increase if current GDP expectations prove too optimistic. This could hit commercial real estate particularly hard since cash flows there are tightly linked to employment growth, making prolonged high unemployment an additional challenge on top of other economic woes.