KeNo's Housing and Economic Portal: Monday March 1 Housing and Economic stories

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Governor Christie Declares "New Jersey on Edge of Bankruptcy" - (Mish at globaleconomicanalysis.blogspot.com) New Jersey is in a state of fiscal emergency. Expect to see more states follow suit. Please consider Christie to freeze $1.6 billion in NJ spending. Gov. Christie today declared that New Jersey had veered to the edge of bankruptcy and ordered a broad array of state cuts in an effort to make up a $2.2 billion deficit in the current budget amid falling revenues. Christie froze aid to more than 500 school districts and public colleges and universities, ordered the end to several state programs and the Office of Public Advocate, and seized unspent money across state government. "Today, we come to terms with the fact that we cannot spend money on everything we want," Christie told a special joint session of the legislature. "The days of Alice in Wonderland budgeting in Trenton are over." The state's sales tax revenues are 5.5 percent below projections, corporate business tax receipts are down 8 percent, both below what had been planned under former Gov. Jon Corzine's administration, Christie said. Christie also announced the state would not contribute $100 million toward pensions costs and signaled that he would push for massive pension restructuring. Christie highlighted the benefits for unnamed individual teachers as an example: a retired teacher who contributed $62,000 in total toward her pension who would be expected to receive $1.4 million in pension payments and $215,000 in medical benefits over the rest of her life. "Is it fair for all of us and our children to have to pay for this excess?" Christie said. Christie said the state would have to pay $7 billion a year to make up unfunded pension and medical liabilities. ""We don't have that money. You know it and I know it," Christie said.

IMF offers to help Greece; EU disappoints markets - (www.reuters.com) Greece's economy shrank more than feared last quarter and the government on Friday sharply revised down its figures for the previous three quarters as well, increasing doubts over its ability to resolve its debt crisis. A European Union government source said meetings of the region's finance ministers next week were unlikely to put together an aid package for Greece, suggesting governments remained unable to decide on how to prevent the crisis from hurting financial markets' faith in the euro zone. "They (EU leaders) try to keep the pressure on Greece as high as possible, as well as on Portugal and Spain, to do whatever they can now," the source said. The euro sank to a fresh eight-month low of $1.3529 against the dollar in response, while spreads for the government bonds of Greece and other heavily indebted states in the south of the zone widened. Greece's gross domestic product contracted 0.8 percent in the fourth quarter, much deeper than the 0.5 percent forecast in a Reuters survey, the government announced.

Cities aren't hitting panic button -- yet - Cities and other municipalities are in a world of budgetary hurt. Is a wave of bankruptcies on the way? The odds are against it, given the rules that restrict who can file for protection from creditors under Chapter 9 of the federal bankruptcy code. States, for instance, can't file, while in many cities, towns and other government bodies can seek bankruptcy only in limited circumstances. Yet with Greece's fiscal problems blaring from the headlines and governments across the United States bracing for another round of draconian cuts, municipal bond investors have been keeping an eye out for a rare event: a default on bonds issued by a local government. "I've been investing in muni bonds for 25 years, and I have never had to focus on this side of it until now," said Matthew Dalton, who runs muni bond investor Belle Haven Investments in White Plains, N.Y. "We're keeping an eye out for something that comes out of left field." Harrisburg, Pa., could be in the ballpark. A top city official said this week that the capital of the sixth-most-populous state may file for protection from its creditors as soon as March 1. The city, straining under a $282 million mountain of debt issued earlier this decade to pay for a trash incinerator, could also take state aid, as cities including Pittsburgh have. Golden State on the brink: The bigger issue though is what happens in California, which as the epicenter of the housing bust is chock full of distressed municipalities -- including the Bay Area city of Vallejo, which filed in May 2008 for bankruptcy. The Vallejo case attracted notice because city managers said the filing would help them slash their payroll for police officers and firemen. The idea of purging costly labor contracts through the court system is sure to appeal to some municipal managers at a time of tumbling tax collections and soaring costs.

How markets attacked the Greek piñata - (www.ft.com) Wall Street loves a piñata party – singling out a company or country, making it the piñata, grabbing their sticks and banging it until it breaks. As in the child’s game, the piñata is left in shreds. Unlike the child’s game, in the Wall Street version the piñata is stuffed with money for the bankers to scoop up with both hands, instead of sweets. We see this game being played today, with Greece as the piñata. Investors trying to understand why their portfolios have begun to melt down for the second time in five years are becoming experts in the fiscal policy of Greece. A look at the piñata party might make things clearer. Greece’s travails are often measured by reference to the market in credit default swaps (CDS), a kind of insurance against default by Greece. As with any insurance, greater risks entail higher prices to buy the protection. But what happens if the price of insurance is no longer anchored to the underlying risk? When we look behind CDS prices, we don’t see an objective measure of the public finances of Greece, but something very different. Sellers are typically pension funds looking to earn an “insurance” premium and buyers are often hedge funds looking to make a quick turn. In the middle you have Goldman Sachs or another large bank booking a fat spread. Now the piñata party begins. Banks grab their sticks and start pounding thinly traded Greek bonds and pushing out the spread between Greek and the benchmark German CDS price. Step two is a call on the pension funds to put up more margin, or security, as the price has moved in favour of the buyer. The margin money is shovelled to the hedge funds, which enjoy the cash and paper profits and the 20 per cent performance fees that follow. How convenient when this happens in December in time for the annual accounts, as was recently the case. This dynamic of pushing out spreads and calling in margin is the same one that played out at Long-Term Capital Management in 1998 and AIG in 2008 and it is happening again, this time in Europe.

‘Volcker rule’ gives Goldman stark choice - (www.ft.com) Goldman Sachs and other banks should give up their bank status if they want to avoid the ban on proprietary trading proposed by the White House, Paul Volcker, head of President Barack Obama’s Economic Recovery Advisory Board, said. “The implication for Goldman Sachs or any other institution is, do you want to be a bank?” Mr Volcker said in a video interview with the Financial Times. “If you don’t want to follow those [banking] rules, you want to go out and do a lot of proprietary stuff, fine, but don’t do it with a banking licence.” Mr Volcker, a former chairman of the Federal Reserve, was thrust into the centre of the financial reform debate last month, when Mr Obama endorsed his proposal to separate proprietary trading from commercial banking, naming the policy the “Volcker Rule”. Markets are wondering how the rule would affect groups such as Goldman Sachs and JPMorgan Chase, which have proprietary trading desks and private equity units. The two groups also enjoy financial holding company status and the consequent right to borrow money from the Federal Reserve and accept retail deposits. Institutions that give up their bank status to continue proprietary trading would lose “the special privileges of a bank”. “Don’t expect the support you would get from being a bank within the club of insured deposits and access to the Federal Reserve and all the loving attention you get as a bank organisation,” Mr Volcker said.