KeNo's Housing and Economic Portal: Monday May 24 Housing and Economic stories

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TOP STORIES:

Los Angeles on the Brink of Bankruptcy - (online.wsj.com) Los Angeles is facing a terminal fiscal crisis: Between now and 2014 the city will likely declare bankruptcy. Yet Mayor Antonio Villaraigosa and the City Council have been either unable or unwilling to face this fact. According to the city's own forecasts, in the next four years annual pension and post-retirement health-care costs will increase by about $2.5 billion if no action is taken by the city government. Even if Mr. Villaraigosa were to enact drastic pension reform today—which he shows no signs of doing—the city would only save a few hundred million per year. Los Angeles's fiscal woes can be traced to two numbers: 8% and 5,000. Eight percent has been the projected annual rate of return on the assets in Los Angeles pension funds. Four years ago, we strenuously warned Mr. Villaraigosa of the dangers behind the myth of that 8%, only to be told by the city controller's office that our warnings were "based on faulty assumptions which are largely disputed." How faulty were our assumptions? Over the last decade, the two main pension funds in Los Angeles have seen their assets grow at just 3.5% and 2.8% annually. Five thousand is the number of employees added to the city's payroll during Mr. Villaraigosa's first term as mayor. According to California's Economic Development Department, when Mr. Villaraigosa took office there were 4.73 million jobs in Los Angeles and 252,000 unemployed people. Today, there are just 4.19 million jobs in Los Angeles and over 632,000 unemployed people. The mayor can't control the economy, but he could have chosen to control spending to keep the size of government proportional to the size of the local economy. Instead he's done the opposite: squeezing the city's productive workers to fund the salaries, pensions and other benefits of government workers. How have city leaders responded to the crisis? Pension officials have played accounting games, like smoothing the investment return over seven years rather than five years. This is designed to dilute the near-term effect of the financial meltdown at the expense of much higher payments later.

City of Fresno Declares Fiscal Emergency - (www.abclocal.go.com) The city of Fresno is facing a $30.6 million budget shortfall and the mayor announced she wants to cut hundreds of city jobs. Mayor Ashley Swearengin says 225 jobs will be eliminated and 81 vacancies will go unfilled. It means roughly one out of every 12 city workers will be let go. At a news conference Monday, Swearengin says the city is in a state of "fiscal emergency." In addition to the cuts, outsourcing city services to the private sector and charging a franchise fee is a big part of her plan. In return the city would receive millions of dollars in revenue. Swearengin said, "These economic conditions force us to be innovative and creative. And we've responded with a budget filled with pain. But it's also a budget with promise." Swearengin hopes to have her "fiscal emergency" budget approved by the city council on Thursday.

Greeks Halt Flights, Ferries as Strikes Escalate Against Cuts - (www.bloomberg.com) Greek demonstrations against government austerity measures turned deadly when three people were killed after protesters set fire to a bank in central Athens. Fire officials at the scene said they discovered three bodies in the building, according to a fire-department statement sent by text message today. The building, located near the Greek parliament, housed a branch of Marfin Egnatia Bank SA. At least three more buildings were set on fire and 30 fire trucks and 80 firefighters battled the blazes, fire officials said. Marfin spokesman Serapheim Konstantinidis said that the bank was trying to identify the three victims and couldn’t confirm whether they were employees. A bank worker who escaped the blaze said the fire spread very quickly and it was hard to tell how it started. Today’s general strike, the third this year, follows Greek Prime Minister George Papandreou’s announcement of a second set of wage cuts for public workers, a three-year freeze on pensions and a second increase this year in sales taxes and the price of fuel, alcohol and tobacco in return for a bailout from the European Union and the International Monetary Fund. Trade union groups have called the austerity measures “savage.”

ECB’s Weber Sees Threat of ‘Grave Contagion Effects’ - (www.bloomberg.com) European Central Bank council member Axel Weber said Greece’s fiscal crisis is threatening “grave contagion effects” in the euro area, justifying Germany’s contribution to a 110 billion-euro ($142 billion) aid package. “There is a threat of grave contagion effects for other member states in the monetary union and increasing negative feedback loop effects on capital markets,” Weber said in a statement today as German lawmakers in Berlin debate the proposed rescue of Greece. “All in all, Germany’s contribution to the aid package for Greece is justifiable.” The euro is tumbling as the Greek fiscal crisis spreads to other indebted nations such as Spain and Portugal. Moody’s Investors Service today placed its Aa2 rating on Portugal’s debt on review for a possible downgrade. In Germany, Chancellor Angela Merkel appealed to parliament to approve the country’s 22.4 billion-euro portion of the joint European Union- International Monetary Fund bailout amid public opposition.

Crisis Panel to Probe Window-Dressing at Banks - (www.nytimes.com) It’s an open secret on Wall Street that many big banks routinely — and legally — fudge their quarterly books. But now Washington is taking a hard look at a range of maneuvers that help banks dress up their financial statements, and raising some uncomfortable questions about banks’ bookkeeping. The techniques in question, which are normally relegated to the shadows of finance, are expected to be thrust into a public spotlight on Wednesday by the federal committee that is investigating the causes of the financial crisis. The Financial Crisis Inquiry Commission is expected to focus most sharply on the way banks slim down their balance sheets before reporting their results and on loans they receive from entities like special-purpose vehicles and hedge funds, which are allowed to operate with little public disclosure. What is perhaps surprising is that many of the practices that enabled investment banks like Lehman Brothers to mask their deteriorating finances during the crisis are still wide open — and still being employed by other banks.

Wishing Greece Had Never Joined the Euro - (www.nytimes.com) The economic challenges facing the European Union unsettled investors around the globe on Tuesday as hundreds of demonstrators took to the streets in Greece, unfurling banners over the Acropolis to protest the government’s new austerity measures. It was not supposed to be this way when Greece, eager to join first the European Union, then the euro zone, pledged financial overhaul. “Now we are paying the price for the fact that we lived above our means, with amazing profligacy, and failed to reduce the role of the state,” said Yannos Papantoniou, the former Greek finance minister. “Some say we should have done more.” The recent crisis is in many ways a peculiarly Greek tragedy. It is rooted in an ancient nation’s epic spending and abetted by the hubris of European leaders whose desire for integration at any cost compelled them to allow political considerations to trump economic realities.

OTHER STORIES:

World stocks slide as 3 die during Greek protests - (finance.yahoo.com)

Crude slumps below $80 a barrel as dollar rises - (www.marketwatch.com)

Euro Falls to One-Year Low on Concern Greek Crisis Spreading - (www.bloomberg.com)

Greek Contagion Spurs Surge in Portugal, Spanish Debt Swaps - (www.bloomberg.com)

Bailout Fails to Calm Europe - (online.wsj.com)

Mortgage Bond Spreads at Widest in Five Months: Credit Markets - (www.bloomberg.com)

White House Recasts Bailout Funds Recovery - (online.wsj.com)

Buffett Says GM Rescue May Mean U.S. Can’t Say No to States - (www.bloomberg.com)

Some Democrats reluctant to include bank tax in overhaul - (www.washingtonpost.com)

Wadhwani Sees Sovereign Crises ‘Recurring’ After Greek Bailout - (www.bloomberg.com)

Capital Markets Face Worst Crisis in 100 Years, Evolution Says - (www.bloomberg.com)