KeNo's Housing and Economic Portal: Thursday July 8 Housing and Economic stories

KeNosHousingPortal.blogspot.com

TOP STORIES:

Illinois pension fund uses OTC derivatives to recoup returns, jeopardizes pensions - (news.medill.northwestern.edu) Dale Rosenthal, a former strategist for Long Term Capital Management, the hedge fund known for its epic collapse in 1998, and a proprietary trader for Morgan Stanley, has seen his share of financial complexities. But when shown a seven-page list of derivatives positions held by the Illinois Teachers Retirement System as of March 31, obtained by Medill News Service through a Freedom of Information Act request, the University of Illinois-Chicago assistant professor of finance expressed disbelief. “If you were to have faxed me this balance sheet and asked me to guess who it belonged to, I would have guessed, Citadel, Magnetar or even a proprietary trading desk at a bank,” Rosenthal said. How bad is it? After losing $4.4 billion on investments in fiscal year 2009, and 5 percent on investments in fiscal 2008, the teachers’ pension is now underfunded by $44.5 billion, or 60.9 percent, according to the Commission on Government Forecasting and Accountability’s March 2010 report. By comparison, only 20.3 percent of the Chicago Teachers’ Pension Fund is unfunded. For the quarter ended March 31, according to derivatives experts who studied TRS’ financial documents, the fund lost some $515 million on its derivatives portfolio. Since then, the fund’s derivatives positions have likely soured further, the experts said, due to worsening financial conditions in Europe. The teachers’ fund denies it’s currently losing money on its derivatives, and in a statement said its investment strategy, which has included OTC derivatives for the past 27 years, is up 9.7 percent during that same time period. That’s better than the fund’s 8.5 percent target return rate.Further, a TRS spokesman said derivatives represented just 2 percent of the $4.4 billion fiscal 2009 loss.

Illinois Doesn't Pay Bills; Crisis Pushes Businesses to Edge of Bankruptcy - (Mish a globaleconomicanalysis.blogspot.com) Illinois is bankrupt, financially, politically, and morally. When it comes to politicians in jail, Illinois is at the top of the list. The volcano has already erupted, but Illinois just sits, bankrupting companies the state owes money to but has not paid. Please consider Illinois deep in debt, doesn’t pay bills: For 35 years, frail senior citizens in southern Illinois could turn to the Shawnee Development Council for help cleaning the house, buying groceries or any of the chores that make the difference between living at home or moving to an institution. No more. The council shut down the program Thursday because of a budget crisis created by the state of Illinois' failure to pay its bills. Paralyzed by the worst deficit in its history, the state has fallen months behind in paying what it owes to businesses and organizations, pushing some of them to the edge of bankruptcy. Illinois isn't bothering with the formality of issuing IOUs, as California did last year. It simply doesn't pay.

Fannie Mae Proposes Bulldozing U.S. Houses - (www.bullionbullscanada.com) Given this reality, I reiterated my position that the U.S. government would have to demand that at least 1million of these homes be bulldozed. This would solve two problems. It would eliminate housing units which would likely never be sold and remedy the problem of overall excess supply, where there are currently somewhere around 20 million empty homes in the U.S. (and an even greater number of “underwater” mortgages). The problem with this solution is that the U.S. banks holding these mortgages – and holding trillions of dollars of leveraged housing-derivatives would have to take virtually 100% write-downs on these units. While the U.S.'s “mark to fantasy” accounting rules allow U.S. banks to maintain totally fictitious valuations on U.S. housing units (and their derivatives) as long as the homes are still intact, that would not be the case once they were razed to the ground. In the efforts by U.S. banks to maintain fictitious valuations on U.S. homes, and to create the artificial appearance of a “bottom” in the U.S. housing market, U.S. banks have been holding vast numbers of “REO” homes off of the market. Part of this game is being played by U.S. banks dragging their heels on foreclosure proceedings – which has been aided by the sheer quantity of defaulting mortgages: enough to totally clog-up the court systems of many U.S. states. In Florida alone, there is a backlog of more than 500,000 foreclosures, with only a trickle of those homes actually reaching the market.

Arizona immigration law may increase Phoenix foreclosures - (www.azcentral.com) The impact of Arizona's tough new immigration law is rippling through the state, six weeks before the law is scheduled to go into effect. One area where SB 1070 could hurt Arizona, but take many months to manifest, is metropolitan Phoenix's housing market. An exodus of people - both legal and illegal residents - could be one more drag on a housing-market recovery. Departures from a state where growth is the economic foundation could add to the number of foreclosures and vacant houses and apartments, all of which will hurt the housing industry just as signs of recovery are starting to appear. Driving illegal immigrants out of Arizona is one stated purpose of the new immigration law. But the law, experts say, could also drive out legal residents and deter potential new residents - people who are afraid of what might happen to them or who simply object to the law.

The Coming Financial Derivative Meltdown - (www.fool.com) We all remember how in late 2008, staggering losses on risky derivatives nearly brought down our entire financial system. With 43 members of the House and the Senate hammering out a final version of the financial-reform bill, one of the biggest contentions remains what to do about the mind-boggling, vast, and opaque derivatives market owned by the nation's too-big-to-fail megabanks. The problem is getting worse. Notional amounts of derivatives held by federally insured bankshave risen to more than $200 trillion.

OTHER STORIES:

Financial Reform Bill - Audit the Fed! - (www.bullnotbull.com)

Government-sponsored mortgage debt leads to murder-suicide - (www.ocregister.com)

Murrieta volunteer "retires" from cleaning yards of abandoned houses - (www.pe.com)

What We Know and Don't Want to Know About Housing - (www.Charles Hugh Smith)

Builders in U.S. Lost Confidence After Buyer-Bait Credit Ended - (www.bloomberg.com)

Banks stop foreclosing, letting squatters live free - (www.centralvalleybusinesstimes.com)

Foreclose or let houseowner squat? - (www.patrick.net)

Is Squatting a Viable Long-Term Solution to Stabilize the Housing Market? - (www.irvinehousingblog.com)

Stephen Roach says China's Housing Boom is Not a Bubble; I say "Nonsense" - (www.Mish)

Radical Ideas From a Federal Housing Bureaucrat - (blogs.wsj.com)

In Desperately Poor Rwanda, Most Have Health Insurance - (www.nytimes.com)