KeNo's Housing and Economic Portal: Friday October 21 Housing and Economic stories

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Dexia’s Breakup May Make Its Shareholders Losers Holding Little of Value - (www.bloomberg.com) Dexia SA (DEXB)’s planned breakup to protect its Belgian depositors and its municipal-lending business in France may leave little value for its shareholders. About 15 years after the French-Belgian bank was created in a merger and after about 100 billion euros ($133 billion) in public guarantees and funds kept the lender afloat in the 2008- 2009 period, France and Belgium are trying to split up its assets in a manner designed to avoid injecting more capital. Under an option favored by France, Dexia SA may be left holding a “bad bank” with the lender’s worst assets, while Belgium assumes control of operations in that country and state entities in France buy up the French municipal-lending business, two people with knowledge of the plans said. Dexia’s market value has tumbled 42 percent in the past four days on concern shareholders will be the losers in a possible breakup. …“It’s hard to tell how much Dexia is worth, but shareholders are ruined, with the core assets in France and Belgium back at their starting blocks,” said Francois Chaulet, who helps manage 250 million euros at Paris’s Montsegur Finance. On Oct. 4, Belgian Prime Minister Yves Leterme said Dexia is pooling its troubled assets into a “bad bank” with Belgian and French government guarantees. Dexia, which was bailed out by the two governments in 2008, will put its “legacy” division, which held 113 billion euros of assets at the end of June, into the bad bank, Leterme said.

Bank Of America Will Lobby Congress To Ensure $5 Fee Stays And America Loves It - (www.businessinsider.com) Bank of America has launched a big PR move to counter the negative PR it got after the fees were announced, according to Charlie Gasparino. In short, they want to make sure the fee stays and you love it. (Sidenote: it's working already! One thing the firm has done so far is reach out to members of Congress as well as officials in the new Consumer Protection Bureau. Gasparino says that the effort is a result of BofA's concerns that they'll have to reverse the fee after the incredible backlash it got from BofA customers. So now BofA is lobbying with the CFB to ensure that doesn't happen. This is good news.

France's AAA Rating Is A Fragile Linchpin In Euro Zone Crisis Plan - (online.wsj.com) Mounting trouble at Franco-Belgian bank Dexia SA (DEXB.BT) and a sudden downgrade of Italy's sovereign debt rating have shined a spotlight on a major risk to the euro zone's effort to avert financial disaster: the prospect that France could lose its triple-A credit rating. If France is downgraded, the euro zone's bailout fund--the European Financial Stability Facility--would also lose its own top-notch rating unless members injected cash, analysts say. That would raise the fund's cost of borrowing and could thus undermine the 17-member euro zone's ability to support the region's debt-burdened countries and beleaguered banks. It would hinder regional leaders' efforts to expand the EFSF's powers and ward off contagion from what many see as an inevitable debt default by Greece. "If France becomes double-A, the whole thing doesn't work," said David Hoffman, managing director at Brandywine Global Investment Management LLC. Moody's Investors Service has previously said the creditworthiness of the EFSF "is particularly sensitive to changes in the ratings of Aaa countries with large EFSF contribution keys," including France.

Global gloom places Latin America on alert - (www.ft.com) Every day Luis Castilla, Peru’s finance minister, says he lights a candle and “prays that China won’t crash”. His prayers are echoed by many in a region that remains one of the world economy’s few bright spots. South America’s commodity-rich economies grew 5 per cent in the first half of this year. Last year, these new motors of the world economy added half a percentage point to global output. But slowing Asian demand and plunging commodity prices have raised the spectre that South America, having largely escaped the 2008-09 Great Recession, may not be so lucky this time around. Another recession would “hurt more than last time, as there won’t be the same positive effects from [growth in] China and India,” Sebastian Edwards, the World Bank’s former chief Latin America economist, said. A recession “would be more global, so it would affect us more”. Abetted by US and European gloom, markets have swiftly priced in that possibility.

False Default Signal Seen With Swaps Cost Most Since January: Muni Credit - (www.bloomberg.com) The cost of protecting municipal debt against default is at the highest level since January even as past warning signals from derivative contracts proved unfounded. Protection on $10 million of securities for 10 years cost as much as $245,000 this week, according to London-based data provider CMA. That’s the most since Jan. 7, three weeks after banking analyst Meredith Whitney predicted “hundreds of billions of dollars” of defaults in the coming year. Instead, failures plunged to $1.1 billion, a quarter of 2010’s rate, according to Bank of America Merrill Lynch. Prices of privately traded credit-default swap contracts have risen 78 percent since May 31 even after states closed a projected $32 billion in budget deficits, according to the Washington-basedNational Conference of State Legislatures. States and localities have also recorded seven straight quarters of year-over-year revenue growth, the U.S. Census Bureau said, while enjoying the longest stretch of rising income and falling interest rates since Bill Clinton’s presidency. While states and cities are balancing budgets and slashing borrowing costs, investors are buying hedges against defaults on concern about a slowing global economy, said Peter Demirali, who manages $350 million of municipal debt at Cumberland Advisors in Mendham Township, New Jersey.