Scene along Bathgate Avenue in the Bronx, a section from which many of the New Jersey homesteaders have come
Ilargi: I posted part of Barry Ritholtz's post from yesterday, US Housing Starts Fall 46%, in a Daily Kos thread earlier today. A commenter reacted:
#! blogger Calculated Risk smacks down Ritholtz for his stupidity that you have reposted: Clacluted Risk has said "It now appears that single family starts might have bottomed in January."
This refers to a post by Calculated Risk, Ritholtz: "Why are people calling a bottom for Real Estate?", in which CR takes offence at a graph Barry Ritholtz posted today in:
New Home Starts
I cannot figure out why people continue to call for a bottom in Real Estate — as if there is going to be this snap back any day now.
click for larger white chart
CR's complete reaction goes like this:
I'm working on a housing start post, but first ...
Barry Ritholtz presents the following graph and asks: "I cannot figure out why people continue to call for a bottom in Real Estate — as if there is going to be this snap back any day now."
Well I'm one of the people who wrote yesterday that a bottom for single family housing starts might have happened: It now appears that single family starts might have bottomed in January.
A few quick points:
If single family housing starts bottomed in January, on a seasonally adjusted annual rate (SAAR) basis, the 12 month moving average of unadjusted data won't bottom until October or so (depending on the shape of the recovery). Using this method adds a lag to the analysis. Barry also conflates calling a bottom in housing starts with: 1) "a bottom in Real Estate" and 2) "a snap back".
First, there will probably be two bottoms for Residential Real Estate. The first will be for new home sales, housing starts and residential investment. The second bottom will be for prices. [..] Most people think prices when they hear the word "bottom", and the bottom for prices usually trails the bottom for housing starts - sometimes the two bottoms can happen years apart!
Second, looking for a bottom in housing starts doesn't imply "a snap back" in activity. As I noted yesterday, "I expect starts to remain at fairly low levels for some time as the excess inventory is worked off." I'll have more on why the housing start report is somewhat good news soon.
Both the commenter on Daily Kos and CR are way off the mark here. In CR's case the particular phrasing of "It now appears that single family starts might have bottomed in January." should say enough. Wanting something badly to be true, but not having the goods. I reacted thusly (let me first emphasize that I have a lot of respect for CR, but not so much this time; he can’t just start making stuff up, no matter that the beholder makes his own reality).
I don't like false claims of recoveries and green shoots. Not only are there plenty of those around as it is, they are dangerous things. Decisions are being based on them, both by governments and by individuals. And false claims lead to false decisions.
Ilargi: CR unfortunately gets into semantics and then flies off into territory Ritholtz never addressed. Not a terribly convincing stance. Ritholtz, on purpose, doesn't distinguish between separate bottoms, and injecting them into the discussion makes no sense, at least not in reaction to the original statement:I cannot figure out why people continue to call for a bottom in Real Estate
CR calls for two separate bottoms; calling for 5 or 10 would have been just as credible (it all depends on what you want to talk about), and just as much not a reaction to what Ritholtz says. It's just CR's pet theory. And he's entitled to those, but it's either disingenuous or simply not too smart to imply that Ritholtz wouldn't be able to tell the difference between housing starts and prices. He simply doesn't bring it up because it's irrelevant to his point.
CR's main flaw in general, which takes nothing away from the quality of his analysis of past events, but does dent the credibility of his predictive powers considerably, is perfectly summed up in this line he uses:It now appears that single family starts might have bottomed in January.
That is plain suggestive wishful thinking based on nothing but what the author would like to see in the data. It's obviously not supported by the Ritholtz graph he comments on, and whether there's a lagging indicator in play is, in that regard, pure semantics. Single family starts might have bottomed, and they just as much might not have. It has the same merit as the headline yesterday that read:US housing starts rise to 7-month high
Looking at this Barron's graph of the starts, it's hard not to laugh at that interpretation of the numbers. It's not untrue, but it is a weird conclusion. June starts are a mere notch above those in January, while April looks at par with January. All in all not exactly a confidence booster. As Ritholtz rightfully states, a 3.6% rise in starts with an 11.3% margin of error means you don't know a single thing.
To call CR's piece a smackdown of Ritholtz's "stupidity" doesn't bode well for your analytical skills. There is no stupidity in what Ritholtz states, and if there's any smacking going on, it misses by a mile and a half. I won't call CR stupid; suffice it to say this is not one of his best posts.
There is no hard evidence of a bottom (Ritholtz's one and only theme), and CR has none to provide; he's just wishfully hypothesizing about a different topic than Ritholtz and thereby unwittingly exposing a glaring weakness. You can't take people to task by randomly changing the subject. Which is what CR does.
Here’s Why It’s Time to Ban Credit Default Swaps
Ask U.S. Rep. Maxine Waters, D-CA, about credit default swaps and she’ll offer this warning: Ban them now or expect a reprise of the ongoing global financial crisis – which the derivative securities helped create. When it comes to elected officials, Congresswoman Waters is not one I would typically feel that I have a lot in agreement with. A representative of a low-income district in Los Angeles, Waters is a senior member of the House Committee on Financial Services and has distinguished herself in the past by her sharp attacks on the financial sector and capitalism in general – what her own Web site describes as her “no-holds-barred style of politics.”
However, Congresswoman Waters’ bill to prohibit credit default swaps – introduced last Friday (July 10) – is strangely appealing, even for a crusty old capitalist like myself. If you want a more pro-capitalist confirmation of Waters’ view (and George Soros doesn’t count) try Warren Buffett’s sidekick Charles T. Munger, who has called the CDS prohibition the best solution, and said “it isn’t as though the economic world didn’t function quite well without it, and it isn’t as though what has happened has been so wonderfully desirable that we should logically want more of it.”
Waters has also pointed out – quite reasonably – that unless credit default swaps are banned outright, “the industry will find a way to loosen standards and widen exemptions for customized contracts and we will be right back to where we are today.” As a free-market enthusiast, my natural instinct is to resist such calls. But I have to recognize that, as we speak, we’re actually not operating in a free market. Key U.S. banks were bailed out by the U.S. government last fall, after which such financial institutions as Fannie Mae , Freddie Mac and Citigroup Inc. have been permitted to carry on as though nothing bad ever happened.
Furthermore, a number of big players in the CDS market – most notably Goldman Sachs Group Inc. – were bailed out through the rescue of busted insurer American International Group Inc.. In that case, the government injected $180 billion into AIG, largely to allow it to make good on the CDS contracts it had written – $13 billion of which were with Goldman Sachs. If Citi, Fannie, and Freddie had gone bankrupt – as they would have done in a free market – and Goldman had lost the best part of $13 billion (which might well have sent it bankrupt in turn) the financial market today would look very different.
The financial industry would be rife with unemployment and apple-selling ex-Citibankers would be on the streets of New York keeping bankers’ salaries and bonuses way down from their pre-crash levels. But such as it is, Goldman Sachs is said to be heading for record profits in 2009, and its partners are expecting record bonuses. The investment-banking firm reported stellar second-quarter profits of $3.44 billion [Tuesday].
If U.S. taxpayers are going to be called on to subsidize the very banks that got us into this mess – just so these institutions can continue to carry on as if it was still 2007 – then another expensive and damaging financial crash is almost certainly in the making. There are a number of product areas in which such a crash might occur, but for my money, credit default swaps top the list. That makes it crucial for us to at least rein in the derivative securities with the utmost urgency. And Congresswoman Waters makes an excellent point when she says that it may prove impossible to rein in credit default swaps without actually banning them altogether.
Indeed, there are two fundamental problems with CDS securities, neither of which appears easy to solve:
- First, there is no watertight way of settling credit default swaps in case of default. The current method is by a mini-auction of the obligations on which the swaps are written to determine a settlement price. But this doesn’t work because the mini-auction relates to only a few million dollars of paper, whereas the credit default swaps in question may have a nominal value of billions – hence it’s in the interest of holders to play games at the auction and distort prices. This might not be a problem for non-participants in the CDS market, but it causes huge risks to the financial system – which in extreme cases, must be bailed out by taxpayers, as was the case with AIG.
- The second problem is that holders of credit default swaps have an incentive to push companies into bankruptcy. In the 1930s, short sales of stock (except on an “uptick”) were prohibited to prevent speculators from driving companies into bankruptcy. Well, the leverage available on CDS securities is much greater than on stock, and in the case of financial institutions, the amount of CDS outstanding is also much greater. That means speculators have correspondingly more incentive to load up on CDS and push a company into bankruptcy.
And it doesn’t end there: Since CDS holders also hold a company’s debt, their position in bankruptcy negotiations is a completely false one. This has already been a problem in the bankruptcies of the Canadian paper company Abitibi-Bowater and the shopping centre developer General Growth; it also caused problems in the massive General Motors Corp. reorganization. The stellar bonus prospects of the lucky employees at Goldman Sachs, in a year that has been thoroughly lousy for legitimate financial business, are an indication that we are not currently operating in a free market. Credit default swaps provide a means whereby Wall Street insiders can make huge amounts of money on corporate bankruptcies and disrupt the U.S. economy while doing so.
Until we can be absolutely sure that the poisons of the most-recent global financial bubble have been fully eradicated from the financial system, the safest measure is to ban those financial products like CDS that seem likely to cause the most trouble. Congresswoman Waters may go too far in wishing to ban credit default swaps altogether. However, I see no reason not to impose a five-year moratorium on the securities.
If, by 2014, the poisons of speculation have been removed from the world’s financial system, and a newly sober Wall Street can convince us that credit default swaps are both useful and sound, the derivative securities can then be reinstituted on a controlled basis, most likely restricted as swaps on “indices” of credit representing an entire sector or country, rather than on single companies alone. That would make it more difficult for CDS dealers to engage in their dangerous bankruptcy games. Perhaps Goldman Sachs employees can do without that third Porsche – at least or now …
Commercial Paper Falls Most Ever as ConEd Sells Bonds
The U.S. commercial paper market, the cheapest source of corporate cash, is shrinking at a record pace, raising the cost of capital for borrowers from Consolidated Edison Inc. to Kellogg Co.
The market for company debt due within nine months has plunged 28 percent since April 8 to $1.1 trillion, its longest and deepest slump, Federal Reserve data show. Investor demand for all but top-rated commercial paper, or CP, evaporated after September’s collapse of the $62.5 billion Reserve Primary Fund sparked a run on money-market accounts, and as the recession sapped companies’ need for short-term credit to expand.
Proposals from the U.S. Securities and Exchange Commission in June may worsen the slump by restricting money-market funds, which hold 40 percent of the paper, to only top-rated debt. That would force more companies to sell bonds that may cost an extra 8 percentage points in interest, or $8 million a year for every $100 million borrowed. “You’re not going to build that plant, you’re not going to expand, you’re not going to hire folks,” said Brian Kalish, a director at the Association for Financial Professionals, which represents 16,000 corporate treasurers, bankers and investors. “We’re creating this world of haves and have nots.”
Higher corporate interest costs may slow the economic recovery, Kalish said in an interview from his Bethesda, Maryland, office. The U.S. economy, after contracting 6.3 percent in the fourth quarter and 5.5 percent in the first, is forecast to start growing in the third, according to the median estimate of 72 economists surveyed by Bloomberg. or now, companies are willing to pay higher rates to ensure access to capital after watching credit dry up almost overnight as the subprime mortgage contagion spread in 2007 and 2008 and Lehman Brothers Holdings Inc. collapsed in September.
More than 60 companies sold bonds this year to repay commercial paper, including Consolidated Edison, Verizon Communications Inc. in New York and Kellogg, the 103-year-old maker of Keebler cookies and Rice Krispies cereal, according to data compiled by Bloomberg. Non-financial companies have sold $306 billion of investment-grade bonds this year, a record pace. “Treasurers aren’t sleeping at night because they don’t know if they can roll over commercial paper,” said Anthony J. Carfang, a partner at Treasury Strategies Inc, a Chicago consulting firm. “They’d rather lock in money for five years and pay a little more.”
Con Edison, New York City’s biggest utility, sold $750 million in 5- and 10-year notes on March 23 to yield as much as 6.67 percent, more than 6 percentage points above the average rate on commercial paper the company retired, according to a March 24 regulatory filing. Con Edison has cut its CP borrowings to $300 million, from $1 billion in March 2008. “We went through the problems last fall when things tightened considerably,” said James O’Brien, treasurer of New York-based Con Edison. “I don’t know that we would carry our paper balances as high as we did in the past.”
The higher costs have so far not affected the company’s capital expenditures, which were reduced by $200 million this year to $2.3 billion because of slower economic growth, he said. The commercial paper market was roiled when the Reserve Primary Fund, based in New York and opened by Bruce R. Bent’s Reserve Management Co. in 1971, fell below the standard $1 a share, or broke the buck, on Sept. 16 because of losses on Lehman debt a day after the investment bank declared bankruptcy. The fund held $785 million, or 1.3 percent of its assets, in Lehman CP and floating-rate notes.
Investors pulled $744 billion from prime money funds over the following three weeks, and so-called second-tier 30-day commercial paper rates doubled to 6.02 percent within two days. Corporations couldn’t issue short-term debt as the funds stopped buying new issues. The Reserve Fund is being liquidated. The SEC wants to make the $3.62 trillion money-market industry safer by preventing the funds from holding debt sold by second-tier companies, or those with investment-grade ratings one level below what is considered the top, such as Con Edison.
The Investment Company Institute, an industry trade group in Washington, proposed in March to prohibit money funds from purchasing second-tier debt, ranked A-2 by Standard & Poor’s, P- 2 by Moody’s Investors Service or F2 by Fitch Ratings. The group also said money funds should keep minimum levels of liquid assets on hand and hold debt with shorter average maturities -- changes that would limit demand for commercial paper. Ten funds that helped draft the proposals, including those run by Pittsburgh-based Federated Investors Inc. and New York- based JPMorgan Chase & Co., plan to adopt them voluntarily, said Jack Brennan, chairman of Vanguard Group Inc. in Valley Forge, Pennsylvania, and head of the panel that drafted the recommendations.
The SEC followed in June with similar recommendations that included even shorter maturity restrictions and higher minimum cash levels. In the year ended July 10, prime money funds reduced their commercial paper to 39 percent of all assets, from 45 percent, and increased Treasuries and other government-backed debt to 17 percent, from 6 percent, according to IMoneyNet Inc. in Westborough, Massachusetts. Commercial paper outstanding fell $39.7 billion, or 3.5 percent, during the week ended yesterday, its 14th straight decline, the Fed said today. At $1.097 trillion, the CP market is less than half its peak of $2.22 trillion in July 2007, with about 10 percent of it owned by the Fed, central bank data show.
The market for second-tier CP also has also shrunk by almost half to $44.1 billion since August 2007, with daily issuance down to $2.66 billion in June, the least in more than a decade and a third of what was sold a year earlier, Fed data show. “The CP market, particularly for 2-rated issuers, has been less reliable since the credit crisis occurred,” said Brad Fox, chairman of the National Association of Corporate Treasurers, who holds that job for supermarket chain Safeway Inc. in Pleasanton, California. Second-tier companies are “trying to increase their liquidity through alternate sources,” he said.
Markets may be coming back after the Federal Reserve and President Barack Obama pledged $12.8 trillion to pull the economy out of the worst calamity since the 1930s. All but $81.3 billion has flowed back into prime funds. “The commercial paper market has had many cycles over the years, so I think it will come back,” Fox said. “It’s an extremely attractive way for corporations to manage their cash flow requirements and daily reconciliations, by far the most efficient way to do it rather than borrow from your banks.”
Duke Energy Corp., owner of utilities in the Carolinas and the Midwest, has had less trouble issuing commercial paper than some issuers because it had a diversified buyer base, assistant treasurer Donna Council said in an interview. The Charlotte, North Carolina company, with second-tier ratings from S&P and Moody’s, sells directly to lenders that include insurance companies, banks and pension funds. Money funds own less than 1 percent of its commercial paper, Council said.
“Issuers need to focus on developing more diverse sources of funding, rather than just relying on an investor class that will run for cover when credit conditions deteriorate,” David Glocke, who helps manage $203 billion in money-fund assets as head of taxable money-market investments at Vanguard Group Inc. in Valley Forge, Pennsylvania. Kellogg raised $750 million on May 18 from a seven-year bond offering to repay commercial paper and “maintain liquidity in this difficult environment,” Chief Executive Officer David Mackay said at the Deutsche Bank Global Consumer & Food Retail Conference in Paris on June 9. Company officials declined to comment further.
The largest U.S. cereal maker, deemed second tier by the three biggest ratings companies, agreed to pay yields of 4.49 percent, almost four times higher than the 1.19 percent mean rate on its commercial paper, the Battle Creek, Michigan-based company said in a May 19 SEC filing. “Clearly we would be concerned about liquidity and about the ability of investors to buy our paper” if the SEC’s proposals are adopted, said Chuck Zebula, treasurer at Columbus, Ohio-based American Electric Power Co. Cutting second-tier borrowers off from federal aid and money-market funds “starts to disadvantage an important part of the economy,” he said.
American Electric, which delivers electricity to more than five million customers in 11 states, borrowed about $2 billion last fall under two revolving credit facilities to pay off about $400 million of commercial paper and bolster its cash reserves, according to the company. While the company is issuing commercial paper “actively,” the higher cost of capital has translated into higher electricity rates for customers, Zebula said.
Panel Probing Financial Crisis Has Wall Street Ties
Two appointees to a congressional panel investigating the financial crisis work for law firms that represent either Wall Street or its antagonists, raising concerns about the commission's impartiality and likely effectiveness. Congressional leaders earlier this week announced their choices for the 10-member Financial Crisis Inquiry Commission, a panel that has drawn comparisons to the Pecora Commission that investigated the stock-market crash of 1929. Its mission is to explore the causes of the crisis, as well as the collapse of specific Wall Street firms.
Some congressional observers are already predicting it could be bogged down by philosophical divides between its pro-consumer and pro-business wings. A nonpartisan watchdog group, the Center for Responsive Politics, released a report Friday saying that some appointees gave substantial amounts in campaign contributions, many of them to Democrats. The professional ties of some of its members also could be a complication, legal experts said. One Democratic appointee to the commission, lawyer Byron Georgiou of Nevada, works with a securities-litigation law firm, Coughlin Stoia Geller Rudman & Robbins LLP, which has filed suit on behalf of shareholders against subsidiaries of several Wall Street firms, including Bear Stearns, J.P. Morgan Chase & Co. and Morgan Stanley. Mr. Georgiou was a pick of Senate Majority Leader Harry Reid of Nevada.
A Republican appointee to the commission, former U.S. Rep. Bill Thomas of California, who was tapped by GOP congressional leaders, is a government-relations adviser for a law firm, Buchanan Ingersoll & Rooney PC, which represents several banking and financial-services clients. Stephen Gillers, an ethics expert at New York University, agreed that "both appointments could present problems." That could lead the commission to restrict the issues that some members take part in, which could impede the panel's work, he said. Mr. Gillers said a conflict doesn't mean either member would act improperly, only that an unacceptable risk could exist.
"Ideally, we should have a commission where no member is sidelined from any part of the inquiry. On the other hand, to get the most knowledgeable, experienced members, it may be necessary to accept some limitation," Mr. Gillers said. Mr. Georgiou is described as "of counsel" by his law firm, and functions as a liaison with institutional investors. He has worked closely with the commission's chairman, former California Treasurer Phil Angelides. Mr. Georgiou also is a business owner and an adviser to a Harvard Law School corporate-governance program. He had a long career in state government in California in addition to his work with plaintiff law firms, and has litigated on behalf of farm workers.
He referred requests for comment to Mr. Reid. Jim Manley, a spokesman for the Senate majority leader, noted that Mr. Georgiou had helped investors in Enron Corp. recover $7.5 billion. "It's precisely because he has in the past represented investors and shareholders victimized by financial fraud that we wanted Georgiou on the commission," Mr. Manley said. "We need a diversity of opinion on this commission to learn more about why our system failed us." A spokesman for Mr. Georgiou said he has no financial interest in the law firm's current cases against Wall Street companies and isn't an equity holder in the firm.
Mr. Thomas, the vice chairman of the commission, is known in Washington as the hard-charging former chairman of the House Ways and Means Committee, and a pro-business conservative. His title at Pittsburgh-based Buchanan Ingersoll is senior government-relations adviser. A spokeswoman for House Republican leader John Boehner of Ohio defended Mr. Thomas Friday, and suggested the commission might address such issues by adopting rules to reduce the potential for conflicts of interest. "Bill Thomas will bring the same impartiality, distinction and integrity to the Financial Crisis Commission that he brought to the halls of Congress," said spokeswoman Antonia Ferrier.
A spokeswoman for Mr. Thomas's firm described him as an independent consultant, and said he doesn't consult with the firm's financial-institution clients. Mr. Thomas didn't reply to an email message seeking comment.
The commission is armed with sweeping powers to gather information, including through judicially enforceable subpoenas. Its work will be closely watched as Congress labors to overhaul financial regulations. The commission is expected to provide a final report in December 2010.
State Tax Revenues at Record Low, Rockefeller Institute Finds
The anemic economy decimated state tax collections during the first three months of the year, according to a report released Friday by the Rockefeller Institute of Government. The drop in revenues was the steepest in the 46 years that quarterly data has been available. The blow to state coffers, which the report said appeared to worsen in the second quarter of the year, reflects the gravity of the recession and suggests the extent to which many states will probably have to resort to more spending cuts or tax increases to balance their budgets.
Over all, the report found that state tax collections dropped 11.7 percent in the first three months of 2009, compared with the same period last year. After adjusting for inflation, new changes in tax rates and other anomalies, the report found that tax revenues had declined in 47 of the 50 states in the quarter. All the major sources of state tax revenue — sales taxes, personal income taxes and corporate income taxes — took serious blows, the report found.
As more people lost their jobs, took pay cuts or worked fewer hours, personal income tax collections fell 17.5 percent in the quarter. Weak retail sales sent sales tax collections down 8.3 percent. Corporate income tax collections, which are often highly variable, declined 18.8 percent. States in the Far West had the largest declines in tax revenue, the report found. Arizona reported the largest drop in personal income tax collections, at 56.1 percent. Alaska experienced the largest overall drop in tax collections, 72 percent in the first quarter, and that was attributed to the state’s unusually high revenue collections in recent years because of high oil prices.
Local governments have fared better during the downturn. The report found that local tax collections rose 3.9 percent in the first quarter, largely because of increased property tax collections, which tend to be relatively stable and which are often based on assessments of value that do not keep pace with true market conditions. As bad as the first quarter was, the second quarter is shaping up to be even worse, the report said. Preliminary data for the first two months of the quarter, April and May, collected from 45 states, indicated that tax revenues declined by 20 percent compared with the same period last year.
That will force states — many of which are already raising taxes or fees, resorting to layoffs or furloughing employees — to come up with more ways to raise or save money. “The continuing sharp decline in revenues will likely force more unwanted choices for states in the months ahead,” wrote the report’s authors, Donald J. Boyd and Lucy Dadayan.
1.5 Million To Exhaust Unemployment Benefits By The End Of The Year
More than 500,000 Americans will exhaust their unemployment benefits by the end of September. And by the end of the year, the number will near 1.5 million, according to a report released Friday by the National Employment Law Project. "It is clear we are coming up on a tidal wave of need for more extensions and help from the federal government," said Andrew Stettner, NELP deputy director, in a statement. David Smith, spokesman for the Pennsylvania Department of Labor & Industry, told the Huffington Post that up to 25,000 people will exhaust their unemployment benefits this weekend alone. "It's the first large wave," he said.
In California, 177,759 will lose their benefits come January; in New York, the total is 131,893. More than 72,000 people in Michigan, where the unemployment rate hit 15.2 percent in June, will stop getting checks at the beginning of the year. The NELP praised the $787 billion stimulus package for covering the full cost of extended benefits for 2.8 million workers. But the report, noting the record number of long-term unemployed -- 4.4 million people have been out for 6 months or longer -- calls for an expansion of benefits for people who will run out in September.
"Never in the history of the unemployment insurance program have more workers been unemployed for such prolonged periods of time," Stettner said. "With an onslaught of exhaustions just around the corner, Americans still need robust benefits to keep their families and communities above water." Federal Reserve leaders forecast on Wednesday that they don't expect the economy to get its act together for another five or six years. Many economists are calling for additional stimulus spending by the government.
Boomers in Trouble: The Unheralded Economic Mega-Trend, Part 1
Thus far, analysis the financial collapse has been framed almost entirely in terms of money. All the research I’ve seen has delved into lending standards, securitization, inflation, interest rates, housing and the like. Yet underneath this veneer lies one larger, mega-trend that has driven all of these themes to a greater or lesser degree. It created one of the largest stock bull markets we’ve ever seen from 1982-2001. It helped drive the Bubbles in Tech stocks AND Housing. And now it will guide the coming collapse in stocks and consumer spending.
That trend is AGE: specifically the Boomer generation and its retirement. For the sake of simplicity, I will define a “Boomer” as someone born in the post war boom years from 1946-64. Using this data, today’s Boomers are between 45 and 63 years old. All told there are 76 million Americans in this age category. As of late 2008, Boomers:
- Comprised 38% of the US population
- Controlled $13 trillion (50%+) in US investable assets
- Controlled 50% of all discretionary income
- Purchased 43% of all new cars
- Accounted for 79% of all leisure travel spending
- Ate out four to five times a week
- Outspent younger generations by 2 to 1
You can see Boomers’ imprints on every major investment trend of the last 30 years whether it’s the rise in consumer spending, the Tech Boom, the Housing Boom, etc. These folks ARE the investing crowd or tide as far as money goes. Please understand, I am not BLAMING the Boomers for ANY of these developments. I am merely pointing out that these folks were the primary participants who drove ALL of these trends due to their ever-increasing economic clout. Between 1980 and 2007, Boomers were “the money” behind virtually every economic development in the US.
The Boomers first came of age in the ‘80s (they were 16-34 years old at the start of the decade). Boomers were the first generation to fully adopt credit cards: between 1980 and 1990, credit card spending increased more than five-fold while average household credit card balances quadrupled. They were also the first generation to see stocks as THE means of securing ones retirement: stock-based 401(k)s were introduced in 1983.
By the time the ‘90s rolled around, Boomers had completely entered the workforce (ages 26-44). Thanks to easy credit and cheap goods from China (formal trade with the US opened on 1971), the Boomers operated under the illusion they were getting richer almost every year, when in reality they were spending their and their parents’ savings. Having seen stocks rise almost continuously from 1982-1990, Boomers were only too happy to take over own investment portfolios with the introduction of low cost online brokerage accounts. In 1950, 10% of US adults owned a stock. By the end of the ‘90s more than four in ten American adults were investing in the market. This massive influx of money helped, in part, to create the Tech Bubble.
By the end of the 20th century, Boomers were ages 35-53. They had truly come into their own as THE major wealth demographic, making most of the income and spending most of the money in the US. Having accrued debt for 30+ years without trouble and seen housing prices rise almost continuously during their lifetimes, they began speculating in homes and other higher value assets. This trend was fueled in large by Wall Street’s securitization and the dramatic drop in lending standards in the US. Which brings us to last year.
In 2008, the Boomer generation was already in the process of or at least beginning to consider retiring. In the decade from 1992-2003, more than 70% of Boomers had seen their wealth increase by more than half. An additional 20% of them saw their wealth increase better than 25%. And they were set to inherit some $7.2 trillion in wealth from their parents over the coming decades. Then the Financial Crisis hit and the Boomers got crushed.
Last year’s collapse in housing and stocks wiped out $11 trillion in household net worth in the US. That’s roughly 18% of total US household wealth at that time. Put another way, the Boomers just lost nearly 1/5th of their wealth in a single year (the same goes for they money they were set to inherit from their parents which was largely tied up in stocks and real estate). Boomer wealth continues to plunge: Commentators celebrated the fact that home prices ONLY fell another 0.6% in June, but none of them mentioned that this represents another $100 billion in US wealth gone.
Bottom line: The 20+ year expansion in Boomer came to a screeching halt last year. We’ve now entered what may in fact be the greatest period of wealth destruction in American history. The effects this will have on Boomer spending, investing, and the like will completely change the investing and economic landscape for the US REGARDLESS of what the Fed, Obama, or any other economic/ political authority attempts.
Boomers in Trouble: The Unheralded Economic Mega-Trend, Part 2
Part 2Yesterday we discussed the Boomer generation and how they’ve driven every economic/ financial development of the last 30+ years. Today, we’re going to analyze how the Financial Crisis has changed Boomer sentiment, spending behavior, and investment strategies. Ben Bernanke, Barack Obama, and the rest of the government can implement whatever policies they like, but if the Boomers aren’t buying it… it ain’t gonna work. And right now, the Boomers are FED UP.
Let’s consider where Boomers sat before the financial crisis occurred. In early 2008, Boomers:
- Controlled $13 trillion (50%+) in US investable assets
- Controlled 50% of all discretionary income
- Purchased 43% of all new cars
- Accounted for 79% of all leisure travel spending
- Ate out four to five times a week
In simple terms, Boomers were THE money flow for the US. In light of this, for the US economy to get back on track any time soon (whether it’s through Stimulus, job growth, etc), Boomers need to participate in a big way. The only problem is that they won’t.
During the recession in the early ‘80s, Boomers were just entering the work force (ages 16-34). The market demographic was technically still in its infancy and growing in economic clout. In the recession in the early ‘90s, Boomers were ages 26-44. Now controlling most of the wealth in the US they could take a hit and come right back buying more stuff, using their credit cards, and investing in stocks and other investments.
Moreover, in the brief recession in the early ‘00s, Boomers were ages 36-54. The younger Boomers were just coming into their own, looking to buy homes, advance their careers, etc. Which brings us to today… on the verge of 2010… when Boomers will be ages 46-64 and focusing on one thing: RETIREMENT. Having just lost 18% of their net worth, potentially lost their jobs, and with record amounts of debt (one in five of Boomers owe more than $50,000 in non-mortgage debt), Boomers are no longer looking for growth or gains, they’re looking for security. Dreams of retirement are no longer soon to be realized (if they will be realized at all). And several key myths have been broken:
- Myth #1: You can’t lose money with real estate
- Myth #2: Stocks ALWAYS offer the best gains in terms of risk/reward.
- Myth #3: Social security and medicare will work
Indeed, if one were to describe the Boomer market demographic in one word, it’d be “disillusioned.” And you can see this disillusionment playing out in the financial markets. First and foremost, many commentators make a big deal about the S&P 500 clearing 950… well that simply brings stocks back to where they were in July 1997. Boomers (who then were largely in their 40s then) have essentially seen NO GROWTH in their 401(k)s in 12 years. That’s simply astounding when you consider that 1997-2007 saw two of the largest investment bubbles in the history of mankind.
Boomers aren’t too happy about all of this and have begun looking for new sources of investment advice. According to the Financial Times, the number of inquiries on changing asset managers rose 40% during the first five months of 2009. Indeed, Charles Schwab reports 69% of the firm’s new clients said they jumped ship from full-service brokerage firms to independent advisor shops because they had lost trust in their previous firm.
Boomers are also giving up hopes for retirement and instead are taking on more work. The (American Association of Retirement Professionals) reports that 24% of Boomers have postponed retirement. David Rosenberg of Gluskin Sheff adds that the 55+ age demographic is the only segment of the US population that is gaining jobs. Boomers are also spending a lot less than they used to. The afore-mentioned AARP survey shows that 56% of Boomers are postponing a major purchase. Unit sales of sailboats is down a third in the first five months of 2009. Year over year, auto-sales for May 2009 were down in double digits ranging from 21% (Ford) to 38% (Toyota); remember Boomers accounted for 43% of purchases of new cars in 2007.
This slowdown in spending pertains to just about any other high-end part of the retail market. Wine sales for bottles priced above $25 are down 12% year over year. Swiss watches are down 24%, The list goes on and on. Folks, we are experiencing seismic shifts in consumer spending patterns. The US consumer (the Boomer) is NOT coming back. Boomers are trying to simply get by with less, working longer than they’d hoped, spending less, and saving more. These patterns are here to stay (remember Boomers outspent younger generations by 2-to-1 during the last decade) until someone implements changes that create sustainable job growth (an ultimately wealth) in the US.
After the Foreclosure: Downsizing and Doubling Up
Moving in with roommates and family: It's what happens to folks who lose their homes, and it ain't pretty
Downsizing their living spaces and doubling up with roommates and relatives: The housing collapse has left many victims of foreclosure looking for a place to call home. For many investors, the once-solid decision to invest in real estate has turned into a financial blunder, leaving the market awash with extra inventory and further depressing prices. In 2006, 4 out of every 10 homes sold were investments or second homes, according to Alex Charfen, CEO of the Distressed Property Institute, an Austin (Tex.) company that teaches real estate agents how to deal with foreclosed properties. In the ensuing crash, that 40% now represents a wave of foreclosures by lenders.
Chris Henning, 66, actually lived in her investment property, a $150,000 South Palm Beach (Fla.) condo overlooking the Atlantic. Despite a solid job and good pay in the 1990s, Henning has refinanced her condo three times since 2002. During the boom, Henning subscribed to the conventional wisdom that housing prices couldn't slide. "Looking back, I thought, 'How naive could I have been?' " she says. Now, after her boyfriend's death and a lack of revenue from a cookbook she co-authored, Henning is unemployed and her condo is on the short-sale block. In the case of short sales, lenders shave money off the loan balance in order to more quickly sell the house and recoup debt money.
"So, here I am, after having a successful career making a six-figure income," Henning says on the telephone from her smaller, cheaper condo in Cocoa Beach. To cover costs, Henning is renting out the Palm Beach property until a buyer materializes. Still, she hasn't found a job—and if she can't secure one soon, she plans to move in with her son and his family to cut costs. "I would much rather help people, vs. them helping me!" she says.
Henning is part of a larger trend of moving in with others that has softened the rental market, which was once expected to strengthen during the wave of foreclosures. According to a survey by Rent.com, an eBay unit that lists apartment rentals, at 40 large property owners representing more than 850,000 units across the country, almost half the vacancies are the result of people doubling up to save money. Bridge Property & Asset Management, a division of Salt Lake City-based Bridge Investment Group, manages more than 9,000 units across nine states and has seen one-bedroom vacancies skyrocket as more renters seek two- and three-bedroom apartments.
"I certainly believe that many people are now moving in with someone else, whether a family member or not, and that this is having a significant effect on the demand for apartment residences," Mark Obrinsky, chief economist and vice-president of research at the National Multi Housing Council, said in a news release. The NMHC is a Washington-based rental advocacy group. Henning would have a few additional months of rent money if she had gotten the few thousand dollars she expected to bring in from selling off her belongings. In the end, she pulled in $355 for two vanloads of furniture and collectibles, accumulated over the past 40 years. Downsizing to the condo meant divesting herself of a lot of her possessions, including a cane rocking chair from the '20s and a signed Steuben art glass, a popular antique decoration. Henning says she sold her belongings to an estate liquidator but isn't sure she was compensated fairly. "I didn't ask enough questions because I was overwhelmed," she said.
Like Henning, many people going through foreclosure have to leave behind belongings or sell them on the cheap. Real estate agents typically recommend their clients find another residence before foreclosure filings adversely affect their credit to the point that they can't rent. "Clients are doing the right thing [trying] to move out as quickly as they can," says Valerie Torelli of Torelli Realty in Orange County, Calif., the U.S.'s foreclosure epicenter. California had some 500,000 foreclosures in 2008, 115,000 more than Florida, second on the list. In her work, Torelli sees lots littered with furniture and, sometimes, pets still locked in their owner's former home. Many people leave their belongings because they can't afford to move them, she says.
Charlotte Jensen and her husband, Dennis, of Glen Allen, Va., declared bankruptcy in May 2008, about a year after they borrowed against the house to consolidate debt. That added an extra $900 onto their monthly mortgage payment. Almost immediately, Jensen says, the housing bill became too much to manage and they were forced to move to an apartment. "Truth be told, we should have never been allowed to refinance," she says. "It put all our eggs in one basket, and it was a very expensive basket we couldn't undo." The couple agonized over the decision to sell their grill and riding mower, two signature representations of homeownership for many people. "It was like some big symbol of our failure," says Jensen.
The Jensens enrolled their 8-year-old son in a new school and say they try to shield him from the reality of the family's bleak financial situation. To protect herself and her husband from the raw emotions that bleed into discussions about economic hardships, Charlotte Jensen says she began referring to her family as Jensen Inc. "As you can imagine, we had to make some very painful decisions," she says. "It is an approach I still use, and I am convinced it has kept my marriage together." Jensen admits that moving in with her father would help Jensen Inc.'s bottom line, but she's concerned about her son and his schooling. "He has two smart parents with good careers who made poor decisions," she says. "It is not fair or healthy to him to shuffle him around." There's also the issue of their two golden retrievers. Her father extended an open invitation for her family, but not to the pooches. She hopes to avoid a merger of households,
Making the transition from ownership to renting—and the new strictures that can bring—can be tough. For example, the foreclosure crisis is also spawning a severe abandoned pet problem in many areas. "No one is going to rent with three dogs," says Torelli, who often has to put pets up for adoption after they've been abandoned by foreclosure victims. The Arizona Humane Society, which covers the hard-hit Phoenix-Scottsdale metro area, saw a 100% increase in abandoned pet calls between 2007 and 2008, and is on pace to match the 2008 numbers.
Animal abandonment falls under the animal cruelty umbrella, and 3,046 of the 7,979 cruelty calls last year were for abandonment, society spokeswoman Kimberly Searles says. While not every abandonment call is tied to foreclosure, "you can tie the numbers in," Searles says. "There's a correlation, obviously." In August 2008, California amended its animal abandonment law to require that anyone who finds a discarded animal in a foreclosed property report the pet to animal control.
On the other side of a pinched homeowner, Jason Stevenson, 27, and his girlfriend Kristin Garrison, 28, of Las Vegas, have been relatively lucky. On May 28, the bank foreclosed on their landlord's single-family house, which they were renting month-to-month. The couple was waiting to close on a short-sale property of their own, but by mid-June the landlord kicked them out and they were essentially homeless—and still waiting to learn whether the short sale will happen. "We started packing boxes with nowhere to go," Stevenson says. With the only other option being the street, the couple's realtor—who is helping them purchase the short-sale—is letting them stay for free at her former home, which she is now trying to sell.
White House foreclosure plan a bust so far
The Obama administration’s $50 billion program to curb foreclosures isn’t working, and the White House knows it.
Administration officials blame the mortgage servicers charged with carrying out the mortgage modifications and refinancing under the federal program. Many of their Democratic allies on Capitol Hill back them up, but others are criticizing the White House for fumbling the execution. Whatever the reason, the program hasn’t stopped the rising tide of foreclosures: Experts predict that at least another 2 million homes will be lost this year, and the administration’s plan has so far reached only about 160,000 of the 3 million to 4 million homes it was supposed to protect over the next three years.
That’s bad news for the economy — and bad news for the Democrats.
The Democrats’ political and policy fortunes rest on their ability to persuade voters that they’re fixing the economy. But experts say that rising foreclosures will only exacerbate the nation’s economic woes, pushing down home prices, slashing state and local tax revenues and imperiling consumer confidence. “Everybody understands that getting out of this broader crisis requires that we stabilize our housing market and stem the tide of foreclosures,” Senate Banking Chairman Chris Dodd (D-Conn.) said in a hearing Thursday. But in unusually harsh words for a Democrat, Dodd said that the Obama administration’s progress in stopping foreclosures has been “disgraceful” so far.
“It’s just hard to explain to the working families in America how it is we could move so fast with extraordinarily complicated deals with the huge financial institutions, and we are moving so incredibly slowly, mired in paperwork, in rules, in talking to banks back home,” said Sen. Jeff Merkley (D-Ore.).
The foreclosure listing service RealtyTrac Inc. reported Thursday that the number of homeowners in foreclosure in the first six months of 2009 was up 15 percent from the same time period a year ago.
The Center for Responsible Lending, a nonpartisan research and policy organization, projects at least 2.4 million additional foreclosure starts this year, causing nearly 70 million surrounding households to lose a combined $500 billion in property value.
The group estimates there will be 9 million foreclosures through the end of 2012, at the cost of $2 trillion in lower home values — enough to pay for the House Democrats’ health care plan, twice.
The White House realizes the stakes. Treasury Secretary Timothy Geithner and Housing and Urban Development Secretary Shaun Donovan took the 27 participating servicers to task in a July 9 letter to their CEOs, telling them to add more staff, improve training, create an appeal path for borrowers dissatisfied with the service and fulfill other measures to do more modifications, better.
The servicers were told to designate a liaison with the administration who will meet with Treasury and HUD on July 28. The servicers have to tell the administration by July 23 what specific steps they’re taking to improve performance.
In addition, the administration announced that next month it will start publishing company-by-company results, including how many modifications each servicer has made and how quickly. At the least, that will give policymakers ammunition to shame recalcitrant lenders.
“We think that that type of disclosure, servicer-by-servicer, will be important to spurring greater activity on their part,” Herbert Allison, assistant treasury secretary for financial stability, told Dodd’s committee.
But assurances that the administration is paying attention were not enough to satisfy senators on either sides of the aisle — and Republicans are ready to make the case that slow progress on the foreclosure front is just one more example of the Obama administration overpromising and overspending.
“I see these extravagant promises in just about everything that happens here, ... and then I see this terrible execution,” said Sen. Mike Johanns (R-Neb.). “The stimulus money isn’t getting out, you’re not getting on top of the foreclosure numbers, you know, and that has nothing to do with what you inherited. Execution is what you do every day.”
“I’m not happy where we are at, and I think there is a lot more to be done,” Republican Sen. Mel Martinez, whose home state of Florida has the third-highest foreclosure rate in the country, told the Treasury and HUD officials there to testify.
“What’s your Plan B?” he asked later.
That’s exactly what some outside experts are asking; they say that the situation requires more drastic action than the modifications the White House is pursuing.
Many housing advocates argue that Obama’s plan was fatally flawed from the start because Congress refused to pass a controversial measure to allow bankruptcy judges to modify primary residential mortgages — recommended by the White House as the one stick in its plan, which is chock-full of carrots for servicers and borrowers.
“You have got to have some leverage, something to hold people’s feet to the fire,” said CRL spokeswoman Kathleen Day. “If you tell the industry this [judge] can do the loan mod if you don’t, that is going to get their attention.”
Andrew Jakabovics, a housing expert with the left-leaning Center for American Progress, believes revisiting bankruptcy is a political nonstarter. But he says there are other sticks the administration could consider, including taking away the tax advantage enjoyed by the trusts that hold mortgage-backed securities if the investors refuse to allow modifications.
“That’s a pretty big stick,” he said.
And while it was the Senate that killed the bankruptcy measure, the White House took flak for not spending a single cent of its political capital on getting it through the upper chamber.
Economist Mark Zandi — whose advice congressional Democrats relied upon during the stimulus debate — has argued that the Obama plan was too complicated. His recommendation for a Plan B: a simple program that covers any homeowner who took out a mortgage between 2005 and 2008 that was clearly unaffordable when it was made, with straightforward criteria to determine that.
Zandi and others argue that the modifications should focus on reducing struggling homeowners’ outstanding principal on homes that have lost much of their value. A major criticism of the Obama housing plan was that it failed to aggressively encourage principal write-downs, focusing instead on reducing homeowners’ monthly payments, largely through interest rate cuts.
But other experts say there’s not a whole lot the administration can do directly on the housing front anymore — and that might be the worst news of all for the White House.
Nicolas Retsinas, director of Harvard University’s Joint Center for Housing Studies, said that while the Obama plan was well-crafted for the issues at hand in February, the cause of foreclosures has changed. Now they are less about the creative, variable-rate loans that buried many homeowners and more about an unemployment rate that has even those with fixed-rate loans struggling to keep up.
“The issues have changed, and in some ways the solutions haven’t kept up with the problems,” Retsinas said. “The most effective intervention would be to put people back to work.”
Housing Finance Debate: A Return to ARMs?
They were one of the scourges of the housing crisis, but are adjustable-rate mortgages on the verge of a comeback? It depends on whom you ask. Last week homebuilder Toll Brothers announced that, in certain housing markets, it would offer its homebuyers ARMs featuring a 3.75 percent interest rate for the first seven years of the loan and a reset rate capped at 8.75 percent for loans at or below $417,000. To qualify, home buyers must have credit scores of at least 720.
Don Salmon, the chief executive of TBI Mortgage Company, Toll Brothers' mortgage division, told ABCNews.com that on the weekend following the announcement, the homebuilder saw a spike in interest that's unusual for the typically slow summer season. Other homebuilders and lenders, he said, might follow Toll Brothers' lead. "If the product makes sense to the consumers, then consumers will demand it (and) then the lender will offer it," he said. But others, like Bankrate.com senior financial analyst Greg McBride, are skeptical.
"People have been scared away from adjustable-rate mortgages and at the same time, the factors that led them to pick adjustable rate mortgages in the first place have dissipated," McBride said. As of July 10, roughly 5 percent of borrowers chose ARMs, according to the latest data from the Mortgage Bankers Association. That represents an uptick from earlier this year but it's still far from the highs last seen in the summer of 2007: At that time, more than one in five borrowers chose adjustable-rate loans.
Toll Brothers' rate notwithstanding, McBride said the average interest rate for 7-year ARMs is 5.55 percent -- just 0.2 percentage points lower than the average rate for a 30-year fixed loan. "The value for the overwhelming majority of homeowners is in fixed-rate mortgages," he said. Adjustable-rate mortgages, McBride said, were a niche product that became popular during the housing boom as buyers used them as an "affordability crutch" -- in other words, buyers who might not have been able to afford the rates on a traditional, 30-year-fixed mortgage could qualify for with the lower initial rates on adjustable loans.
While the housing market was strong, many homeowners with ARMs figured they could sell their homes before their interest rates reset or refinance into fixed-rate home loans. Those assumptions often proved false and defaults by adjustable-rate mortgage homeowners -- particularly for homeowners with bad credit who took out subprime adjustable-rate loans -- played a key role in driving foreclosures to record highs.
McBride said that a homebuyer today would be foolish to assume they could find a bank to refinance them out of an ARM. And taking the bet that you'd be able to sell your home before the reset requires a "cast iron stomach," he said. Banks and investors who buys home loans from lenders aren't keen on ARMs either, McBride said. "The secondary market been dead for a couple of years," he said. Salmon says that Toll Brothers, however, won't have trouble selling its ARMs. The delinquency rate for Toll Brothers borrowers, he said, is less than 1.7 percent. The homebuilders' underwriting standards -- including the 720 credit score minimum -- are prudent, Salmon said.
"We have a very strong buyer profile and our delinquencies historically are lower than the market, therefore our product is more attractive to banks," he said. There may be more than just buyer stats working in Toll Brothers' favor. McBride said that since Toll Brothers is a homebuilder and a lender, they have a flexibility that traditional lenders don't -- the costs of offering ARMs could be offset by the increases in home sales. Still, David Ledford, the senior vice president for housing finance and land development at the National Association of Homebuilders, said that as of now, most other homebuilders haven't followed suit.
Instead, to combat the continued lack of demand from would-be homebuyers, other builders are subsidizing fixed-rate mortgages to offer lower rates, he said.
Some homebuilders have gone a few steps further, offering pre-paid homeowner association dues, free parking, free flat-screen televisions or new furniture. Such incentives have become more common among homebuilders because, unlike many individual home sellers, the builders stand to lose more money the longer their homes go unsold, Scott Nagel, the vice president of real estate operations for the online realty company Redfin, recently told ABCNews.com.
"Most of the time, they've got their costs sunk," he said. "They're making payments on the construction loans that they used to build those condos and those homes. Every month they're not selling, it's another month it's eating into their profit margin." Toll Brothers, which finds that many of its buyers are existing homeowners, offers some help in selling their old homes. In some communities, they assist in making old homes look more attractive to buyers by eliminating clutter, paint touch-ups and other small fixes. Toll Brothers also offers guidance on marketing your old home. "We do many things to help people sell their homes," Salmon said, "because we know that that eases the path to settling in our home."
Morgan Stanley to Get Top Underwriting Role on AIG Share Sales
Morgan Stanley, the world’s third- biggest stock underwriter, won a lead role from the Federal Reserve Bank of New York in arranging initial public offerings of American International Group Inc. units. Morgan Stanley, which is advising the New York Fed on its bailout of AIG, will reap fees from the IPO’s and from sales of other units to buyers, according to documents the agency posted on its Web site yesterday. The bank gets an initial $4 million payment and $2.5 million a quarter for its advisory role.
The New York Fed extended an $85 billion credit line to AIG in September to rescue the insurer and avoid a financial-system collapse. AIG agreed to sell businesses to repay a federal bailout that has swelled to $182.5 billion. The firm plans to hold public offerings for its two largest non-U.S. life units. “The New York Fed shall, to the extent that it has the power or authority to do so in connection with a specific transaction, retain or appoint Morgan Stanley to act as global coordinator and lead book-running manager, as applicable, in connection with any such IPO,” according to the Oct. 16 document on Morgan Stanley letterhead, marked confidential.
AIG has struck deals to raise more than $6.7 billion since the rescue, finding buyers for assets including a U.S. auto insurer, an equipment guarantor and a Japanese office tower. The IPO fees may be the most lucrative part of Morgan Stanley’s arrangement. The bank may earn about $72 million on the public listing, for example, of AIG’s American International Assurance, an Asian insurer to be listed in Hong Kong, according to calculations based on figures disclosed by the New York Fed. Mark Lake, a Morgan Stanley spokesman, declined to comment.
The IPO, slated to take place next year, may raise as much as $8 billion, people familiar with the matter said in May. Deals of that size in Hong Kong have typically yielded their underwriters a total of 2.5 percent of the IPO, and Morgan Stanley, as co-global coordinator, might get about 36 percent of that amount, according to the Fed document. Deutsche Bank AG was selected as AIA’s other global coordinator. Morgan Stanley is entitled to transaction fees if any of 11 major AIG business units are sold. For instance, if AIG were to sell its American Life Insurance Co. unit for $11 billion, Morgan Stanley would earn about $23 million.
MetLife Inc. offered $11.2 billion for the unit earlier this year, people familiar with the bid said in February. The talks haven’t led to a transaction yet, and AIG announced plans this week to sell shares of Alico to the public.
Morgan Stanley will also bill the New York Fed for expenses including travel costs and outside advisers, the bank said, and must get permission for expenses beyond a total of $5 million.
JPMorgan, U.S. Lenders Lean on Investment Banking for Profits
Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc., the three biggest U.S. lenders, reported a total of $10.2 billion in profits for the second quarter that relied on investment banking and asset sales to counter growing losses on consumer loans. Goldman Sachs Group Inc., which gets almost none of its revenue from retail consumer banking, had a record quarter, reporting earnings of $3.44 billion.
Nine months after accepting more than $200 billion in government rescue funds aimed at preventing a collapse of the financial system, U.S. banks are girding for more losses from mortgages, credit cards and other businesses linked to consumers, while their underwriting and trading units generate revenue at or near all-time highs. “Capital-markets businesses are going very well right now, and Goldman Sachs is the best of the best,” said Paul Miller, an analyst with FBR Capital Markets in Arlington, Virginia. “But the consumer is still struggling out there and anybody with a lot of consumer exposure is struggling along with it.”
Profit at JPMorgan, the second-biggest U.S. bank, was $2.72 billion, or 28 cents a share, and increased for the first time since 2007 on record fees from trading and stock and bond underwriting. The bank ranks No. 1 in underwriting stocks globally and in managing bonds sold in the U.S., according to data compiled by Bloomberg. Chief Executive Officer Jamie Dimon, 53, predicted more losses on consumer loans and said credit cards probably wouldn’t be profitable next year. The lender boosted its loan loss reserve by $2 billion in the quarter, adding to the $28 billion set aside to cover credit losses as of March 31.
Bank of America, No. 1 in the U.S. in deposits and assets, reported net income of $3.22 billion, or 33 cents a share. Earnings at the unit that includes trading of bonds, equities and currencies more than quadrupled to $1.38 billion on improved credit markets. Chief Executive Office Kenneth Lewis, 62, predicted the weak economy would persist into next year, and the Charlotte, North Carolina-based company said debts it no longer expects to be repaid jumped 25 percent to $8.7 billion. The credit-card unit’s $1.62 billion loss compared with a $582 million profit last year.
At Citigroup, the $4.28 billion second-quarter profit was the result of $6.7 billion the New York-based company booked on the sale of a controlling stake in its Smith Barney brokerage. Without that money, the company lost 62 cents a share as costs for bad loans jumped 75 percent to $12.2 billion. Consumer-banking profits at Citigroup tumbled 78 percent, while profit from businesses linked to securities and investment banking increased 13 percent, the company said.
“Our most significant challenge now remains consumer credit,” Chief Executive Officer Vikram Pandit, 52, said in a statement. “Losses in our consumer businesses have been growing for some time, but we see some positive signs of moderation in those loss trends.” Pandit said in a June 15 speech in Detroit that he expects slow U.S. economic growth in coming years because Americans are saving more and borrowing less. That means Citigroup must use profits from its global banking network, especially in emerging markets, to restore its health, he said.
Goldman Sachs’s record net income was driven by fixed- income, currencies and commodities, the company’s biggest unit. Revenue from the business totaled a record $6.8 billion in the second quarter, which compared with $6.56 billion in the first quarter and $2.38 billion in last year’s second quarter. “We also continue to benefit from having virtually no direct exposure to the retail consumer business,” Goldman Sachs Chief Financial Officer David Viniar, 53, told analysts on July 14. JPMorgan and Goldman Sachs were among 10 lenders that repaid a total of $68 billion in TARP funds last month.
Citigroup and Bank of America are the two biggest banks yet to repay government rescue funds from the Troubled Asset Relief Program. Both received $45 billion. The U.S. continues to back billions of debt sold by the companies through the Federal Deposit Insurance Corp.’s loan guarantee program. “The government is out there throwing a lot of money behind this whole thing, and if the government ever decides to pull out of this thing, a lot of these Wall Street earnings will go away very quickly,” Miller at FBR Capital said.
CIT Group’s Banks Said to Weigh Bankruptcy Financing
CIT Group Inc. advisers, including JPMorgan Chase & Co. and Morgan Stanley, are discussing options for funding the lender if it enters bankruptcy, people with knowledge of the matter said. JPMorgan and Morgan Stanley are talking with other banks about a debtor-in-possession loan, used to fund a company’s operations after it seeks court protection from creditors, according to the people, who declined to be identified because the negotiations are private. CIT and its advisers, including Morgan Stanley and Evercore Partners Inc., are also trying to arrange rescue financing to avert bankruptcy, they said.
CIT may need as much as $6 billion to avoid filing for bankruptcy protection after the U.S. wouldn’t give the firm a second bailout, according to CreditSights Inc. A failure of CIT, which has almost $76 billion in assets, would be the biggest bank collapse by that measure since regulators seized Washington Mutual Inc. in September. “This thing doesn’t have a future,” CreditSights analyst David Hendler said yesterday in a telephone interview. “Anything is possible but the problem is not solvable anymore. They’re just in denial it’s finally over,” the New York-based analyst said referring to the rescue financing.
The century-old lender that finances about 1 million businesses from Dunkin’ Brands Inc. to Eddie Bauer Holdings Inc. is “continuing to evaluate alternatives” after failing to convince the U.S. government to back its debt, the New York- based company said July 16 in a statement. CIT, which has reported $3 billion of losses in the last eight quarters, received $2.33 billion in funds from the U.S. Treasury in December and hasn’t been given access to the Federal Deposit Insurance Corp.’s debt-guarantee program.
Pacific Investment Management Co., CIT’s largest bondholder based on regulatory filings, was to host a call this week to discuss a debt exchange, and bondholders were considering hiring financial and legal advisers, said a person familiar with the discussions. The company hasn’t proposed an exchange offer. CIT bondholders hired law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP and investment bank Houlihan Lokey Howard & Zukin to advise them, according to a person familiar with the matter who declined to be identified.
Thomas Lauria, a lawyer at White & Case LLP, said in an e- mail that a group of CIT creditors he represents offered to provide $3 billion in new loans to bridge CIT to an out-of-court restructuring or an orderly bankruptcy. He said the group was waiting for a response from CIT and didn’t name its members. Lauria was the lawyer who represented Indiana pension funds that fought the sale of most of Chrysler LLC’s assets to a group including Fiat SpA, the U.S. and Canadian governments and a United Auto Workers benefit trust.
Bondholders held calls this week to discuss whether to swap some claims for equity to reduce indebtedness, according to a person familiar with the situation. CIT’s $300 million of 6.875 percent notes due in November rose 7.5 cents on the dollar to 64 cents yesterday, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Shares rose 29 cents, or 71 percent, to 70 cents in composite trading on the New York Stock Exchange.
“It seems CIT was ill-prepared for this moment, so they’re scrambling,” said Scott Peltz, a managing director focused on restructuring at consulting firm RSM McGladrey Inc. “Unless you have all these bondholders holding hands and singing Kumbaya, I think they’re too far behind the eight ball to avoid filing.” Another route for CIT to raise cash -- selling parts of its business -- might run afoul of bankruptcy laws. Asset sales need to be carefully handled, because if CIT later winds up in bankruptcy the purchaser could be accused of having robbed creditors of value due to them, lawyers said.
“A buyer will be liable if it buys assets at a steep discount,” said Michael Cook, a lawyer with Schulte Roth & Zabel LLP in New York. “That’s why skittish buyers tell the seller to go into Chapter 11 so they can buy the assets with the insurance of a court order blessing the sale.” Even if the buyer does pay “reasonably equivalent value” outside of bankruptcy, unscrupulous creditors may sue to set aside the sale as a fraudulent “to squeeze more money out of the buyer,” he said.
Roasted vampire squid turns out to be dish of the day on Wall Street
It ought to have been a moment of triumph for Goldman Sachs, the most feared, revered and envied of Wall Street's investment banks. Long synonymous with power and wealth, the firm delivered the biggest, healthiest profit since it was established in a one-room Manhattan office by a German immigrant, Marcus Goldman, in 1869. But hunched over their computer screens from dawn until late at night, Goldman's elite bankers were unprepared for the ferocity of the looming backlash.
Over the three months to June, Goldman clocked up $3.44bn of profits, amounting to $38m a day or $1.58m an hour. Making money has suddenly become easier. Under Goldman's policy of dedicating half its revenue to staff pay, the firm's 29,400 employees can expect average take-home packages of between $700,000 and $900,000 for the year if the present level of prosperity continues. Not everybody is impressed - far from it. In Congress, senators fulminated against the divide between two Americas: Wall Street trumpeting its return to prosperity while citizens on the high street lose jobs and homes. A leading US union, the Service Employees International Union, accused Goldman of emerging from the credit crunch "unrepentant and unreformed".
An article by writer Matt Taibbi in Rolling Stone magazine compared Goldman Sachs to a parasitic vampire squid squeezing the life out of humanity. The New York Times said that Goldman employees were known in New York as the "bandits of Broad Street". The rightwing television host Bill O'Reilly referred to Goldman as "swine". And the Nobel Prize-winning economist Paul Krugman weighed in, declaring that what the bank does is "bad for America". "Goldman made profits by playing the rest of us for suckers," wrote Krugman, pointing out that the firm made a fortune in the run-up to the financial crisis by betting on a collapse in the sub-prime mortgage market.
In Westminster, 33 MPs have signed an early day motion demanding a 90% tax on bankers' bonuses that are worth more than 15% of salary. Across the English Channel, President Nicolas Sarkozy's top adviser, Henri Guaino, declared that the bank had posed a "gigantic" moral problem: "Goldman Sachs wouldn't exist had American taxpayers not come to its aid. To be drowning in dollars and bonus money today is utterly scandalous."
Goldman's critics fall into two camps. There are those who object to the sheer scale of its profits, on the grounds that such sums can only be made by taking irresponsible risks bound to end in financial disaster. And there are those who, while welcoming its return to fiscal health, are disgusted that Goldman still insists on giving 49% of its revenue to already well-off staff. This, after all, was the bank that handed pay packets of more than $20m to 50 of its employees before the credit crunch began to bite three years ago. Why, asked former New York governor Eliot Spitzer, could Goldman not reinvest the proceeds in job-creating industries such as green energy or biotechnology?
Most galling of all is that, in the eyes of many, the money has been made with the help of the US government. In the dying days of the Bush administration, Goldman was one of nine top banks ordered by the US Treasury to accept bailout money whether they needed it or not. Robert Borosage, president of the left-leaning Campaign for America's Future, says Goldman has been crucially bolstered by the US government's implicit message that it is too big to fail: "These guys are going back to their old games with a new sense of empowerment thanks to the Federal Reserve ultimately back-stopping them."
Within Goldman, there is disbelief at the avalanche of hatred. A spokesman describes many of the attacks on Goldman as "unjustified and hideously distorted". The bank points out that it pays a US tax rate of 31% on its earnings - so the public get a third of its profits. Its success, argues the firm, helps stimulate economic activity. "The government and other banks want us to engage fully and provide liquidity into the markets," says Goldman's spokesman. "It seems perverse to criticise firms that have done what they're asked to do for doing what they've been asked to do."
As far as remuneration is concerned, Goldman does not consider itself a typical Wall Street employer. It recruits bright people at a young age - and it does not rely on Ivy League or Oxbridge graduates. On average, Goldman staff become partners by the age of 35 and they are quietly encouraged to leave a decade later. Many go into public office, a fact which further enrages critics, who view the succession of senior US government roles held by former Goldman staff as evidence of the bank's powerful tentacles.
Goldman sources cite another sector popular among its former employees - or "alumni", as it calls them - as evidence of the need for top-dollar bonuses. Many hedge funds and private equity firms have been established by alumni, so it is not so much the prospect of poaching by competitors that worries the bank but the allure for its employees of going it alone.
Goldman insiders feel that, perversely, the bank has been discriminated against by encouraging its staff to enter public service. It wanted to buy Bear Stearns and Washington Mutual but lost out both times to JP Morgan - partly, sources allege, because of nervousness in the Bush administration about the appearance of a deal with a bank that used to employ both the then treasury secretary Henry Paulson and President Bush's chief of staff, Josh Bolten. Just this week, Goldman acolytes wondered whether fear of a backlash prevented the Obama administration from working with Goldman on a mooted joint rescue of the struggling lender CIT Group.
Reacting to Rolling Stone's evisceration of the company, one Goldman executive jokingly pointed out this week that real vampire squid were harmless to humans. Nevertheless, the bank is caught at the trickiest of moments: its earnings have recovered, but at a grassroots level much of Europe and the US remains in recessionary misery.
The fury and disbelief at Goldman's seemingly untouchable fortunes was captured this week by Elijah Cummings, a Democratic congressman for inner-city Baltimore. At a Congressional hearing on the financial crisis, he explained: "People in my district, you know what they ask me? They say, 'Cummings, is that money that folks are getting on Wall Street, those millions and billions, is that our money? Because our money went somewhere. What about us? What about us, who can't send our kids to college in September? What about us, who don't have a house? What about us?'"
Goldman Sachs bites Uncle Sam's hand
The investment bank is fat and happy again, but you wouldn't know it from its squabbling with the Treasury over the warrants in the TARP deal.
I've always thought that the guys running Goldman Sachs were really smart, not only about making money, but also about projecting a classy image to the world outside of Wall Street. Clearly, I overestimated them. If there was ever a firm with the motivation -- and the money -- to be gracious to the U.S. taxpayers who kept it alive when the financial markets were imploding, it's Goldman. It had a chance to look good and do good for taxpayers and itself and Wall Street for a relative pittance -- and has blown it. Horribly.
As you have probably noticed, Goldman is getting attacked for posting record profits and setting aside a record amount for employee compensation about three seconds after it repaid its $10 billion of loans from the Troubled Asset Relief Program. Repaying those loans freed Goldman from pay restrictions on its top honchos, who seem headed for record or near-record bonuses unless things go badly for the firm in the second half of the year. What you probably don't know is that Goldman, flush with cash and profits, is squabbling with the Treasury about how much it should pay taxpayers to buy back the stock purchase warrants it gave the government as part of the TARP deal. Talk about tacky.
Had Goldman retained something it was once reputed to have -- a sense of short-term sacrifice in return for long-term profit -- it would have agreed to pay the government generously for the warrants. It could have announced that on Tuesday, along with its profits, and looked like a decent, concerned corporate citizen instead of Greedhead Central. The warrants are very valuable, especially with the recent sharp run-up in Goldman's stock price. The warrants carry the right (but not the obligation) to buy 12.2 million Goldman shares at $122.90 each. Goldman's closing price of $156.84 yesterday put the warrants "in the money" by a bit over $400 million. (That's the $33.94 difference between $156.84 and $122.90, multiplied by 12.2 million.)
Given that the warrants still have more than nine years to run, they're clearly worth more than $400 million, because its owner has years of upside. However, because there's no existing market for such long Goldman warrants, their value is in the eye of the beholder (and the pricing modeler). Alas, no one would tell me what the government is asking for the warrants or what Goldman is offering for them. "We are in discussions with the Treasury on the buyback of the warrant," said Goldman spokesman Lucas VanPraag. "The purchase price has yet to be determined.... We believe that taxpayers should get a decent return, and we hope that our discussions with the Treasury will do just that." The Treasury declined comment.
My estimate -- okay, my SWAG (for scientific wild-assed guess) -- is that the Treasury is asking for $1 billion to $1.5 billion and Goldman is offering $500 million or so. Under the law, Goldman, like other early TARP repayers, has the right to force the Treasury to sell back the warrants after a lengthy set of price arbitrations. When I say that taxpayers kept Goldman alive, I'm not talking about the $10 billion of TARP money or the $12.9 billion of AIG bailout money that Goldman got. The $10 billion was nice, but not necessarily essential to Goldman's survival, and Goldman says it was holding enough assets and collateral to get all or almost all of the $12.9 billion had the government not bailed out AIG.
Rather, I'm talking about the way that U.S. and foreign governments -- in other words, taxpayers -- saved the world's financial system, saving Goldman in the process. Had many of the world's biggest institutions collapsed, which would have happened without taxpayer aid, Goldman would have been wiped out because the firms that owed it money wouldn't have been able to meet their obligations. I'm also talking about the Federal Reserve Board moving with lightning speed last fall to allow Goldman to become a bank holding company.
By giving Goldman access to vast amounts of money it was making available to bank companies, the Fed ended panicky demands from Goldman customers that the firm immediately return the cash and securities it was holding for them. That was the equivalent of a run on the bank, which no institution can survive. Stopping it saved Goldman.
Now this is how Goldman shows its gratitude. It could have shelled out a few extra bucks and done the right thing for taxpayers (and ultimately for itself) by exercising good business judgment and looking generous. Instead, it's behaving in a way that brings to mind one of my favorite Biblical verses, Deuteronomy 32:15: "So Jeshurun waxed fat and kicked...and spurned the Rock of his salvation." In these ultra-political days, filled with economic pain for so many Americans, that's not only the wrong way to act, it's foolish. A word I never thought I'd associate with Goldman.
Goldman Sachs Unbound
The money machine that is Goldman Sachs is humming again just a few quarters after the firm's existence was briefly in doubt following Lehman Brothers' collapse. Goldman last week reported $3.4 billion in net income for the second quarter, its strongest showing ever. Stripping out a one-time preferred dividend related to the firm's repayment of its $10 billion government TARP investment, Goldman earned $5.71 a share, up from $4.58 in the second quarter of 2008.
Late Friday afternoon, Goldman was around 157, up 10% on the week. Barron's was bullish on Goldman and Morgan Stanley in a March 16 cover story, arguing that both firms had ample capital and were benefiting from weakened rivals. Goldman isn't the bargain it was then when the stock traded under 100, but it could rise to $175 to $200 in the next year if the firm can continue to post quarterly profits of $4 to $5 a share, analysts say.
Amazingly, Goldman said that the outsized trading profits that powered its results didn't stem from large proprietary trading positions in the sharply improving credit and stock markets.
On the firm's conference call, Chief Financial Officer David Viniar insisted that Goldman earned the vast bulk of its trading profits from simply making markets for customers at a time when many former rivals are gone or have scaled back their trading operations. "Virtually none was based purely on spreads tightening and inventory mark-ups," Viniar said. Given Goldman's limited financial disclosure, Viniar's statement can't be verified.
Known for its excessive pay packages in good times, Goldman is back to its old ways despite criticism from Washington that it's unseemly for the firm to dole out so much money so soon after a financial crisis produced a vast federal backstop that guaranteed the firm's survival. Goldman is on course to pay each of its 29,400 employees a stunning average of $770,000 in 2009 based on money set aside so far this year. The $770,000 figure does include items like payroll taxes and health benefits, but the vast bulk is in cash and equity compensation. During 2007, its most profitable year, Goldman's compensation was about $720,000 per employee before falling about 50% last year.
No major companies appear even close to Goldman in average compensation. A highly profitable JPMorgan Chase, which competes against Goldman in areas like trading and investment banking while running a huge commercial banking operation, is on course to pay its 220,000 employees an average of $130,000 this year. Shareholders haven't always been well served by Wall Street's generous pay policies that have set aside 50% of profits for employees. While staffs at Lehman Brothers and Bear Stearns did wonderfully for many years, the firms ended being undercapitalized in a crisis and shareholders ultimately got a pittance or were wiped out.
In the first half of 2009, Goldman set aside about 49% of pretax profits in compensation. It's a good bet, however, that Goldman will set aside a lower percentage of profits for compensation in the second half of 2009 because the absolute pay levels are so high. That was true in 2007, when Goldman paid out 44% of profits in compensation after cutting the ratio in the final quarter. Goldman says it doesn't adhere to any fixed ratio of pay to profits. The firm's approach is to pay competitively to keep its best people -- including traders, investment bankers and quantitative types. Yet given the depressed state of Wall Street, it seems a stretch that Goldman needs to set aside so much for employees.
One alternative would be for Goldman to pay employees less -- say 40% of profits -- and retain more of its earnings for shareholders. That way, the chances of Goldman needing any government backstop would become more remote. If more profits were retained, Goldman's shareholder equity would expand more rapidly and that could boost the stock, although more employees might leave. This idea probably won't sit well with Goldman and the rest of the Street. Don't expect compliant boards of directors to act for change.
Some believe Goldman now is overcapitalized, and it's under pressure from some analysts to repurchase stock. Goldman's Viniar resisted such suggestions on the conference call, saying the firm needs to husband capital in a still-difficult economic and financial climate. Roger Freeman, the brokerage analyst at Barclays Capital, says investors are wrestling with several issues in evaluating Goldman: "Do we get multiple expansion from here and if so, when? Can Goldman trade for meaningfully north of 1.5 times book and can it consistently earn a return of equity of 20% or better?"
Goldman now trades for 1.5 times its second-quarter book value of $106 a share after earning a 23% return on equity in the period. Freeman believes Goldman is starting to "bump up" against a price/book ceiling and that it will be tough for the firm to regularly top a 20% ROE with a much greater equity capital base. He thinks the stock may track book-value growth. That would make it more like Berkshire Hathaway. If book rises to $120 to $125 a share in a year, the stock could hit $180 to $190, assuming a price/book multiple of 1.5 times. Love them or hate them, the smartest guys on Wall Street are back -- and raking in the dough. Goldman's pay looks excessive, but there's still a lot now for shareholders. That's probably good news for the stock.
Bankers, Lawmakers Assail Pace of Obama’s Mortgage Programs
The Obama administration may be “just going through the motions” in dealing with the deficiencies of U.S. anti-foreclosure programs, leaving a record number of struggling homeowners with few options for relief, Senate Banking Committee Chairman Christopher Dodd said. “I’ve had a lot of frustrations in trying to come up with plans that work,” Dodd, a Connecticut Democrat, said during a break in a hearing on the programs today in Washington. “I’m concerned that we’re just going through the motions. I don’t get the sense of urgency.”
A Bank of America Corp. executive told Dodd’s committee that the administration stokes “confusion and delay” among lenders when it announces anti-foreclosure plans before completing the program details, while Senator Richard Shelby of Alabama complained that the programs have fallen short of goals. “Existing modification programs have not been very effective,” Shelby, the ranking Republican on the Senate Banking Committee, said. “Sustainable policies must be based on economic realities and facts, not wishful thinking.”
The administration has “encountered a few difficulties” in starting the Making Home Affordable refinancing program for troubled borrowers, said William Apgar, an adviser at the Housing and Urban Development Department. The program, intended to help as many as 4 million people, has so far extended modification offers to about 325,000, he told the committee. More than 1.5 million properties received a default or auction notice or were seized by banks in the six months through June, Irvine, California-based RealtyTrac Inc. said today in a statement. That’s a 15 percent increase from a year earlier.
“Many consumers have had trouble reaching their servicers and receiving a timely response from servicers after they have submitted applications for modification,” Apgar said. Others have complained that lenders have given them inaccurate or misleading information. Allen Jones, a default-management policy executive at Bank of America, said part of the problem is that the administration keeps announcing programs without providing the rules for how borrowers and lenders should proceed. That practice “creates immediate demand with insufficient lead time for operational readiness,” Jones said in his testimony to the committee. “This can lead to negative customer experience and, ultimately, public backlash against the programs,” Allen said.
Borrowers are still awaiting the final details of a plan announced in April that would let homeowners rework home-equity debt. Other elements of a broader plan announced in February have been slow to reach the public.
Senator Jim Bunning, a Kentucky Republican, asked “when are you going to stop the bleeding?” As many as half of the at-risk mortgages have second liens, Apgar said, adding that a home-equity loan can increase the likelihood of default because it may raise a borrowers’ monthly mortgage payments beyond affordable levels.
“The issuance by Treasury of its brief and limited guidelines for the second-lien and short-sale programs months before their comprehensive rules have been finalized or even drafted has led to a great deal of confusion and delay in the industry and with the public,” Allen said in his testimony. Herb Allison, the Treasury Department’s assistant secretary overseeing the $700 billion U.S. Troubled Asset Relief Program for financial companies, said while the administration has made substantial progress, he realizes that much more needs to be done to help forestall record foreclosure filings.
The Making Home Affordable program requires banks that received federal aid from the Treasury’s Troubled Asset Relief Program, or TARP, as well as mortgage-finance companies Fannie Mae, Freddie Mac to lower the monthly payments for borrowers at “imminent risk” of default. Banks can lengthen repayment terms, lower interest rates to as low as 2 percent and forbear outstanding principal, among other methods. Charlotte, North Carolina-based Bank of America, the biggest U.S. bank by assets, took $45 billion in U.S. aid through TARP amid last year’s financial crisis.
Allen said the Treasury could improve the effectiveness of the program by giving loan servicers advance notice of new rules, allowing the industry to review program changes before they take place and completing details before making announcements. Bank of America has almost doubled its team of home retention specialists in the past year to 7,400 people, Allen said. About 80,000 Bank of America borrowers have been offered modifications or are in the three-month trial period under Obama’s Home Affordable initiative, he said.
Apgar said administration officials are also still drafting the final details of its framework, announced April 28, to simplify the process of closing short sales and deeds-in-lieu. Those provide alternatives to foreclosure that are less expensive to lenders and less damaging to the credit of borrowers, who still lose their home. He also said HUD officials are having trouble implementing new laws designed to improve participation in the Hope for Homeowners program, which was designed to help as many as 400,000 borrowers refinance into more affordable loans insured by the Federal Housing Administration. Just 50 loans have closed through that program, HUD Secretary Shaun Donovan said last month.
The program provides low-cost federal backing for the refinanced loans in exchange for principal writedowns. It also authorizes HUD to pay second-lien holders to extinguish the loan, which is proving difficult to calculate, Apgar said. Banks controlling modification decisions as servicers have stood in the way of the Hope for Homeowners program because other types of aid don’t require them to suffer losses on their home-equity loans, said Curtis Glovier, a managing director at Fortress Investment Group, a New York-based asset manager. “Investors are willing to do our part by making a significant sacrifice in reducing mortgage principal,” Glovier plans to tell the committee today, speaking on behalf of a mortgage-investor group.
A Costly Bank Failure Friday
Four banks failed on Friday, soaking the FDIC’s deposit fund for more than $1 billion. The biggest losses came from Southern California, as regulators finally ended what had become a slow-motion sink beneath the waves for two banks. The total number of bank failures for the year now stands at 57. Analysts recognized Vineyard National Bank’s troubles as early as January 2008, when its parent holding company announced losses of $41.3 million for the previous quarter.
By July of that year, the California-based bank had signed a consent decree with the Office of the Comptroller of the Currency requiring it to stop gorging on brokered deposits and to raise capital from more other sources. Instead, its capital shrunk while its non-performing loans grew. This past April, the Nasdaq and the New York Stock Exchange delisted Vineyard National Bancorp, the holding company. Speculation then centered not on whether the bank would fail but why it hadn’t already. Regulators finally pulled the plug on Friday evening entering into an agreement with California Bank & Trust of San Diego to take on Vineyard’s deposits. The FDIC estimates the total cost to its insurance fund at $579 million.
Temecula Valley Bank followed a similar path. It reported in January that in the last quarter of 2008 its non-performing assets has grown nearly fivefold to $148 million. On February 12, it signed a Cease and Desist Order with the FDIC requiring it to raise more capital. Then a deal with a private equity group to inject $210 million into the bank’s holding company fell apart. After the bank missed numerous deadlines, regulators on Friday brokered their own deal with First-Citizens Bank and Trust Company of Raleigh, North Carolina to take on the bank’s deposits. Total cost to the FDIC—$304 million.
The two other banks to fail yesterday were in South Dakota and Georgia. BankFirst of Sioux Falls was the first bank to fail in South Dakota since 1992. The FDIC entered into an agreement with Alerus Financial of Grand Forks, North Dakota to assume the deposits. In Georgia, banks have been falling like ripe peaches. The FDIC shuttered First Piedmont Bank of Winder, making it the tenth Georgia bank to fail this year. First American Bank and Trust Company of Athens, Georgia will assume the deposits.
Feds may soon seize Corus Bankshares: report
Corus Bankshares Inc. might be taken over in the next few weeks by regulators, who are getting ready to auction the struggling condo lender or assets of it, according to a report. The government could seize the bank in the next several weeks, the Federal Deposit Insurance Corp. has indicated, according to a Bloomberg News report Friday citing unidentified "people briefed on the matter."
Corus has warned investors it might fail. Corus and Bank of America Corp., its financial adviser, have not been able to find a buyer that will do a deal without government help, Bloomberg said. Colony Capital LLC and real estate developer Related Cos. are among the investors that have shown interest in the bank's assets, Bloomberg reported last month. The Wall Street Journal reported this week that private-equity firm Starwood Capital Group is bidding on Corus assets, citing unidentified sources.
Young Hit Worst by British Joblessness
As overall unemployment in Britain reaches 7.6%, the rate among adults ages 18 to 24 is 20% and set to grow. Fears are growing of another lost generation
Unemployment has soared by a record 281,000 in three months to total 2.38 million, the highest since before New Labour came to power. Some 7.6 per cent of the workforce is jobless, the highest rate since January 1997, and up by three-quarters-of-a-million on this time last year. The increase over the last quarter was the steepest since the severe recession of 1981. About 1.6 million people are claiming unemployment benefits. Economists called the data "truly horrible". The West Midlands has become the first British region in the current recession to see its unemployment rate reach double figures: 10.3 per cent.
Young people are bearing the brunt of the pain. Gordon Brown made his political reputation in the 1980s and 1990s railing against the waste of human talent during the Conservatives' rule, yet today one in five 18-to-24 year olds is jobless; 726,000 youngsters are looking for work. That toll will jump dramatically as more school leavers and graduates sign on this summer. Concern about the economic and social costs of supporting a lost generation of "neets" – those not in employment, education or training schemes – continues to grow. Poignantly, those now leaving school aged 16 and trying to find work or in further education to avoid unemployment will have started primary school in 1997.
There is also increasing evidence that workers are turning to temporary and part-time work, as well as putting up with minimal pay rises, to avoid the dole. Renewed efforts by the authorities to push workers to accept any kind of job rather than claim benefits, and increasingly stringent eligibility criteria, have accelerated this trend. Thus the number of the unemployed claiming jobseeker's allowance rose by only 23,800 in June, much less than expected – down from rises of 30,800 in May and a record 136,600 in February.
Almost one million people have accepted part-time jobs while looking for full-time work, up 255,000 on last year, and 413,000 are temping while looking for a permanent position, up 58,000 on 2008. "Self employment", which may be disguising underemployment among the "freelancing" professional and managerial classes, is up 55,000. Philip Shaw, UK Economist at Investec commented: "We suspect that the claimant count numbers are being biased down by individuals moving off the count onto government schemes such as the New Deal. While they would still effectively be jobless, on this measure they would no longer be classified as unemployed. Are people really finding jobs? Employment and hours worked fell sharply in the three months to May, so we think not."
Kevin Green, chief executive of the Recruitment and Employment Confederation, added: "Temporary work should remain a crucial lifeline for those wanting to get back into employment. Flexible working [is] vital in these recessionary times, especially with increasing numbers of jobseekers including recent graduates, wanting to get a foothold in the jobs market." At all levels there seems to be little resistance to employers' offers to save jobs in return for pay restraint. The ONS say that annual headline average earnings growth is running at a muted at 2.3 per cent, and only 0.8 per cent in manufacturing.
Over the past year the worst losses have been in manufacturing – 212,000 jobs gone. About 196,000 posts in hotels and restaurants and 187,000 in financial services have disappeared. Most economists believe that unemployment will continue climbing to 3m, or beyond, well into next year. That will happen even if the economy starts to recover, as employers are usually able to respond to rises in demand without having to hire new staff. Today's numbers would also have been worse but for a boost to public sector employment of around 55,000, partially offsetting the loss of 683,000 private sector jobs. Given the pressures on the public finances, that benign trend may soon also begin to reverse.
Major cities such as Newcastle, Swansea, Plymouth, Newport and Ipswich face heavy job losses over the next decade because of the imminent squeeze on public spending, a think-tank will warn today. One in four jobs in Britain's cities is now in public service, cushioning urban populations from the effects of the recession. But the Centre for Cities says such places will become particularly vulnerable to the inevitable spending cuts from 2011. Dermot Finch, its director, said: "The current size of their public sector workforce is untenable." The Inland Revenue's National Insurance Contributions Office is based in Newcastle and the head office of the Driver and Vehicle Licensing Agency is in Swansea. Plymouth has high employment in the naval dockyards. Public sector posts have grown rapidly in Ipswich in recent years, while Newport has a relatively low number of jobs in private industry.
Meanwhile, the shadow Business Secretary Kenneth Clarke warned yesterday that Gordon Brown's "lack of candour" on public spending would cause a lack of confidence in the British economy on the financial markets. He accused Mr Brown of "trying to hide the scale of the crisis" by delaying a government-wide spending review, and said he should "tell it straight". The former Chancellor told the Institution of Civil Engineers: "The risk, if we do not have a sensible debate on public spending, is that no action will be taken to get public borrowing on to a credible downward course. Interest rates will be driven up and stifle the recovery before it can become established."
Mr Clarke said a comprehensive spending review was needed more desperately than ever, even though the Government appears to have postponed the one due until after the general election. Accusing Mr Brown of being in "denial", he said: "We need frankness in our political dialogue. It is going to be very tough."
Steve and Shelley Carter, both 36, live in Stone, Staffordshire, with their two children. Steve works in Toyota's human resources department at the manufacturing plant in Burnaston, Derbyshire, where all members of staff have taken a 10 per cent cut in hours and pay since the beginning of April. This is a loss of 16 hours' pay each month. "Everyone from senior management downwards has taken a reduction in hours to protect jobs. There's also no pay increases this year, and overtime has been cut.
There are some people within our team who have had to find other part-time work. Each week, staff aren't paid for four hours (half a shift), but rather than coming in just to do half a shift, every employee takes a full day off once a fortnight. My wife was made redundant in the past 12 months from the corporate events company she worked for. We had to tighten our belts and be careful, especially with two young children. Fortunately, she's back in a full-time marketing position, but there was a period of real uncertainty for us.
It forced us to look at our household income to see where we could make savings. There are benefits – I'm able to pick my children up from school, and there's DIY around the house. And it's a longer weekend. It's a challenge, as we've all got commitments. But it's working towards long-term job security. In the next few months I'll be back to full-time hours, as the recently introduced scrapping scheme has led to an increase in volume. So people are making the most of their day off, knowing that soon they won't have it."