Archive for March, 2010
Yesterday Standard & Poor's announced its sovereign rating of Greece would be maintained for the moment at triple-B. The birthplace of democracy recently navigated a hotbed of solvency issues, including downgrades to its sovereign rating, as Greece became the poster child for 'how not to run your country's finances.'
In parallel, the day before, Moody's Investors Service said the United States risks losing its beloved triple-A credit rating if it doesn't better manage its piles of debt.
But more on that later, let's start with what's up with Greece:
Simply put, the country's own debt-management issues put it in hot water, financially, and now the rumor is that the EU may not bailout Greece to a large extent, potentially driving the country to go cap-in-hand to the International Monetary Fund.
Hardly a confidence builder for a country that ranks relatively high on the Human Development Index.
Needless to say, things have eased up a bit for Greece, though it continues to drag the Euro markets. Credit analyst Suki Mann of Société Générale remarked that, "Greece is off the front pages, [and] all of a sudden things are not looking too exciting: it's a slow grind higher/tighter and heads down."
Reluctance, it seems, is once again rearing its ugly head: "We are all totally aware by now that European corporates are awash with liquidity and preserving it," he said.
Naturally, these events pushed sovereign risk into the market forefront once again. After all, even though Mohamed El-Erian CEO of PIMCO states that, "at present this is being viewed primarily – and excessively – through the narrow prism of Greece," it is being viewed nonetheless.
Who would have thought we'd be talking along these terms for the U.S.? But here we are.
Greece was part of the EU, such a large machine, and the matter of it's near insolvency still needs to be cleared up. It is only logical, regardless of any feelings of improbability, that as a matter of fact some other countries could be facing the same fate. It hurts just talking about it.
"Today, we should all be paying attention to a new theme: the simultaneous and significant deterioration in the public finances of many advanced economies," El-Erian said in a note on PIMCO's website. "Down the road, it will be recognized for what it is: a significant regime shift in advanced economies with consequential and long-lasting effects."
I will be highly interested in how such a "significant regime shift" materializes though. For example, what is really known about sovereign risk? In the sense that what was really known, risk wise, about the mortgage market in the days before the credit crisis?
If we (and themselves) were unaware that Greece was taking on such risk, then how can we be sure that the sovereign risk of the United States can conversely be properly accounted for, and what sort of calculations must be used to determine this?
But enough questions. Ron D'Vari, CEO and Co-founder of NewOak Capital, a Manhattan advisory, asset management and capital markets firm said in a note to reporters that, more importantly, investors remain currently unconcerned about the U.S. credit rating.
Yet he adds that: "if the current budget deficit trends continue, the interest servicing burden will approach those of the 80s," however that the option of lowering interest rates is no longer available in today's market. "Since the government is already in a box of not being to either lower spending or increasing already high taxes, the public finance will continue to deteriorate and the rating agencies may have to take action."
For the government's part, however, they remain dismissive, with U.S. Treasury Secretary Timothy Geithner saying the country's "political will" is hedge enough against downgrade.
More debt, however, will grow the bubble bigger.
Jacob Gaffney is managing editor of HousingWire and HousingWire.com
The media reports on the tea-leaf reading going on in Washington DC, and Wall Street messages sent out Tuesday by the Federal Reserve.
The Fed affirmed its plan to stop buying mortgage-backed securities, a practice that has helped hold interest rates to their lowest levels in a generation at under 5%. Those purchases, totaling $1.25trn, are expected to wrap up by the end of March.
But the Fed left open the possibility that it may begin buying the securities again if the housing “recovery” stalls.
The Fed also voted to keep its benchmark interest rate – the one that tends to set a bar for mortgage rates – at nearly 0%. It cited continued worries of economic weakness.
As European finance ministers meet to discuss the proposed Alternative Investment Fund Managers Directive, aimed at curbing the activities of hedge funds and private equity groups, a think-tank is claiming such activities pull in €9.2bn (US$12.6bn) of taxes a year. Open Europe, which campaigns for European Union (EU) reform and is supported by Sir Stuart Rose and other senior figures in industry, says that €6.1bn of this is raised in the UK. This is enough to pay the salaries of more than 200,000 nurses, Open Europe says. Unless the directive is amended, it will cost European investment firms about €8.2bn by 2020, a large part of which will be passed on to investors. Mats Persson, director of Open Europe, says that ministers have come a long way since the publication of the original proposals, which were heavily criticized by the investment industry. But this is a “terrible time” to put unnecessary burdens on the industry.
The company that controls troubled Manhattan apartment complex Stuyvesant Town-Peter Cooper Village told hedge fund Appaloosa to back off yesterday, saying the New Jersey bondholder has no right to try to scuttle the property's foreclosure proceedings.
In a brief filed with Manhattan federal court, CW Capital — which represents holders of the $3bn defaulted mortgage — argued that the hedge fund must gain the support of 25 percent of bondholders to have a say in the foreclosure.
CW also accused Appaloosa of trying to hold up the foreclosure to "maintain its stream of payments" on its bonds, which were bought "at a steep discount" when it was clear foreclosure was coming.
Late last month, David Tepper's hedge fund filed a motion to stop recent foreclosure proceedings on StuyTown, saying the move would hurt its investment.
An investigation into mortgage fraud in cities across North Texas has led to indictments targeting 40 people.
Prosecutors say the group used phony buyers, questionable documents and inflated appraisals to sell houses — including properties in the Hills Creek neighborhood of McKinney — for more than what they were worth.
In 2002, one house on Hills Creek Drive was valued at $315,000; by January 2006, it sold for $625,000.
Prosecutors said the value of other modest homes was increased to as much as $715,000. When the properties sold, prosecutors allege that the profits went to the man at the top in the form of "disbursements."
"And then he's gone, with some $200-$300,000 in profit from that particular transaction," said US Attorney John Bales.
What happens next? "The house is foreclosed on and the asset is a dead weight on the bank's books," Bales explained.
Wynn Bloch has always dutifully paid her bills and socked away money for retirement. But in December she defaulted on the mortgage on her Palm Desert home, even though she could afford the payments.
Bloch paid $385,000 for the two-bedroom in 2006, when prices were still surging. Comparable homes are now selling in the low-$200,000s. At 66, the retired psychologist doubted she'd see her investment rebound in her lifetime. Plus, she said she was duped into an expensive loan.
The way she sees it, big banks that helped fuel the mess all got bailouts while small fry like her are left holding the bag. No more.
"There was not a chance that house was ever going to be worth anywhere near what my mortgage was," said Bloch, who is now renting a few miles away after defaulting on the $310,000 loan. "I haven't cheated or stolen."
Detroit, a city at the epicenter of economic downturn in the industrial US, is coping with financial distress by downsizing not only its blighted urban neighborhoods.
Forty-five Detroit schools and other educational facilities will close in June under a $1bn plan unveiled Wednesday by the city school district's emergency financial manager.
The district has been beset with falling enrollment, as well as aging buildings, Robert Bobb said Wednesday. The plan will allow the district to cut operating costs by about $31m in 2010 and ensure lower maintenance costs in the future, he said.
The plan, which complements an academic plan recently unveiled by Bobb, will "create a leaner, smarter DPS," he said.
China is in the midst of “the greatest bubble in history,” said James Rickards, former general counsel of hedge fund Long-Term Capital Management LP.
The Chinese central bank’s balance sheet resembles that of a hedge fund buying dollars and short-selling the yuan, said Rickards, now the senior managing director for market intelligence at McLean, Virginia-based consulting firm Omnis Inc.
“As I see it, it is the greatest bubble in history with the most massive misallocation of wealth,” Rickards said at the Asset Allocation Summit Asia 2010 organized by Terrapinn Pte in Hong Kong yesterday. China “is a bubble waiting to burst.”
Rickards joins hedge fund manager Jim Chanos, Gloom, Boom & Doom publisher Marc Faber and Harvard University professor Kenneth Rogoff in warning of a potential crash in China’s economy. The government has raised banks’ reserve requirements twice this year after economic growth accelerated and property prices rallied.
Gordon Brown delayed European Union (EU) proposals for tighter rules covering hedge funds and private equity groups after he intervened to block a discussion by finance ministers meeting in Spain.
A debate in the EU parliament is scheduled to go ahead tomorrow, but MEPs will discuss the Alternative Investment Fund Managers's (AIFM) directive without a recommendation from the finance ministers' group, Ecofin.
It is understood the prime minister telephoned his Spanish counterpart, José Luis Rodríguez Zapatero, who holds the European Union presidency, to call for more time to debate the rules.
The compromise directive was due to be hammered out at a meeting of finance ministers, but the item was dropped from the agenda. A spokesman for Brown welcomed the move. He said: "The fact that it has been postponed is good news. More time is needed."
