This post first appeared on Minyanville and Cirios Real Estate.
Simply put: There are too many homes in America.
Travel to the outskirts of Phoenix, California's inland empire -- or even suburban Washington, DC -- and you'll find scores of vacant homes, for-sale signs, and soon-to-be ghost towns. Sprawling Lennar (LEN) cookie-cutter developments, Pulte Home (PHM) condos jammed against freeway sound barriers, mostly vacant strip malls - these are not the relics of dynamic social progress.
There are many who believe that superfluous developments in the so-called exurbs must be razed for housing supply to return to anything like sustainable levels.
But few expect the bulldozers to reach the urban downtown. Just as the "subprime" mortgage problem began in areas where economic fundamentals fell hopelessly out of sync with home prices, so too will urban renewal rise from the ashes of these communities.
Take Flint, Michigan, a city looking to shrink itself just to stay alive.
This once-proud industrial town 65 miles north of Detroit is embracing a trend which may eventually spread to cities throughout the United States: In response to seemingly endless economic woes, government officials in Flint are considering hastening the town's decline in order to rebuild anew.
The New York Times reports that city leaders have floated a plan whereby certain dilapidated neighborhoods would be razed to the ground, consolidating residents and businesses closer to downtown. The aim is to reorganize the population around fewer, more sustainable communities, thereby pushing run-down homes and empty lots to the outskirts of town.
While uprooting citizens is a prickly political topic, the county Treasurer and advocate of the shrinking of Flint grimly noted that "Not everyone's going to win. But now, everyone's losing."
Foreclosures, the latest in a series of economic epidemics to sweep Flint, are causing formerly vibrant communities to turn to dust. Genesee County, of which Flint is the largest town, in addition to Indianapolis and Little Rock, Arkansas, are tackling the foreclosure issue with county land banks. These publicly-funded institutions buy unwanted properties and rehabilitate them before squatters and vandals can take over.
Contrast this government-led form of community development with the policies now operative at Wells Fargo (WFC), Citigroup (C) and Bank of America (BAC) to leave bank owned homes vacant and ripe for vandalism, and you have an example of government policy that can speed up the recovery of a local real estate market.
And while Flint's situation may be unique in that it faces the twin headwinds of the auto industry's demise and the ongoing housing market collapse, it's root troubles are emblematic of towns across the country: Cities, expectant of growth that never came, supported development that proved unsustainable.
Myriad solutions have been proposed to solve this country's housing nightmare, but the simplest, and indeed the most effective may be to simply reduce supply the old-fashioned way, with bulldozers.
Thursday, April 23, 2009
Keepin' It Real Estate: Beware The False Bottom in Housing
This post first appeared on Minyanville and Cirios Real Estate.
Residential real estate is about to get very weird.
In the coming months, housing-market data is likely to show price stabilization in many of the country’s hardest hit areas. Pundits, government officials and real-estate professionals will loudly proclaim the worst of our real estate woes are behind us. Back in reality, however, this data will simply reinforce the axiom that there are lies, damn lies, and statistics.
The lion share of home price declines have, thus far, been focused in low-end markets -areas where property values became the most detached from housing-market fundamentals. Even though the high end is now declining, sales activity is still heavily concentrated in the country's most distressed markets.
Taking a look at the data below compiled by my firm, Cirios Real Estate -- which depict sales transactions for the part of the San Francisco Bay Area between San Francisco and San Jose known as the Peninsula -- one can see how rising home prices from 2003 to 2007 shifted sales transactions towards more expensive properties. This makes intuitive sense, and should naturally push up both average and median home prices.
Click to enlarge
Since the market peaked, however, notice how the percentage of sales of homes under $400,000 shot up to more than 50% of sales in the first quarter of this year, from as low as 9% in 2007.
Conversely, sales over $1,000,000 that accounted for almost a quarter of transactions in 2007 now make up less than 9% of total sales so far in 2009.
This heavy concentration of sales in low-end markets is skewing home price data to the downside, exaggerating the impact of depressed markets on broad measures of prices.
As the foreclosure epidemic spreads outwards to more well-to-do areas, and job losses force previously stable homeowners to sell into a weak high-end market, more expensive homes will begin to make up a greater percentage of total transactions. This dynamic -- not an overall rise in property values -- is likely to push up average and median home price measures.
In other words, high-end markets will be falling as price discovery rears its ugly head, while low-end markets are flat at best, as price declines reach exhaustion levels and investors step in to buy. High levels of supply and looming shadow inventory of foreclosures will prevent meaningful appreciation in these distressed areas for the foreseeable future.
Meanwhile, data will show a housing market on the rebound.
No doubt, banks like Wells Fargo (WFC), Citigroup (C) and Bank of America (BAC) will cheer the end of the real-estate slump. Real estate professionals will pound the table that now's the time to buy (just like they said back in 2007). Government officials will proudly assert their mortgage-relief efforts were a success.
Nothing, however, could be further from the truth.
Residential real estate is about to get very weird.
In the coming months, housing-market data is likely to show price stabilization in many of the country’s hardest hit areas. Pundits, government officials and real-estate professionals will loudly proclaim the worst of our real estate woes are behind us. Back in reality, however, this data will simply reinforce the axiom that there are lies, damn lies, and statistics.
The lion share of home price declines have, thus far, been focused in low-end markets -areas where property values became the most detached from housing-market fundamentals. Even though the high end is now declining, sales activity is still heavily concentrated in the country's most distressed markets.
Taking a look at the data below compiled by my firm, Cirios Real Estate -- which depict sales transactions for the part of the San Francisco Bay Area between San Francisco and San Jose known as the Peninsula -- one can see how rising home prices from 2003 to 2007 shifted sales transactions towards more expensive properties. This makes intuitive sense, and should naturally push up both average and median home prices.
Click to enlarge
Since the market peaked, however, notice how the percentage of sales of homes under $400,000 shot up to more than 50% of sales in the first quarter of this year, from as low as 9% in 2007.
Conversely, sales over $1,000,000 that accounted for almost a quarter of transactions in 2007 now make up less than 9% of total sales so far in 2009.
This heavy concentration of sales in low-end markets is skewing home price data to the downside, exaggerating the impact of depressed markets on broad measures of prices.
As the foreclosure epidemic spreads outwards to more well-to-do areas, and job losses force previously stable homeowners to sell into a weak high-end market, more expensive homes will begin to make up a greater percentage of total transactions. This dynamic -- not an overall rise in property values -- is likely to push up average and median home price measures.
In other words, high-end markets will be falling as price discovery rears its ugly head, while low-end markets are flat at best, as price declines reach exhaustion levels and investors step in to buy. High levels of supply and looming shadow inventory of foreclosures will prevent meaningful appreciation in these distressed areas for the foreseeable future.
Meanwhile, data will show a housing market on the rebound.
No doubt, banks like Wells Fargo (WFC), Citigroup (C) and Bank of America (BAC) will cheer the end of the real-estate slump. Real estate professionals will pound the table that now's the time to buy (just like they said back in 2007). Government officials will proudly assert their mortgage-relief efforts were a success.
Nothing, however, could be further from the truth.
Consumers to Campbell's: No Soup For You!
This post first appeared on Minyanville.
Given that Americans are embracing thrift, cutting corners and getting by on less, one could logically conclude canned-soup sales would be booming, as families opt to eat in rather than out. Logic, however, often fails.
According to the Wall Street Journal, consumer spending on food fell an inflation-adjusted 3.7% in the fourth quarter of 2008, the biggest drop since World War II. And it’s not just that consumers are turning to lower-priced options - they’re buying less, period.
Campbell’s Soup (CPB), a classic recession play for its affordable dinner options, is scrambling to realign its product offerings with changing consumer preferences. For example, a sales campaign offering 10 cans of condensed soup for $10 didn't boost sales as much as the company hoped. Research showed that while buyers liked the per-can price, they were reluctant to shell out more than was necessary for meals in the immediate future. In short, making rent takes priority over stocking the pantry.
Campbell’s, along with Kraft Foods (KFT), is trying to appeal to a clientele that wants to save a few pennies without settling for the same old boring fare every night. The Journal reports Kraft now has an iPhone (AAPL) application to help users manage shopping lists and search recipes, and Campbell’s is coming out with fancier canned soup options to appeal to a broader array of potential buyers.
This trend away from bomb-shelter grocery shopping and general extravagance may not just be some passing fad. Shoppers are stretching budgets further - not just by buying cheaper items but by simply spending less. And with the economic future cloudy at best, a swift return to gastronomic luxury is unlikely.
Budgets are back in vogue, and purchasing in bulk to save a few bucks isn’t as viable a grocery strategy as it used to be. This doesn’t bode well for Costco (COST), which banks on customers buying more soap, cereal or frozen chicken breasts than any normal family could possibly consume in months.
Credit, once the lifeblood of consumer spending, is well-nigh impossible to find. Coupled with the broadening repudiation of debt in general, frugality could be here to stay.
Pass the Spam.
Given that Americans are embracing thrift, cutting corners and getting by on less, one could logically conclude canned-soup sales would be booming, as families opt to eat in rather than out. Logic, however, often fails.
According to the Wall Street Journal, consumer spending on food fell an inflation-adjusted 3.7% in the fourth quarter of 2008, the biggest drop since World War II. And it’s not just that consumers are turning to lower-priced options - they’re buying less, period.
Campbell’s Soup (CPB), a classic recession play for its affordable dinner options, is scrambling to realign its product offerings with changing consumer preferences. For example, a sales campaign offering 10 cans of condensed soup for $10 didn't boost sales as much as the company hoped. Research showed that while buyers liked the per-can price, they were reluctant to shell out more than was necessary for meals in the immediate future. In short, making rent takes priority over stocking the pantry.
Campbell’s, along with Kraft Foods (KFT), is trying to appeal to a clientele that wants to save a few pennies without settling for the same old boring fare every night. The Journal reports Kraft now has an iPhone (AAPL) application to help users manage shopping lists and search recipes, and Campbell’s is coming out with fancier canned soup options to appeal to a broader array of potential buyers.
This trend away from bomb-shelter grocery shopping and general extravagance may not just be some passing fad. Shoppers are stretching budgets further - not just by buying cheaper items but by simply spending less. And with the economic future cloudy at best, a swift return to gastronomic luxury is unlikely.
Budgets are back in vogue, and purchasing in bulk to save a few bucks isn’t as viable a grocery strategy as it used to be. This doesn’t bode well for Costco (COST), which banks on customers buying more soap, cereal or frozen chicken breasts than any normal family could possibly consume in months.
Credit, once the lifeblood of consumer spending, is well-nigh impossible to find. Coupled with the broadening repudiation of debt in general, frugality could be here to stay.
Pass the Spam.
Consumers to Banks: Give Us a Little Credit
This post first appeared on Minyanville.
Even the Treasury Department's best attempts at statistical obfuscation can't hide the truth that credit remains off limits for most Americans. Banks -- despite billions in government handouts -- still aren't lending.
A Wall Street Journal study of lending data supplied by the 19 biggest recipients of TARP funds paints a decidedly less-rosy picture than does the Treasury's analysis of the same information.
New lending, as measured by aggregate loans made in February compared to last October -- which was the month then-Treasury Secretary Hank Paulson poured tens of billions of dollars into Goldman Sachs (GS), Bank of America (BAC), Citigroup (C) and other big American banks -- is down 23%. This tally, arrived at by the Journal, contrasts Treasury Department figures that measure the change in lending by looking at the median amount of new loans made by the same group of banks.
No surprise, government methodology arrives at numbers that make things markedly better.
And while no one data point can truly claim to be the best measure of the entire US lending environment, that government officials chose the method that supports their claim that borrowing is still possible for the most creditworthy Americans, shouldn't be surprising.
Even as the Treasury, Federal Reserve, FDIC and even Congress urge banks to make new loans, loudly assuring the American people the government has their best interests in mind, the borrowing public isn't listening: Americans continue to shun credit.
A spokesperson for JPMorgan Chase (JPM) said the bank aggressively made credit available "despite the fact that loan demand has dropped dramatically." This assessment is consistent with reports from community banks that consumers simply don't want to take on new debt.
About the only corner of the lending market that's booming is mortgages. Artificially low interest rates, falling home prices and aggressive marketing from the National Association of Realtors has led to a spike in new home loan originations.
Yet, as property values continue to spiral downward, banks like Wells Fargo (WFC), who tout their mortgage division as a strong earnings driver, are lending against an asset class that continues to tumble in value.
Increasingly, Americans are reassessing their own personal income statements. And with an economic future that's cloudy at best, taking on more debt isn't sounding like a great idea.
Not convinced? Examine the lengths to which automakers like Ford (F) are going to get buyers to open their wallets: payment insurance against job losses.
These sorts of marketing tricks are not dissimilar to teaser rates and no-money-down loans that were so prevalent during the mortgage boom. And we see how well that turned out.
Until Washington accepts the new reality -- that credit is driven not just by supply, but also demand -- we'll keep reading suspect analysis of data ostensibly supporting crackpot theories that credit markets have thawed, and a return to the go-go years of unsustainable economic growth is just around the corner.
Even the Treasury Department's best attempts at statistical obfuscation can't hide the truth that credit remains off limits for most Americans. Banks -- despite billions in government handouts -- still aren't lending.
A Wall Street Journal study of lending data supplied by the 19 biggest recipients of TARP funds paints a decidedly less-rosy picture than does the Treasury's analysis of the same information.
New lending, as measured by aggregate loans made in February compared to last October -- which was the month then-Treasury Secretary Hank Paulson poured tens of billions of dollars into Goldman Sachs (GS), Bank of America (BAC), Citigroup (C) and other big American banks -- is down 23%. This tally, arrived at by the Journal, contrasts Treasury Department figures that measure the change in lending by looking at the median amount of new loans made by the same group of banks.
No surprise, government methodology arrives at numbers that make things markedly better.
And while no one data point can truly claim to be the best measure of the entire US lending environment, that government officials chose the method that supports their claim that borrowing is still possible for the most creditworthy Americans, shouldn't be surprising.
Even as the Treasury, Federal Reserve, FDIC and even Congress urge banks to make new loans, loudly assuring the American people the government has their best interests in mind, the borrowing public isn't listening: Americans continue to shun credit.
A spokesperson for JPMorgan Chase (JPM) said the bank aggressively made credit available "despite the fact that loan demand has dropped dramatically." This assessment is consistent with reports from community banks that consumers simply don't want to take on new debt.
About the only corner of the lending market that's booming is mortgages. Artificially low interest rates, falling home prices and aggressive marketing from the National Association of Realtors has led to a spike in new home loan originations.
Yet, as property values continue to spiral downward, banks like Wells Fargo (WFC), who tout their mortgage division as a strong earnings driver, are lending against an asset class that continues to tumble in value.
Increasingly, Americans are reassessing their own personal income statements. And with an economic future that's cloudy at best, taking on more debt isn't sounding like a great idea.
Not convinced? Examine the lengths to which automakers like Ford (F) are going to get buyers to open their wallets: payment insurance against job losses.
These sorts of marketing tricks are not dissimilar to teaser rates and no-money-down loans that were so prevalent during the mortgage boom. And we see how well that turned out.
Until Washington accepts the new reality -- that credit is driven not just by supply, but also demand -- we'll keep reading suspect analysis of data ostensibly supporting crackpot theories that credit markets have thawed, and a return to the go-go years of unsustainable economic growth is just around the corner.
Guns: A Better Buy Than Stocks
This post first appeared on Minyanville.
Forget stocks and bonds, the real money's in guns.
The Wall Street Journal reports artillery enthusiasts are stocking up on guns and ammo, not necessarily ahead of widespread civil unrest resulting from our ongoing economic swoon, but as an investment. These trigger-happy speculators are betting President Obama will institute a ban on assault rifles, which would crimp supply and send prices, well, shooting up.
For it's part, the Obama Administration says it has no plans to enact such legislation and supports the Second Amendment right to bear arms.
During the federal ban on semiautomatic weapons from 1994-2004, prices soared. Recent buying has reached almost a frenzied pitch, creating backlogs for popular models and enabling resellers to list certain guns well above suggested retail prices. AK-47s doubled in price between September 2008 and the end of last year.
Ammo, as well, has become a hot commodity. As one supplier said, "[Ammunition] beats the hell out of money markets and CDs. You can double your investment in ammunition in a year."
Equity investors, too, are betting on Americans arming themselves to the teeth. Smith & Wesson (SWHC), maker of Dirty Harry's weapon of choice -- the .44 Magnum -- has seen its stock jump from around $2 per share to over $6 since Inauguration Day. Still, shares are off around 70% from highs seen as recently as late 2007. Sturm Ruger (RGR), another gun manufacturer, has seen a rise of almost 100% in 2009.
As Minyanville's Kevin Depew is apt to say, "These are heady times we are living in." The Journal running a front-page story on buying guns rather than stocks is indicative of just how strange things have become.
Recent volatility in financial markets is driving Americans to seek alternative ways to protect -- and even grow -- their money. And while we're yet to see widespread construction of bunkers, protective trenches or armed militias patrolling the streets, the country is on edge to an extent not witnessed since September 2001.
I mean, pirates are all over the news for god's sake. Pirates!
Forget stocks and bonds, the real money's in guns.
The Wall Street Journal reports artillery enthusiasts are stocking up on guns and ammo, not necessarily ahead of widespread civil unrest resulting from our ongoing economic swoon, but as an investment. These trigger-happy speculators are betting President Obama will institute a ban on assault rifles, which would crimp supply and send prices, well, shooting up.
For it's part, the Obama Administration says it has no plans to enact such legislation and supports the Second Amendment right to bear arms.
During the federal ban on semiautomatic weapons from 1994-2004, prices soared. Recent buying has reached almost a frenzied pitch, creating backlogs for popular models and enabling resellers to list certain guns well above suggested retail prices. AK-47s doubled in price between September 2008 and the end of last year.
Ammo, as well, has become a hot commodity. As one supplier said, "[Ammunition] beats the hell out of money markets and CDs. You can double your investment in ammunition in a year."
Equity investors, too, are betting on Americans arming themselves to the teeth. Smith & Wesson (SWHC), maker of Dirty Harry's weapon of choice -- the .44 Magnum -- has seen its stock jump from around $2 per share to over $6 since Inauguration Day. Still, shares are off around 70% from highs seen as recently as late 2007. Sturm Ruger (RGR), another gun manufacturer, has seen a rise of almost 100% in 2009.
As Minyanville's Kevin Depew is apt to say, "These are heady times we are living in." The Journal running a front-page story on buying guns rather than stocks is indicative of just how strange things have become.
Recent volatility in financial markets is driving Americans to seek alternative ways to protect -- and even grow -- their money. And while we're yet to see widespread construction of bunkers, protective trenches or armed militias patrolling the streets, the country is on edge to an extent not witnessed since September 2001.
I mean, pirates are all over the news for god's sake. Pirates!
Banks Rev Up Foreclosure Machine
This post first appeared on Minyanville.
For almost 2 years, we've been told government-backed loan modification efforts and foreclosure moratoriums would help ease the pain of the ongoing housing crisis. It's not working.
Despite recent calls to the contrary -- this morning's came courtesy of real-estate mogul Sam Zell -- residential home prices are still in free fall, and the bottom will remain elusive.
Picking up a trend noted weeks ago by housing blogs and other real-estate analysts, the Wall Street Journal reports banks and mortgage-servicing companies are pushing through foreclosures at the fastest rate in more than a year.
JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC), 3 of the country's biggest loan servicers, scaled back foreclosure efforts in recent months at the request of the Obama Administration. Now, with the bans lifted, a new wave of repossessions are simply a matter of time. In California, notices of default and trustee sale, which precede foreclosures, spiked in March as moratoriums expired and lenders returned to "business as usual."
Banks, especially those collecting payments on behalf of Fannie Mae (FNM) and Freddie Mac (FRE), say they're doing everything they can to keep borrowers in their homes. But according to GMAC (GM), as few as 10% of struggling homeowners qualify for the Obama Administration's highly touted foreclosure prevention program.
The logical conclusion is that this new wave of bank owned homes being dumped onto the market will put even more downward pressure on housing prices. And while this is true on a localized, market by market level, widely monitored home price indicators may not tell the whole story.
As noted by the Field Check Group, a real-estate analysis firm, delinquencies on jumbo loans are rising at an alarming rate. This is consistent with trends we have been seeing over the past 6-9 months as prime defaults are now rising faster than subprime.
Currently, low-end, inexpensive homes dominate sales data, dragging down median and average prices. Foreclosures, however, are creeping into high-end markets, and coupled with high levels of inventory and weak demand, prices are tumbling. As forced sales become more prevalent and transactions rise in these well-to-do areas, expensive home sales will begin to represent a larger portion of transactions used in broad measures of prices.
In the coming months, we could see home price measures falling at a less severe rate as the data mix becomes less skewed towards the low end. The bottom will be cheered, recovery will be lauded by the spin machine known as the National Association of Realtors, and buyers around the country will be lured into a false sense of security that housing has finally hit rock bottom.
Meanwhile, back in reality, property values -- actual homes, rather than statistics -- will keep sliding.
For almost 2 years, we've been told government-backed loan modification efforts and foreclosure moratoriums would help ease the pain of the ongoing housing crisis. It's not working.
Despite recent calls to the contrary -- this morning's came courtesy of real-estate mogul Sam Zell -- residential home prices are still in free fall, and the bottom will remain elusive.
Picking up a trend noted weeks ago by housing blogs and other real-estate analysts, the Wall Street Journal reports banks and mortgage-servicing companies are pushing through foreclosures at the fastest rate in more than a year.
JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC), 3 of the country's biggest loan servicers, scaled back foreclosure efforts in recent months at the request of the Obama Administration. Now, with the bans lifted, a new wave of repossessions are simply a matter of time. In California, notices of default and trustee sale, which precede foreclosures, spiked in March as moratoriums expired and lenders returned to "business as usual."
Banks, especially those collecting payments on behalf of Fannie Mae (FNM) and Freddie Mac (FRE), say they're doing everything they can to keep borrowers in their homes. But according to GMAC (GM), as few as 10% of struggling homeowners qualify for the Obama Administration's highly touted foreclosure prevention program.
The logical conclusion is that this new wave of bank owned homes being dumped onto the market will put even more downward pressure on housing prices. And while this is true on a localized, market by market level, widely monitored home price indicators may not tell the whole story.
As noted by the Field Check Group, a real-estate analysis firm, delinquencies on jumbo loans are rising at an alarming rate. This is consistent with trends we have been seeing over the past 6-9 months as prime defaults are now rising faster than subprime.
Currently, low-end, inexpensive homes dominate sales data, dragging down median and average prices. Foreclosures, however, are creeping into high-end markets, and coupled with high levels of inventory and weak demand, prices are tumbling. As forced sales become more prevalent and transactions rise in these well-to-do areas, expensive home sales will begin to represent a larger portion of transactions used in broad measures of prices.
In the coming months, we could see home price measures falling at a less severe rate as the data mix becomes less skewed towards the low end. The bottom will be cheered, recovery will be lauded by the spin machine known as the National Association of Realtors, and buyers around the country will be lured into a false sense of security that housing has finally hit rock bottom.
Meanwhile, back in reality, property values -- actual homes, rather than statistics -- will keep sliding.
Fannie, Freddie: Lights Are On, But No One's Home
This post first appeared on Minyanville.
Who knew that working for a quasi-nationalized bureaucratic nightmare -- with the added bonus of becoming a national scapegoat -- was such a lousy gig?
At Fannie Mae (FNM) and Freddie Mac (FRE), high-level employees are leaving in droves, and replacements are proving to be few and far between. According to the New York Times, candidates are turned off by heavy scrutiny and the burden of having to answer to over 300 million taxpayer-shareholders.
Fannie is on the market for a general counsel, chief risk officer and chief technology officer; Freddie, on the other hand, is truly a rudderless ship, currently managing a cool $6 trillion in mortgages without a chief executive officer, chief financial officer or chief operating officer.
The Obama Administration faces an ongoing challenge: Finding knowledgeable financial professionals willing to take on the truly thankless job of cleaning up after the orgy of financial greed and excess of the last 2 decades.
Treasury Secretary Tim Geithner, working with a skeleton crew, is suffering delays in implementing key initiatives. Neel Kashkari, former President Bush’s choice to head up the Treasury’s financial rescue plan, is stepping down as soon as a suitable replacement can be found. Ironically, President Obama’s top choice is Herbert Allison Jr., who's currently running Fannie Mae.
James Lockhart, director of the Federal Housing Finance Agency, the group overseeing Fannie and Freddie, is concerned about his staff: “Everybody is stretched very thin. We’re very worried, not only about the vacancies now, but also about future holes,” which could impact risk management, technology and limit the firms’ ability to implement aggressive loan-modification plans.
And after the unabashed fury hurled at American International Group (AIG) chief Ed Liddy just weeks ago, it’s no wonder Wall Street’s top brass isn’t jumping at the chance to get aboard the sinking ships that are Fannie Mae and Freddie Mac.
Such is the problem with a centrally planned economy. Corporate chieftains may be brash, offensive or downright mean, but managing hundreds of thousands of employees is no simple task. Being a CEO isn't for the faint at heart, and few executives in the country -- or the world, for that matter -- are up to the task.
To be sure, the system as it stood as of early 2006 was far from perfect. But to expect that government -- with an aptitude for incompetence that more than surpasses that of the private sector -- will do much better is downright foolish.
Aren't politicians supposed to work for us, not the other way around?
Who knew that working for a quasi-nationalized bureaucratic nightmare -- with the added bonus of becoming a national scapegoat -- was such a lousy gig?
At Fannie Mae (FNM) and Freddie Mac (FRE), high-level employees are leaving in droves, and replacements are proving to be few and far between. According to the New York Times, candidates are turned off by heavy scrutiny and the burden of having to answer to over 300 million taxpayer-shareholders.
Fannie is on the market for a general counsel, chief risk officer and chief technology officer; Freddie, on the other hand, is truly a rudderless ship, currently managing a cool $6 trillion in mortgages without a chief executive officer, chief financial officer or chief operating officer.
The Obama Administration faces an ongoing challenge: Finding knowledgeable financial professionals willing to take on the truly thankless job of cleaning up after the orgy of financial greed and excess of the last 2 decades.
Treasury Secretary Tim Geithner, working with a skeleton crew, is suffering delays in implementing key initiatives. Neel Kashkari, former President Bush’s choice to head up the Treasury’s financial rescue plan, is stepping down as soon as a suitable replacement can be found. Ironically, President Obama’s top choice is Herbert Allison Jr., who's currently running Fannie Mae.
James Lockhart, director of the Federal Housing Finance Agency, the group overseeing Fannie and Freddie, is concerned about his staff: “Everybody is stretched very thin. We’re very worried, not only about the vacancies now, but also about future holes,” which could impact risk management, technology and limit the firms’ ability to implement aggressive loan-modification plans.
And after the unabashed fury hurled at American International Group (AIG) chief Ed Liddy just weeks ago, it’s no wonder Wall Street’s top brass isn’t jumping at the chance to get aboard the sinking ships that are Fannie Mae and Freddie Mac.
Such is the problem with a centrally planned economy. Corporate chieftains may be brash, offensive or downright mean, but managing hundreds of thousands of employees is no simple task. Being a CEO isn't for the faint at heart, and few executives in the country -- or the world, for that matter -- are up to the task.To be sure, the system as it stood as of early 2006 was far from perfect. But to expect that government -- with an aptitude for incompetence that more than surpasses that of the private sector -- will do much better is downright foolish.
Aren't politicians supposed to work for us, not the other way around?
Tuesday, April 14, 2009
GM: One Step Closer to Nationalization
This post first appeared on Minyanville.
The great modern American nationalization experiment is underway: General Motors (GM), once the largest automaker in the world, has become a sort of Frankenstein's monster for the US government.
Bloomberg reports the Obama Administration is stepping up pressure on management, unions and creditors to make further concessions, and is considering taking a sizable equity position in the once-proud Detroit firm. The move, which would swap out some of the outstanding $13.4 billion in government loans for stock in a new, slimmed-down, cleaned-up version of GM, is the latest in a series of steps toward outright nationalization.
Analysts say the swap would diminish the rights of creditors, to whom the company offered around 90% ownership in a recent restructuring plan - a plan rejected by government officials. Under the Obama Administration's preferred tact of temporary state ownership, employees owed pension benefits would end up faring better than bondholders.
The government aims to take an ownership interest in GM, then quickly use the cover of bankruptcy courts to hack off the 'bad' parts of the firm. With a fresh start, free of legacy obligations and under performing divisions, Washington says it would quickly divest of it's stake and let the restructuring process continue.
We've by now become almost numb to government-led bailouts of failed companies, most notably American International Group (AIG), Fannie Mae (FNM) and Freddie Mac (FRE). The details are almost an afterthought, as the complexity of each scenario renders casual analysis almost a waste of time. The GM situation, however, could be a blueprint for future intrusion of the federal government into private enterprise.
Secured lenders, as is the government in the case of GM, often prefer a bankruptcy filing when companies get into trouble since it can enable the quickest repayment of their loans in full. Unsecured creditors and equity owners are left holding the bag.
The Bush Administration before him and now Obama have set a precedent: Emergency, secured loans are a likely precursor to state ownership. Notably, the huge bailouts of Citigroup (C) and Bank of America (BAC) were executed through portfolio guarantees and capital injections, not secured loans to the company itself. Not yet, anyway.
Despite efforts on the part of officials to play down the government's role in running GM, or AIG, or Citigroup, or Bank of America, we have entered an economic reality where business success, rather than relying on vision, strategy and good practices, is becoming increasingly reliant on political acumen.
By adding layers of red tape and palm-greasing to our already politicized economy, we move closer and closer to an economic system directed not by the collective will of the many, but rather one controlled by an ever-shrinking group of power brokers and political puppeteers.
This, despite loud proclamations of an impending return to economic vibrancy, is not a welcome development.
The great modern American nationalization experiment is underway: General Motors (GM), once the largest automaker in the world, has become a sort of Frankenstein's monster for the US government.
Bloomberg reports the Obama Administration is stepping up pressure on management, unions and creditors to make further concessions, and is considering taking a sizable equity position in the once-proud Detroit firm. The move, which would swap out some of the outstanding $13.4 billion in government loans for stock in a new, slimmed-down, cleaned-up version of GM, is the latest in a series of steps toward outright nationalization.
Analysts say the swap would diminish the rights of creditors, to whom the company offered around 90% ownership in a recent restructuring plan - a plan rejected by government officials. Under the Obama Administration's preferred tact of temporary state ownership, employees owed pension benefits would end up faring better than bondholders.
The government aims to take an ownership interest in GM, then quickly use the cover of bankruptcy courts to hack off the 'bad' parts of the firm. With a fresh start, free of legacy obligations and under performing divisions, Washington says it would quickly divest of it's stake and let the restructuring process continue.
We've by now become almost numb to government-led bailouts of failed companies, most notably American International Group (AIG), Fannie Mae (FNM) and Freddie Mac (FRE). The details are almost an afterthought, as the complexity of each scenario renders casual analysis almost a waste of time. The GM situation, however, could be a blueprint for future intrusion of the federal government into private enterprise.
Secured lenders, as is the government in the case of GM, often prefer a bankruptcy filing when companies get into trouble since it can enable the quickest repayment of their loans in full. Unsecured creditors and equity owners are left holding the bag.
The Bush Administration before him and now Obama have set a precedent: Emergency, secured loans are a likely precursor to state ownership. Notably, the huge bailouts of Citigroup (C) and Bank of America (BAC) were executed through portfolio guarantees and capital injections, not secured loans to the company itself. Not yet, anyway.
Despite efforts on the part of officials to play down the government's role in running GM, or AIG, or Citigroup, or Bank of America, we have entered an economic reality where business success, rather than relying on vision, strategy and good practices, is becoming increasingly reliant on political acumen.
By adding layers of red tape and palm-greasing to our already politicized economy, we move closer and closer to an economic system directed not by the collective will of the many, but rather one controlled by an ever-shrinking group of power brokers and political puppeteers.
This, despite loud proclamations of an impending return to economic vibrancy, is not a welcome development.
Inflation vs. Deflation: Endgame Approaches
This post first appeared on Minyanville and Cirios Real Estate.
Of the myriad highbrow economic debates currently raging throughout the world of punditry, academia and government policy, few are as contentious as the one over the future of prices: Inflation vs. Deflation.
Indeed, the endgame for this issue is not insignificant, as many believe our economic future hinges on the Federal Reserve’s ability to deftly engineer a return to steady, manageable inflation. To say the least, this is no easy task.
With the unemployment marching upwards, credit markets still largely frozen and global trade grinding to a halt, the American economy is in desperate need of a monetary jolt. The trouble for Fed Chairman Ben Bernanke is that with interest rates already at zero, he’s being forced to rely on so-called “quantitative easing” to pump money into our badly bruised financial system.
These efforts are being managed through the alphabet soup of new lending programs like TALF, TAF, CPFF and others.
Meanwhile, a glut of savings from the developing world coupled with reckless financial alchemy caused debt loads to skyrocket to unsustainable levels. The ongoing destruction of that debt, discussed often by Minyanville's Kevin Depew and Mr. Practical, is now raging at full speed, as assets of all types have come screaming back to earth.
Bloomberg highlights the debate by focusing on 2 highly regarded economists with divergent views on inflation and its causes.
John Maynard Keynes, a 20th century British economist gained notoriety for his thesis that inflation was controlled by supply-demand fundamentals within an economy. He advanced the view that well-directed government spending could help a country balance economic growth with a moderate, healthy rise in prices.
Western politicians jumped on the Keynesian bandwagon during much of the last century to support a vast expansion in government spending and intrusion into the private sector.
Opposing Keynes was Milton Friedman, who instead believed that “inflation is always and everywhere a monetary phenomenon.” Friedman’s focus on monetary policy, that is, interest rates and controlling the flow of money through a country’s economy, clashed with the Keynesian view that inflation could be controlled with fiscal measures and legislation.
Bernanke is doubling down on Keynes, evidenced by recent lending initiatives, bailouts of financial institutions like American International Group (AIG) and his support of President Barack Obama's massive fiscal spending program. The Fed’s involvement in cleaning up the balance sheets of Citigroup (C) and Bank of America (BAC), along with efforts to jumpstart the mortgage market have also diminished its ability to remain apolitical and tend solely to the needs of the economy.
The Fed's gamble is a bold one, as inflating our way out of a deflationary debt unwind could lead to a rapid, uncontrollable rise in prices should the economy rebound sooner than expected.
For example, big oil companies like Exxon Mobil (XOM) and Chevron (CVX) will be reticent to invest in new technologies or drill new wells should crude prices remain low. Limited production capacity could squeeze supply when demand picks back up, leading to a rise in prices.
This trend of firms retrenching in response to rapidly waning demand for goods is being mirrored throughout the economy. And although the Fed promises to take back the monetary stimulus when the economic growth returns, the timing and political implications of such a move are anything but a slam dunk.
And unlike other more esoteric debates over economic ideology, the result of the inflation vs. deflation slugfest has real implications for all Americans.
Inflation, while generally viewed as a necessary evil for economic growth, lines the pockets of those invested in financial and other economic assets at the expense of those on the lower rungs of the economic ladder. If real incomes rose at the same rate prices did since the Fed was created in 1913, they would currently stand at $300,000 per year, six times the current median household income of around $50,000.
In other words, Americans earn about 80% less, in real terms, than they did 100 years ago.
Deflation, while causing a drag on the economy at large, benefits those making less money as each additional dollar they earn stretches further. Meanwhile, at the top of the economic spectrum, the wealthy dislike deflation since their stocks, bonds, commodities, homes and Rolexes all fall in value.
As calls for a stock market bottom and impending economic recovery gain momentum, so too will predictions of rampant inflation. Ironically, Bernanke and fellow central bankers around the world are counting on the hangover from the financial crisis to be bad enough to forestall a resurgence in demand and enable them to slowly, carefully withdraw their monetary steroids.
Whether that will be possible, or even politically acceptable is anybody's guess.
Of the myriad highbrow economic debates currently raging throughout the world of punditry, academia and government policy, few are as contentious as the one over the future of prices: Inflation vs. Deflation.
Indeed, the endgame for this issue is not insignificant, as many believe our economic future hinges on the Federal Reserve’s ability to deftly engineer a return to steady, manageable inflation. To say the least, this is no easy task.
With the unemployment marching upwards, credit markets still largely frozen and global trade grinding to a halt, the American economy is in desperate need of a monetary jolt. The trouble for Fed Chairman Ben Bernanke is that with interest rates already at zero, he’s being forced to rely on so-called “quantitative easing” to pump money into our badly bruised financial system.
These efforts are being managed through the alphabet soup of new lending programs like TALF, TAF, CPFF and others.
Meanwhile, a glut of savings from the developing world coupled with reckless financial alchemy caused debt loads to skyrocket to unsustainable levels. The ongoing destruction of that debt, discussed often by Minyanville's Kevin Depew and Mr. Practical, is now raging at full speed, as assets of all types have come screaming back to earth.
Bloomberg highlights the debate by focusing on 2 highly regarded economists with divergent views on inflation and its causes.
John Maynard Keynes, a 20th century British economist gained notoriety for his thesis that inflation was controlled by supply-demand fundamentals within an economy. He advanced the view that well-directed government spending could help a country balance economic growth with a moderate, healthy rise in prices.
Western politicians jumped on the Keynesian bandwagon during much of the last century to support a vast expansion in government spending and intrusion into the private sector.
Opposing Keynes was Milton Friedman, who instead believed that “inflation is always and everywhere a monetary phenomenon.” Friedman’s focus on monetary policy, that is, interest rates and controlling the flow of money through a country’s economy, clashed with the Keynesian view that inflation could be controlled with fiscal measures and legislation.
Bernanke is doubling down on Keynes, evidenced by recent lending initiatives, bailouts of financial institutions like American International Group (AIG) and his support of President Barack Obama's massive fiscal spending program. The Fed’s involvement in cleaning up the balance sheets of Citigroup (C) and Bank of America (BAC), along with efforts to jumpstart the mortgage market have also diminished its ability to remain apolitical and tend solely to the needs of the economy.
The Fed's gamble is a bold one, as inflating our way out of a deflationary debt unwind could lead to a rapid, uncontrollable rise in prices should the economy rebound sooner than expected.
For example, big oil companies like Exxon Mobil (XOM) and Chevron (CVX) will be reticent to invest in new technologies or drill new wells should crude prices remain low. Limited production capacity could squeeze supply when demand picks back up, leading to a rise in prices.
This trend of firms retrenching in response to rapidly waning demand for goods is being mirrored throughout the economy. And although the Fed promises to take back the monetary stimulus when the economic growth returns, the timing and political implications of such a move are anything but a slam dunk.
And unlike other more esoteric debates over economic ideology, the result of the inflation vs. deflation slugfest has real implications for all Americans.
Inflation, while generally viewed as a necessary evil for economic growth, lines the pockets of those invested in financial and other economic assets at the expense of those on the lower rungs of the economic ladder. If real incomes rose at the same rate prices did since the Fed was created in 1913, they would currently stand at $300,000 per year, six times the current median household income of around $50,000.
In other words, Americans earn about 80% less, in real terms, than they did 100 years ago.
Deflation, while causing a drag on the economy at large, benefits those making less money as each additional dollar they earn stretches further. Meanwhile, at the top of the economic spectrum, the wealthy dislike deflation since their stocks, bonds, commodities, homes and Rolexes all fall in value.
As calls for a stock market bottom and impending economic recovery gain momentum, so too will predictions of rampant inflation. Ironically, Bernanke and fellow central bankers around the world are counting on the hangover from the financial crisis to be bad enough to forestall a resurgence in demand and enable them to slowly, carefully withdraw their monetary steroids.
Whether that will be possible, or even politically acceptable is anybody's guess.
Keepin it Real Estate: The Stabilization Fallacy
This post first appeared on Minyanville and Cirios Real Estate.
Despite recent reports to the contrary, the impending stabilization of the housing market is a myth. While declines in certain markets are coming to an end, real estate, in general, is still in freefall.
Last November, amidst a great deal of media fanfare, Fannie Mae (FNM) and Freddie Mac (FRE) enacted a temporary foreclosure moratorium, angling to give renewed loan modification efforts a chance to work. All the major financial news outlets jumped on the story, loudly proclaiming the mortgage giants were doing their part to give the housing market a chance to lick its wounds.
Then last week, without so much as a nod from the Wall Street Journal, Bloomberg or CNBC, the foreclosure ban was quietly lifted, right on schedule. A nod to the Washington Independent and Calculated Risk for picking up the story.
This is a not-insignificant development in the round of bottom-calling that's gripped the world of real-estate punditry and prognostication.
Two datapoints are to blame for this misplaced optimism: A month-over-month increase in February new home sales, and one in existing home sales. In addition to rising transactions in the most depressed markets, many cite the eagerness of big banks like JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC) to get foreclosed properties off their books a a sign supply is quickly being eaten through.
Meanwhile, reality tells a very different story.
In yesterday's San Francisco Chronicle, Carolyn Said revealed a phenomenon familiar to real-estate insiders, but little appreciated by the financial world at large: phantom supply. Also known as "shadow inventory," phantom supply represents homes banks have repossessed, but have yet to sell. In other words, it's the pipeline of foreclosures still to come on the market.
According to data from RealtyTrac, a foreclosure monitoring service, banks are selling less than half the homes they take back from borrowers. This analysis is echoed by courthouse auction results, which show the vast majority of foreclosures are delayed, rather than being taken back by banks. Even fewer are being sold to third parties, which means asking prices are still too high.
Couple banks' unwillingness to take back, market and sell properties with Fannie and Freddie's recent lifting of their foreclosure ban, and improving housing data could prove to be short-lived. As one well-informed California real estate broker and Minyan writes, "There is a huge logjam [of foreclosures]. With Fannie and Freddie’s recent announcement, the logjam may be coming undone."
To be sure, being negative on the housing market is beating a very, very dead horse. However, with the spin experts at the National Association of Realtors flooding the market with ads -- and with media cries of "stabilization" -- prospective homebuyers should be skeptical of anyone who says the best deals will pass them by if they don't act now.
Despite recent reports to the contrary, the impending stabilization of the housing market is a myth. While declines in certain markets are coming to an end, real estate, in general, is still in freefall.
Last November, amidst a great deal of media fanfare, Fannie Mae (FNM) and Freddie Mac (FRE) enacted a temporary foreclosure moratorium, angling to give renewed loan modification efforts a chance to work. All the major financial news outlets jumped on the story, loudly proclaiming the mortgage giants were doing their part to give the housing market a chance to lick its wounds.
Then last week, without so much as a nod from the Wall Street Journal, Bloomberg or CNBC, the foreclosure ban was quietly lifted, right on schedule. A nod to the Washington Independent and Calculated Risk for picking up the story.
This is a not-insignificant development in the round of bottom-calling that's gripped the world of real-estate punditry and prognostication.
Two datapoints are to blame for this misplaced optimism: A month-over-month increase in February new home sales, and one in existing home sales. In addition to rising transactions in the most depressed markets, many cite the eagerness of big banks like JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC) to get foreclosed properties off their books a a sign supply is quickly being eaten through.
Meanwhile, reality tells a very different story.
In yesterday's San Francisco Chronicle, Carolyn Said revealed a phenomenon familiar to real-estate insiders, but little appreciated by the financial world at large: phantom supply. Also known as "shadow inventory," phantom supply represents homes banks have repossessed, but have yet to sell. In other words, it's the pipeline of foreclosures still to come on the market.
According to data from RealtyTrac, a foreclosure monitoring service, banks are selling less than half the homes they take back from borrowers. This analysis is echoed by courthouse auction results, which show the vast majority of foreclosures are delayed, rather than being taken back by banks. Even fewer are being sold to third parties, which means asking prices are still too high.
Couple banks' unwillingness to take back, market and sell properties with Fannie and Freddie's recent lifting of their foreclosure ban, and improving housing data could prove to be short-lived. As one well-informed California real estate broker and Minyan writes, "There is a huge logjam [of foreclosures]. With Fannie and Freddie’s recent announcement, the logjam may be coming undone."
To be sure, being negative on the housing market is beating a very, very dead horse. However, with the spin experts at the National Association of Realtors flooding the market with ads -- and with media cries of "stabilization" -- prospective homebuyers should be skeptical of anyone who says the best deals will pass them by if they don't act now.
Tuesday, April 7, 2009
The Great SUV Baillout?
This post first appeared on Minyanville.
The double standard continues.
There seems to be no limit to the amount of money the federal government is willing to spend to prop up our broken financial system. But when it comes to putting money in the pockets of average Americans, or support policies that will foster energy independence, Washington cries broke.
The Wall Street Journal reports that Congress is throwing weight behind a so-called "cash for clunkers" program, whereby owners of SUVs and trucks can receive a kickback for scrapping their gas-guzzlers in favor of more energy-efficient vehicles. The catch: The handout is likely to be capped at far less than the clunkers' trade-in value.
To be sure, the program is a step in the right direction. The fewer Escalades (GM) and old Suburbans clogging up our freeways and spitting out carbon dioxide, the better. Not to mention, cars aren't exactly flying off the lot at American dealships - a few new purchases wouldn't hurt the forturnes of GM, Chrysler and Ford (F).
But the initiative would be a lot more effective if it made economic sense. In an environment where making the mortgage payment, putting food on the table, and paying the bills on time are the top financial priorities, eating a few grand to save the trees is barely on the radar.
Sure, a policy that paid full trade-in value for pollution-spewing trucks wouldn't be cheap - but neither is dumping hundreds of billions of dollars into insolvent banks. And it might actually do some good. I mean, insuring more than $300 billion of Citigroup's (C) bloated balance sheet is nice - but my credit line still got cut.
There's clear lesson here: If you want to get on the government dole in a meaningful way, make sure to come as close as possible to bankrupting the entire country. Anything less just won't cut it.
Take GM, whose former CEO Rick Wagoner was fired by the Obama Administration for poor strategic decisions and a turnaround plan that wasn't up to snuff. Meanwhile, Bank of America (BAC) CEO Ken Lewis ran his firm into the ground so thoroughly that he would have taken the entire financial system down with him - had Washington not stepped in with over $200 billion in bailout money and federal guarantees.
The government doesn't seem to have a problem overpaying for toxic financial assets -- in fact, it's encouraging pension funds to do just that -- but when it comes to handing over taxpayer money to, well, taxpayers... The well suddenly runs dry.
The double standard continues.
There seems to be no limit to the amount of money the federal government is willing to spend to prop up our broken financial system. But when it comes to putting money in the pockets of average Americans, or support policies that will foster energy independence, Washington cries broke.
The Wall Street Journal reports that Congress is throwing weight behind a so-called "cash for clunkers" program, whereby owners of SUVs and trucks can receive a kickback for scrapping their gas-guzzlers in favor of more energy-efficient vehicles. The catch: The handout is likely to be capped at far less than the clunkers' trade-in value.
To be sure, the program is a step in the right direction. The fewer Escalades (GM) and old Suburbans clogging up our freeways and spitting out carbon dioxide, the better. Not to mention, cars aren't exactly flying off the lot at American dealships - a few new purchases wouldn't hurt the forturnes of GM, Chrysler and Ford (F).
But the initiative would be a lot more effective if it made economic sense. In an environment where making the mortgage payment, putting food on the table, and paying the bills on time are the top financial priorities, eating a few grand to save the trees is barely on the radar.
Sure, a policy that paid full trade-in value for pollution-spewing trucks wouldn't be cheap - but neither is dumping hundreds of billions of dollars into insolvent banks. And it might actually do some good. I mean, insuring more than $300 billion of Citigroup's (C) bloated balance sheet is nice - but my credit line still got cut.
There's clear lesson here: If you want to get on the government dole in a meaningful way, make sure to come as close as possible to bankrupting the entire country. Anything less just won't cut it.
Take GM, whose former CEO Rick Wagoner was fired by the Obama Administration for poor strategic decisions and a turnaround plan that wasn't up to snuff. Meanwhile, Bank of America (BAC) CEO Ken Lewis ran his firm into the ground so thoroughly that he would have taken the entire financial system down with him - had Washington not stepped in with over $200 billion in bailout money and federal guarantees.
The government doesn't seem to have a problem overpaying for toxic financial assets -- in fact, it's encouraging pension funds to do just that -- but when it comes to handing over taxpayer money to, well, taxpayers... The well suddenly runs dry.
Malls Pull Out All the Stops; Shoppers Yawn
This post first appeared on Minyanville.
It's a tough time to own a mall.
The credit spigot has been turned off: Americans are cutting credit cards, shunning debt and generally spending less. Retail vacancies are at highs not seen in decades. Mall owners are beginning to get desperate.
So desperate, in fact, that some are shelling out $2 million to install Flowriders.
Flo-whats?
The Flowrider -- the retail extension of a nascent craze currently sweeping cruise ships and water parks -- is a wave-making machine that lets city dwellers feel the rush of shooting the curl. The device is the creation of Adenalina, an extreme sports store hawking gear for the brave-at-heart.
The New York Times reports that a half-dozen malls around the country are paying to install Flowriders to pull in foot traffic and keep shoppers entertained enough to, hopefully, spend.
Mall owners aren't just contending with weak demand; supply is piling up as stores contract their operations. Big-box retailers and department stores like Sears (SHLD), Macy's (M) and Dillard's (DDS) are closing stores in response to the ongoing economic slump. Others, like Linens 'N Things, are just going under.
According to the Times, from 1990-2005, retail space per capita more than doubled, while consumer spending grew just 14%, adjusted for inflation.
Take a drive around suburban America, and it's easy to see the challenges facing malls and retailers alike. Strip malls sit empty next to the waving flags of the latest Toll Brothers (TOL) development; Starbucks (SBUX) does brisk business in a shopping center that's half vacant.
Even big cities are struggling to fill commercial space. At the bottom of my building in downtown San Francisco, 3 of the 10 storefronts are empty. Our building, a historic landmark recently purchased by private equity firm Thor Equities, has stepped up an ad campaign to try and attract tenants.
Who knows - maybe instead of braving the frigid, shark-infested waters of the north Pacific to catch some waves, I'll be able to wander down to the swanky Westfield Mall and paddle into a few lefts before I hit up the food court.
It's a tough time to own a mall.
The credit spigot has been turned off: Americans are cutting credit cards, shunning debt and generally spending less. Retail vacancies are at highs not seen in decades. Mall owners are beginning to get desperate.
So desperate, in fact, that some are shelling out $2 million to install Flowriders.
Flo-whats?
The Flowrider -- the retail extension of a nascent craze currently sweeping cruise ships and water parks -- is a wave-making machine that lets city dwellers feel the rush of shooting the curl. The device is the creation of Adenalina, an extreme sports store hawking gear for the brave-at-heart.
The New York Times reports that a half-dozen malls around the country are paying to install Flowriders to pull in foot traffic and keep shoppers entertained enough to, hopefully, spend.
Mall owners aren't just contending with weak demand; supply is piling up as stores contract their operations. Big-box retailers and department stores like Sears (SHLD), Macy's (M) and Dillard's (DDS) are closing stores in response to the ongoing economic slump. Others, like Linens 'N Things, are just going under.
According to the Times, from 1990-2005, retail space per capita more than doubled, while consumer spending grew just 14%, adjusted for inflation.
Take a drive around suburban America, and it's easy to see the challenges facing malls and retailers alike. Strip malls sit empty next to the waving flags of the latest Toll Brothers (TOL) development; Starbucks (SBUX) does brisk business in a shopping center that's half vacant.
Even big cities are struggling to fill commercial space. At the bottom of my building in downtown San Francisco, 3 of the 10 storefronts are empty. Our building, a historic landmark recently purchased by private equity firm Thor Equities, has stepped up an ad campaign to try and attract tenants.
Who knows - maybe instead of braving the frigid, shark-infested waters of the north Pacific to catch some waves, I'll be able to wander down to the swanky Westfield Mall and paddle into a few lefts before I hit up the food court.
PPIP Gets a Facelift
This post first appeared on Minyanville.
The Public-Private Investment Program, or PPIP, is already getting a facelift.
In response to mounting criticism that the latest government-backed attack on toxic assets is simply another way to transfer risk from banks to taxpayers, the Treasury Department announced plans to expand the program to smaller investors and service providers.
According to the Wall Street Journal, a firm must have at least $10 billion in eligible assets under management to qualify as a potential PPIP fund manager. The Treasury may relax these limits, which would make room for smaller players.
Treasury Secretary Tim Geithner’s plan has been harshly rebuked for handing out business to a few well-connected firms like Goldman Sachs (GS), BlackRock (BLK) and Pacific Investment Management Co., or PIMCO. These firms stand to earn huge fees managing assets; most hedge funds, valuation providers or asset managers are being locked out of the program.
Meanwhile, big banks like Citigroup (C), JPMorgan Chase (JPM) and Bank of America (BAC) are patiently waiting for both the PPIP and recently announced mark-to-market accounting changes to help clean up their balance sheets.
Toxic mortgage assets are either being dumped into exclusive, government-directed investment pools or left on balance sheets to be written up to higher values. As a result, vast quantities of capital -- raised to take advantage of distressed loans -- are now looking for a home. Investors -- enticed in by returns that looked too good to be true -- allocated tens of billions of dollars to buy non-performing loans, mortgage-backed securities, and a host of other so-called toxic assets.
Already at a disadvantage, competing against big firms using cheap government leverage to bid up prices, boutique distressed investors are fighting for an increasingly small piece of what remains a very, very large pie.
The Public-Private Investment Program, or PPIP, is already getting a facelift.
In response to mounting criticism that the latest government-backed attack on toxic assets is simply another way to transfer risk from banks to taxpayers, the Treasury Department announced plans to expand the program to smaller investors and service providers.
According to the Wall Street Journal, a firm must have at least $10 billion in eligible assets under management to qualify as a potential PPIP fund manager. The Treasury may relax these limits, which would make room for smaller players.
Treasury Secretary Tim Geithner’s plan has been harshly rebuked for handing out business to a few well-connected firms like Goldman Sachs (GS), BlackRock (BLK) and Pacific Investment Management Co., or PIMCO. These firms stand to earn huge fees managing assets; most hedge funds, valuation providers or asset managers are being locked out of the program.
Meanwhile, big banks like Citigroup (C), JPMorgan Chase (JPM) and Bank of America (BAC) are patiently waiting for both the PPIP and recently announced mark-to-market accounting changes to help clean up their balance sheets.
Toxic mortgage assets are either being dumped into exclusive, government-directed investment pools or left on balance sheets to be written up to higher values. As a result, vast quantities of capital -- raised to take advantage of distressed loans -- are now looking for a home. Investors -- enticed in by returns that looked too good to be true -- allocated tens of billions of dollars to buy non-performing loans, mortgage-backed securities, and a host of other so-called toxic assets.
Already at a disadvantage, competing against big firms using cheap government leverage to bid up prices, boutique distressed investors are fighting for an increasingly small piece of what remains a very, very large pie.
Monday, April 6, 2009
Calpers Doubles Down on Distressed Debt
This post first appeared on Minyanville.
The country's largest pension fund keeps pouring money into losing bets.
According to Bloomberg, the California Public Employees' Retirement System, or Calpers, dumped $1.7 billion dollars into Leon Black's private equity giant Apollo Management LP last year, hoping to profit from ongoing credit market dislocation. Calpers, which mangages pension money for 1.6 million public employees in California, has invested more than $3.5 billion with Apollo since 2006.
Apollo, which focuses on private equity investments as well as distressed debt, has shown investors outsized returns for the past two decades: 25% annually. Recently, however, as the economy has turned south, Apollo is facing mounting troubles with investments gone bad: Linens 'N Things and Harrahs Casino, 2 of its biggest profile private equity deals, are either bankrupt or struggling to restructure debt, respectively.
Meanwhile, Calpers is smarting from more than a few ill-advised bets of it's own, having effectively top-ticked the New York City real estate market in 2006. Together with developer Tishman Speyer, Calpers dumped $500 million into Peter Cooper Village and Stuyvesant Town, a massive residential housing project just south of midtown. The deal now faces cash flow and valuation issues, as the New York real estate markets has officially cracked.
Closer to home, displaying its aptitude for buying at the top, Calpers invested in a speculative land deal on the outskirts of Los Angeles in early 2007. The partnership, LandSource Community Development LLC, filed for bankruptcy a little more than a year later. Lennar (LEN), the developer that sold Calpers the land, recently bought it back for a song.
Pension funds as a whole are reeling from ongoing turmoil in the financial markets. It's estimated that funds are short $237 billion nationwide, according to a recent study. Never fear; Treasury Secretary Tim Geithner is working on a solution.
The recently announced Public-Private Investment Program, or PPIP, is encouraging pension funds to spot the cash to buy distressed assets from the likes of JPMorgan (JPM), Citibank (C) and Bank of America (BAC).
In other words, the federal government is asking money managers with a fiduciary responsibility to safeguard the retirements of millions of public employees to plunk down tens of billions of dollars to clean up the collective balance sheet of the American banking system.
And people are up in arms over AIG (AIG).
The country's largest pension fund keeps pouring money into losing bets.
According to Bloomberg, the California Public Employees' Retirement System, or Calpers, dumped $1.7 billion dollars into Leon Black's private equity giant Apollo Management LP last year, hoping to profit from ongoing credit market dislocation. Calpers, which mangages pension money for 1.6 million public employees in California, has invested more than $3.5 billion with Apollo since 2006.
Apollo, which focuses on private equity investments as well as distressed debt, has shown investors outsized returns for the past two decades: 25% annually. Recently, however, as the economy has turned south, Apollo is facing mounting troubles with investments gone bad: Linens 'N Things and Harrahs Casino, 2 of its biggest profile private equity deals, are either bankrupt or struggling to restructure debt, respectively.
Meanwhile, Calpers is smarting from more than a few ill-advised bets of it's own, having effectively top-ticked the New York City real estate market in 2006. Together with developer Tishman Speyer, Calpers dumped $500 million into Peter Cooper Village and Stuyvesant Town, a massive residential housing project just south of midtown. The deal now faces cash flow and valuation issues, as the New York real estate markets has officially cracked.
Closer to home, displaying its aptitude for buying at the top, Calpers invested in a speculative land deal on the outskirts of Los Angeles in early 2007. The partnership, LandSource Community Development LLC, filed for bankruptcy a little more than a year later. Lennar (LEN), the developer that sold Calpers the land, recently bought it back for a song.
Pension funds as a whole are reeling from ongoing turmoil in the financial markets. It's estimated that funds are short $237 billion nationwide, according to a recent study. Never fear; Treasury Secretary Tim Geithner is working on a solution.
The recently announced Public-Private Investment Program, or PPIP, is encouraging pension funds to spot the cash to buy distressed assets from the likes of JPMorgan (JPM), Citibank (C) and Bank of America (BAC).
In other words, the federal government is asking money managers with a fiduciary responsibility to safeguard the retirements of millions of public employees to plunk down tens of billions of dollars to clean up the collective balance sheet of the American banking system.
And people are up in arms over AIG (AIG).
Keepin' It Real Estate: Jumbo Prime R.I.P.
This post first appeared on Minyanville and Cirios Real Estate.
Now, both are out of business.
Thornburg said it expects to file for Chapter 11 bankruptcy protection, ending a nearly 2-year struggle to fend off creditors and survive the credit crunch. The company, once the country's second largest independent mortgage lender, specialized in making jumbo loans to borrowers perceived to have little credit risk. Ever since the market for its mortgage-backed securities evaporated in the summer of 2007, however, Thornurg has been under siege.
In what now seems like ancient history, Countrywide nearly collapsed as its short-term commercial papers seized up, and investors fled Thornburg in droves. The Federal Reserve stepped in and shocked the market back to life, but the revival was short-lived. Enough damage had been done that any financial institution holding even highly rated securities backed by residential mortgages had a target on its back.
Thornburg's stock was delisted last December as a series of last-ditch efforts by CEO Larry Goldstone failed to save the company. With investors buying nothing by government-backed Fannie Mae (FNM) and Freddie Mac (FRE) mortgages, Thornburg’s bread and butter -- jumbo loans -- became virtually worthless.
Although Thornburg’s demise was a foregone conclusion months ago, the fate of a company many once believed immune illustrates how far we’ve come from what began as a “subprime” problem.
High-end real estate is now fully engaged in the nation’s housing slump. Prime loans are souring faster than subprime ones as job losses spread up the socioeconomic ladder. Manhattan’s real-estate market is in the news again, as sales continue to plunge and prices follow suit.
Here in the San Francisco Bay Area, where expensive homes dominate many markets, high-end buying activity has slowed to a trickle. The chart below, from Cirios Real Estate shows purchases over $1,000,000 since the broader housing market peaked in 2005. Even without the statistical wizardry of seasonal adjusting the data, the trend is clear: America’s wealthy aren't buying.
click to enlarge
Sales figures don't look much better in the first quarter of this year, even though broad sales activity is up month-over-month. The bifurcation of the real-estate market continues, as troubles in the high end are picking up the slack while low-end markets grope for a bottom.
Foreclosures are even happening in some of the country's wealthiest communities. In many of these markets, denial reigns as owners clong to the belief that the slump is temporary, their paper losses transitory. But as deleveraging continues, asset prices continue to fall, and forced liquidations creep towards the very wealthy, reality is slowly setting in.
Now, both are out of business.
Thornburg said it expects to file for Chapter 11 bankruptcy protection, ending a nearly 2-year struggle to fend off creditors and survive the credit crunch. The company, once the country's second largest independent mortgage lender, specialized in making jumbo loans to borrowers perceived to have little credit risk. Ever since the market for its mortgage-backed securities evaporated in the summer of 2007, however, Thornurg has been under siege.
In what now seems like ancient history, Countrywide nearly collapsed as its short-term commercial papers seized up, and investors fled Thornburg in droves. The Federal Reserve stepped in and shocked the market back to life, but the revival was short-lived. Enough damage had been done that any financial institution holding even highly rated securities backed by residential mortgages had a target on its back.
Thornburg's stock was delisted last December as a series of last-ditch efforts by CEO Larry Goldstone failed to save the company. With investors buying nothing by government-backed Fannie Mae (FNM) and Freddie Mac (FRE) mortgages, Thornburg’s bread and butter -- jumbo loans -- became virtually worthless.
Although Thornburg’s demise was a foregone conclusion months ago, the fate of a company many once believed immune illustrates how far we’ve come from what began as a “subprime” problem.
High-end real estate is now fully engaged in the nation’s housing slump. Prime loans are souring faster than subprime ones as job losses spread up the socioeconomic ladder. Manhattan’s real-estate market is in the news again, as sales continue to plunge and prices follow suit.
Here in the San Francisco Bay Area, where expensive homes dominate many markets, high-end buying activity has slowed to a trickle. The chart below, from Cirios Real Estate shows purchases over $1,000,000 since the broader housing market peaked in 2005. Even without the statistical wizardry of seasonal adjusting the data, the trend is clear: America’s wealthy aren't buying.
click to enlarge
Sales figures don't look much better in the first quarter of this year, even though broad sales activity is up month-over-month. The bifurcation of the real-estate market continues, as troubles in the high end are picking up the slack while low-end markets grope for a bottom.
Foreclosures are even happening in some of the country's wealthiest communities. In many of these markets, denial reigns as owners clong to the belief that the slump is temporary, their paper losses transitory. But as deleveraging continues, asset prices continue to fall, and forced liquidations creep towards the very wealthy, reality is slowly setting in.
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