[Marxism] Continuing economic woes
lnp3 at panix.com
Fri Jun 6 07:56:59 MDT 2008
Wall Street Journal, June 6, 2008; Page A1
Real-Estate Woes of Banks Mount
Lenders Dumping Bad Loans at Discount;
Regulators See Losses Continuing
By MICHAEL CORKERY, JONATHAN KARP and DAMIAN PALETTA
Federal regulators warned Thursday that banking-industry turmoil would
continue as financial institutions come to terms with piles of bad loans
they made to finance the construction of homes and condominiums.
Until now, most of the damage to banks from the housing crisis has come
from homeowners defaulting on their mortgages. But amid a dismal spring
sales season for new homes, loans to home and condo builders are looking
increasingly shaky. Banks have begun to dump them at what will likely be
steep discounts, setting the stage for billions of dollars in fresh losses.
"As long as the housing market is on a downward path, as long as those
prices continue to fall, I think there's a risk that the losses could
continue to mount on a variety of loans," Federal Reserve Vice Chairman
Donald Kohn told the Senate Banking Committee Thursday.
At the same hearing, Federal Deposit Insurance Corp. Chairman Sheila
Bair said banks that aren't diversified, or those with high exposures to
residential construction and development, are of particular concern.
"That's where we are really seeing the delinquencies spike," she said.
The surprisingly gloomy outlook is at odds with the sentiment of
investors, who appear to have moved on from worrying about the health of
the financial system to obsessing about gasoline prices and consumer
spending. The Dow Jones Industrial Average rose 213.97 points, or 1.7%,
on Thursday on the back of surprisingly strong retail-sales data.
The health of the economy is heavily dependent on the willingness of
banks and other financial institutions to lend to consumers and
businesses. Many banks have already taken substantial losses, and either
will have to pare their lending or raise new capital to rebuild their
safety nets. The Federal Reserve and Treasury Department have been
pressing banks to raise capital so as not to further reduce lending.
Banks with swelling portfolios of troubled loans tied to land and
housing are struggling to unload some of their real-estate debt. IndyMac
Bancorp Inc., a Pasadena, Calif., lender, is trying to sell $540 million
in loans made to finance land purchases and housing construction
projects. Winning bids on many of the loans were, on average, about 60
cents on the dollar, according to people familiar with the matter. But
some winning bids were only about 20 cents on the dollar.
Cleveland-based KeyBank, a unit of KeyCorp., is trying to unload $935
million in loans tied to land and residential developments, while
Wachovia Corp. is shopping a $350 million loan portfolio, according to
two people who have seen the offerings. Representatives of the banks
declined to comment.
The sales are a response to a growing problem: Home builders are falling
behind on loan payments, and the value of the land and housing
developments that serve as loan collateral is plummeting. Over the next
five years, U.S. banks could "charge off" as bad debt between 10% and
26% of their loans tied to residential construction and land assets,
which would amount to about $65 billion to $165 billion, according to a
report sent to clients Thursday by housing research firm Zelman &
Associates. That compares with charge-offs of about 10% of
construction-related bank assets, totaling $31.6 billion, when adjusted
for inflation, during the last housing downturn in the late 1980s and
early 1990s. In 2007 and the first quarter of this year, banks wrote
down just 0.7% of such assets, according to Zelman.
"We believe this period of procrastination is nearly over," says Ivy
Zelman, chief executive of Zelman & Associates.
The prospect of a new wave of losses worries federal regulators, given
the large proportion of loans to housing developers held by many banks
and thrifts. The problems are worse at small banks that can't easily
absorb losses, and at banks with big exposure in states hit hard by the
housing crisis. Banks in Arizona have 36% of their total loans tied to
construction and development. In Georgia that number is 34%, and in
North Carolina it's 28%. Zelman said construction and development loans,
as a percentage of total loans, are at their highest levels since at
Grab Bag of Assets
IndyMac is trying to sell debt backed by a grab bag of assets, including
partially built subdivisions, condo buildings and large parcels of raw
land covered in sagebrush in parts of California, where the housing
crisis is acute, according to people familiar with the offering.
Selling real-estate loans could help larger lenders like IndyMac shore
up their balance sheets. But such sales, by setting a market value for
distressed real-estate loans, could trigger problems at smaller banks
with real-estate exposure, which might have a difficult time absorbing
Office of Thrift Supervision Director John Reich told Congress that the
number of savings-and-loan associations at a heightened risk of failure
jumped from 12 at the end of March to 17 today. Federal regulators have
met privately with Treasury officials to discuss the potential fallout
from a larger number of bank failures, people familiar with the matter
said. Four banks have already failed this year, more than in the prior
three years combined.
The FDIC's Ms. Bair said she would be "very surprised" if a large bank
failed, but added that "we need to be prepared for all contingencies."
Federal regulators said they have increased scrutiny of banks with high
concentrations of real-estate loans, with Comptroller of the Currency
John Dugan saying a formal initiative is in place to review asset quality.
Signs of Improvement
At the same time, regulators praised the banking industry for raising
capital and for building up reserves against losses. They added that
some pockets of the credit markets were showing signs of improvement.
Over the last week, for example, direct lending by the Federal Reserve
to investment banks and commercial banks declined, suggesting that
credit strains across the industry were easing. Average daily borrowing
by securities firms was $8.3 billion in the week ending Wednesday, down
from $12.3 billion a week earlier, the Fed said Thursday.
Real-estate lenders had been hoping for a decent spring sales season for
new homes, which would have helped builders stay current on their loans.
But the selling season has been a bust. The rate of foreclosures on
homeowners hit a record, as did the rate at which they fell behind on
their mortgage payments. In the first quarter, 6.35% of mortgages were
at least 30 days delinquent, not including those already in foreclosure,
a rise of 1.51 percentage points from the year-earlier period.
"We've seen a real change in the market," says Ricardo Chance, a
managing director at KPMG Corporate Finance LLC, who is helping troubled
builders restructure their businesses. "Finally the banks are
capitulating and saying, 'Let's mark to market and flush this all out.'
The market is going to get worse. We don't want to hold on to this stuff."
The glut of foreclosed homes has made life hard for home builders. "I've
been through three cycles, and this is the worst," says Mark Connal, a
vice president at Michael Crews Development, a closely held Escondido,
Calif., builder. "You can buy brand new homes for less than the cost of
At the peak of the housing boom, during the second quarter of 2005,
luxury-home builder Toll Brothers Inc. signed 3,120 contracts. In its
latest quarter ended April 30, buyers signed just 929 contracts for new
homes in the builder's 300 communities across the nation.
In Riverside County, Calif., where the housing market is dismal,
developers are offering upgrades and services to move unsold homes.
"They used to landscape the front yard," says Gloria Britt, of
Prudential California Realty in Riverside. "Now they're doing the back,
upgrading the patio, whatever the buyer asks for."
Write to Damian Paletta at damian.paletta at wsj.com
NY Times, June 7, 2008
Unemployment Rate Hits 5.5%; Payrolls Shrink for Fifth Month
By MICHAEL M. GRYNBAUM
The American unemployment rate surged to 5.5 percent last month, the
government said on Friday, the biggest increase in more than two
decades. The report was the latestsign that workers face a darker
outlook even as they struggle to cope with the housing slump and high
energy prices that have cut into their spending power.
Employers also shed 49,000 jobs in May, the Bureau of Labor Statistics
said in a statement. Payrolls have shrank every month this year, the
worst losing streak since 2003. Manufacturers, construction companies
and the retail sector were the hardest hit, as businesses struggled with
lower demand and looked to cut costs.
The jump in the unemployment rate, which was 5 percent in April, led to
a sharp increase in the number of Americans who looked for jobs in May.
The size of the work force grew, but fewer jobs were available, nudging
up the percentage of unemployed to its highest level since October 2004.
The jump caught many economists off-guard.
“This is a pretty weak report. And you can’t dismiss a five-tenths of a
jump in the unemployment rate, even if you figure there’s some flukiness
to the data,” Ethan Harris, the chief United States economist at Lehman
That flukiness referred to teenagers, who tend to enter the job market
in May as schools let out for the summer; the result is a bloated labor
pool, Mr. Harris said.
But the bad news could not be entirely blamed on the adolescent set, he
said. “The report suggests the trends in the labor market are quite weak.”
Economists said the report may keep the Federal Reserve from tightening
interest rates in the near future. Fed policy makers meet again at the
end of the month.
The government also revised down its payroll estimates for April and
March for a net loss of 15,000 jobs.
The weak labor market is likely to raise anxieties among Americans,
putting a pall on consumer spending. Many workers could be left with
little room to maneuver if they lose their jobs, as home values decline
and equity lines are maxed out.
Even employed Americans are feeling pressure. Salaries continued to
shrink in May, after adjusting for inflation. Workers’ wages grew in May
but at an anemic pace, with rank-and-file employees earning $17.94 an
hour, on average. That was a 5 cent increase — or 0.3 percent — from April.
In the last 12 months, hourly earnings have risen 3.5 percent, below the
pace of inflation, which is running at about 4 percent a year.
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