By all means, CLEAN up your home. Get rid of all the dirt, dust, grime, debris, clutter, and paper. Make your existing home or property as spacious and neat as possible. Prepare your house as if you were renting it and moving out and you wanted every penny of your security deposit back.
Wednesday, September 30, 2009
By all means, CLEAN up your home. Get rid of all the dirt, dust, grime, debris, clutter, and paper. Make your existing home or property as spacious and neat as possible. Prepare your house as if you were renting it and moving out and you wanted every penny of your security deposit back.
Tuesday, September 29, 2009
Home Prices Rebound as Tax-Credit Expiration Looms
A national average of home prices increased 1.6% from June to July, according to the S&P/Case-Shiller report
By Phil Mintz
Is the home price recovery real or being artificially supported by the $8,000 first-time home buyer's tax credit that's scheduled to expire at the end of November?
That's one of the questions being raised by the Standard & Poor's/Case-Shiller home price report for July, issued Sept. 29. Home prices increased 1.6% from June to July in the 20 metro markets tracked by the report, though they are still down 13.3% from a year ago. It was the third straight month of price increases for the 20-market average, as well as a narrower 10-city composite.
"The rate of annual decline in home price values continues to decelerate and we now seem to be witnessing some sustained monthly increases across many of the markets," David M. Blitzer, chairman of the index committee at Standard & Poor's, said in a news release. "The two composites and all metro areas are showing an improvement in the annual rates of return, as seen through a moderation in their annual declines."
All but two of the 20 metros showed price increases from June to July. The outliers are Las Vegas, down 1.1% for the month and 31.4% year-over-year, and Seattle, down 0.1% for the month and 15.3% year-over-year.
Blitzer said the report indicates a continued "stabilization in national real estate values," but added, "we do need to be cautious in coming months to assess whether the housing market will weather the expiration of the Federal First-Time Buyer's Tax Credit in November, anticipated higher unemployment rates, and a possible increase in foreclosures."
TAX CREDIT EXTENSION?
The National Association of Realtors and the National Association of Home Builders are pressing for an extension of the tax credit into next year. The Realtors group said in mid-September that 350,000 new buyers would not have purchased a home this year without the credit, which may cost the Treasury as much as $15 billion. Opponents of an extension say it would be too costly to taxpayers. Several bills have been introduced to expand and extend the credit, and earlier this month the White House said its economic team is looking at the various options.
Paul Dales, U.S. economist for Capital Economics in Toronto, said in a report on Sept. 29 that while prices are being supported by the tax credit, more significant drivers are economic stabilization and a decline in mortgage rates below 5%. "This suggests that the recovery will continue even if the tax credit is not extended beyond November," Dales writes. "That said, without the tax credit the pace of the recovery in both activity and prices will slow. Moreover, on the Case-Shiller measure prices remain [more than] 30% below their peak. Accordingly, even a fairly robust recovery may not provide much of a boost to consumption."
FDIC Proposes Banks Prepay Deposit Fees Through 2012
Sept. 29 (Bloomberg) -- The Federal Deposit Insurance Corp. is asking lenders to prepay three years of premiums, raising $45 billion, to replenish reserves drained by the fastest pace of bank failures in 17 years.
The insurance fund will have a negative balance as of tomorrow after 120 banks were shut in the past two years, and will be positive by 2012, the staff said. Banks failures may cost $100 billion through 2013 with half the cost already incurred, the FDIC said. The agency today rejected options for a second special fee or borrowing from the Treasury Department.
“What we are proposing to do is to tap the ample liquidity of the banking industry to improve our own liquidity position without borrowing from the Treasury,” FDIC Chairman Sheila Bair said at a Washington board meeting.
The agency is required by law to rebuild the insurance fund when the reserve measured against insured deposits falls below a certain level. The fund, drained by 95 bank failures this year, had $10.4 billion as of June 30 and will return to a positive balance in 2012.
The proposal adopted unanimously by the board requires banks to pay premiums for the fourth quarter and next three years on Dec. 30.
The board backed prepayments over alternatives such as borrowing taxpayer dollars from the Treasury Department, charging the banking industry a special fee in addition to levies they already pay and borrowing directly from the banks.
Dec. 30 Payment
Under the proposal, the FDIC wouldn’t impose another special assessment this year. The agency would raise assessments by 3 basis points in 2011.
The FDIC will seek public comment until Oct. 28.
The banking industry lobbied against a special fee that would be added to the regular annual premium, telling the FDIC and Congress such a levy would hurt their ability to raise capital. The industry welcomed the FDIC’s proposed approach.
The prepayment approach gives “the FDIC the cash that they need, it will be paid for by the industry and it will not have the severe impact that other options would have had on banking,” Chessen said.
Banks paid a special assessment in the second quarter that raised $5.6 billion for the insurance fund. The agency also has authority to impose fees in the third and fourth quarters.
Banks backed prepayment because the premiums are classified as an asset when the payment is made, becoming an expense during the quarter in which the obligation is due.
The agency has authority to borrow against a Treasury line of credit that Congress in May increased to $100 billion. This option would have put the FDIC in the position of borrowing from taxpayers in the wake of public anger over the bank bailout.
Monday, September 28, 2009
Investors, lured by the safety of taxpayer-guaranteed debt, are lending states money at the lowest interest rates in decades.
The borrowing has helped governments increase spending during the recession and avoid some painful spending cuts. Lower interest rates will save governments several billion dollars annually during the life of the debt.
Even financially troubled states are getting large amounts of cash at bargain prices. California borrowed $8.8 billion last week at interest rates of 1.25% to 1.5% for debt due by June 30. That's about one-third the interest rate it paid a year ago.
"It's a good time to go out and borrow money," Utah Treasurer Richard Ellis says.
State and local governments had added $217 billion in new debt this year through last Thursday, up 5% from a year earlier, reports Thomson Reuters. That doesn't include California's $8.8 billion debt issue, which closed Friday.
Governments are borrowing more while consumers and business have less access to credit.
• Miami-Dade schools. The district will make a profit on $150 million borrowed last week to tide it over until property tax collections arrive in December. The district borrowed money at 0.37% and will invest the money, until it is spent, at 0.80%. "We'll make a little money on our debt," Chief Financial Officer Richard Hinds says.
• Ohio. The state planned to borrow $252 million last week. Instead, it borrowed $544 million to take advantage of low rates and refinance old debt.
• Utah. The state borrowed $1 billion for highway projects Sept. 16. As one of seven states with the top AAA bond rating, Utah sold 15-year bonds for 2.72%. "We caught the market at a phenomenal time," Ellis says.
Short-term interest rates for governments hit a record low of 0.56% last week for debt due in 13 months or less, reports The Bond Buyer, a newspaper that tracks public finance. Rates on 20-year bonds fell to 3.79%, the lowest level since 1967.
Not all governments can get low rates, Bond Buyer editor Amy Resnick says. Some small governments or programs backed by a specific revenue source, such as tolls, have a hard time borrowing cheaply because investors don't want to take risks.
States and cities borrow at lower rates than businesses because interest paid to investors is generally exempt from federal income taxes. Risk is low, too. No state has defaulted since the 1930s.
State and local governments increased borrowing at an 8.3% annual rate in the second quarter, the most recent figures available, the Federal Reserve reports. Federal borrowing rose 28%. By contrast, household and business debt shrank.
Saturday, September 26, 2009
Friday, September 25, 2009
Bonita Bay Group, once a premier developer of upper-crust golf communities in this upper-crust town, is on the verge of collapse. The company says it will be forced to file for bankruptcy if it has to refund $245 million in golf-club membership fees some homeowners are demanding, in a battle that's pitting residents against each other and against the company that sold them lavish dream homes during the height of the boom.
Through the 1990s and the earlier part of this decade, Bonita Bay was regarded as one of the leading developers in the Naples area, which has the highest per capita income of any locale in the country except Stamford-Greenwich, Conn. Bonita Bay launched seven Naples-area communities where houses sold for up to $12 million and came with access to exclusive golf clubs with restaurants, tennis courts and pools. Its homeowners have included Richard Schulze, the billionaire chairman of Best Buy Corp., opera diva Kiri Te Kanawa and New Jersey Nets President Rod Thorn.
Mediterra is Bonita Bay's most opulent community. The development also has a Mediterranean-themed park.
Today, like many other Sunbelt developers, Bonita Bay is being squeezed by debt and plunging sales. But its biggest problem is a dispute over the deposits homeowners plunked down for memberships in the golf clubs, a marina and other clubs. Many members want to quit the clubs and get their money back for reasons ranging from cheaper golf elsewhere to the desire for ready cash. Their membership agreements say the deposits -- up to $185,000 per member -- are refundable on demand, a relatively unusual stipulation homeowners say was a big part of the appeal of joining.
Yet Bonita Bay says the agreements also stipulate that the rules "may be amended from time to time," thus allowing it to cancel the refund policy at its discretion -- and that at any rate, it can't pay the money.
Angry residents have filed at least 15 lawsuits against Bonita Bay seeking the return of their deposits and accusing the company of civil fraud. They say the right to amend the rules doesn't apply to the refund policy. The Florida attorney general, responding to a citizen complaint, is investigating Bonita Bay to see whether the way it sold and refunded membership deposits was a Ponzi scheme. One Bonita Bay resident and former Wall Street executive, Michael Lissack, has filed a whistle-blower's complaint against the company with the Internal Revenue Service, saying it owes back taxes on profits it made by holding the deposits.
Bonita Bay's bind is one of the strongest signs yet that putting up houses around fairways -- a hallmark of the real-estate boom -- has lost its cachet. Several other developers of golf communities have already entered bankruptcy proceedings, including the high-end Winchester Country Club in Auburn, Calif., and Promontory in Park City, Utah.
In an interview, Bonita Bay Chairman David Lucas scoffed at the idea that the company is running a Ponzi scheme -- in which investors are paid returns from money that comes from later investors -- or doing anything else that is wrong. Mr. Lucas says the deposits were used to meet operating costs, and aren't taxable. He says the developer is simply in a financial bind as a result of bad land purchases combined with the real-estate downturn, and that members of his wife's family, which owns the closely held company, have poured in funds to keep Bonita Bay going. He says losses in the past three years have "completely wiped out" prior profits.
Bonita Bay has already closed the golf club at Twin Eagles, its latest development, where most of the lots are unsold and weeds are sprouting from the bunkers. In addition to threatening a bankruptcy filing if it has to refund deposits at the other clubs, the developer says it might have to shut down the clubs entirely unless residents come up with millions of dollars to buy them -- a prospect that has homeowners doubly steamed.
Golf-community developers typically sell golf clubs -- courses and all -- to members once the developments are completed, and convert membership deposits into equity stakes. But Bonita Bay is trying to do so at a time when many members want out.
A Bonita Bay club recently closed amid a crunch for golf communities.
Living amid the swaying palms and bougainvillea, many well-heeled residents of Bonita Bay's developments say they feel burned and trapped. Few are eager to pour fresh money into the golf clubs -- but many believe that allowing them to close would take away the central attraction of the communities and further erode house values on the Bonita Bay sites. Local real-estate agents say prices are off by more than the 36% average decline that Naples-area housing has suffered since 2006.
Morris Shepard, a former Northeastern University professor who sold an Internet company he started in the 1990s and moved to a Bonita Bay community, says he stopped paying dues to his fitness and beach clubs this year "because I don't deal with crooks," referring to the fact that company has refused to give people their money back. Mr. Shepard says he is opposed to giving any more money to Bonita Bay -- to buy the golf clubs or for anything else.
"There have been severe cutbacks in services and in the condition of the facilities," says Mr. Schulze, the Best Buy chairman, who hasn't asked for his deposit back but also doesn't want to pony up more money to buy the club at Bonita Bay, the developer's oldest community. "Mold is growing in the bag rooms" where players store golf clubs, he says. Bonita Bay acknowledges it has cut maintenance to hold down costs but it says the clubs "will be in excellent shape for the [winter] season," when most members hit the links.
Some residents say the issue of buying the clubs has created bitterness between the wealthiest homeowners, who often have golf memberships, and less wealthy residents who enjoy the landscaping but resent pressure to contribute to the purchase of the clubs. At Bonita Bay's Mediterra community, a committee of golf-club members initially proposed pushing nonmembers to join the club on a social basis and pay $2,500 or more to help fund the purchase. They were told if they didn't join, no future buyers of their homes would be allowed to become golf members. A number of residents called the plan extortion, and the committee eventually dropped its demand.
Richard Schmidt, who lives in Mediterra, where many homes have colonnaded porticos, four-car garages and wine cellars, is part of a group of residents trying to buy the golf club. Bonita Bay, he says, was once "the platinum standard" among developers, and he'd like to preserve the community he lives in. The former chief of water utility Aquarion Co. says not buying the club opens it to the uncertainty of bankruptcy and a sale to others or opening it to the public.
The family-owned company was started by David Shakarian, who founded vitamin retailer GNC Corp. In 1985, it broke ground on the first of its developments, the Bonita Bay Club, which sported a marina on the Gulf of Mexico, three golf courses, homes that went for $3 million and condominium towers. Over the years, the company added six more developments. Its communities now cover 16 square miles of southwest Florida with 12,096 dwellings. Mr. Shakarian died in 1984, just before the first development went up, and the company has been run ever since by his son-in-law, Mr. Lucas, now 62.
Mr. Lucas says that the first sign of trouble for Bonita Bay started with Hurricane Wilma, which hit Naples hard in 2005 and scared away potential land buyers -- many of them contractors who build homes for buyers. Then Florida real estate began to crater, and the mortgage crisis hit. Bonita Bay's land sales are expected to fall to $1.9 million this year from $343 million in 2005.
The company appeared to be getting by with revenue from the clubs and property management and maintenance fees, until a surge of requests for membership refunds began last fall. "It was like a run on the bank," Mr. Lucas says.
In November 2008, the company told homeowners who had paid $245 million in club deposits that it would no longer redeem the fees on demand. The company says it had returned $77 million in such fees over the prior three years.
The first resident suit against Bonita was filed in December. Mr. Lucas acknowledges that Bonita Bay had promised refunds on demand in its membership agreements, but says that members also signed documents that disclosed that terms could be changed at any time. Plaintiffs in the lawsuit say that the terms that could be changed were limited and didn't cover refunds.
Bonita Bay now says that in the future it will refund a deposit to one member for every three new members who join.
As the membership furor was unfolding, Bonita Bay was being forced to renegotiate its loans from Cleveland-based KeyCorp bank. With new lending from the Shakarian family, it cut KeyCorp debt to $74 million from $105 million, but the bank is tightly limiting further loans. Mr. Lucas says Bonita Bay also has $41 million in liabilities in community-development bonds. KeyCorp declined to comment, except to say it hasn't tried to seize Bonita Bay.
Mr. Lucas says he tried to negotiate deals with residents to partially repay the golf deposits -- but KeyCorp refused to lend funds for that. In April, Bonita Bay hired Tim Boates, of Alabama-based RAS Management Advisors, as "chief restructuring officer." Mr. Boates set about cutting cash-draining operations and reducing staff. "Frankly, we needed help," says Mr. Lucas. "We cut headquarters staff 60%."
Bonita Bay began closing beach clubs, slashing hours at restaurants and cutting back on maintenance. Earlier this summer it closed the courses at its Twin Eagles development, which were designed by golf legends Jack Nicklaus and Gary Player.
On Aug. 12, Mr. Boates, the new restructuring officer, sent a letter to the remaining five clubs' 3,000 members saying the clubs would close unless members agreed to buy them by Sep. 30.
But with only one tentative agreement in place so far, the company recently dropped its Sept. 30 deadline, and says as long as members continue to pay their dues and to negotiate a purchase of the clubs in good faith, it will keep them open. However, a spokeswoman for Bonita Bay Group says, the company still needs the members to agree to buy the clubs at most of its communities, and it could close them otherwise.
The battle at Bonita Bay has already had a ripple effect on house values, local real-estate agents say. One of them, Mr. Lissack, who filed the whistle-blower's complaint, says that one of his clients has been trying to sell his Bonita Bay Club residence and guesthouse since early this year. Mr. Lissack says that in another Naples development a comparable property would sell for $4 million. His client's property is priced at $2.5 million and hasn't had any takers.
Although property sales in the Naples area have increased this year, they are down at the Bonita Bay communities, according to Mr. Lissack's tally. He says that only 15 residences have sold at Mediterra since last November, down from 38 in the same time period a year earlier; and in the larger Bonita Bay Club area, 67 homes have sold, down from 148. A Bonita spokeswoman says sales of low-end properties in Naples are up, and that sales declines in Bonita Bay communities are in line with sales in Naples's comparably high-end communities.
Some residents say they'd rather see Bonita Bay Group file for bankruptcy, because they think they could buy the clubs more cheaply then. Tom Melancon, a former Burberry Co. executive who was one of the first residents of Mediterra, says Mr. Boates "is trying to bully people and that's not going to work."
Wednesday, September 23, 2009
I keep asking myself the same question while others talk so glibly about economic recovery.
Tuesday, September 22, 2009
By David M. Levitt
Sept. 21 (Bloomberg) -- Commercial real estate prices in the U.S. resumed a “steep decline” in July after showing signs of leveling off in June, Moody's Investors Service said, as credit restrictions curtail lending and push landlords toward default.
The Moody's/REAL Commercial Property Price Indices fell 5.1 percent in July from the month before, Moody's said today in a statement. The index is down almost 39 percent from its October 2007 peak. The decline in June was 1 percent.
Commercial property sales this year may fall to an 18-year low. This latest set of numbers suggests no letup in that trend, said Neal Elkin, president of Real Estate Analytics LLC, a New York firm that partners with Moody's in producing the report.
We are still vulnerable to moves on the downside, Elkin said in a telephone interview. As time passes, the distress and the stress among those who need to sell is growing.
Elkin cited figures from Real Capital Analytics Inc., whose data are used in compiling the report, showing the portion of sales classified as troubled -- those properties in or close to default -- almost doubled to 23 percent in July from March.
That's “something we've never seen, Elkin said.
Sales this year through July totaled about one-third of the year-earlier number, Moody's Managing Director Nick Levidy said in the statement. The market averaged about 375 sales a month this year compared with almost 1,100 a month last year, he said.
Office sale prices fell 23 percent from a year ago in New York, 27 percent in San Francisco and 22 percent in Washington, according to the report.
Prices of apartment buildings in the U.S. South have seen some of the steepest value declines, according to the report. Apartment prices in the region dropped 44 percent in the 12 months through June, almost twice the nationwide decline of 24 percent, and are now about half what they were two years ago.
Florida apartment values tumbled 40 percent in a year, the report said.
The decline is being caused in part by “a ripple effect from the overbuilding of condominiums in those markets, many of which are now competing as rentals, he said.
Robert J. Abalos, Esq.
Monday, September 21, 2009
Wednesday, September 16, 2009
Tuesday, September 15, 2009
"From a technical perspective, the recession is very likely over," Bernanke told questioners at a Brookings Institution conference, but he cautioned it may not feel like it's over.
"I've seen some agreement among the forecasting community that we are in a recovery," Bernanke said, "But the general view of most forecasters is that the pace of growth in 2010 will be moderate."
This article above from The New York Times is beyond scary, it is laughably absurd. For Inspector Clouseau of the Fed to make such truly bizarre comments underscores why the United States is suffering through the worst recession since the Great Depression and why, sadly, this incompetent needs to be fired immediately.
First, who cares if the recession is "technically" over? The pedantic distinctions of academics and economists who fiddle and fart around with calculations written on blackboards to amuse each other and no one else don't matter to real people looking for jobs, trying to pay bills, or attempting to get home loans or borrow money to start a business. Economic conditions are worse---AND GETTING WORSE---and even Bernanke himself says so.
Unemployment is still growing in Mr. Bernanke's technical economic recovery. Even he admits this. So how can you have an "economic recovery" when economic conditions continue to deteriorate from an already nosebleed 10% unenployment rate? How can you say the patient is getting healthier when their vital signs continue to slide towards growing sickness? Do we believe Mr. Bernanke's mere words or all the statistic and analytic evidence staring at us from the news? I'm reminded of the old quip from Groucho Marx when he was caught with a blonde in his bedroom by his girlfriend:
"Who are you going to believe? Me or your own eyes?"
Second, GDP growth is not a valid measure of national economic health for a wide variety of reasons most notably that the Feds and corporations play games with the numbers. Of course Washington and Wall Street always have an incentive to make conditions appear better than they really are. (Can you think of a reason why either would ever want to report things worse?)
Personal and corporate income growth is the ultimate measure of national wealth for the obvious reason. How much money people make determines how rich they are. Don't you feel richer when your paychecks get larger and you have more money in the bank? It's common sense except down on the Potomac.
Despite Mr. Bernanke's "likely" recovery, personal income in the United States continues to decline. Even the Federal Government's own Bureau of Economic Analysis says so. Read their latest 2009 report here. Doesn't the Chairman of the Federal Reserve know this? Does he not read his own government's reports?
Third, virually every fundamental measure of economic growth except GDP growth is negative. Where should I start? How about bank failures? The FDIC itself is warning that a new wave of bank failures is coming---after they just closed 92 banks this year and seized 25 last year. I'm sure in Ben Bernanke's world an economic recovery brings with it a host of new bank failures. Shouldn't banks be able to earn there way out of an economic recovery, especially when they are borrowing money to lend out at 1% or less?
Doesn't everyone know the old 1/2/3 rule about banking?
Borrow at 1%
Lend at 2%
Be on the golf course by 3.
I'm very happy that our Fed Chairman thinks the current recession, the worst since 1930 which of course started completely on his time in office, is over, solved by his brilliant leadership and TRILLIONS of wasteful Federal spending, all borrowed of course. This, of course, is the same man who didn't see the current recession coming when many of us (me included) were warning of the pending disaster years in advance. Bernanke has literally has been wrong on every major economic issue of the day. Read this article for proof. It's uncanny---but unfortunately true.
Even a broken clock is right twice a day. Bernanke's record is actually worse than a timepiece with no hands and no motor. Think about it.
To paraphase the old E.F. Hutton line:
"When Ben Bernanke speaks, people listen and wince in painful disbelief."
Robert J. Abalos, Esq.
Monday, September 14, 2009
Not many are talking about the commercial real estate crisis of 2009.
Just like not many people were talking about the subprime mortgage crisis of 2007.
But I was. So listen up again.
The fundamentals of the commercial real estate market are in freefall. REIT investors seem to be ignoring the risk. I don't see any serious default risk priced into the shares.
Same is true of a great many ongoing and vacant projects. The problem is simple. Too much empty space, too much leverage, too many tenants demanding concessions, too many falling prices, and not enough capital to refinance at current LTVs.
The article reprinted below explains the basics of the problem. I don't want my readers to ignore this crisis. Those that tuned in to my previous newsletter and blog from 2001-2008 did not ignore the bubble debacle and I'm proud of that fact. I hope many profited from what I warned was going to happen.
Robert J. Abalos, Esq.
The Next Financial Explosion
A weird quiet seems to have settled over the country. We're in the midst of the financial crisis, yet it feels like the whole thing has somehow passed. In fact, the ionized air around us suggests we're in the eye of this hurricane—experiencing a moment of calm before the storm whips up again.
Which is to say we are probably experiencing a "rolling recession." And some analysts believe the crisis has yet to fully ripple across the myriad types of assets held by banks and investors. The failure of residential mortgage-backed securities was just the first ripple of this much larger wave. Asset types that didn't exist on the same scale in 1929—like credit cards, industrial loans, and commercial real estate—still hold the force to wreak more havoc. And on the tip of Wall Street's and Washington's tongues are commercial mortgage-backed securities. They sure look like the tsunami in this financial storm. But it might just be the Geithner plan that halts the wave and saves our shopping malls from looking as dead as some suburbs .
So first, why do CMBS have to blow up? Like residential mortgages, the premise behind commercial loans was faulty. And that premise is, of course, that the market would never go down. Commercial loans, which are packaged into CMBS, are given to owners of buildings that have multiple streams of income, like apartment complexes and shopping malls. Unlike residential mortgages, their terms are as short as five years with a lump-sum payment due at the end. In residential mortgages, only savvier homeowners—well, they seemed so at the time—thought to treat their homes like cash machines and take out equity in the form of refinancing. But in the commercial market, especially the crazed one of 1993-2006, it was de rigueur to refinance loans and pull out equity before the big payout came due.
Thanks to that practice, America's $6.5 trillion commercial real estate market, of which nearly 50 percent was financed, may be in dire straits, too. More than half a trillion dollars in commercials mortgages are coming due between now and 2011 (which is five years out from the market's 2006 peak). And just like the homeowners who never expected to actually face their balloon payments, the frozen credit markets are leaving commercial loan holders unable to pay off their loans. Delinquencies in CMBS loans are already up 246 percent  over this quarter last year, and analysts say they could go much higher.
Real estate investment trusts are built on commercial loans, which are often packaged into CMBS. REITs are a special type of company that allows investors to avoid corporate income taxes if they distribute 90 percent of their profits back to investors, usually as a dividend. Which is why it was scary for many of those investors to watch General Growth Properties, the largest REIT in the country, declare bankruptcy last week. The company, which owns 200-plus malls, faces $5.5 billion in commercial real estate loans due in two years. Basically, it was hugely overleveraged. It has been a dead REIT walking for months—Sam Zell predicted the bankruptcy at a REIT conference in New York three weeks ago. But General Growth was holding out hope that it could convince its investors to simply hang in there—to give them an additional year to pay off their loans with no penalty either in a moratorium or a forbearance. Ultimately, investors said no, and here's why.
Analysts, media, and investors are lashing the commercial real estate sector with their tongues. Zell called it "Darwinian ." Stock values of public REITs, despite a recent upswing, have been "routed ," according to the Wall Street Journal. REITs are wrecks  and have turned to the tenets of religion  to survive: faith, hope, and charity. Their future is "clouded ," according to one unusually sanguine headline writer. "Commercial Property Faces Crisis ," says another.
A strip mall, the quintessential piece of commercial real estate, is only as valuable as the rent it earns its landlords. When tenants, i.e., stores, stopped making money , they stopped paying rent. Commercial landlords were faced with two unsavory choices: allow stores to leave or lower their rents. (Several stores, from Circuit City to Steve and Barry's, gave their landlords no choice at all; they went out of business, leaving large vacant holes in malls and balance sheets.) Landlords are now allowing down-market stores into previously off-limits malls and investing in gimmicks  like the "Flowrider ," an indoor wave-surfing machine, to draw people back in the hope that they might purchase a latte or T-shirt before leaving. Needless to say, when landlords are hanging ten to avoid a wipeout, the times, they are a-changing .
But what's puzzling is that several of the largest public REITs, though not General Growth, have lately been raising cash  through secondary stock offerings—and have found willing investors. One plausible explanation for why real estate moguls like Zell, Steve Roth, and William Mack are bemoaning the fate of their industry while REITs are padding their bank accounts is that REITs were prepping for General Growth's and other weak REITs' liquidations. It is a Darwinian sector, then, and everyone in it is trying to avoid looking like the dodo bird. As General Growth's 200-plus shopping malls hit the auction block, stronger REITs will become the latest vulture capitalists, buying up the distressed properties and assuming their debts. But here is where, unlike last time, the carnage stops. Those debts, commercial mortgages, are probably about to be a lot safer, as they are likely soon  to be protected by the Geithner Public-Private Investment Plan.
The PPIP, as has been explained here  among other places, protects investors to an absurd degree  against losses in assets they buy in the coming distressed asset auctions. An investor with government protection can potentially make 45 cents on a dollar of investment, according to a Credit Suisse analysis, while a theoretical unprotected one would make only 15 cents per dollar invested. The mortgages on those empty strip malls and shopping centers full of wave-surfing, unemployed, nonshopping shoppers will magically become sound investments! Therefore, REITs that have extra cash in hand may find a way, working with the government's handpicked PPIP managers, to bail themselves out of their own mortgages, mostly on Uncle Sam's dime.
So while commercial real estate values could indeed be headed for collapse , savvy REITs are already putting aside money for umbrellas and galoshes. And Obama and Geithner are hoping they have built a weather-changing machine for the entire economy in the form of the PPIP. Of course, the PPIP has promised only up to $1 trillion in investor protection across all asset-backed securities, not just CMBS, so far. Yet the blog REIT Wrecks estimates that up to $1.8 trillion  may be required for complete investor prophylacticism in the CMBS market alone.
The REITs that survive this extinction are going to be on sounder financial footing than even the strongest REITs now. After overleveraging their holdings in reckless pursuit of profit, they are positioned to swoop in and buy up, in the form of auctioned distressed assets, well, themselves. And their weaker brethren. At a discount. With government backing. Welcome to Bailout Economics.
If all of this smarts a bit, consider what the collapse of the residential mortgage market has shown us about not providing a government safety net in times like these. If our options are bank collapses, shotgun mergers, and investor panic versus a mild form of economic socialism, then call me comrade. (Though there is still no reason for the administration to privatize the gains from what can fairly be called the CMBS bailout and socialize only the potential losses.)
My only question is, why haven't Rick Santelli and his tea partiers criticized this latest promotion of bad behavior by Obama and Geithner? The residential mortgage bailout that launched Santelli's screed has a mere $75 billion price tag. Yet the commercial mortgage bailout could end up costing us $500 billion in taxpayer money. Could it be because the ultimate beneficiaries of this bailout will be billionaire developers who dug themselves too deep a debt hole rather than mere homeowners? Subsidized bad behavior, indeed.
Thursday, September 10, 2009
About a year ago I wrote about the brilliant success of the Central Bank of Iraq in reducing inflation in their war ravaged country. I wanted to follow up and see how they are doing today.
I simply was amazed at the success of the Central Bank of Iraq in 2008. I am even more amazed now.
At the same time I last wrote about the CBI there was civil war on the streets of Baghdad. But brave civil servants in the Iraqi financial ministries were making the tough calls to bring stability to the Iraqi dinar. I praised their courage, insight, and discipline in looking long-term and resisting easy political options---unlike our own Federal Reserve Board here in the United States. They literally risked their lives for the future of their new nation, as opposed to our own political class in Washington that will not even risk their jobs for ours.
During the height of the Saddam regime and even during the early years of the American occupation of Iraq, inflation in the country ran between 70-100% or even higher. Saddam and his sons treated the Iraqi central bank as a private piggy bank, raiding it for cash whenever they needed money, which was often. Decades of central bank corruption and mismanagement left Iraq literally broke despite the massive oil wealth being pumped from the ground.
Well, how is the Central Bank of Iraq doing today?
Inflation was 4.1% in Iraq in 2008.
Inflation was down .4% in July 2009.
1 US Dollar = 1,174.30 Iraqi Dinar today.
In 2004 the rate was 4,000 dinars per U.S. dollar.
The official target rate of the Central Bank of Iraq is 1,170 dinars per U.S. dollar. so they have successfully pegged the dinar to the dollar.
GDP growth in Iraq was 6.6% in 2008. What was GDP growth in the United States in 2008? A measly 0.4%.
Read this amazing article on how the Central Bank of Iraq recently refused to yield to political pressure and borrow against its own reserves to cure a budget deficit. Notice that our Federal Reserve Board is doing the exact opposite.
I would like to praise and celebrate the extraordinary achievements of Dr. Sinan Al Shabibi, Governor of the CBI, and all those brave men and women who are building a solid economic foundation for Iraq.
Ben Bernanke, take notice. Here is the official website of the CBI. Read some articles, please.
Robert J. Abalos, Esq.
Wednesday, September 9, 2009
I told you so.
Or better still you could have figured this out on your own. The market gave the equity of GM and Chrysler a value of zero. Only the Feds and the Feds alone found $81 billion of value there, or more accurately wasted taxpayer money to buy shares worth just about nothing---then, today, and tomorrow.
Robert J. Abalos, Esq.
Taxpayers Unlikely to Recover GM, Chrysler Investment
By John Hughes
The Treasury Department should consider placing its GM and Chrysler ownership stakes into an independent tr
“Even if no direct conflict exists, a trust could prevent the use or appearance of political influence in the government’s ownership,” the panel concluded.
The report didn’t estimate how much of taxpayers’ aid to the auto industry will be recovered. The panel said GM stock would need “highly optimistic” returns in order for the full investment to be repaid.
The panel, which oversees the U.S. government’s $700 billion Troubled Asset Relief Program, raised questions about the Obama administration’s transparency in aiding automakers and challenged the Treasury Department to make more disclosures about company decisions and the government’s future role.
“Congress and ultimately the American taxpayer have been left in the dark concerning details of Treasury’s review process and its methodology and metrics at a time when Treasury committed additional TARP funds to these companies,” the panel said.
“The Treasury auto team failed to disclose to the public both the factors and criteria it used in its viability assessments, the scope of outside involvement in its evaluations, and its basis and reasoning for selecting particular benchmarks,” according to the report. “Simply, its disclosures did not go far enough.”
Treasury Secretary Timothy Geithner said in an e-mailed statement that the government’s restructuring role gave it access to company information that normally wouldn’t be available.
Officials had to “balance our desire and responsibility to be responsive to oversight requests, while also protecting the interests of the taxpayers, who have an enormous stake in the ability of these companies to compete,” Geithner said in the statement.
Elizabeth Warren, a Harvard Law School professor who heads the oversight panel, said today there remains “a good chance” that the portion of taxpayer dollars invested in the automakers’ restructuring plan will be recovered.
“It really depends on what happens to the auto industry going forward,” Warren said in a Bloomberg Television interview. “If things go well, then the taxpayer could see its money back. But if it doesn’t, then our losses could be substantial.”
Greg Martin, a GM spokesman, said in an e-mail that the company expects to repay the government.
“We are a company with less debt, a stronger balance sheet, a winning product portfolio and the right size to match today’s market realities,” Martin said. “GM will be transparent in its business and regularly report its results.”
A Chrysler spokeswoman, Linda Becker, said in an e-mail that the company wouldn’t immediately comment.
The Treasury should use its shareholder role “to ensure that these companies fully disclose their financial status and that the compensation of their executives is aligned to clear measures of long-term success,” the report said.
The decisions by the George W. Bush administration and the Obama administration to use TARP funds for automakers raise “a number of questions,” including the government’s role as negotiator, potential conflicts that arise as part owner of a private company and which strategy the Treasury Department will ultimately use to exit from its role, according to the panel.
“Although taxpayers may recover some portion of their investment in Chrysler and GM, it is unlikely they will recover the entire amount,” the panel said.
President Barack Obama, his automotive task force and the Treasury Department have stated several different objectives for the intervention, including the prevention of liquidations and averting mass layoffs, the report said.
“There is little clarity with respect to what has ultimately driven the decision making,” the report said.
The Treasury Department spent $49.9 billion in TARP funds for GM and $14.3 billion for Chrysler. Including $16.9 billion in aid to GM’s financial arm and suppliers, taxpayers’ total net investment as of Sept. 9 is about $81 billion, the panel said.
The government’s equity interest in Chrysler would need to reach a value of about $5.7 billion in order for taxpayers to recoup their investment, assuming other loans are repaid.
For GM, repayment of TARP would require government shares of the new GM to be worth $40.7 billion, assuming other debt is repaid. That means the market cap of the entire company would need to be $67.7 billion, the report said.
In April 2008, when old GM shares were at their highest, the company’s total value was $57.2 billion, the panel said. The figure is not adjusted for inflation.
“New GM will have to achieve a capitalization that is higher than was ever achieved by Old GM if taxpayers are to break even,” according to the report.
The Treasury Department’s “more likely” scenarios show lower recoveries for early aid to GM and Chrysler and a “reasonably high” chance of return of funding “advanced as part of the restructurings,” Geithner said in the statement.
Wednesday, September 2, 2009
- $2.8 billion in taxpayer money spent in about a month---after spending $100 billion to rescue General Motors and Chrysler
- Auto sales FELL at U.S. auto makers Chrysler and General Motors
- Auto sales ROSE at JAPANESE auto makers Honda and Toyota
- HALF of all clunker sales were going to be made anyway according to industry estimates
- Auto dealers now fear that consumers will not be buying cars this fall because there will be no subsidies available. They are calling it a "clunker hangover."
It's nice that shareholders in Japan made money this summer.
But what about American taxpayers that lost a bundle on this silly program.
This program was once thought of as a model for reducing new home inventory in the United States. Give buyers a subsidy to trade up.
Not anymore. Cash for Clunkers is being buried in Washington in an unmarked grave.
Robert J. Abalos, Esq.
Clunkers aid Ford, Toyota sales; GM, Chrysler fall
Clunkers lift Ford, Toyota, Honda Aug. sales; low supply of smaller cars dampens Chrysler, GM
By Kimberly S. Johnson and Dan Strumpf, AP Auto Writers
DETROIT (AP) -- The Cash for Clunkers program boosted sales at Ford, Toyota and Honda in August as consumers snapped up their fuel-efficient offerings, but rivals Chrysler Group LLC and General Motors Co. withstood another month of falling sales.
The program, which ended on Aug. 24, drew hordes of buyers into quiet showrooms by offering up to $4,500 toward new, more fuel-efficient cars and trucks. The hefty rebates gave automakers and dealers a much-needed lift, spurring 690,114 new sales, many of them during August, at a taxpayer cost of $2.88 billion.
Other automakers are expected to release U.S. sales figures later Tuesday. Combined, the results are likely to mark the first year-over-year monthly sales gain since October 2007.
Ford Motor Co. sold 181,826 cars and light trucks compared with 155,117 in August 2008, when high gas prices and growing economic uncertainty kept people away from showrooms.
Two of Ford's vehicles -- the Focus and Escape -- were among the top selling cars under the clunkers program. Sales of the Focus rose 56 percent while those of the Escape crossover vehicle climbed 49 percent.
Japanese automakers Toyota Motor Corp. and Honda Motor Co. also posted gains year-over-year gains in August. Toyota sales rose 6.4 percent to 225,088, lifted by small cars like the Corolla, the best-selling clunkers vehicle.
Honda sales rose 9.9 percent to 161,439, also largely on the strength of its fuel-efficient offerings.
Meanwhile, low supplies of fuel-efficient vehicles at Chrysler kept the automaker from benefiting more from the clunkers program, whose rebates encouraged customers to buy gas sippers in exchange for guzzlers with gas mileage of 18 mpg or less.
Chrysler sales fell 15 percent to 93,222 units.
Going into August, five of Chrysler's most efficient vehicles were already at low inventory levels. Those vehicles -- the Dodge Caliber, the Chrysler Sebring, the Jeep Patriot, the Jeep Compass and the Dodge Avenger -- all qualified as Cash for Clunkers purchases.
To make up for the shortfalls, Chrysler is boosting production by 50,000 vehicles of most of its vehicles through the end of the year.
At General Motors Co., sales fell 20 percent to 245,550. GM said its inventory levels hit an all-time low of 379,000 during August.
GM vehicles like the Chevrolet Aveo subcompact, the Cobalt sedan and Equinox crossover got a lift from the clunkers program. No GM vehicles made the closely watched list of top-10 Cash for Clunkers sales, but they had the largest market share behind Japan's Toyota Motor Corp.
GM also said it was extending through the end of September its test program selling vehicles on eBay.
Consumers are expected to steer clear of dealers this autumn now that the clunker rebates are no longer available.