Monday, November 14

Receiving Wide Coverage ...

Repurposing REOs: A story on the front-page of the Sunday Times reports that in Merced, California, "the downturn in the real estate market has presented an unusual housing opportunity for thousands of college students," namely foreclosed McMansions now available for rent on the cheap. This development has rubbed salt in the wounds of local homeowners who owe more than their similarly luxurious houses are now worth. "Everybody on this street is underwater and can't see any relief," says "an out-of-work English teacher who paid $532,000 for a house that is now worth $221,000," who tells the Times that the area "was supposed to be an edge-of-town, Desperate Housewifey community … These students are the reverse." Living the student life in the ruins of someone's subprime suburban dream "sounds like fun - and definitely better than the dumps I lived in going to college," comments the Calculated Risk blog. "Unfortunately these might be the nicest homes they live in for a number of years ..." (More on that below.) Meanwhile, the Los Angeles Times reports that in Las Vegas, "America's foreclosure capital," a number of abandoned properties are being repurposed as marijuana grow houses. What a shame. We bet that unlike previous occupants, many of whom undoubtedly lied about their incomes on loan applications (either voluntarily or under pressure from salespeople), the pot growers might actually generate enough cash flow to cover a monthly mortgage payment. Hey, maybe there's a solution in this to the "shadow inventory" that's hanging over the housing market. It can even be summed up in a catchy slogan: "Legalize it … then monetize it."

New York Times, Los Angeles Times, Calculated Risk

Hard Knocks: A Journal story on Saturday opened with a hedge fund trader who specializes in student loan-backed securities and says he won't touch the debt of students who graduated college this year or last. The risk, he says, is unquantifiable. Another analyst is quoted as saying default rates on the newest vintage of student loans are expected to be in the 30% to 40% range, a good 10 to 15 basis points over the historical norm. For a more granular perspective on this issue, New York's Village Voice looks at the burdens of recent grads from New York University, "the poster child for the excesses of 21st-century student debt in America." The school's heavy capital expenditures have led to high tuition, low financial aid and a relatively small endowment. As a result, the Voice says, NYU "creates more student debt than any other nonprofit college or university in the country. The only schools putting students into more debt are the kind of for-profit diploma mills currently being investigated by the United States Senate." Hence buyer remorse among young alumni like "Lyndsey," who will turn 54 before she's done paying her loans from Citibank (which was a "preferred lender" at NYU before then-Attorney General Andrew Cuomo cracked down on such partnerships). Student loan forgiveness has also become a demand of some Occupy Wall Street protestors. Before you say "caveat emptor," one protestor and recent NYU grad has another suggestion that's harder to dismiss out of hand: "Make sure that the banks and the universities are focused on making sure these young students are making financial decisions that aren't going to leave them penniless when they're 25 and 30 years old. … There needs to be more information … from banks-you know, 'Are you sure you want to take on this debt to get this degree? It's not free. It seems free now, maybe, but you're going to have to pay it back.'" In other words, lenders should educate prospective borrowers. That's what they're going to college for anyway, right? Wall Street Journal, Village Voice

Romney's PE Past: Another front-page New York Times story Sunday looks at Mitt Romney's pre-political career as head of the private-equity firm Bain Capital in the 1980s and 1990s, focusing on the buyout of a medical company in Illinois, Dade International. While a home run from the PE investors' perspective, the deal had "unintended human costs and messy financial consequences" - layoffs, a crushing debt load and, eventually bankruptcy. New York magazine ran a similar, broader piece about Romney's time at Bain a few weeks ago. Both articles note that the future Massachusetts governor was ahead of his time in applying management-consulting techniques to the leveraged-buyout business. The magazine article also gives two other examples of investments that generated handsome profits for Bain and its partners but were followed by massive layoffs and/or bankruptcies at the companies: American Pad and Paper and KB Toys. So what does all this mean for how Romney would run the country if nominated and elected president? "It is arresting to imagine a Romney White House … The PowerPoints, the 80-20 jargon, the clinical separation of decision-making from ideology, the detachment of those decisions from moral consequence," the magazine story says. "It would represent the final ascension of a perfectly American type, one that has already remade the culture of business." New York Times, New York

Wall Street Journal

The Journal rounds up the disclosures made by U.S. banks of their exposures to Europe, and the reasons why investors are still worried. One such reason is the "doubts about how well banks' hedging strategies might work in the event of a euro-zone financial shock." Investors are focusing on the gap between net exposure, which takes into account the laying off of risk through arrangements like credit default swaps, and gross exposure. The latter figure is important because of the risk that the swap counterparty won't make good on its end of the deal. Also, CDS on Greek debt won't do a bank much good under the recent restructuring deal: "While creditors are likely to suffer 50% 'haircuts,' participation is voluntary, and therefore the deal is deemed to not technically constitute a default under derivatives contracts. It was deliberately structured to avoid triggering the credit-default-swap contracts."

In the Journal's "Greater New York" section, "Metro Money" columnist Anne Kadet, who banks at Chase, considers the pros and cons of switching to a local community bank or credit union. She finds a mutual savings bank she really likes, but its "ATM network consists of its 26 branch locations. Do I want to rearrange my life around my checking account?"

"Five years into a brutal national housing downturn, raw land destined for residential development has fallen so far in value that thousands of acres across the country are being used again for agriculture," according to this Journal story. Meredith Whitney, it looks like you called it right.

Since Kevin Warsh left the Federal Reserve Board in April, no member of the board has Wall Street experience, but that could change as President Obama is "seriously considering" tapping for one of the two open spots Jerome "Jay" Powell, a 58-year-old Republican who served in Treasury under George H. W. Bush. Harvard economist Jeremy Stein has been the rumored nominee for the other vacancy. But, the paper reports, an announcement is not imminent.

Financial Times

"Concern is growing that banks in Europe and elsewhere are moving to meet new tougher capital requirements" under Basel III "by tinkering with their internal models to make their holdings appear less risky." Loathe to dilute shareholders by raising equity, banks are "trying to reach the required ratios by reducing the denominator, through what they call 'risk-weighted asset optimisation.' In some cases, that means selling or running down risky assets, but in others, it means changing the way risk weights are calculated to cut the amount of capital that will be required." In other words, gaming the rules - which is what a European regulator means when he tells the FT that "the language of RWA optimisation is basically regulatory arbitrage." Sure, the FT's said this once before, but it bears repeating.

In an op-ed, David Rothkopf suggests that the Occupy Wall Street movement "hit banks where it hurts" by trying to raise the cost of capital. This could be done, he argues, by lobbying "social responsible" institutional investors like Calpers to broaden their definition of "irresponsible" to include the "reckless and predatory" practices being protested in Zuccotti Park. Then they'd have to dump or avoid the banks' shares.

New York Times

The Times rounds up new fees that banks have been quietly introducing to make up for lost revenues. While B of A gave up on the $5 monthly debit card fee, for instance, it now charges that much to replace a lost card, or $20 for rush delivery.

A profile of Timothy Geithner sets out to explain why, despite his unpopularity, the Treasury Secretary has emerged as Obama's "indispensable economic adviser who has outlasted every other member of the original inner circle and whose successes easily outweigh his missteps." Like the case for the Obama administration's record overall, the one for Geithner's depends on a counterfactual: "Europe's troubles, perhaps more than anything, highlight what Mr. Obama likes about Mr. Geithner, because they help show how the effects of the financial crisis could have been worse in this country."

Washington Post

The headline pretty much says it all in this one by columnist Kenneth Harney: "Jumbo mortgages may be next in line to default." Strategically default, that is, as people who can afford to continue paying their big mortgages realize that doing so won't get them above water any time soon. Harney warns that walking away from the home could hurt the borrower's credit rating, and in many states lenders can go after them for the deficiency. As an alternative, we suggest renting it out, if possible for the amount of the monthly payment. If not as a residence, then perhaps as commercial space; we hear there are some, er, agricultural concerns that like to set up shop in big houses….