Wednesday, January 11, 2012

Today's links

1--Hedge funds clash with IMF on Greek debt, IFR

Excerpt: Hedge funds are taking on the powerful International Monetary Fund over its plan to slash Greece’s towering debt burden as time runs out on the talks that could sway the future of Europe’s single currency.

The funds have built up such a powerful positions in Greek bonds that they could derail Europe’s tactic of getting banks and other bondholders to share the burden of reducing the country’s debt on a voluntary basis.

Bondholders need to give up some €100bn (US$130bn) of their investment in the planned bond swap, drawn up in October, but many hedge funds plan to stay out of it.

They either prefer letting the country go under, which would trigger the credit insurance they have bought, or hope to get paid out in full if enough others sign up. That puts them in direct conflict with the IMF, which wants to force Greece’s cost of financing down to an affordable level.

“The play is purely ’they’ll be forced to pay me’. Greece will want to avoid a wider default. so if it managed to restructure 80% of the deal and pay the rest that’s still better,” said Gabriel Sterne at securities firm Exotix.

Without a deal, the IMF, the EU and the European Central Bank – the so-called troika of official lenders – will not pay out a second bail-out package Greece needs to survive.

2--Measures to boost financial markets, China Daily

Excerpt: Financial markets will be developed and the securities industry opened further to foreign participants in a bid to diversify risk in the banking sector, a leading financial official said.

China should be "highly cautious" about systemic risk in the banking sector and needs to substantially boost the scale of direct financing, such as stocks, to diversify the risk, Guo Shuqing, chairman of the China Securities Regulatory Commission (CSRC), said.

The regulator plans to launch several new products, including high-yield corporate, municipal and government agency bonds, in order to boost direct financing. The regulator will also reduce administrative procedures regarding the issuing of bonds, he added.

Three of the world's top 10 banks, judged by assets, are Chinese. However, cash-strapped small businesses are still experiencing difficulty in raising capital.

"Some of the firms may be more suitable for stock or bond financing but they can't get sufficient financial support because direct financing remains small-scale," he said. "This structural problem can damage the economy seriously."...

It was reported that the regulator has approved US bank Citigroup Inc to set up a joint-venture securities firm in China.

Analysts said that the acceleration in approving the launch of joint-venture securities firms is part of the regulator's preparation for the long-awaited international board in Shanghai. The board will allow overseas companies to raise capital in the A-share market.

3--Mafia now "Italy's No.1 bank" as crisis bites: report, Reuters

Excerpt: Organised crime has tightened its grip on the Italian economy during the economic crisis, making the Mafia the country's biggest "bank" and squeezing the life out of thousands of small firms, according to a report on Tuesday.

Extortionate lending by criminal groups had become a "national emergency," said the report by anti-crime group SOS Impresa.

Organised crime now generated annual turnover of about 140 billion euros ($178.89 billion) and profits of more than 100 billion euros, it added.

"With 65 billion euros in liquidity, the Mafia is Italy's number one bank," said a statement from the group, which was set up in Palermo a decade ago to oppose extortion rackets against small business.

Organised crime groups like the Sicilian Cosa Nostra, the Naples Camorra or the Calabrian 'Ndrangheta have long had a stranglehold on the Italian economy, generating profits equivalent to about 7 percent of national output.

Extortionate lending had become an increasingly sophisticated and lucrative source of income, alongside drug trafficking, arms smuggling, prostitution, gambling and racketeering, the report said.

The classic neighborhood or street loan shark is on the way out, giving way to organised loan-sharking that is well connected with professional circles and operates with the connivance of high-level professionals," the report said.

It estimated about 200,000 businesses were tied to extortionate lenders and tens of thousands of jobs had been lost as a result

4--Commercial real estate stalls after reboundingLA Times

Excerpt: Prices level out after reaching 10% of their record highs in a tug of war between investors' desire for low interest rates and the fear that a faltering economy might prevent any profit

U.S. commercial real estate values are drifting sideways after a two-year rally, analysts said.

Prices for offices, warehouses, shopping centers and apartment buildings in major cities rebounded to within 10% of their historic highs before leveling out six months ago, according to Green Street Advisors Inc. of Newport Beach.

"I think people are used to values going up or down," analyst Peter Rothemund said, adding that it's not abnormal for prices to be flat.

5--Housing’s Huge Supply and Demand Imbalance, Diana Olick CNBC

Excerpt: Inventories [of unsold homes] have been coming down, showing very healthy declines,” Ivy Zelman, CEO of Zelman and Associates told the Wall Street Journal. And Zelman is new to the bull ring, as she is famous for predicting the housing bubble in the first place.

Pent-up demand exists, no question, but it has nowhere to go right now for the vast majority of organic home buyers. When I say organic, I’m excluding investors from the mix, because that demand is high and building up cash like mad. I mean regular lower to upper middle-class Americans still struggling in today’s rough economy.

“There are relatively few borrowers that can qualify for a mortgage given today's tight lending standards,” says Laurie Goodman, Senior Managing Director at Amherst Securities. “Aside from FHA and VA mortgage, you need 20 percent down, and that's very, very difficult for most borrowers.”

Goodman, one of the best number crunchers I’ve come across in this field, claims there is far more distress in the housing market than some of the leading mortgage data providers portray. She counts eight to ten million more foreclosures over the next six years, because she adds borrowers currently in mortgage modifications.

“That includes borrowers who have never missed a payment before, but are deeply underwater and are apt to default because borrowers just like them are defaulting on a regular basis,” Goodman contends.

Her conclusion, and the one I’ve been promoting for over a year now, is that the only way to re-balance supply and demand is to get investors into the market in force to buy up these properties and meet the huge rental the demand that will continue for several years. As we reported last week, hedge funds are busy working on deals, but government needs to help. Fannie Mae and Freddie Mac are currently sitting on a huge supply of foreclosed properties and facing even more down the pike.

The Federal Housing Finance Agency (Fannie and Freddie’s conservator), along with the U.S. Treasury Department, need to get moving on their so-far inchoate plan to sell these REOs in bulk to investors, and in doing so, make sure said investors are provided with financial incentives to make it worth their while.

6--Private Equity Readying a Run on Foreclosures, CNBC

Excerpt: As the Obama administration and federal regulators work on a program to sell government-owned foreclosures in bulk to investors, those investors aren’t wasting any time stockpiling cash and buying foreclosed properties at auction and from the major banks.

Oakland, California-based Waypoint Real Estate Group, a major acquirer of so-called “REO to Rental” (Real Estate Owned) just announced a partnership with a private equity firm, Menlo Park, California-based GI Partners, to buy foreclosed properties.

GI Partners has approximately $6 billion of capital under management, according to its website.

“Our approach to buying distressed single-family houses, renovating them, and leasing to residents who are committed to a path to future home ownership is a viable solution to our nation’s housing crisis,” said Colin Wiel, managing director and co-founder of Waypoint in a press release. “Our partnership with GI Partners ensures we can take the next step in our company’s evolution.”

GI is taking an increasingly popular bet on distressed real estate, closing on a $400 million fund with Waypoint, which has plans to purchase $1 billion in distressed real estate assets over the next two years, according to its release. Waypoint already owns nearly 900 single family rental homes in California.

This deal is clearly a sign of things to come, as millions of distressed properties will likely come to market over the next few years. As reported yesterday on CNBC and on this Realty Check page, the conservator of Fannie Mae and Freddie Mac is working with the Obama administration on a plan to sell not just the quarter of a million foreclosed properties already owned by the GSE’s, but hundreds of thousands more in the pipeline heading to foreclosure.

7--The Elusive Mortgage Refinancing Bonanza, CEPR

Excerpt: Fannie Mae and Freddie Mac had a policy for several years of allowing people to refinance who had mortgages that were up to 125 percent of their home value. This probably accounts for close to half of the 12 million or so underwater homeowners. Of the roughly 50 percent of mortgages insured by Fannie and Freddie, it is likely that a greater share are in the under 125 percent group, since they generally did not get the worst mortgages.

In September, President Obama persuaded the Federal House Finance Administration to remove this cap, allowing anyone with a Fannie or Freddie backed mortgage to refinance no matter how much they are underwater. Undoubtedly many people are taking advantage of this opportunity as refinancing has been very strong through the fall months. (Mortgage refis tend to run around 700k to 800k a month.)

8--ECB Loans Stabilize Market, Don’t Provide Much Stimulus, WSJ

Excerpt: Data from the European Central Bank Tuesday suggests that the ECB’s latest unconventional policy measures are helping restore calm in money markets, but aren’t yet helping support the currency bloc’s worsening economy.

The data, comprised of various ECB lending and deposit operations to euro-zone banks, suggest the central bank is unlikely to introduce any further new initiatives to stabilize markets at its press conference Thursday.

In a sign of less market anxiety, banks’ demand for unlimited one-week loans from the ECB reached an eight-month low Tuesday, as the central bank allotted 110.923 billion euros at its weekly main refinancing operation.

Demand for the ECB’s weekly loans has been falling since Dec. 21, when the ECB allotted nearly half a trillion euros in long-term loans to more than 500 euro-zone banks.

“The massive three-year liquidity injection is net positive, there’s no doubt about this,” said Marco Valli, chief euro-zone economist at UniCredit....

“Bank lending is very unlikely to pick up and we assume lending growth will continue to decelerate this year. The huge ECB liquidity injection will only smooth or soften this downward trend,” Valli said.

Euro-zone banks need to refinance more than 600 billion euros in debt that matures this year, up about 35% from 2011, according to a Bank of England report issued in December. Those funding demands will make it harder for euro-zone banks to grant loans, analysts say, especially as they tighten lending standards and shun risky investments in a worsening economy.

9--John Maynard Keynes, Robert Skidelsky, New York Times

Excerpt: John Maynard Keynes (1883-1946), the British economist who developed the theory that increasing government deficits stimulate a sluggish economy, was long the guiding light of liberal economists. He is considered one of the major economists of the 20th century. And these days, he is enjoying a comeback.

In his times, he quarreled with laissez-faire economic policies, and with the beliefs that all uncertainty could be reduced to measurable risk, that asset prices always reflected fundamentals and that unregulated markets would in general be very stable.

Keynes created an economics whose starting point was that not all future events could be reduced to measurable risk. There was a residue of genuine uncertainty, and this made disaster an ever-present possibility, not a once-in-a-lifetime “shock.” Investment was more an act of faith than a scientific calculation of probabilities. And in this fact lay the possibility of huge systemic mistakes.

His basic question was: How do rational people behave under conditions of uncertainty? The answer he gave was profound and extends far beyond economics. People fall back on “conventions,” which give them the assurance that they are doing the right thing. The chief of these are the assumptions that the future will be like the past (witness all the financial models that assumed housing prices wouldn’t fall) and that current prices correctly sum up “future prospects.” Above all, we run with the crowd. A master of aphorism, Keynes wrote that a “sound banker” is one who, “when he is ruined, is ruined in a conventional and orthodox way.”

But any view of the future based on what Keynes called “so flimsy a foundation” is liable to “sudden and violent changes” when the news changes. Investors do not process new information efficiently because they don’t know which information is relevant. Conventional behavior easily turns into herd behavior. Financial markets are punctuated by alternating currents of euphoria and panic.

Keynes’s prescriptions were guided by his conception of money, which plays a disturbing role in his economics. Most economists have seen money simply as a means of payment, an improvement on barter. Keynes emphasized its role as a “store of value.” Why, he asked, should anyone outside a lunatic asylum wish to “hold” money? The answer he gave was that “holding” money was a way of postponing transactions. The “desire to hold money as a store of wealth is a barometer of the degree of our distrust of our own calculations and conventions concerning the future. . . . The possession of actual money lulls our disquietude; and the premium we require to make us part with money is a measure of the degree of our disquietude.” The same reliance on “conventional” thinking that leads investors to spend profligately at certain times leads them to be highly cautious at others. Even a relatively weak dollar may, at moments of high uncertainty, seem more “secure” than any other asset.

It is this flight into cash that makes interest-rate policy an uncertain agent of recovery. If managers of banks and companies hold pessimistic views about the future, they will raise the price they charge for “giving up liquidity,” even though the central bank might be flooding the economy with cash. That is why Keynes did not think cutting the central bank’s interest rate would necessarily — and certainly not quickly — lower the interest rates charged on different types of loans. This was his main argument for the use of government stimulus to fight a depression. There was only one sure way to get an increase in spending in the face of an extreme private-sector reluctance to spend, and that was for the government to spend the money itself.

This, in a nutshell, was Keynes’s economics. His purpose, as he saw it, was not to destroy capitalism but to save it from itself. — From “The Remedist,” by Robert Skidelsky, The Times, December 2008

No comments:

Post a Comment