Schwarzenegger Vows Drastic Budget Cuts

In the wake of voters overwhelmingly turning down tax hikes to balance the budget, governor Schwarzenegger's Latest proposal eliminates CalWORKs, lets out inmates early.

In California's latest doom-and-gloom announcement, Gov. Arnold Schwarzenegger's Department of Finance on Tuesday proposed closing the state's main welfare program, releasing nonviolent prisoners one year early and shuttering up to 80 percent of state parks to shrink the state's $24.3 billion budget deficit.

Schwarzenegger wants $5.6 billion in new cuts to replace a like amount of borrowing he proposed in his budget plan earlier this month. The Republican governor previously asked for more than $15 billion in other savings by slashing schools and Medi-Cal, laying off 5,000 state workers and borrowing money from local governments.

Several of the latest cuts were eye-openers, but the largest was the wholesale elimination of the California Work Opportunity and Responsibility to Kids Program, which provides grants to parents that people commonly refer to as "welfare."

Nearly 1.3 million Californians received CalWORKs payments in February, almost 1 million of whom were children. The state would save $1.3 billion next year by eliminating CalWORKs but lose three times as much in federal funds.

"It boggles the mind that California would be the only state in the Union without a CalWORKs-type program," said Frank Mecca, executive director of the County Welfare Directors Association. "In fact, we'd be, to our knowledge, the only state in a country in the entire First World not to have subsistence benefits for children."

Schwarzenegger envisions phasing out Cal Grants for low-income college students. He would save $10 million by giving only $7,000 to the University of California's Hastings College of the Law, the bare minimum so as not to upset the state's 19th-century compact with the Hastings family. And he wants to defund state parks, forcing them to rely on user fees.

"It could be upwards of 80 percent of parks not having sufficient fee revenues to continue to operate," Matosantos said.

A Schwarzenegger proposal to close parks last year didn't go anywhere, but the state's fiscal condition has worsened considerably since then.

The governor's plan would release a year early about 19,000 nonviolent, non-serious prisoners not convicted of sex offenses, saving $120 million. He also would seek $790 million in savings by reducing inmate services such as substance abuse counseling and vocational education.

The governor proposes saving $150 million by retaining a two-day furlough for state workers.

Schwarzenegger would cut Medi-Cal services such as dialysis, breast cancer treatment for women over 65 and non-emergency care for undocumented immigrants.

Assemblywoman Noreen Evans, D-Santa Rosa, chairwoman of the Assembly Budget Committee, said it would be more responsible to seek additional taxes. "With this proposal, the governor's made it very clear he'd rather throw women and children out of the lifeboat before he raises taxes," she said.

Voters Chose Wisely

Schwarzenegger did not make these decisions, voters did. Raising taxes is not the answer, spending money wisely is. Evans clearly does not know the difference.

Voters made a wise decision. People like Evans will spend every cent and come back for more. Hopefully voters will show Evans the door.

New 5 percent cut for state workers on the table

Gov. Schwarzenegger, speaking with reporters vowed to make "drastic cuts" to the state budget. As part of his proposal, Schwarzenegger says new 5 percent cut for state workers on the table.

Left: Gov. Schwarzenegger, speaking with reporters last week near the U.S. Capitol in Washington, vowed to make "drastic cuts" to the state budget. Mark Wilson/Getty Images

Gov. Arnold Schwarzenegger plans to propose a 5 percent across-the-board pay cut for state workers to save nearly $500 million in next year's budget and preserve cash, a spokesman said Thursday.

The pay cuts would affect 235,000 state workers under the governor's control, according to Schwarzenegger press secretary Aaron McLear. The state's judicial and legislative branches would be exempt because they are autonomous, but McLear said employees who work for constitutional officers would receive a pay cut.

"Voters gave the leaders of this state a mandate to cut government spending, and that's exactly what we're doing," McLear said.

The move would save $470 million by cutting pay for 100,000 general fund employees, as well as $415 million by reducing salary for special fund workers.

A 5% wage cut hardly seems drastic. 25-30% can be considered drastic. 5% cuts will raise $885 million. The budget hole is $24.3 billion and growing about $2 billion a month for a year.

As noted in California Voters Immediately Rewarded For Voting Down Propositions 1A Thru 1E a state panel slashed the salaries of elected state officials by 18% a day after voters rejected a plan by the governor and Legislature to address the budget crisis.

Before tossing around the word "drastic", let's at least see cuts of 18%.

California cities, counties vow to fight state over budget tactics

Fourth up in a series of budget crisis articles, the Sacramento Bee notes California cities, counties vow to fight state over budget tactics.

Arguing that the state is nickel and diming them to oblivion, leaders of California's financially beleaguered counties and cities say they plan to fight back.

Soon after the May special election, in which voters rejected the state's deficit stopgap measures, the Bay Area Council and several other groups launched a drive for a constitutional overhaul to address the state's governmental dysfunction.

Multiyear labor agreements also are placing a burden on both cities and counties. Local jurisdictions statewide have been negotiating with unions to win labor concessions to reduce cost of personnel, which consumes a major portion of general funds.

But Roger Dickinson, Sacramento County supervisor, cautioned about putting too much emphasis on labor costs.

"Even if we had significant concessions by our employees, we still have a very serious budget gap," Dickinson said. "It's truly an illusion when you consider the reality of the numbers. That is, this is a very deep hole."

Both cities and counties are watching legislation that would require them to get state approval before filing for bankruptcy.

The measure carried by Assemblyman Tony Mendoza, D-Artesia, is backed by state firefighters unions and the nonprofit AARP whose members' benefits could be jeopardized in bankruptcy.

Cities' and counties' associations are strongly opposed.

"It's absurd to me that the state of California believes it's appropriate to provide financial advice to local agencies," said CSAC's Hurst. "The state doesn't have a great track record with managing its own finances."

If you want higher taxes and more waste, by all means vote for Tony Mendoza and any other clowns who want to raise your taxes to support union graft and ridiculous pensions.

Bankruptcy is one of the few means available capable of bringing about much needed pension reform. Tony Mendoza wants to deprive cities and counties of that means.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Mortgage Market Locks Up

Yesterday 10 year treasury yields went soaring and the mortgage market literally seized up. Mark Hanson at the Field Check Group has this report that I can share.

As Bad As You Can Imagine

With respect to yesterday’s episode in the mortgage market -- yes, it is as bad as you can imagine. Yesterday, the mortgage market was so volatile that banks and mortgage bankers across the nation issued multiple midday price changes for the worse, leading many to ultimately shut down the ability to lock loans around 1pm PST. This is not uncommon over the past five months, but not that common either. Lenders that maintained the ability to lock loans had rates UP as much as 75bps in a single day.

A good friend in the center of all of the mortgage capital markets turmoil said to me yesterday “feels like they [the Fed] have lost the battle...pretty obvious from the start but kind of scary to live through it ... today felt like LTCM with respect to liquidity”.

The negative consequences of 5.5% rates are enormous. Because of capacity issues and the long timeline to actually fund a loan very few borrowers ever got the 4.25% to 4.75% perceived to be the prevailing rate range for everyone A significant percentage of loan applications (refis particularly) in the pipeline are submitted to the lender without a rate lock. This is because consumers are incented by much better pricing to lock for a short period of time…12-15 day rate locks carry the best rates by a long shot. But to get this short-term rate lock, the loan has to be complete enough to draw loan documents, which has been taking 45-75 days over the past several months depending upon the lender’s timeline. Therefore, millions of refi applications presently in the pipeline, on which lenders already spent a considerably amount of time and money processing, will never fund.

Furthermore, many of these ‘applicants’ with loans in process were awaiting the magical 4.5% rate before they lock -- a large percentage of these suddenly died yesterday. To make matters worse, after 90-days much of the paperwork (much taken at the date of application) within the file becomes stale-dated and has to be re-done with new dates -- if rates don’t come down quickly many will have to be cancelled out of the lender’s system. To add insult to mortal injury, unless this spike in rates corrects quickly, a large percentage of unlocked purchases and refis will have to be denied because at the higher interest rate level, borrowers do not qualify any longer. For the final groin kicker, a 5.5% rate just does not benefit nearly as many people as a 4.5%-5% rate does. Millions already have 5.25% to 5.75% fixed rates left over from 2002-2006.

This is a perfect example of why the weekly Mortgage Applications Index is an unreliable indicator of future loan fundings and has been for a year and a half. As a matter of fact you will see this index crumble over the next few weeks at the same disproportional rate as it increased over the past several months if rates don’t settle lower quickly.

With respect to banks, mortgage banks, servicers etc, under-hedging a potential sell-off with the Fed supposedly having everybody’s back was a common theme. Banks could lose their entire Q2 mortgage banking earnings and middle market mortgage banker may never recover or immediately have to close shop.

Lastly, consider sentiment -- this is a real killer. This massive rate spike may have invalidated hundreds of billions spent to rig the mortgage market literally overnight. This leaves the mortgage and housing market very vulnerable. Mortgage loan officers around the country are having a very bad day today explaining to their clients why their rate was not locked and how rates are going to come right back down. They will not feel like getting too aggressive taking new loan applications at least for the next month unless this corrects quickly.

We have to see where all this settles over the next few days before making a near to mid-term call on the outright damage because at this point, Fed or Treasury shock and awe is almost certain. Another common theme has been ‘if it doesn’t work throw much more money at it’. Obviously they have been following this closely for the past few weeks, as conditions started to deteriorate, and have likely been waiting to see where the upper range was before shocking in order to get maximum benefit…that would be a humongous short squeeze in Bonds. The problem is…if they do shock her and it is sold into with the same fury that we have been seeing, there may not be an act two.

Treasuries Massacred

For more on the 10-year treasuries please see Treasuries Massacred; Yield Curve Steepest On Record.

This morning there was a bit of a treasury rally on a rumor the Fed was going to buy $10 billion in long dated treasuries but treasuries are now back to the lows of the day, with 10-year yields essentially unchanged vs. yesterday.

Yield Curve as of 2009-05-28



click on chart for sharper image

Mortgage banks are going to be flooded with calls from people wanting to lock at 4.75. Sorry folks, those rates are gone.

I called Mark Hanson this morning to see if there was any improvement in the mortgage. Mark said "Rates fell from 5.5 to 5.375 on intervention rumors this morning but are now back to 5.5. If rates stay in the mid 5's, new loan applications will quickly dry up.

By the way, that 5.5% rate is pretty much for the "perfect borrower" with a FICO score of 740 or higher and a 20% down payment. Jumbos are hovering near 8% with 1.5% points.

Mortgage banks that made unhedged commitments at 4.25-4.75% are now in a position to lose substantial sums of money.

Bernanke thought it would be an easy task to keep down mortgage rates. So much for a $1.2 trillion commitment. What's next? A $2.4 trillion commitment? Fannie Mae, Freddie Mac, and the FHA are the lenders of only resort yet the Fed is still struggling to rig the market.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Initial Unemployment Claims Dip Slightly; Continuing Claims Approach 6.8 Million, 17th Consecutive New Record

The peak in initial claims might be in but the peak in unemployment is nowhere close. Continuing claims hit 6.788 million, setting a record for the 17th straight week.

Please consider the Department of Labor Weekly Claims Report.

Seasonally Adjusted Data

In the week ending May 23, the advance figure for seasonally adjusted initial claims was 623,000, a decrease of 13,000 from the previous week's revised figure of 636,000. The 4-week moving average was 626,750, a decrease of 3,000 from the previous week's revised average of 629,750.

The advance seasonally adjusted insured unemployment rate was 5.1 percent for the week ending May 16, an increase of 0.1 percentage point from the prior week's unrevised rate of 5.0 percent.

The advance number for seasonally adjusted insured unemployment during the week ending May 16 was 6,788,000, an increase of 110,000 from the preceding week's revised level of 6,678,000. The 4-week moving average was 6,608,250, an increase of 123,750 from the preceding week's revised average of 6,484,500.

Weekly Claims



click on chart for sharper image

The dip in initial claims from the March peak of roughly 650,000 is not accelerating very fast, if indeed at all. Those looking for a recovery in jobs soon are going to be disappointed.

Economists expect to see unemployment by 10% at the end of the year. I expect to see it at 9.8%+- by August and approaching 11% by the end of the year. Bear in mind the "stress-free tests" conducted by the Fed had an adverse scenario of 10.3% at the end of 2010.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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National Sales Tax (VAT) Gets Fresh Look In Congress

Budget deficits are soaring so the smart thing to do would be to stop wasting money. Instead Once Considered Unthinkable, U.S. Sales Tax Gets Fresh Look.

With budget deficits soaring and President Obama pushing a trillion-dollar-plus expansion of health coverage, some Washington policymakers are taking a fresh look at a money-making idea long considered politically taboo: a national sales tax.

Common around the world, including in Europe, such a tax -- called a value-added tax, or VAT -- has not been seriously considered in the United States. But advocates say few other options can generate the kind of money the nation will need to avert fiscal calamity.

At a White House conference earlier this year on the government's budget problems, a roomful of tax experts pleaded with Treasury Secretary Timothy F. Geithner to consider a VAT. "There is a growing awareness of the need for fundamental tax reform," Sen. Kent Conrad (D-N.D.) said in an interview. "I think a VAT and a high-end income tax have got to be on the table."

A VAT is a tax on the transfer of goods and services that ultimately is borne by the consumer. Highly visible, it would increase the cost of just about everything, from a carton of eggs to a visit with a lawyer. It is also hugely regressive, falling heavily on the poor. But VAT advocates say those negatives could be offset by using the proceeds to pay for health care for every American -- a tangible benefit that would be highly valuable to low-income families.

"Everybody who understands our long-term budget problems understands we're going to need a new source of revenue, and a VAT is an obvious candidate," said Leonard Burman, co-director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, who testified on Capitol Hill this month about his own VAT plan. "It's common to the rest of the world, and we don't have it."

The federal budget deficit is projected to approach $1.3 trillion next year, the highest ever except for this year, when the deficit is forecast to exceed $1.8 trillion. The Treasury is borrowing 46 cents of every dollar it spends, largely from China and other foreign creditors, who are growing increasingly uneasy about the security of their investments. Unless Congress comes up with some serious cash, expanding the nation's health-care system will only add to the problem.

Obama wants to raise income taxes for high earners and impose new levies on business, but those moves would not generate enough cash to cover the cost of health care, much less balance the budget, and they have not been fully embraced by Congress. Obama's plan to tax greenhouse-gas emissions could raise trillions of dollars, but again, Congress is balking.

Enter the VAT, one of the world's most popular taxes, in use in more than 130 countries. Among industrialized nations, rates range from 5 percent in Japan to 25 percent in Hungary and in parts of Scandinavia. A 21 percent VAT has permitted Ireland to attract investment by lowering its corporate tax rate.

The VAT has advantages: Because producers, wholesalers and retailers are each required to record their transactions and pay a portion of the VAT, the tax is hard to dodge. It punishes spending rather than savings, which the administration hopes to encourage. And the threat of a VAT could pull the country out of recession, some economists argue, by hurrying consumers to the mall before the tax hits.

A VAT's Bottom Line

What would it cost? Emanuel argues in his book that a 10 percent VAT would pay for every American not entitled to Medicare or Medicaid to enroll in a health plan with no deductibles and minimal copayments. In his 2008 book, "100 Million Unnecessary Returns," Yale law professor Michael J. Graetz estimates that a VAT of 10 to 14 percent would raise enough money to exempt families earning less than $100,000 -- about 90 percent of households -- from the income tax and would lower rates for everyone else.

And in a paper published last month in the Virginia Tax Review, Burman suggests that a 25 percent VAT could do it all: Pay for health-care reform, balance the federal budget and exempt millions of families from the income tax while slashing the top rate to 25 percent. A gallon of milk would jump from $3.69 to $4.61, and a $5,000 bathroom renovation would suddenly cost $6,250, but the nation's debt would stabilize and everybody could see a doctor.

Most lawmakers are still looking for "a painless source of revenue" to overhaul the health-care system and dig the nation out of debt, Burman said. "Who knows?" he added. "Maybe the tooth fairy will bring that to them."

The Senate Finance Committee refused to consider the VAT to pay for health care. I guess health care is free.

Imagine a 25% hike on the price of everything you buy. Think that would fly? Still, if they would eliminate personal and corporate income taxes and replace them solely with a VAT (excluding food and medicine) I would be in favor of it, IF they would cut unneeded programs which is nearly every Congressional program on the books.

It's time to balance the budget. Public support for wars would drop to zero if taxes had to be raised to pay for them. Same holds true for unneeded military programs, Fannie Mae bailouts, Bank of America bailouts, etc etc.

"I think interest is quietly picking up," Graetz said. "People are beginning to recognize that the mathematics of the current system are just unsustainable. You have to do something. And a VAT has got to be on the table if you want to do something big and serious."

Therein lies the problem. The mathematics are unsustainable for the simple reason we are spending too much money. Rethinking taxes is a good idea, especially substituting taxes that encourage saving. However, the fear (and likelihood) is more taxes will just lead to more stupid spending.

Congress can come up with innumerable ways to waste money if given the chance. Unfortunately a VAT at this point is likely to accomplish nothing other than giving Congress that chance. Taxing people to pay for programs (or wars) that most would opt out of if they could, is not good policy.

The US can no longer afford to be the world's policeman. Before considering a VAT, Why don't we just start there and see what the savings would be?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Treasuries Massacred; Yield Curve Steepest On Record

Bernanke cannot have his cake and eat it too. If the economy is recovering the yield curve should steepen. And steepen it has. The Yield Curve Is Steepest On Record.

The difference in yields between Treasury two and 10-year notes widened to a record on concern surging sales of U.S. debt will overwhelm the Federal Reserve’s efforts to keep borrowing costs low.

The so-called yield curve steepened to 2.75 percentage points, surpassing the previous record of 2.74 percentage points set on Aug. 13, 2003.

Ten-year notes have lost 10.3 percent this year, according to Merrill Lynch & Co. indexes, while 30-year bonds have lost 27.5 percent. Two-year notes have gained 0.2 percent.

Rising 10-year Treasury yields are pushing yields on mortgage bonds higher, prompting holders of the securities to sell government debt used as a hedge to protect portfolios against rising interest rates.

As mortgage rates rise, the expected average lives of mortgage bonds and mortgage-servicing contacts extend as potential refinancing drops, leaving holders with portfolios of longer-than-anticipated durations. Duration is a measure of bond price sensitivity to interest-rate change.

“The back-up is mostly related to convexity selling by mortgage investors,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “This will be a test for the Fed.”

Yield Curve 1999 - Present



click on chart for sharper image

If the economy is recovering, the Fed should welcome this steepening. However, what if the yield curve is simply reacting at the thought of Bernanke monetizing Obama's massive deficits and the various stimulus plans?

I doubt the economy is recovering but it is may be getting worse at a lesser rate. Moreover, if the curve flattens, it sure will not be because of intervention, it will be because the so-called recovery has stalled. Heaven help Bernanke if the economy worsens and the yield curve continues to steepen.

Regardless why the yield curve is steepening, Bernanke's belief that he can control both the long and short end of the curve is seriously misguided. The fact is he cannot really control either, at least for long.

Twilight Zone Treasuries

Flashback April 23 2009: Twilight Zone Treasuries

The Fed said at its last meeting it intends to buy $300 billion in Treasury securities over six months in a bid to lower long-term borrowing costs and revive economic growth.

$TNX - 10 Year Treasury Note Yield




click on chart for sharper image

Professor Fil Zucchi on Minyanville had this succinct comment:

"Today the Federal Reserve printed $7 billion dollars and used it to buy an equivalent amount of 7 and 10 year Treasury bonds. As I publicly asked before, if Mr. Fed can't rig the price of an asset by buying it with printed money, why should anyone else buy it?"

Those wishing to keep an eye on these price rigging attempts can follow the Federal Reserve Bank Permanent OMOs: Treasury link.

Bernanke's Hubris

It is ridiculous for the Fed to think it can control the vast $trillion treasury market with pea shooting efforts at $7 billion a pea. However, as the charts above show, the Fed announcement hugely distorted the market in smaller timeframes.

As Prof. Zucchi says "If Mr. Fed can't rig the price of an asset by buying it with printed money, why else should anyone else buy it?"

Other than the initial pop, the Fed's silly attempt to game the system may have caused so much mistrust that it is putting upward pressure on yields.

Treasury Yields Where To From Here?

A couple of people wrote me today saying I have been wrong about treasuries.

Let's backtrack for a moment to set the record straight for those who think I have been bullish on treasuries all year. Although the strength of the selloff this year has been surprising, I stepped aside in December.

Prior to that I was hugely bullish, more so than anyone I know.

Mish Treasury Calls

Sunday, January 20, 2008: Time To Short Treasuries?

Kass Says Sell Bonds Short.

Kass: The bond market is in a bubble that is reminiscent of (and quite possibly as extreme as) other bubbles during previous eras. From my perch, the only issue is the timing of this trade.

Mish: Timing is indeed everything and perhaps there is a temporary selloff. But the primary trend is for lower yields. Perhaps much lower yields. There is no bubble in bonds. Not yet.

...

Anyone who wants to short treasuries with impunity on this economic backdrop can be my guest. For the record, I have no grudge against Kass. He puts out a good column that I frequently agree with. However, I take the other side of this debate.

There is no bubble in treasuries if you look closely at the fundamental issues. Those who want to see how low treasury yields can get and stay there, need to look at Japan. Yields in the US are going to go far lower and stay lower longer than nearly everyone thinks.

Thursday, June 26, 2008: Is The Inflation Scare Over Yet?

Those focused on the CPI failed to see any chance of the Fed Fund's Rate at 2.00 again. On the other hand, those focused on the destruction of credit from an Austrian economic perspective got this correct. That is just one reason why it makes more sense to watch the credit markets than the CPI. The second is the CPI is so distorted it is useless.

In my opinion, it is very likely new all time lows in the 10-year treasury yield and 30-year long bond are coming up.

Wednesday, November 19, 2008: Misguided Bets On The Yield Curve

Someone from one of the big brokerage houses emailed me last week saying the yield curve would steepen. My response was "Why should it?"

A bet on the yield curve to steepen is a bet the economy improves. Why should it? An even better question is "How low do 10 year and 30 yields go?" Certainly 3% or lower on the 10 year and even 30 year are in the realm of possibilities. That's how nasty this recession is likely to get.

Tuesday, January 06, 2009: Reflections On 2008, Themes For 2009

It is quite possible the lows in treasury yields are in. Unlike 2008 where I was constantly beating the drums for lower yields, 2009 could be different. Here are the facts: 3 month and 6 month yields hit 0% and the 10 year came close to hitting 2%. Could there be lower yields still? Yes, quite easily. Is it worth playing for other than as a hedge or part of an overall investment strategy? No.

Thursday, March 26, 2009 Quantitative Easing Begins; "Operation Twist" Revisited

Appearance vs. Reality

Yields may drop. If they do it will not be because quantitative easing is working. If yields drop from here, in spite of the massive supply of treasuries stemming from Obama's sky high budget, it will be because the economy is in worse shape than anyone thinks.

Those hoping for a second half economic recovery should be hoping yields rise, not sink.

"Operation Twist" failed. So will "Operation Twist Again" in one way or another, or perhaps multiple ways. For example there is no specific reason mortgage rates will drop even if [treasury] yields do. Default risk is simply too high.

Are Yields Going Up Or Down From Here?

Yes they are. I guarantee it. If you want to know which way short term, I do not know, nor does anyone else.

Monday, April 06, 2009: Fed's Effort To Roll Snowball Uphill Is Failing

Bernanke thinks he can manipulate treasury yields by purchasing long dated treasuries. He can't. The market is simply too big.

The Fed's problem is that it cannot force rates where it wants no matter how many treasuries it buys, short of owning them all. If the Fed is buying treasuries at an unnatural price, supply will be unlimited.

Friday, May 15, 2009: Nonexistent "pre-recovery" in Manufacturing Suggests US Treasuries a Buy

Yield Curve as of 2009-05-15



Treasuries Are A Buy

I went cautious on treasuries in December, but it's now time to become bullish again. Talk of "green shoots" and "pre-recoveries" is way overdone. Let's come back to this chart in September and October. My bet is the yield curve will be flatter and yields on the high end (10 year and 30 year) will be lower than today.

In September and October we will see if I was right or wrong, but looking back I am quite pleased with 2008 calls culminating with taking the treasury chips off the table in December 2008 (via public blog comments) and officially posted January 6, 2009.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Bair Says No to Furthering PPIP Scam

Banks are not content to have bidders rape taxpayers on their behalf. The banks want to rape taxpayers themselves. Please consider Banks Aiming to Play Both Sides of Coin.

Some banks are prodding the government to let them use public money to help buy troubled assets from the banks themselves.

Banking trade groups are lobbying the Federal Deposit Insurance Corp. for permission to bid on the same assets that the banks would put up for sale as part of the government's Public Private Investment Program.

PPIP was hatched by the Obama administration as a way for banks to sell hard-to-value loans and securities to private investors, who would get financial aid as an enticement to help them unclog bank balance sheets. The program, expected to start this summer, will get as much as $100 billion in taxpayer-funded capital. That could increase to more than $500 billion in purchasing power with participation from private investors and FDIC financing.

Allowing banks to have it both ways would give them added incentive to sell assets at low prices, even at a loss, the banks contend. They claim it also would free up capital by moving the assets off balance sheets, spurring more lending.

Bair Says Banks Can’t Buy Own Assets in PPIP Auction

The PPIP is a big enough scam as it is. Fortunately Bair Says Banks Can’t Buy Own Assets in PPIP Auction.

Federal Deposit Insurance Corp. Chairman Sheila Bair said banks involved in the U.S. Public- Private Investment Program won’t be permitted to buy their own impaired assets as a way to cleanse their balance sheets.

“There should be no confusion: Banks will not be able to bid on their own assets,” Bair said today at a Washington news briefing to discuss first-quarter U.S. bank earnings. There is “no structure” for such purchases, she said.

Banking groups and the Clearing House Association LLC, a group of 10 lenders including JPMorgan Chase & Co. and Bank of America Corp., are pressing the FDIC to let them use the program to buy their own troubled assets, the Wall Street Journal reported today.

Bair said other issues could discourage participation in the program including “discomfort” among potential buyers and sellers that Congress might change the rules.

As an example, Bair cited an amendment Congress approved this month after the program was introduced that would require the government to impose conflict-of-interest rules on managers of public-private investment funds to ensure that securities are bought by the funds in “arms-length” transactions.

The measure “created some uncertainty,” Bair said. “The Treasury will need to issue regulations, I think, to clarify those issues before we will have comfort by market participants.”

Either a buyer or a seller be - but not both.

Yesterday in Banks Lobby to Game PPIP Calculated Risk came up with a catchy phrase "Either a buyer or a seller be - but not both."

Unfortunately, as it sits, the PPIP is still a fraudulent system. I do not care who bids or does not bid, what I care about is the public (taxpayers) are putting up 93% of the funds, and taking 93% of the risk. It is amazing how greedy these banks are, asking to bid on their own assets.

The fear now is that Bank of America bids on Citigroup assets (wink wink) if Citigroup bids on Bank of America assets. The whole process is nothing but a massive transfer of bad assets to taxpayers and the purpose is to bail out bondholders. Please see Geithner's Plan Can Succeed for details.

Geithner and Bernanke keep insisting that banks are now well capitalized. I say prove it by halting the PPIP. Alternatively, let anyone and everyone bid on everything as long as the public is not involved. That way we would have a true idea of what those assets are worth.

"Either a buyer or a seller be - but not both." is insufficient to address all the ill's surrounding this fraudulent taxpayer ripoff.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Manhattan Awash in Office Space; Residential Gridlock in California

Midtown Manhattan and the entire state of California both have problems. Let's first take a look at Manhattan Is Awash in Sublet Office Space.

Few office towers have been left untouched by the flood of sublet space that has recently inundated the New York office market. In Midtown Manhattan — where many of the world’s largest financial companies are headquartered — three out of every four office towers now have sublet space available.

In Midtown Manhattan, for example, 13 percent of prime, modern, well-located offices — which brokers often refer to as Class A space — was available in April, up from 6.5 percent a year earlier, according to Colliers ABR, a commercial real estate services company. And sublets now account for some 40 percent of the space available in Midtown, compared with 30 percent of the much smaller total that was available a year ago, the company said.

Robert Sammons, the managing director in charge of research at Colliers ABR, said that sublet space in trophy office towers along Madison Avenue and Park Avenue has been leasing for as little as one-third of what that space might have commanded in early 2008, at the height of the roaring market.

“A year and a half ago, this space might have leased for $150 per square foot,” Mr. Sammons said, while he has heard of recent sublets in high-end buildings in this office corridor with annual rents of as little as $40 to $50 a r square foot. “This is the most remarkable turnaround in pricing that I’ve ever seen in such a short period of time.”

In April, two financial companies began offering sublet space at 399 Park Avenue, between 53rd and 54th Streets: Citigroup listed the building’s entire third floor, and Legg Mason listed the entire fourth floor. Each floor covers more than 97,000 square feet.

This month, JPMorgan Chase listed a large sublet at 277 Park Avenue, between 47th and 48th Streets. It amounts to more than 400,000 square feet, covering the 13th to the 17th floors, and the 19th to the 25th floors of this 51-story office tower. This is the largest block of space currently being offered for sublet in Midtown Manhattan.

Gridlock in California



California Stats

• There has been no increase in organic house sales in California in 18 months.
• Foreclosure-related resale market at the point of maximum demand.
• Total sales vs. foreclosure supply is heavily imbalanced.

"Over 50% of all sales are foreclosure related and that is snuffing out demand from other sectors."

Even though there is massive housing oversupply in California, the homebuilder industry lobbied for tax credits to build new homes.

California Tax Credits For New Home Purchases

Inquiring minds are investigating the California Tax Credit for New Home Purchase program.

This tax credit is available for qualified buyers who on or after March 1, 2009, and before March 1, 2010, purchase a qualified principal residence that has never been occupied. The buyer must reside in the new home for a minimum of two years immediately following the purchase date.

California allocated $100,000,000 for this tax credit. Buyers must apply for credit allocation from us. We will review applications and allocate credit on a first-come, first-served basis. Once $100,000,000 has been allocated, the tax credit will no longer be available. We began issuing certificates of credit allocation on May 1, 2009. Please check this page for updates on the allocated and remaining credits available. (Updated 05/15/09)



California allows qualified new home buyers a total tax credit amount equal to either five percent of the purchase price or $10,000, whichever is less. Taxpayers must apply the total tax credit in equal amounts over three successive taxable years (maximum of $3,333 per year) beginning with the taxable year (2009 or 2010) in which the new home is purchased.

California has wasted $65 million of a planned $100 million wastage.

It is beyond reckless to waste money like this in the midst of a fiscal crisis. If you want to know why California is broke and looking to increase taxes, such idiocy is always at the heart of the matter.

Moreover, note that the California credit is on top of the Federal First-Time Home Buyer Tax Credit.

A tax credit of up to $8,000 is available for qualified first-time home buyers purchasing a principal residence on or after January 1, 2009 and before December 1, 2009.

There is a massive oversupply of housing and the Federal government and states are attempting to stimulate home building!

The most amazing thing to me in all this is the number of people who blame regulation for the current crisis. The creation of Fannie Mae, Freddie Mac, idiotic programs like these, and the existence of the Fed itself are what regulation brings.

Yet complete fools and many people I otherwise consider brilliant are screaming for more regulation.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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