Bankruptcy loses its taboo for California’s cities
By Agnes T. Crane and Martin Hutchinson
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.
Bankruptcy is no longer taboo among California’s struggling cities. San Bernardino has just become the third Golden State municipality in two weeks to fail – ending a four-year hiatus since fellow California town Vallejo began its costly and protracted court battle against creditors. So far, though, investors seem pretty sanguine.
Granted, the three cities, which also include Stockton and Mammoth Lakes, are hardly bustling metropolises – each has a population of less than 300,000. But California, home to the glamorous Silicon Valley and Los Angeles, has the high taxes, big government and heavy regulation that are characteristic of major metropolitan areas.
That makes it especially tough for cities in the state’s heartland that can’t attract the glitterati. They have also been hammered by the housing market bust. Throw in rising pension costs and terrible governance and it’s likely that other towns will turn to the courts to remedy their woeful finances.
Yet municipal bond yields on lower-rated debt actually fell 0.06 percentage point to just 3.71 percent in the days after Stockton and Mammoth Lakes turned to the courts. Compare that to the height of muni madness two years ago, when investors feared a wave of defaults would rip through the $3 trillion market. Yields then topped 5 percent.
So what gives? First, the hysteria in 2010 was overblown. Bankruptcy is, and should be, the last resort for cities and counties who have exhausted all other options. As San Diego and San Jose have shown this year, governments can deploy more creative initiatives to plug budget shortfalls.
Central bank stimulus won’t solve the crisis
By Ian Campbell
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Following another weak U.S. jobs report, fear abounds. The sense is that the global economy is teetering and central banks can’t do much more. The point is that in the developed world they should not do more. Monetary policy risks becoming harmful if pushed further.
Mario Draghi, the President of the European Central Bank, hinted at the limits of policy on July 5. The interest rate doesn’t work so well when demand for credit is lacking, he said. In other words, you can create pools of cheap money but you can’t make nervous borrowers drink. Nor did it seem that he was thinking of other spurs, such as quantitative easing. It’s “not obvious there are measures that could be effective in a highly fragmented area”.
The hard truth is that Draghi is ill-placed to stimulate growth in the euro zone. Confidence is the problem. The ECB cannot resolve a crisis of insolvent and uncompetitive states locked in a union with solvent and competitive ones. Only politicians can do that. Then the growth horses might drink.
The Bank of England is trying, but it’s hard to imagine the newly launched 50 billion pounds of quantitative easing, taking the total to a colossal 375 billion pounds, will do much for growth. Of course, the BoE could emulate the U.S. Federal Reserve and buy mortgage-backed securities. But UK house-buyers might still be reluctant to drink.
In emerging economies, central banks are far from the end of the stimulative line. China has just cut its lending rate to 6 percent; Brazil is now down from 12 percent last summer to 8.5. Emerging economies can and will ease further, profiting from falling global inflation. But that helpful fall in inflation could itself be undone if the West chooses to push harder on the monetary string. Further QE would push up bonds, commodities and equities, pleasing financial markets – but driving up oil prices and hurting consumers.
The Bank of England is indeed very trying and currently on trial.
Mortgage backed securities? Only after rigorous Regulation is in place. They are what started the current crisis and were rated AAA by the rating companies. They were of course junk.They were wrapped in a cloak of “sub-prime” and wow, they were indded that! Flogging mortgages that have no chance of being repaid is not good practice as millions of people worldwide have found out the hard way.
A National Development Bank backede by Government is what we need, one institution dedicated to funding SME’s who can’t get loans from High Street Banks. The CEO would not be paid £20 million either. Besides, the High Streeters/Hooker Banks will be tied up in current inquiries, hopefully undertaken by Judges, not Parliamentary Committees with no teeth, after hearing “evidence” which within 48 hours is exposed as a series of lies.Let’s put our economy straight, then we can have a National Homeowners Bank againGovernment Bank for the average person on £20,000 a year. HIGH street will look after the rich at a price.
The bottom line is, earn money before you spend it.
China grows faster but most Cubans are better off
By Martin Hutchinson
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Raul Castro could use his visit to China to pick up a few tips. True, the Caribbean nation hasn’t done so badly despite being isolated by U.S. trade sanctions. It is still richer than China, less unequal and less corrupt. Still, a smattering of China-style reforms, particularly allowing freer movement of prices, could produce a useful boost to growth and prosperity.
China is the great growth story of the 21st century, while Cuba is often deemed a basket case. That’s not entirely fair. China is economically freer than Cuba, according to the Heritage Foundation, but Cuba is less corrupt and ranks much higher on the United Nations’ Human Development Index. Cubans have a higher life expectancy, and more years of schooling. Moreover, Cuba’s per capita GDP, measured in current U.S. dollars, is still somewhat higher even after China’s recent growth, while its incomes are significantly more equally distributed.
Economic policy under the Castros has interspersed periods of ideological crackdown with moments of liberalization. After Soviet subsidies ended in 1989 the economy shrank by 35 percent, but Raul Castro’s ascension to power in 2006 has brought further modest reform. Cuba has not opened up its agricultural sector as China did, maintains more extensive price controls than China, does not allow a free market in housing and remains relatively restrictive and arbitrary in its attitude to foreign investment.
There are some big differences. China’s relative poverty mostly reflects its vastly larger population and the level to which its economy sank under Mao Zedong. Copying some of China’s agricultural policies, its acceptance of the price mechanism in housing and elsewhere and its ability to work with foreign investors could provide a major boost to Cuba and its people.
There’s always the concern that opening up the economy could return Cuba to the ultra-unequal society of its 1950s past and some other Latin American countries. That’s something China itself is wrestling with. But Castro should take a pinch of China’s gradualism as well as its reform. Small-scale opening could help Cuba’s economy without destroying its social fabric. Castro can learn from China’s examples, both good and bad.
Martin Hutchinson and Reuters don’t know what youare talking about. It is just a same old bullshit by western media.
New mortgage seizure plan is the nuttiest idea yet
By Daniel Indiviglio
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
A California county’s new plan to seize underwater mortgages from investors may be the most dangerous housing market intervention yet. If it catches on, bondholders could face billions in losses – and taxpayers, too, if local authorities start targeting loans backed by the federal government. That would whack up mortgage costs and may leave Washington as the only lender.
The plan is simple enough. San Bernardino county wants to invoke existing eminent domain laws to seize mortgages that are bigger than the current value of the homes they’re lent against. That’s a radical departure from the way eminent domain is usually deployed – to commandeer land for public use, such as to build a road.
The county would then sell the loans to a fund called Mortgage Resolution Partners. The deal is a no-brainer for all concerned: the investment group makes a profit on the safer new mortgages – to qualify, borrowers have to be current on their payments. The homeowners get a loan that’s now worth less than their home, so also end up with some equity. And the local politicians look smart and may win some extra votes.
But that doesn’t allow for the true cost of the program. Assume it’s implemented across the country and includes not just private-label mortgages, as is the case in San Bernardino, but the far larger market of those backed by the U.S. government. That opens up the scheme to a large chunk of the $1.2 trillion-worth Americans owe on their mortgages above the current value of their homes, according to Zillow’s first-quarter Negative Equity Report.
That would cause enormous losses for bondholders and taxpayers alike. At the extreme, private investors would probably abandon any intentions of financing a private mortgage market in the future, leaving the U.S. government as the only entity willing to shoulder the risk.
most loans are from federally chartered banks or the money has moved across state lines. whatever. this attempt will be
stopped by the courts. what a joke.
iPhone anniversary marks triumph over crisis
By Robert Cyran
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Apple rolled out its iconic iPhone five years ago, just as Bear Stearns subprime hedge funds sounded the alarm on a systemic trauma. Financial woe often impedes development. But the iPhone is proof that innovation can defy the odds and overcome hard times.
The advance of technology is hard to stop. R&D budgets do get slashed in downturns. The growth rate of patent filings has slowed during the recent crisis. But companies that don’t invest, or that do so poorly, can suffer. Research In Motion and Nokia learned the lesson all too well. Their market values have plummeted over 90 percent since mid-2007.
More importantly, desired products, whether new plastics in the 1930s or smartphones now, tend to thrive regardless of the economic climate. About 40 percent of Dupont’s revenue in 1937 came from products introduced during the Great Depression. Almost 60 percent of Apple’s sales are now generated by the iPhone.
Apple’s focus on high-end customers hasn’t hurt. Even reduced disposable income at a certain level still leaves plenty left over for a new bauble. But the iPhone offers value for the considerably less affluent, too. It replaces digital cameras, personal organizers, guidebooks, dictionaries, satellite navigation systems and music players. That list isn’t inclusive and is bound to grow.
The contrast with the financial crisis is a stark one. Apple’s market value has increased by about $430 billion since the iPhone was introduced. The device represents a majority of the company’s sales and an even greater proportion of profit, and has contributed greatly to the popularity of the iPad. That makes it safe to ascribe a healthy amount of the gain to the iPhone.
Too big to fail anxiety fuels Jamie Dimon circus
By Agnes T. Crane
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
One thing binds the politicians, pundits, protesters and investors outraged by JPMorgan’s loss of some $2 billion on dodgy trades. None of them believes that U.S. taxpayers are really off the hook for Wall Street’s future, and probable, failures. The real loser of the debate – which today saw the CEO of a well-capitalized, profitable private financial institution hauled before the Senate – is the Dodd-Frank Act.
First, the loss – though painfully embarrassing for a bank that prides itself on risk management – still pales against the $5.4 billion earned last quarter and the $4 billion expected for this one, according to consensus estimates compiled by Thomson Reuters.
Yet, ever since Jamie Dimon told the world about the boneheaded trades in May, JPMorgan has become the focal point for frustration and anger among those who believe the United States wasted a financial crisis by keeping alive the notion that certain banks are too important to let fail. On Wednesday, protesters started calling Dimon a crook at a Senate Banking Committee hearing before he could even tell lawmakers how the bank stumbled.
Calls for a modern-day Glass-Steagall Act – the Depression-era legislation that kept commercial and investment banking separate – have grown louder as many across the political spectrum say the landmark financial reform passed two years ago has made matters worse. Complicated rulemaking such as the Volcker Rule is unwieldy and calling big banks systemically important reinforces the belief that the government still implicitly backs Wall Street.
Sure, regulators now have the explicit ability to wind down big, complicated financial institutions, but it’s untested. And if JPMorgan is too big to manage, what makes anyone think the government can break it or other large banks up, if need be, without sending shock waves through the financial system?
UK banks’ euro zone firewall needs government help
By George Hay
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
UK banks’ euro zone firewall needs strengthening. Despite a range of support measures introduced after the 2008 financial crisis, the Bank of England’s arsenal for managing a pan-European liquidity freeze looks underpowered when compared with the European Central Bank’s three-year loans. But if the euro zone cracks, UK lenders would be better off turning to the government for support.
The BoE has three conventional liquidity support mechanisms. Banks can borrow against liquid collateral for up to six months via its Indexed Long-Term Repo (ILTR) auctions. More troubled banks can swap illiquid collateral for gilts for up to a year through the Discount Window Facility (DWF). And, since late last year, lenders have been able to use the Extended Collateral Term Repo facility (ECTR), which uses an auction system that allows banks to pledge ropier collateral, albeit for a higher fee.
The ECTR is the nearest British rival to the ECB’s longer-term refinancing operation (LTRO), under which euro zone banks have so far borrowed 1 trillion euros. But there are two big differences. First, UK banks can only borrow from the ECTR for 30 days, while the LTRO runs for three years. Second, unlike the ECTR, the LTRO is unlimited. If a Greek euro exit caused the market for bank debt to freeze, UK banks would be at a significant disadvantage.
But that doesn’t mean the BoE should rush to mimic the ECB. Long-term liquidity facilities encumber large chunks of banks’ balance sheets, making unsecured bank lending less attractive. Moreover, central banks are only supposed to field liquidity shocks, not long-term funding freezes.
Fortunately, the UK has an option not available to most euro zone lenders: government support. When the market froze in 2008, the UK Treasury’s Credit Guarantee Scheme provided 250 billion pounds worth of multi-year guarantees on bank debt, almost all of which has been repaid. A new CGS would help to prevent a credit crunch while preserving the BoE’s integrity and taking advantage of the UK’s historically low bond yields.
Citi looks too accident-prone to make it to 300
By Martin Hutchinson
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Happy 200th birthday Citigroup – shame you are unlikely to make it to 300. At the very least, it’s hard to envision the accident-prone New York bank will make it to 2112. Founded in 1812 as the City Bank of New York, Citi’s first century was more successful than the second. By 1912 Citi was the largest U.S. bank with worldwide operations, a top-three underwriting business and one near-death experience, in 1837. Since then it’s had several costly expansions and four more near-fatalities.
At its founding, Citi was a blue-chip operation; its first president, Samuel Osgood, had been in President George Washington’s cabinet, and its money came from former sponsors of the shuttered first Bank of the United States. The bank’s first century saw only one major hiccup, when it suspended specie payments on May 10, 1837, but was bailed out by John Jacob Astor, who installed his protégé Moses Taylor as director. Taylor ran the bank from 1856 to 1882 as the financial services arm of his iron, coal and railroad business empire.
James Stillman, who bought effective control of the bank in 1891, was as rich as Taylor, but with an international reach, having financed the 1876 coup that installed Porfirio Diaz as president of Mexico. By 1912 the bank was America’s largest, and was referred to in the “Money Trust” hearings of 1913 as one of its three leading issuing houses. Only foreign branches were lacking – illegal until the 1913 Federal Reserve Act.
But Citi’s second century has been marred by too many near-death experiences to assure it makes it to 300 intact. It flirted with insolvency in 1920 after Cuban sugar loans went sour. Then “Sunshine Charlie” Mitchell, its 1920s-era president, was prosecuted for tax evasion; describing his role in the 1929 financial crisis, Senator Carter Glass said: “Mitchell more than any 50 men is responsible for this stock crash.”
During the Great Depression Citi’s stock par value was cut by 40 percent and it was bailed out by the Reconstruction Finance Corporation. Then, after another exuberant burst of international expansion in 1959-1980, during which chairman Walter Wriston claimed “countries don’t go bust” it was bailed out in 1991 by Prince Al-Waleed bin Talal. In 2008, losses in the U.S. mortgage market necessitated another rescue, this time by U.S. taxpayers.
California shows way through tricky pension mess
By Agnes T. Crane
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
San Jose and San Diego want current public workers to make sacrifices for their pensions, like contributing up to 16 percent more of salaries to fund retirement schemes. The proposals, overwhelmingly backed by voters in elections this week, look to be a sensible way forward in the thorny thicket of pension reform.
Since the downturn, new hires have borne the brunt of belt-tightening in the nation’s public sector. They, not their elder cubicle mates, have had to swallow diminished expectations for their golden years. This unfair two-tier system is likely to further discourage the young and talented from considering a career in the civil service. In addition, such marginal reform won’t be enough over the long term to fill a $700 billion shortfall in America’s public pension system. A better approach is burden sharing – something San Jose and San Diego are trying to push through.
Their proposals, though different in form, both demand sacrifices from those already on each city’s payroll, and voters agree. San Jose won 70 percent for its measures, while San Diego got the backing of two-thirds of the electorate. The southern California city wants to freeze salaries for five years in a bid to slim future liabilities.
Silicon Valley’s Anchor City, meanwhile, is pushing for something more interesting. It hopes to encourage, but not force, workers to opt for what could be a cheaper, less generous, benefit scheme. If employees want to hold onto current benefits – like retiring by 55 – they’ll have set aside up to 16 percent of their salary for pension contributions. If everyone took that option, the city could save $25 million a year – potentially reducing the city’s own payout by around 10 percent. Alternatively, employees could keep their pension contributions as they are and instead help the city save money by accepting reduced perks like halving standard-of-living adjustments and not retiring until they turn 62.
None of the options, however, is pleasant for workers. Unions have already filed suits to contest the proposal in San Jose. Yet such burden sharing looks inevitable. Historically, markets have done the heavy lifting for pension funds. Beefy 8 percent annual investment gains, however, look increasingly unrealistic. Many state and local government budgets, meanwhile, are already stretched to the breaking point. That leaves employees, who have traditionally contributed the least, to step up if they hope to have any pension at all. Better to try to find a solution now than wait until it’s too late.
This lets San Jose City officials off to easy, they claim they need more police on the streets, maybe they do. If the funding tax base is not there the public has to accept reduced services are a fact of life. That is the real issue.
City officials instead are using the ballot box to get popular vote to over turn an legal and binding contract. If the City is that desperate it should file for bankruptcy. As that is the legal way to reorganize city operation. See if the politicians have the intestinal fortitude to do so..
Personally wanting to join a organization that does not respect contracts and negotiated agreements is not one that bright and young people should be interested in.
Slashing pensions to fund operations is being done so at the cost of the pensioners…Ballot box initiative like this usually are rejected by the legal community. This one should be too.
Young talent wanting to join a public agency that does not honor its agreements and looks to make ends meet on the back of pensioners is one that the young and talented will look at in suspicion.
BofA reject wins Fannie Mae booby prize
By Daniel Indiviglio and Agnes T. Crane The authors are Reuters Breakingviews columnists. The opinions expressed are their own.
No good deed goes unpunished. Fannie Mae has chosen Timothy Mayopoulos, its general counsel, as its new chief executive. His promotion won’t improve already tense relations with Bank of America – the mega-bank fired him in 2008 after he questioned mounting losses. But his integrity and background make him a decent fit for the job.
As the top lawyer at BofA during the crisis, he counseled executives they didn’t need to disclose Merrill’s mortgage-related losses if they didn’t creep too high. But as Greg Farrell points out in his book “Crash of the Titans,” new estimates just days after shareholders had approved taking over the Thundering Herd “had busted through the outer limit of what Mayopoulos had been using as his guideline.” A day after trying to raise it with BofA’s finance chief, he was fired.
Running the mortgage zombie could make for some awkward conversations with his old firm. While Fannie’s general counsel, Mayopoulos recused himself from dealing with a long-running spat over who should take the hit on faulty mortgages BofA had sold to the agency. But as chief he may now have to deal directly with Brian Moynihan, who briefly replaced him before being put in charge of the investment bank and, ultimately, all of BofA.
He’s also taking a $2 million pay cut to move to Fannie’s corner office. That’s a rare and humble step in the world of finance and a welcome attribute in an organization like Fannie Mae better known for accounting shenanigans, eye-popping CEO pay and now a $116 billion bailout tab.
A hard-nosed, principled lawyer is just the kind of leader Fannie needs. Mayopoulos’s in-depth knowledge of corporate and contract law should serve the agency well, as clawing back money from lenders who sold it dodgy mortgages will remain a priority. That surely beats having a more traditional business leader – Fannie’s role in financing mortgages is, after all, slated to diminish.
It’s a good fit for Mayopoulos, too. With New York Attorney General Andrew Cuomo immortalizing him by claiming BofA bumped him as “the man who knew too much,” getting another job on Wall Street might be hard. Running the Fannie briar patch looks a good fit for both of them.
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