Must-Know News - Jan. 30

• 1) Low-Flying PIIGS (Barron’s)

“Still, the week may mark a watershed, with the realization that governments no longer could borrow without limit. Sovereign debt, long seen a riskless asset in modern financial markets, no longer is presumed as such. And with governments’ credit lines running out, harsh choices are being forced upon them and their citizens.

By week’s end, the markets for bonds of the rudely named PIIGS — Portugal, Italy, Ireland, Greece and Spain — settled down after volatile swings that have posed the greatest threat to the viability of the euro since the common currency was introduced just over a decade ago.”

• 2) Euro Sovereign Debt Crisis Expands

“A leading story in Germany’s Spiegel Online, datelined from Davos, Switzerland, site of the ongoing economic summit, carries the alarming headline, “Economists Warn of Domino Crash.” It’s report begins: “Greece is on the verge of a crash, and Europe fears for the Euro.”

The debt crisis in Greece, with Spain not far behind, is breaking out as a threat in Europe at the same time as the drastic crisis precipitated by Obama’s downfall in the United States.

Despite the safety net organized by private banks to buy Greek bonds Jan. 25, the Greek (and Euro) financial crisis is worsening, with Greek spreads yesterday climbing to 405 points, to settle back at 390, still higher than the day before. Secondly, Spain is now in the line of fire, with Spanish spreads for the first time higher than Italian spreads. Italian three-years bonds yesterday suffered, with the government deciding to sell a little bit less than scheduled in order not to pay penalties. And Moody’s has put Portugal under watch.

It is evident that a wave of speculation is taking place, with hedge funds and others shorting state bonds. This is typic—recall the scandal when Goldman Sachs was caught shorting those same assets they were selling to customers.”

• 3) Fannie Mae, Freddie Mac delinquencies rise

“Fannie Mae and Freddie Mac’s home loan delinquencies rose 4.2 per cent in October and the companies modified more mortgages under President Barack Obama’s anti-foreclosure program, the Federal Housing Finance Agency said.

The number of borrowers at least 60 days behind on home loans owned or guaranteed by Fannie Mae and Freddie Mac rose to 1.65 million in October from 1.59 million in September, and has more than doubled since a year earlier, FHFA said in a report today. Delinquencies of 60 days or more as a share of mortgages serviced by the companies rose to 5.4 percent, from 5.2 per cent.”

“McLean, Virginia-based Freddie Mac and Washington-based Fannie Mae own or guarantee about $US5.7 trillion of the $US12 trillion in US residential mortgage debt.”

• 4) Fannie, Freddie Chase Bad Mortgages

“Stuck with about $300 billion in loans to borrowers at least 90 days behind on payments, Fannie and Freddie have unleashed armies of auditors and other employees to sift through mortgage files for proof of underwriting flaws. The two mortgage-finance companies are flexing their muscles to force banks to repurchase loans found to contain improper documentation about a borrower’s income or outright lies.

The result: Freddie Mac required lenders to buy back $2.7 billion of loans in the first nine months of 2009, a 125% jump from $1.2 billion a year earlier. Fannie Mae won’t disclose its figure, but trade publication Inside Mortgage Finance said Fannie made $4.3 billion in loan-repurchase requests in the first nine months of 2009.

“Because taxpayers are involved, we’re being very vigilant,” said Maria Brewster, who oversees Fannie’s repurchase team. “No taxpayer should have to pay for a business decision that caused a bad loan to be sold to Fannie Mae.”

The get-tough stance comes amid pressure on Fannie and Freddie to make the most out of more than $100 billion in taxpayer funds they got to stay afloat. The U.S. government took them over in September 2008″

• 5) Greek Debt Swap Counterparty Risk May ‘Spook’ Market

“Greece’s economic woes will “spook” the derivatives market because of concern the nation’s banks may struggle to honor their credit-default swap trades, according to BNP Paribas SA.

Asset quality at the country’s lenders will deteriorate as the economy slows, forcing them to mark down about 40 billion euros ($56 billion) of government bond holdings, analyst Olivia Frieser wrote in a note to clients today. Funding costs are also rising as the European Central Bank tightens its lending criteria, Frieser wrote.

“What will spook the markets is CDS counterparty risk, our understanding is that Greek banks were active CDS players, and there is no way of finding out about these particular exposures,” the London-based analyst wrote. “As long as Greek sovereign and bank spreads remain under pressure, this will weigh on the wider European banking sector.” ”

• 6) Obama to propose further Medicaid help for states ($25 billion)

“The Obama administration will propose giving cash-strapped states about $25 billion worth of help with their Medicaid budgets when presenting its 2011 budget on Monday, a White House official with knowledge of the plan said Friday.

The proposal would extend for six months - until July of next year - the help that states got in last year’s economic stimulus bill with their Medicaid programs.”

• 7) Sparks fly at CalPERS forum on pension costs

“The Schwarzenegger administration says CalPERS benefits are unsustainable, especially with the fund shouldering a $56 billion loss in the last fiscal year. Crane said the problem began long before the stock market crashed – and is at least partly CalPERS’ fault.

He said the fund lulled legislators into thinking they could raise benefits – as they did in 1999 – without having to worry about costs to the taxpayers.

Since then, as Schwarzenegger said earlier this week, the state’s annual contribution to CalPERS has risen from $150 million to about $3.5 billion. ”

• CalSTRS (California teachers pension) depleted by 2045

“Fully funding CalSTRS in 30 years would require investment earnings averaging more than 20 percent during the next five years or a contribution increase of 14 percent of payroll, a big jump in the current contributions totaling more than 18 percent.

What happens if nothing is done? The report said an actuary, Milliman, projects that CalSTRS investment assets will be “depleted” by 2045.”

• 9) Russia tried to force a bailout of Fannie and Freddie, Paulson writes

“Russia urged China to dump its Fannie Mae and Freddie Mac bonds in 2008 in a bid to force a bailout of the largest U.S. mortgage-finance companies, former Treasury Secretary Henry Paulson said.

Paulson learned of the “disruptive scheme” while attending the Beijing Summer Olympics, according to his memoir, “On The Brink.”

The Russians made a “top-level approach” to the Chinese “that together they might sell big chunks of their GSE holdings to force the U.S. to use its emergency authorities to prop up these companies,” Paulson said, referring to the acronym for government sponsored entities. The Chinese declined, he said.

Russia’s five-day war with U.S. ally Georgia started on Aug. 8, the same day as the opening ceremonies of the Beijing Games.”

• 10) Europe feels chill of 10pc unemployment

“BRUSSELS: Unemployment hit 10 per cent in Europe on Friday, amid rising inflation and a weakened euro currency according to new data that shows recession-mired Spain bearing the brunt of a jobless recovery.

The human cost of post-recession, structural economic rebirth could be seen in updated European Union data when the seasonally-adjusted unemployment rate for the 16 euro countries hit a miserable one in 10 in December.”

• 11) Ebbing US home sales hint prices may fall again-S&P

“A recent decline of U.S. home sales is swelling the supply of houses and may push prices down, adding to losses from an earlier three-year slide, said rating agency Standard & Poor’s in a statement on Friday.”

“The recent fall in home sales is boosting the number of existing homes on the market, which grew to a 7.2 months supply in December from 6.5 months in November, S&P said.

In coming months, “an expanding default and foreclosure pipeline of 2005-2007 vintage mortgage loans may push the ’shadow’ inventory of distressed U.S. housing even higher,” which could impede the market’s stability, S&P added. ”

• 12) State layoffs to affect PERS assets (Nevada)

“Massive layoffs of state employees could induce many long-term workers to retire and potentially affect the assets of the Public Employees Retirement System, its top official said today.”

“PERS has $22 billion invested to pay for retirement for its 40,000 retirees and 104,000 active members, which include local government employees, teachers and general state government employees.

The money now covers 72.5 percent of what PERS estimates ultimately will be needed to pay their retirement costs, down from a peak of 83.4 percent.”

• 13) Another Budget Casualty for Muni (San Francisco)

“The closure of a San Francisco Municipal Railways downtown sales booth this Wednesday is another casualty of the agency’s budget difficulties that include a $16.9 million deficit this year, and estimated deficits of about $100 million for each of the next two fiscal years.

Faced with a $129 million deficit last spring, Muni introduced higher fares and service cuts. The agency eliminated about 250 positions, including 100 employee layoffs, in November.”

• 14) Granholm seeks to retire 46,000 to address deficit (Michigan)

“In three years, the 62-year-old Alma resident, who works in the state Department of Information Technology, would retire and pay off the remainder of her house about the same time.

But she worries those plans could be dashed under a deficit-reduction proposal unveiled Friday by Gov. Jennifer Granholm. Her plan is to prod up to 7,000 state employees and 39,000 public school employees into early retirement to shave costs and help balance the state budget.”

• 15) State Comptroller Says Current Year Deficit Closer to $1 Billion (New York)

“New York State Comptroller Thomas DiNapoli is warning the state could end this fiscal year $1 Billion dollars in the red. That is twice as big as the deficit being projected by Governor David Paterson.

DiNapoli says that’s largely due to pressure on Wall Street to change the way it hands out bonuses. The changes will likely impact the state’s tax revenue during this quarter, when the state typically receives a boost from Wall Street.”

• 16) Illinois is Broke (Notice the Illinois debt clock)

“Illinois is broke

By July, Illinois will be $130,000,000,000 (that’s BILLION!) in debt. This crushing load hampers the state’s ability to fund public schools and universities, health care, and other essential public services. Most of that money is owed to the state’s pension funds and retiree health care plans. And YOUR SHARE of that debt is $25,000 per household. ”

• 17) Oregon PERS board moderates rate hikes, warns of trouble to come

“The board overseeing Oregon’s employee pension fund voted Friday to give schools, state agencies and other public employers a break on their upcoming pension contributions.

The 4-1 vote eases those employers’ pain in the state’s upcoming budget cycle, but does nothing to ease the long-term agony inflicted by the stock market’s 2008 crash.

The Oregon Public Employees Retirement Fund lost $17 billion during the market’s slide. It recovered three-quarters of that during last year’s rally, but remains about $14 billion underfunded. ”

“Even if the state’s investments average a hearty 10.5 percent return over the next decade, Mercer forecast that employers’ PERS costs will top out at 20 percent of their total payroll in 2014 — up from 12 percent this year.

If investments perform less well, and average the 4.5 percent return they did over the past decade, pension costs will rise steadily and eat up more than a third of public employers’ total payroll by 2022. ”

• 18) Workers cannot ignore the cost of PERA (Colorado…commentary)

“In 2008, PERA’s funding ratio tumbled to below 52 cents for every dollar of promised benefits — a $30 billion deficit. After almost a year of cautioning lawmakers against acting hastily, even PERA’s directors finally asked for help — a third rescue plan in just seven years.

PERA had little choice. Its $30 billion unfunded liability is enormous. For comparison, state government is expected to collect about $27 billion in taxes and “fees” over the next three years. Shutting down state government for three years in order to bail out PERA isn’t exactly a viable option.”

• 19) Milwaukee’s OPEB unfunded obligation at $881 million (Fitch)

“The employee’s retirement system was overfunded for many years, but with investment losses the funded ratio dipped in 2008 to under 90%. Gains in 2009 and a large pension contribution in 2010 should increase funding ratios to near 100% of the accrued liability. Nevertheless, the city has a sizable OPEB unfunded obligation, at $881 million. ”

• 20)  Pensions to drop Monday for Delphi salaried retirees (By up to 70%)

“Delphi’s 21,000 salaried retirees and plan participants filed a class-action lawsuit seeking to block the company’s decision to abandon its pension plans and hand them to the government’s insurer, the Pension Benefit Guaranty Corp. They also sued the Treasury Department and members of President Barack Obama’s auto task force.

But a judge this week declined to stop the move.

That decision, which also applied to hourly pension plans, will cost some younger retirees up to 70 percent of their pensions and saddles the pension agency with a $6.7 billion in debt. ”

• 21) China Suspends U.S. Military Ties on Taiwan Arms Sale

“China halted planned military exchanges with the U.S. military and warned it will punish companies involved in a Pentagon plan to sell weapons worth $6.4 billion to Taiwan. ”

• 22) Illegal Aliens Suspected of Massive First-time Homebuyer Tax Credit Fraud

“Nearly one third of all suspicious first-time homebuyer credit claims submitted by noncitizens around the country come from Texas where 1,000 applications for the tax credit have been filed by people employing a special taxpayer identification number that is used primarily by illegal immigrants, according to a Treasury Department investigation.”

“George said he could not disclose for privacy reasons where in Texas the suspicious homebuyer claims by noncitizens originated. But he said his office has not completed its investigation. He said another interim report is expected to be released by late February and will contain more revelations.

“The numbers get a lot worse,” he said.”

• 23) Fannie Mae Offers Subsidy for REO Purchases

“Fannie Mae says it will cover the closing costs on purchases of its REO homes – an incentive the GSE hopes will help it pare down a bloated supply of repossessed foreclosed properties.”

“The offer is available to any owner-occupant who closes on the purchase of a property listed on HomePath.com before May 1, 2010, the company said. In addition, many Fannie Mae-owned properties are eligible for special HomePath Mortgage and HomePath Renovation Mortgage financing, with as little as 3 percent down.”

- Saxplayer00o1