backing debt with a guarantee does not require an immediate outlay of funds, the federal government could have to cover losses if there are defaults

TO BE NOTED: From the NY Times:

"Localities Want U.S. To Support Muni Bonds

By LESLIE WAYNE

State and local governments are asking Washington to give them something that banks are trying to get rid of: federal bailout money.

California is asking that money from the Treasury’s TARP, the Troubled Asset Relief Program, be used to help back more than $13 billion in short-term borrowings. Members of Congress and several municipalities want bailout money to be used to cover more than $1 billion in losses from investments by municipalities in debt issued by Lehman Brothers, the investment bank that went bust.

And Representative Barney Frank, chairman of the House Financial Services Committee, is drafting legislation that would have the Federal Reserve, and potentially the Treasury’s bailout money as well, stand behind floating-rate municipal bonds — a $400 billion market that provides short-term financing to municipalities, but which has been largely frozen in the current credit crisis.

Another measure drafted by Mr. Frank, Democrat of Massachusetts, would create a public finance office within the Treasury Department to reinsure $50 billion in municipal bonds. This proposal comes as downgrades of municipal bond insurance companies have made it more difficult and costly for state and local governments to issue bonds.

All of the proposals are meant to help struggling state and local governments that are facing a cash-flow squeeze. The economic downturn has eaten into their tax bases as local businesses shut, houses are lost to foreclosure and there is a resistance to raising taxes. The risk to the federal government is that it could lose money if things get worse for municipalities and states. ( NB DON ) Although backing debt with a guarantee( NB DON ) does not require an immediate outlay of funds, the federal government could have to cover losses if there are defaults — which could be substantial if the economy weakens or states and municipalities cannot bring their budget deficits under control. Nonetheless, these overtures by state and local officials reflect a sense — perhaps just a hope — that municipalities suffering from a downturn in revenues and creditworthiness may find some relief in Washington beyond the stimulus money the federal government already is spending.

When the relief program was first conceived of last year, pleas by municipalities for a slice of the money went unheeded by Treasury officials who had earmarked the funds solely for troubled banks and financial institutions. But, in recent days, new conversations have taken place involving Federal Reserve and Treasury officials and state and local representatives that have given rise to cautious optimism.

“The municipal sector has been asking for federal assistance since TARP was just a glimmer in Hank Paulson’s eye,” said Matt Fabian, managing director at Municipal Market Advisors, an independent research firm. “But no one was pursuing it for months. Now, there has been a re-engagement in Washington about using the TARP money.”

Andrew Williams, a Treasury spokesman said, “We’ve had conversations with people from California and with people from around the country about the challenges facing the municipal market. And we continue to study the issue closely.”

In a speech last week at the National Press Club, Treasury Secretary Timothy F. Geithner said that the Treasury is “looking at ways to make sure these markets are working so that states and munis can meet their needs.”

But, according to a Bloomberg News account of the speech, Mr. Geithner cautioned: “I wouldn’t use the word bailout.”

With bailout fatigue setting in, it is unclear how successful the municipalities will be. At a Congressional hearing last Thursday called by Mr. Frank, federal officials remained cool to the idea of tapping into the relief fund, while still expressing concern over a credit squeeze facing many municipal borrowers.

David W. Wilcox, a deputy director at the Federal Reserve, said at the hearing that the Fed is “quite concerned” over any proposal that would extend federal guarantees to municipal debt. But, he allowed that if Congress does take that course, it should “tailor any government intervention in the municipal bond market relatively narrowly” and provide for a quick government exit when market conditions improve.

On the same day, Mr. Geithner told a House Appropriations subcommittee that the relief money cannot be used to resolve local government budget crises, since that money has been reserved for financial companies.

He said, however, that the Treasury would work with Congress to help states like California, which have been struggling to arrange backing for municipal bonds and short-term debt. Mr. Geithner did not provide any specifics.

Clearly, market conditions are not favorable in several corners of the municipal bond market, which consists of more than 50,000 public entities that have issued about $2.7 trillion in debt.

In April, Moody’s Investors Service issued its first-ever blanket report on municipalities and assigned a negative outlook on the creditworthiness of all local governments in the United States. This suggests that Moody’s may downgrade the ratings of many municipal issuers, which would increase their borrowing costs.

The biggest squeeze right now is on variable-rate demand notes, a common form of floating-rate borrowing that is backed by the promise of having sufficient future municipal revenues to repay investors — an increasingly uncertain proposition. The relief money would be used to guarantee these notes.

California, which has been crying the loudest for relief money, is in worse shape than most municipal borrowers. In a May 13 letter to Mr. Geithner, California’s treasurer, Bill Lockyer, said that the state “will be almost out of cash in July.”

Mr. Lockyer added that it is “highly unlikely that the state can access the short-term market ... based on its own credit.”

“We believe that California is not the only state to confront the same short-term cash-flow borrowing needs,” said Tom Dresslar, a spokesman for the California treasurer’s office. “But no one has as great a need as we do in terms of dollars.”

Michael Decker, a co-chief executive for the Regional Bond Dealers Association, concurred.

“All kinds of municipal borrowers are facing revenue shortfalls,” said Mr. Decker. “California is the largest example. Some states are better off than others. But all outstanding debt is backed by tax revenues. And municipalities are facing a greater or lesser level of distress.”

Also clamoring for help is a group of municipalities that purchased Lehman debt, which is now nearly worthless. Legislation authorizing the use of relief money to make these purchases was introduced by two California Democratic representatives, Jackie Speier and Anna Eshoo. If approved, this would be more like a bailout than a guarantee, because the federal government would be paying face value for debt that otherwise has little value.

The price tag on that proposal is around $1.6 billion. The argument promoted by the two congresswomen is that the Treasury and Fed allowed Lehman to fail, causing governmental bodies to lose money.

Though this effort has hit stiff opposition, Ms. Eshoo has not given up.

“It’s been said that some banks are too big to fail,” Ms. Eshoo said in testimony at a May 5 hearing held by Mr. Frank on the issue. “It can also be that counties, school districts and cities are too small to be noticed.”

Bay Area CBS News 5 reports "there are now signs of a serious real estate rebound in San Francisco

TO BE NOTED: From Free Exchange:

"The brutality of clearing markets

Posted by:

Economist.com | WASHINGTON

Categories:

Housing markets

BETWEEN 2000 and 2007, the state of California added just north of 900,000 households. During that time, municipalities within the state also approved about 1.3 million new housing units. There was, in other words, a slight overhang. Now it also happened that in 2006 home prices began falling. As they began falling, households which had stretched themselves to the limit to purchase a home, on the assumption that rising prices would bail them out if they had to sell, began defaulting. These defaults turned into foreclosures, which added to the supply overhang.

Those defaults also contributed to a massive financial crisis and subsequent deep recession, which pushed the state's unemployment rate above 10%. Those lost jobs meant that ever more Californians couldn't pay their mortgages, leading to more defaults and foreclosures, leading to a larger supply overhang.

But the market is trying desperately to clear:

California home prices dropped 41 percent last month from a year earlier, more than double the U.S. decline, as surging foreclosures drove down values, the state Association of Realtors said today.

The median price for an existing, single-family detached home in California sank to $247,590 in February from $418,260 a year earlier, the Los Angeles-based group said in a statement. The U.S. median price fell 16 percent during the same period, the second-biggest drop on record, according to the National Association of Realtors.

It's difficult to grasp the probable impact on local economies, local budgets, and local communities of such a substantial fall in just one year. It has to be wrenching. But there is a ray of hope—sales in February were 83% above their level one year previously. The price declines are having their intended effect, which is more than can be said for places like Detroit, Michigan. As painful as this must be for the state, it can still be said that there are people—a growing number of them—willing to purchase a home in California."

From the Washington Post:

"California's Wipeout Economy

By Steven Pearlstein
Wednesday, March 25, 2009; D01

LOS ANGELES The sun is shining less brightly these days in sunny Southern California.

The recession hit here earlier and harder than the rest of the country -- the statewide unemployment rate topped 10 percent last month -- and chances are it will linger here longer.

The severe downturn reflects the region's central role in the Bubble Economy.

As the headquarters for Countrywide Financial, Washington Mutual, New Century Financial and IndyMac, along with several of the nation's largest home builders, Southern California is ground zero for the mortgage crisis and the residential real estate bust.

As the capital of conspicuous consumption, its heavy reliance on auto sales, fashion, electronics and entertainment is now out of sync with the country's new frugality.

And as the gateway through which a majority of the country's imports flowed from Asia to American homes and businesses, its ports, warehouses and distribution channels, which once strained to keep up with the volume, now find themselves with large amounts of unused capacity.

More significantly, the receding economic tide has revealed serious structural problems and challenges in key sectors. The music, entertainment and electronic gaming industries are being turned upside down by the Internet. The real estate industry is bumping up against the limits of population growth and exurban sprawl. And state and local governments that have long financed themselves by pushing costs off into the future have finally met their day of reckoning.

"People here used to feel that because of the weather and the lifestyle, we were immune," said Robbin Itkin, a lawyer with a suddenly booming corporate workout and bankruptcy practice at the Los Angeles office of Steptoe & Johnson. "They don't think that now. There is a somberness I've not seen before."

Indeed, the most recent poll by the Field Research found that only about 40 percent of Southern California residents view the state as one of the best places to live. Back in the Beach Boy days, it was more than 70 percent.

I got the most vivid picture of how dramatically things have slowed at the Port of Los Angeles. Two years ago, ships lined up out to the horizon waiting to unload containers; unionized longshoreman routinely worked double shifts; and on any day there was usually work for a thousand or more nonunionized "casual" workers. But on a recent morning, the cranes on many terminals were idle, few if any casual workers were needed, and the few ships moving through the port's channel looked to be only partially loaded.

The ports of Los Angeles and Long Beach are, far and away, the biggest economic drivers in Southern California, directly employing 280,000 workers, indirectly supporting nearly 900,000 jobs in the region and handling $350 billion in goods. But last month volume at the bigger Los Angeles port was off by nearly a third, and executive director Geraldine Knatz said she and her crew were scrambling to preserve their market share. Already the port has cut fees by 10 percent on "intermodal" cargo bound for points north and east and is considering a reduction of 50 percent on new business.

It's not just the economic slowdown Knatz worries about, but also the longer-term prospect of losing business to other western ports with lower labor and environmental costs, or East Coast ports that will become her competition once the Panama Canal is widened to accommodate the biggest cargo ships.

"We're going to come back to a new normal," she predicts, with annual growth rates of less than half the average 7 percent rate of the previous decade, and a fraction of the torrid 14 percent rate in 2006.

The port's fortunes are reflected elsewhere in the region's sizable manufacturing sector -- in particular the toy, electronics and clothing companies that have long since moved the bulk of their production to Asia but retain much of their design, marketing and distribution functions in Southern California.

Last fall, Lonnie Kane had to lay off several hundred workers at the women's clothing company he and his wife have operated for decades. They import fabric from Europe and Asia, use high-tech equipment to cut the patterns and then ship the pieces out to local shops staffed by low-wage immigrant workers for the final sewing.

The small department stores that once formed the base of Kane's business are now gone, his small-store customers cannot get credit and the big department stores that buy his blouses and sweaters are constantly on the phone delaying or canceling their orders. His sales are off by more than 25 percent.

As Kane sees it, Southern California is no longer the "middle-class paradise" it fancies itself, with steady growth of good-paying manufacturing jobs. Like the rest of the country, the region is now uncomfortably divided between the haves and have-nots. Although some of that was inevitable, he also blames state and local governments whose attitude toward business has always been that if firms failed or left the area, there would always be plenty of others to take their place.

"People think that when this is all over, it will go back to the way it always was, " Kane says. "That's a fantasy."

It is hard to overstate how reliant the Southern California economy has always been on population growth to drive its economic growth -- in oversimplified terms, building houses for the next wave of home builders. In the beginning, the early developers could be pretty confident that if they built it, they would come -- from the Northeast and Midwest, and then from all corners of the globe. But in recent years, this perpetual growth machine has pretty much run out of steam as residents old and new confronted the realities of two-hour commutes, bad air, a shortage of water and a backlash against illegal immigration.

Moreover, without the steady growth in tax revenue that came with population growth, the Ponzi scheme that passes for public finance in California was suddenly and painfully revealed. Much of the blame lies with public employee unions and a handful of other special-interest groups that have essentially hijacked political control of state and local governments. Now, despite decades of high taxes and rapid growth, state and local governments find that they not only don't have the revenue to provide even basic services, but are saddled with hundreds of billions of dollars in unfunded pension liabilities and infrastructure needs.

"L.A. is becoming a Third World city," says Rick Caruso, a successful developer who has considered running for mayor.

Although Caruso's upscale new development, the Grove, has been a smashing success, he's putting most of his new projects on hold, figuring that for the moment, there's more money to be made with lower risk by buying up financially distressed properties at deeply discounted prices. There should soon be plenty for him to choose from. The shakeout in commercial real estate, which is now in full swing in suburban Orange and Riverside counties, has made its way to the tonier areas of the city. There are numerous "For Rent" signs on Melrose Avenue in West Hollywood and along Montana Avenue in Santa Monica. Lack of financing has stalled the $3 billion, Frank Gehry-designed hotel and residential project on Grand Avenue downtown and a $400 million luxury condo tower in Century City.

"It's clear to me that we will have a lot of reinventing to do here over the next few years," Jim Thomas, a prominent local developer, told me.

What's less clear is whether Southern California is ready to embrace that challenge.

Next time: Hollywood and the entertainment industry.

Steven Pearlstein will host a Web chat at 11 a.m. today at http://www.washingtonpost.com, where he is also the moderator of a new Web site, On Leadership. He can be reached at pearlsteins@washpost.com"

From The Good News Economist:

"San Francisco Housing Market Instantly Hot

In another sign that the US economy is turning the corner, the San Francisco housing market has almost instantly become hot.

Bay Area CBS News 5 reports "there are now signs of a serious real estate rebound in San Francisco." Their news story headline? "Mini-Boom."

"This is not some kind of spin from the real estate brokers. We absolutely have hard numbers to back this up," claims reporter Hank Plante of News 5. "In the last 2 weeks in San Francisco there have been more homes sold than in the previous 6 months."

One 40-year veteran agent claims he has never seen activity like he saw last week. On one home alone he received 42 offers. That house sold for $100,000 over the listing price.

Another house in the same neighborhood had 10 offers on it. It was listed for $525,000 and just sold for $608,000. And Plante reports several more examples of almost instant sales in this resurgent market with none of the examples being foreclosures.

Real estate expert Brendon DeSimone claims that evidently, "buyers have been waiting, they've been saving their money and waiting. The foreclosures have come and driven the prices down. With affordable monthly payments now, buyers are coming back in."

With those low prices, "pent up demand has now been unleashed, even at the high-end," continued Plante. For instance, waterfront real estate developer Alan Mark describes their "amazing run since the beginning of the year. We've had 50 [high-end waterfront condo] sales in 2009 and 30 in the last 30 days."

We'll add this incredible observation to our growing list of strong recovery signs."