Monday, August 31, 2009

FDIC bank insurance fund shrinking; concern grows as failures continue


The fund stands at $10.4 billion, its lowest point since 1993. Some speculate that the agency will have to tap its line of credit or, worse, seek taxpayer money to cover expected future losses.

By Jim Puzzanghera and E. Scott Reckard, Los Angeles Times

August 28, 2009

Reporting from Orange County and Washington

Today is Failure Friday, the grim point each week when federal regulators typically seize the latest round of most-troubled banks. Expect more bad news in the Fridays to come, even though the economy shows signs of improving.

U.S. banks lost a combined $3.7 billion in the second quarter, and the 81 failures this year have reduced the federal fund that insures deposits to its lowest level since 1993, when the fiasco in the savings and loan industry was drawing to a close.

Some analysts speculate that the Federal Deposit Insurance Corp. will have to tap its $500-billion line of credit or, worse, seek taxpayer money to cover expected future losses. Regardless of where the agency gets the rescue money, its chairwoman sought Thursday to reassure Americans that their deposits were in no danger.

"The FDIC was created specifically for times such as these," Sheila C. Bair said. "Our resources are strong. Your insured deposits are safe."

But that doesn't mean your bank is safe.

The FDIC has opened a facility in Irvine where more than 400 employees, most of them newly hired, plan to work for three to five years closing banks in the western United States and disposing of their bad assets. The offices are in a 15-story tower that had sat empty since developer Irvine Co. completed it last year as part of the Irvine Spectrum complex.

Bair warned of many more failures as banks move beyond the housing collapse to deal with problems caused by troubles in the commercial real estate market and the continued effect of high unemployment. That will keep regulators busy Friday evenings, a time they prefer for taking down failed institutions so they have the weekend to usher in new management and get branches ready to reopen Mondays.

"Loans are going bad because people are losing their jobs or their businesses are closing down, or people aren't traveling and staying in hotels," Bair said.

"Banks typically are a lagging indicator, so even as the economy rebounds, you'll probably still see a continuing increase in bank failures."

James Chessen, chief economist for the American Bankers Assn., said that banks "are neither at the beginning nor the end of the problems presented by a difficult economy. They are in the middle, and significant challenges still remain."

He stressed that 96% of banks were deemed "well capitalized" by regulators.

But the FDIC has estimated that bank failures now through 2013 could cost its insurance fund about $65 billion.

Many of those failures will come from banks the FDIC has identified as "problem institutions." That figure continues to swell -- to 416 in the second quarter from 305 in the first. It is the largest number of banks in danger of failing since 1994.

Those problem institutions, which the FDIC does not publicly identify for fear depositors would rush to take out their money, had a total of $300 billion in assets.

The amount of expected losses is troubling because the insurance fund, which covers accounts up to $250,000, has been depleted badly by earlier bank failures.

The fund's balance plunged 20% in the second quarter to $10.4 billion. That was its lowest level since 1993 and came before 36 more banks collapsed this summer. At the end of June last year, the fund had $45.2 billion.

To avoid tapping into its line of credit at the U.S. Treasury, the FDIC this year raised the assessments it charges banks to furnish the insurance backstop. Banks pay about $12 billion a year in premiums, and the increased assessments added nearly $6 billion in the second quarter.

Bair said the fund was in better shape than it appeared. The FDIC has set aside an additional $32 billion to cover losses at banks expected to fail over the next year, she said. For example, the failure of Colonial Bank in Montgomery, Ala., this month was estimated to cost the FDIC $2.8 billion, but the loss was anticipated as part of money set aside for future failures and did not reduce the fund's level.

Not all banks on the problem list fail. And when they do, they still have assets the FDIC can sell to cover some of the insured deposits. The 45 banks that failed through June 30 this year had a total of $35.9 billion in assets but are estimated to cost the insurance fund $10.5 billion.

The agency now has $43.2 billion in assets from failed institutions that it is trying to sell.

Though the FDIC can draw on its line of credit to cover shortfalls, as it did once before during the S&L crisis, Bair said she did not anticipate needing to borrow any money.

The FDIC, however, has said it expects to levy another special assessment on banks by the end of September to help replenish the fund.

Richard Newsom, a former FDIC bank examiner, said that Bair is "delusional if she actually thinks additional bank fees and assessments will cover the black hole in the FDIC insurance fund."

Newsom blamed the FDIC and other regulators for contributing to the industry's downfall by easing up on oversight earlier this decade.

"I am certain the published numbers of problem banks and related dollars dramatically understate the actual number and dollar amount of problem institutions in the banking system, as it has for at least two years," he said.

" 'Too big to fail' historically means too big to put on the problem list and admit to past regulatory failure," he said.

Executives at healthy banks have been chafing at the prospect of ponying up more money to cover the growing losses from failed institutions.

The FDIC is trying to be creative in how it sells the assets of seized banks to lessen the effect on the insurance fund. On Wednesday, the agency's board eased proposed rules on private equity firms seeking to buy failed banks. And the agency has entered into agreements to limit the exposure of buyers to failed banks' loan losses.

As bleak as things look, they aren't expected to reach the levels of the S&L crisis -- at least in the sheer number of failures. There were 1,043 failures then, compared with 106 since this recession began in late 2007. But banks are larger now, and the $408 billion in assets of the latest crop of failures is approaching the $519 billion in assets of the earlier banking crisis.

"There will be more bank failures this year and next, but it's still going to be a small percentage of banks overall," Bair said. "But there are a lot of losses to work through."


Copyright © 2009, The Los Angeles Times

Wednesday, August 26, 2009

FDIC Sets Standards for Private-Equity Firms to Buy Shut Banks

By Alison Vekshin, Bloomberg

Aug. 26 (Bloomberg) -- The Federal Deposit Insurance Corp. approved guidelines for private-equity firms to buy failed banks, opening a growing pool of failing lenders to new buyers and limiting costs to the agency and the industry.

The FDIC board approved the rules today at a meeting in Washington, agreeing to lower to 10 percent from the proposed 15 percent the Tier 1 capital ratio private-equity investors must maintain after buying a bank.

“The FDIC recognizes the need for additional capital in the banking system,” FDIC Chairman Sheila Bair said at the meeting. “We want to maximize investor interest in failed institutions.”

The agency is seeking to encourage private-equity investors to bid on assets of collapsed banks as the pace of failures reaches a 17-year high with 81 so far this year, draining the agency’s insurance fund by more than $21 billion. The surge has forced the FDIC to enter loss-sharing arrangements and absorb other costs to unload the assets of failed lenders.

The FDIC has twice brokered deals with private-equity groups this year. In March, California-based IndyMac Federal Bank, split off from IndyMac Bancorp Inc., was sold to investors led by Steven Mnuchin, an ex-Goldman Sachs Group Inc. investment banker, and including buyout firm J.C. Flowers & Co. Florida’s BankUnited Financial Corp. was sold in May to firms including Blackstone Group and WL Ross & Co.

U.S. Senator Jack Reed, a Rhode Island Democrat who leads a Banking Committee panel overseeing the securities industry, wrote to Bair in May asking her to spell out rules for private- equity firms investing in banks.

The FDIC proposed the rules in July and released them for 30 days of public comment, prompting complaints from private- equity firms that the rules were too onerous and would discourage industry participation.

To contact the reporter on this story: Alison Vekshin in Washington at

Last Updated: August 26, 2009 16:11 EDT

Slump Spurs Grab for Markets

AUGUST 24, 2009


After spawning legions of victims, the recession is forging a class of winners.

....the survivors in the home-building industry so far tend to be the ones that -- for whatever reason -- reacted a bit earlier than their peers. Now, a few of the surviving home builders are cautiously starting to feed on their dead rivals.

"It was not a feat of strength to survive,'' said Robert Toll, the 68-year-old chief executive of Toll Brothers Inc., who led the company through three previous downturns. "It was following the experience we had gained in past housing recessions."

Toll Brothers and a few other builders stopped buying land in mid-2006, as the market showed early signs of strain, even as others plowed ahead. This let Toll stockpile cash by eliminating a major expense. Miami-based builder Lennar Corp. also accumulated cash by slashing home prices relatively early.

Now, Lennar, Toll and others are in the market to snap up land at deep discounts. Lennar, for instance, recently bought back a stake in a huge parcel of California land that it had sold two years ago -- at the top of the market. The deal values the land at about 18% of its value when Lennar sold it in 2007.

Toll, too, has bought land in recent months. Mr. Toll says he's being cautious in case housing slumps further. "We would rather be safe than sorry,'' he said in an interview last week.

Another lesson of the downturn: Surviving home builders financed their operations with debt that matured five to seven years out, providing them some breathing room. By comparison, struggling builders often had loans tied to specific real-estate developments now in default. That will likely force them to sell off the land at fire-sale prices.

"That's one of the places where we will pick up [land] in the future," Mr. Toll said.

Credit Suisse analyst Dan Oppenheim estimates that over the next few years the largest firms, led by a dozen or so publicly traded builders, will control as much as 35% of the new-home market, up from about 25% before the crisis.

The business of mortgage lending is also seeing a dramatic power realignment, partly due to bank acquisitions hammered out when housing-crisis fear was at its highest. Last fall, as stocks plummeted, Wells Fargo & Co. agreed to snap up Wachovia Corp. And in January 2008, Bank of America Corp. agreed to buy ailing mortgage lender Countrywide Financial Corp. for a fraction of its peak value.

Bank of America and Wells Fargo controlled nearly half of all mortgage originations in the first six months of this year, according to Inside Mortgage Finance. By contrast, in 2007, the top three lenders accounted for 37% of all mortgage originations. Countywide, the top mortgage lender for much of the boom, never crossed 20%.

Wells Fargo's market share jumped to 24% at the end of June, from 11% two years ago. Bank of America's share rose to 21% from 6.8% two years ago.

Lenders like Bank of America and Wells that didn't depend as heavily on exotic mortgage loans -- tongue twisters like pay-option adjustable-rate mortgages with negative amortization -- are now "picking up market share because the market has moved in their direction," says Fred Cannon, an analyst at Keefe, Bruyette & Woods.

The acquisitions may not prove to be home runs. Wachovia had certain risky mortgages and a significant portfolio of commercial loans that could leave Wells vulnerable if business stays bleak. A Wells spokeswoman said Wachovia's loan portfolio "has been performing within our expectations."

Bank of America's mortgage and insurance arm lost money in the second quarter, but mortgage-refinancing volume was up significantly. Countrywide "has made a positive contribution to the company's financial results in the first half of the year," said spokesman Jerry Dubrowski.

Write to Leslie Scism at, Matthew Dolan at, Ann Zimmerman at and Michael Corkery at

Printed in The Wall Street Journal, page A1

Tuesday, August 25, 2009

FDIC to Expand Pool of Bidders for Distressed Banks


| 25 Aug 2009 | 01:02 PM ET

U.S. regulators are set to buttress their defenses this week against a slew of sick banks still facing closure and the risks to the dwindling fund that protects depositors.

The Federal Deposit Insurance Corp has been looking at expanding the pool of potential bidders for distressed banks, providing some capital relief for troubled assets that will soon be brought back onto banks' books, and charging further industry premiums to replenish the insurance fund.

All of these moves are geared to get the banking industry, and the agency charged with ensuring the industry's safety, through a financial crunch that is coming to a head.

"We're working through this problem. We're not at the beginning, we're not at the end," said James Chessen, chief economist for the American Bankers Association. "We're in the middle and it's painful."

Regulators have shuttered 81 banks so far this year, compared with 25 last year, and three in 2007. Analysts say the wave of failures is far from over. Richard Bove of Rochdale Securities said on Sunday that 150 to 200 more U.S. banks will fail in the current banking crisis, which started with a dramatic fall in housing prices that sent the economy into a recession and caused many borrowers to default on their loans.

Bove said the continuing failures will force the FDIC to turn increasingly to non-U.S. banks and private equity funds to shore up the banking system.

On Wednesday the FDIC will hold a board meeting to vote on guidelines aimed at attracting private investment money to distressed banks while ensuring the investors are serious about nursing these institutions back to health. The agency will likely relax the previously proposed guidelines after critics derided them as overly strict and predicted a chilling effect on investment.

The agency will also vote on a rule that will ask banks if they need some capital relief associated with an accounting change that will bring more than $1 trillion of assets back on their books next year.

On Thursday, the FDIC holds its quarterly briefing that provides critical information about its outlook for bank failures and the state of the deposit insurance fund.

'Drip, Drip, Drip'

The meetings will come on the heels of two large bank failures that resulted in multibillion-dollar hits to the deposit insurance fund.

The largest bank failure of the year landed on Aug. 14, when the FDIC announced that Alabama-based Colonial Bank had been closed and its assets sold to BB&T. Colonial had total assets of $25 billion and is expected to cost the FDIC insurance fund $2.8 billion.

This past Friday, the FDIC announced Texas-based Guaranty Bank failed, and that Spain's BBVA was buying its assets. Guaranty, which had $13 billion in assets, drained another $3 billion from the insurance fund.

Paul Miller, an analyst at FBR Capital Markets, said there will be a "drip, drip, drip" of bank failures over the next year but he does not see any more failures of the same magnitude as Colonial. "For the number of bank failures, we're in the first couple of innings. For the size, we're in the late innings," Miller said.

The insurance fund has been drained to its lowest level relative to deposits since 1993, largely because the FDIC must pull out money for expected bank failures over the next year.

The fund's balance stood at $13 billion as of March 31, compared to $53 billion a year earlier.

The agency will provide an update on Thursday about how much more money has been drawn, and if the outlook for future bank failures has worsened.

The FDIC in May raised the expected loss for the insurance fund to $70 billion over the next five years from $65 billion.

Officials are likely to reiterate on Thursday that they will have to exercise their option to charge banks further special premiums to bolster the fund. Regulators are still wary of tapping the FDIC's $500 billion line of credit with Treasury.

FDIC Chairman Sheila Bair has said she is reluctant to ask taxpayers to temporarily put up money to cover the cost of failures, and would rather have the industry cover the insurance costs.

In May the FDIC voted to impose a 5 basis-point levy on each bank's assets, which equals a $5.6 billion fee that the industry has to pay in the third quarter. The FDIC also voted to give itself the option to collect additional special fees in the fourth quarter of 2009 and first quarter of 2010.

"Obviously the first best solution is to avoid tapping the line of credit," ABA's Chessen said, while also acknowledging that additional premiums would be painful at a time when many banks are still fragile. "The key is to find a reasonable approach that doesn't make the situation worse but ensures the FDIC has the funding they need."

Hotel losses mount, hurting city's coffers

Robert Selna, San Francisco Chronicle

Monday, August 24, 2009

After two notable and high-end San Francisco hotels defaulted on large loans last month, the city's hotel economy - a key contributor to municipal coffers - has only become bleaker.

On July 8, owners of the stately, 97-year-old Renaissance Stanford Court on Nob Hill defaulted on an $89 million loan. Three weeks later, the glitzy Four Seasons Hotel, built on Market Street in 2001, withheld payment on $90 million it owed.

The explanation for the ailing hotel industry is straightforward: High unemployment and job insecurity have meant that patrons aren't willing to pay as much as they have in recent years. In June, the average room rate in San Francisco was $134, the lowest it has been since 2005 and well below the $162 peak in June 2008, according to PKF Consulting, which tracks hotel industry trends.

For a while, managers filled rooms by offering lower rates, but the number of visitors also has begun to slide, and in June, occupancy tumbled to 73 percent, down from 85 percent the same time last year.

Add to the troubled mix the fact that many hotel owners, in San Francisco and across the state, financed purchases or refinanced loans between 2005 and 2007 - when the hotel values were at their peak. Since then, hotels statewide have lost 50 to 80 percent of their value, meaning that many owners owe far more than their asset is worth.

Hospitality industry analyst Alan Reay calls the situation a "perfect storm" that won't improve any time soon - probably not until 2011.

"We won't hit the bottom on this until we see stabilization in employment and income," said Reay. "Plummeting revenue and an inordinate amount of debt on these properties is a recipe for disaster."

More defaults expected

Seven San Francisco hotels are currently in default, but Reay and others expect more defaults in the coming months and believe that some hotels will go into foreclosure. Apart from the Stanford Court and Four Seasons, the distressed hotels have confidentiality agreements that keep their identities private.

Alongside the owners who can't pay off their loans, it appears the city itself has taken the biggest loss as a result of the hotel slump. Data from the San Francisco Controller's Office shows that the city's hotel-related revenue is expected to decline by 9 percent in 2008-2009 to $203 million and to drop to $173 million in 2009-2010.

Ted Egan, San Francisco's chief economist, said hotel occupancy taxes and property taxes comprise about 7 percent of annual revenues that go to the city's general fund, the highest amount from the private sector. The next biggest tax contribution from private industry comes from payroll taxes, but they typically represent less than half of hotel taxes, he said.

Nearby destinations also are suffering. Based on the key indicator of revenue per rooms available, San Francisco and Oakland were down 24 percent from the previous June and the San Jose/Campbell area has plummeted 32 percent, according to numbers compiled by Reay's Atlas Hospitality Group.

Smaller California towns that rely heavily on tourism also have seen established hotels flail. For example, the owners of Sausalito's turn-of-the-century Casa Madrona Hotel recently filed for bankruptcy after defaulting on a $24 million loan.
Rates fall nationwide

The problem is not limited to California. For example, the average price for a Manhattan hotel room now is about $200 a night, down almost one-third since last year.

Hotel companies (as opposed to owners) are relatively sheltered from the real estate disaster, Reay said. Many hotels are no longer owned by companies bearing the hotel's name, such as Marriott and Hilton, but instead are managed by them. The Stanford Court is an example.

While cheaper rooms are a boon to visitors, some hotels have had to cut services to correspond with declining rates. Room service may no longer run all night and fewer staff may be on hand to ensure a comfortable stay.

Scott McCoy, Stanford Court's general manager, said the hotel had "calibrated services with the expectations of guests" and had made some changes, but that it was essentially the same hotel.

E-mail Robert Selna at

Friday, August 21, 2009

Most Failing Banks Are Doing It the Old-School Way

August 21, 2009

High & Low Finance

By FLOYD NORRIS, New York Times

Banks are now losing money and going broke the old-fashioned way: They made loans that will never be repaid.

As the number of banks closed by the Federal Deposit Insurance Corporation has grown rapidly this year, it has become clear that most of them had nothing to do with the strange financial products that seemed to dominate the news when the big banks were nearing collapse and being bailed out by the government.

There were no C.D.O’s, or S.I.V.’s or AAA-rated “supersenior tranches” that turned out to have little value. Certainly there were no “C.D.O.-squareds.”

Staying away from strange securities has not made things better. Jim Wigand, the F.D.I.C.’s deputy director of resolutions and receiverships, says banks that are failing now are in worse shape — in terms of the amount of losses relative to the size of the banks — than the ones that collapsed during the last big wave of failures, from the savings and loan crisis.

The severity of the current string of bank failures shows that many of the proposed remedies batted about since the financial crisis erupted would have done nothing to stem this wave of closures. These banks did not get in over their heads with derivatives or hide their bad assets in off-balance sheet vehicles. Nor did their traders make bad bets; they generally had no traders. They did not make loans that they expected to sell quickly, so they had plenty of reason to care that the loans would be repaid.

What they did do is see loans go bad, in some cases with stunning rapidity, in volumes that they never thought possible.

The fact that so many loans are souring is a testament to how bad the recession, and the collapse in property prices, has been. But looking at some of the banks in detail shows that they were also victims of their own apparent success. Year after year, these banks grew and grew, and took more and more risks. Losses were minimal. Cautious bankers appeared to be missing opportunities.

As the great economist Hyman P. Minsky pointed out, stability eventually will be destabilizing. The absence of problems in the middle of this decade was taken as proof that nothing very bad was likely to happen. Any bank that did not lower its lending standards from 2005 through mid-2007 would have stopped growing, simply because its competitors were offering more and more generous terms.

Take the recent failure of Temecula Valley Bank, in Riverside County, Calif. For most of this decade, it grew rapidly. Deposits leapt by 50 percent a year, rising to $1.1 billion in 2007, from less than $100 million in 2001.

That growth was powered by construction loans, on which it suffered virtually no losses for many years. By 2005, loans to builders amounted to more than half its total loans — and to 450 percent of its capital.

Temecula appeared to be very well capitalized. But virtually all that capital vanished when the boom stopped.

When the F.D.I.C. stepped in last month, the bank had $1.5 billion in assets. The agency thinks it will lose about a quarter of that amount.

Across the country, at Security Bank of Bibb County, Ga., the story was remarkably similar. Its fast growth was powered by construction loans, although in this case the loans mostly financed commercial buildings, not houses. When those loans went bad, what had appeared to be a well-capitalized bank went under. The F.D.I.C. estimates its losses will be almost 30 percent of the bank’s $1.2 billion in assets.

In both of those cases, to get another bank to take over the failed bank, the F.D.I.C. had to agree to share future losses on most of the loans. That is one reason the agency’s estimates of its eventual losses could turn out to be wrong. In the best of all worlds, the loss estimates would be too high because the economy and property prices recover rapidly. But if the recovery is slow, the losses could grow.

In either case, the F.D.I.C. may soon need to seek more money to pay for failing banks. It could seek that cash from the Treasury, where it has a line of credit, or it could seek to raise the fees it charges banks.

So far this year, the F.D.I.C. has closed 77 banks, and there almost certainly will be more on Friday, the agency’s preferred day for bank closures. Last Friday there were five. Not since June 12 has there been a Friday without a bank closing. By contrast, there were three failures in 2007 and 25 in 2008.

Of the 77 failures in 2009, the F.D.I.C. could not even find a bank to acquire eight of them. Of the other 69, the agency signed loss-sharing agreements on 41.

By contrast, the agency found acquirers for all of the 25 failed banks in 2008, and had to sign loss-sharing agreements for just three of the banks.

“Loss-sharing” is something of a misnomer. In practice, the vast majority of the losses are borne by the F.D.I.C. Typically, it takes 80 percent of the losses up to a negotiated limit, and 95 percent of losses above that level.

Although the losses on current failures stem mostly from construction loans, it is possible that commercial real estate will be the next big problem area. Losses in that area were growing at the Temecula bank, although its portfolio was relatively small.

During the credit boom, loans on those properties became easier and easier to get, on more and more liberal terms. Unlike residential mortgages, commercial real estate loans typically must be refinanced every few years. With rents and values down in many areas, that will not be possible for a lot of buildings, and some owners are just walking away from their buildings.

Two years ago, when the subprime mortgage problems began to surface, Washington took great comfort from solid balance sheets, which regulators thought meant the banks could easily weather the problem.

Last year, we learned that the regulators, like the bankers, did not comprehend the risks of some of the exotic instruments dreamed up by financial engineers. This year we are learning that the regulators, like the bankers, also failed to understand the risks of the generous loans that the banks were making in the middle of this decade.

Some Bank Assistance Should Be Permanent: Fed Staffer

| 21 Aug 2009 | 01:29 PM ET

Central banks should consider making some of their existing emergency liquidity programs permanent to minimize the stigma of accessing central bank credit, a top Federal Reserve board staffer said Friday.

"They should consider whether some now-existing arrangements such as the Term Auction Facility and similar mechanisms, need to be adapted and made permanent, or new facilities established, so that the stigma of using central bank credit is minimized, especially in future crises," Brian Madigan, director of the Fed's Division of Monetary Affairs, said in remarks prepared for deliver to a conference.

The Fed uses its discount window to lend directly to banks, but some firms are wary of tapping it on concern it will be perceived as a sign of weakness.

"The problem of discount window stigma is real and serious," Madigan said. "The intense caution that banks displayed in managing their liquidity beginning in early August 2007 was partly a result of their extreme reluctance to rely on standard discount mechanisms."

The TAF was introduced in December 2007 to help ease a funding crunch in the interbank market as the financial crisis gathered steam. It was aimed at making it easier for banks to borrow from the Fed anonymously and over longer periods.

Madigan also argued that central banks should have the ability to lend to important non-bank firms that are subject to bank-like runs.

"Like banks, their interconnectedness with other parts of the financial system, as well as their similarities to one another and to other types of financial institutions, makes contagion possible," he wrote.

In addition, individual firms that are not big enough to be systemically important in and of themselves can also warrant access to central bank lending, Madigan added.

Money funds, for example, experienced bank-like runs in October 2008 as investors rushed to redeem their holdings. A number of them facing redemptions at the same time can pose a risk to the system.

"A means of lending in contingency situations even to nonbank firms that may not be systemically critical in themselves would seem necessary to promote a suitable degree of financial stability," he said.

A regulatory regime should include a mechanism for central banks to extend credit in a crisis to entities that are not normally able to borrow from the central bank, Madigan said.

"No reasonable system of regulation can draw a bright line that cannot be crossed between banks and nonbanks," he said.

Thursday, August 20, 2009

Calpers Takes Another Property Hit

AUGUST 19, 2009


The California Public Employees’ Retirement System has given up control of its stake in a trophy office tower in Portland, Ore., a sign that even the largest institutional investors are cutting their losses rather than throwing good money after some badly battered real-estate assets. The decision by Calpers, the country’s largest public pension fund by assets, to walk from its investment in the Koin Center, one of Oregon’s tallest buildings at about 509 feet, nicknamed the “mechanical pencil” for its signature shape, also shows that leasing problems are cropping up in even the country’s healthier markets. While it is on the rise, downtown Portland’s Class A office vacancy rate was 6.1% as of June 30, below the average of 12.9% for major U.S. downtown markets, according to Colliers International. Despite Portland’s relative health, in July a partnership that includes Calpers and CommonWealth Partners, defaulted on the Koin Center’s $70 million mortgage provided by New York Life Insurance Co., according to court papers. A state circuit court judge approved New York Life’s request that a receiver be appointed to control and possibly sell the property.

Tuesday, August 18, 2009

Bad banks -- They're baaack!

Seeking to lure more buyers at a time of intense distress, the FDIC has dusted off the oft-touted, but rarely used, plan of setting up bad banks. Will it work this time?

By Colin Barr, senior writer, Fortune
August 18, 2009: 1:28 PM ET

NEW YORK (Fortune) -- Facing mounting bank failures, regulators are putting a new twist on a familiar idea: splitting a bank's good assets from the bad ones.

The Federal Deposit Insurance Corp. said last month it would consider splitting the toxic assets of a failed bank from its more valuable parts, such as deposits and loans that aren't going sour.

The goal is to help the FDIC, facing the biggest wave of bank failures in almost two decades, find new buyers for the remains of failed banks while limiting losses on its depleted insurance fund.

"This helps us widen the net in marketing bank assets," said FDIC spokesman David Barr. "When you have the inventory we have, you look for different ways to try to sell it."

Thanks to the ill effects of the housing bubble, the FDIC certainly has the inventory. Barr said the FDIC had $26.5 billion in assets in liquidation at the end of July, with two-thirds of that in mortgages and real estate-backed securities.

Though the FDIC says it's having success in finding buyers for much of these assets, it is also trying to find ways to move inventory at better prices. In one program, the agency will provide financing to acquirers of troubled loans.

"There has been little activity in sales of whole loans," said Hal Reichwald, a lawyer at Manatt Phelps & Phillips in Los Angeles who represents investors. "The danger is you could end up with a bottleneck in the distressed asset markets."
Wave of failures

When a bank is on the verge of collapse, the FDIC typically tries to find buyers for the entire bank at once, often with the help of deals in which the agency shares losses on the failed bank's bad loans.

Friday's failure of Alabama's Colonial BancGroup is one such deal: buyer BB&T (BBT, Fortune 500) took on most of Colonial's $25 billion in assets, with it and the FDIC sharing losses on two-thirds of that pool. Some $3 billion of assets will remain with the FDIC for later disposition, the agency said in a statement Friday.

But with banks failing at a clip not seen since the late stages of the savings and loan crisis in the early 1990s, finding a buyer for the whole bank isn't always possible.

So far in 2009, 77 banks have failed -- more than triple the 2008 toll. The FDIC has taken on some assets in many of those deals, and it has failed to find takers of any kind for six banks -- including the giant correspondent bank Silverton, which went under in April with $4.1 billion in assets.

In a more recent case, the FDIC couldn't find a buyer for a small bank in Georgia, even after contacting 300 potential buyers.

The wave of failures and resulting soft demand have left the FDIC weighing the benefits of attracting new capital to shore up failed banks against the risks of allowing private equity investors, which typically use a lot of debt to finance deals, to become more active buyers.

Last November, the FDIC issued rules expanding the field of bidders for troubled bank assets. But last month it proposed holding private investors to higher capital standards and imposing a waiting period that would keep buyout firms from "flipping" banks.

"The question is real equity vs. borrowed equity," said James Angel, a finance professor at Georgetown University. "The temptation is to lever yourself up to your eyeballs, and that's something the FDIC has to be on guard against."

How the agency decides to treat private equity buyers could go a long way toward deciding whether the bad-bank plan succeeds.

That said, the FDIC's approach marks the first time during the financial crisis that the bad-bank concept has been considered as something other than a Hail Mary pass.

Lehman Brothers proposed a split last September to rid itself of its troubled commercial real estate assets, in a desperate bid to restore market confidence. Investors rejected the plan as unworkable and the firm filed for bankruptcy just days later.

Since then, the government has toyed with variations on good-bank/bad-bank plans for healthy institutions at least twice. The first was former Treasury Secretary Hank Paulson's original plan for the Troubled Asset Relief Program. Then there was discussion of a so-called aggregator bank by the Obama administration.

But those plans foundered due to questions of how the bad assets would be valued and how the already capital-constrained banks getting rid of those assets would make up for the resulting losses.

That isn't a problem for the FDIC. As the receiver of failed banks, it takes possession of the assets itself.

Still, bankers expect to continue struggling with the issue of how much to pay for bad assets for some time -- even though a robust bank stock rally over the past five months suggests investors are less worried about toxic assets than they once were.

"There are a ton of toxic assets out there right now," said Norman Skalicky, CEO of Stearns Bank, a St. Cloud, Minn.-based lender that has bought several banks and a $730 million loan portfolio from the FDIC over the past year. "But then, they say there are no toxic assets -- just toxic prices." To top of page

Grim forecast for L.A. and Long Beach ports

The busiest U.S. seaport complex won't fully recover from the economic downturn until 2013, a report says. Imports at both facilities fell in July from a year earlier.

By Ronald D. White, Los Angeles Times

August 17, 2009

As the ports of Los Angeles and Long Beach post another round of dismal monthly import statistics, a new assessment finds that the nation's busiest seaport complex will need at least four more years to fully recover its momentum -- not to mention the jobs, incomes and revenues that went with it -- after the worst global recession in 60 years.

The recovery will be so slow and painful that a return to the pace set during the economic boom year of 2006 -- when the ports handled 15.8 million cargo containers bound for most parts of the U.S. -- won't come before 2013.

That is the grim conclusion of a new report produced for the local ports but not released to the public.

"It's going to take a long time to climb up out of this," said John Husing, an economist and cargo expert who has read the report. The comeback "is not going to look like a V, which would be an equally sharp recovery. It's going to look like a very wide check mark."

The force of the recession can be seen in what has been lost along the supply chain.

In 2006, dock jobs were so plentiful that longshoremen could count on working multiple shifts. Even part-time "casual" dockworkers were working nearly full-time hours. And warehouses in the nation's fastest-growing cargo distribution network had tenants before their construction was complete.

Now, full-time longshoremen have days without work. Vacant warehouses spend months on the market.

Among the report's many points is that this recession is far more complicated than the economic downturns following the dot-com bust and the 9/11 terrorist attacks, after which pent-up consumer demand rather quickly returned the economy to relatively normal levels.

This time, no such pent-up demand exists. Instead there has been a fundamental lowering of financial capability, according to the report, produced for the ports by consulting firms Tioga Group and IHS Global Insight.

"The plummeting values of homes, stock portfolios and other assets is expected to result in a permanent reduction in wealth and a concomitant reduction in disposable income. Absent a phenomenal rebound (which no one is predicting), the U.S. population will have less to spend on imports in any given year than was previously forecast," the report said.

Moreover, the recession and its multiple roots have caused a jolt to the collective psyche of consumers, such that even when their fortunes begin to recover they will be more reticent (sic) about their spending than in times past, it said.

"The marginal saving rate in the U.S. has increased greatly since the start of the recession. While still low compared to many nations, a greater propensity to save and a low propensity to spend will likewise reduce demand for imports," the report said.

The report tracks with what economists at the Los Angeles County Economic Development Corp. have been predicting and leads experts there to question whether international trade "will be the big engine of growth that it once was" for the region.

The absence of easy credit also will slow the recovery of international trade, said Jack Kyser, an economist at the business group.

"The easy credit spigot that was running full blast in 2004 through 2006 has been turned off," Kyser said. "Credit card companies are much tighter with their qualifications. Lenders have an ultra-cautious attitude."

Mike DiBernardo, director of marketing for the Port of Los Angeles, acknowledged that the days of double-digit cargo growth are gone for a while, to be replaced eventually by annual increases of 4% to 5%. But, he added, the port still has to prepare for additional traffic.

That's why, DiBernardo said, port officials have moved ahead with expansion plans for its TraPac terminal, which includes more space, a longer wharf and an on-dock rail where cargo can be loaded directly onto trains.

"We're not stopping," he said. "We're going to continue to develop our terminals and we are talking to other customers about their needs."

The slump was again evident in the July trade numbers for both ports.

Imports at Los Angeles, the nation's busiest port, were down 16.9% to 305,226 cargo containers compared with a year earlier. Overall for the year, traffic is down 15.9% to 3.77 million containers, counting imports, exports and the number of empty boxes that leave the port bound for Asia.

Imports at the nation's No. 2 port, Long Beach, were down even more sharply in July compared with a year earlier, by 18.6% to 221,719 containers. Overall cargo traffic at Long Beach is down 26.8% for the year to 2.77 million containers.

But sluggish recovery from the recession isn't the only thing that threatens the amount of business at the two ports.

The report said that a larger number of freight shippers will prefer to move more cargo via a wider Panama Canal channel that is expected to open in 2014, bypassing the Southern California ports' rail connection for moving freight to other parts of the U.S.

Also, retailers will be increasingly willing to divert their goods to other trade gateways should congestion develop in the L.A. and Long Beach ports, the report said. In addition, any resumption of growth in Latin American and European trade favors East Coast and Gulf Coast ports.

For those reasons, "there has been a pendulum swing in favor of the East and Gulf Coast ports," the report said.

The one bit of good news from the report is that the massive amount of economic stimulus generated in the U.S. and abroad will slowly begin to have an effect.

"A Great Depression or Japan-style lost decade appears unlikely," the report said. "The forecast calls for a modest recovery in 2010, and a stronger rebound in 2011."

Monday, August 17, 2009

Major Bank Fails in South

Colonial's Assets Sold to Rival in 6th-Largest Collapse on Record; Blow to FDIC


Wall Street Journal

Regulators seized Colonial Bank on Friday after reaching a deal to sell its branches, deposits and most of its assets to rival BB&T Corp. in the sixth-largest bank failure in U.S. history.

The demise of Colonial, a regional bank based in Montgomery, Ala., with assets of $25 billion and 346 branches in five states, signals an ominous phase in the nation's banking crisis. Even as some large institutions show signs of stabilizing, a slew of regional lenders remain on the ropes. And regulators appear to be giving up hope that some of them can be saved.

Colonial, a unit of Colonial BancGroup Inc., is the largest bank to fail since Washington Mutual Inc.'s banking operations collapsed last September and were sold to J.P. Morgan Chase & Co.

Colonial's slide came largely as a result of aggressive real-estate lending in Florida and other frothy markets. The company had been teetering for months, but federal and state regulators gave it time to try to secure a financial lifeline from outside investors or another bank.

Those prospects dimmed in recent weeks. A planned deal between Colonial and a Florida mortgage company unraveled amid a federal criminal investigation. Colonial said last week that the Justice Department is investigating one of its lending units and related accounting irregularities. That prompted federal regulators to start shopping Colonial to potential buyers, according to people familiar with the situation.

Aside from BB&T, a regional bank in Winston-Salem, N.C., that has avoided the brunt of the financial crisis, bidders for Colonial were scarce, even though the Federal Deposit Insurance Corp. offered to shield buyers from some potential losses, according to a person involved in the talks. "No one wanted to touch this thing," said Morgan Keegan & Co. analyst Bob Patten.

The FDIC agreed to share losses with BB&T on $15 billion of the $22 billion in assets included in the deal.

Colonial's inability to find a buyer, and the limited interest in the FDIC auction, is a reminder of the industry's lingering troubles, experts say. Colonial, founded in 1981 by Alabama real-estate developer Robert E. Lowder, for years had a coveted franchise. But the severity of the losses facing the bank scared away several buyers, according to the person familiar with the talks.

Colonial's collapse will cost the FDIC's dwindling deposit-insurance fund an estimated $2.8 billion, the agency said. The fund stood at just $13 billion as of March. "Our industry-funded reserves have covered all losses to date," FDIC Chairman Sheila Bair said on Friday.

n addition to Colonial, regulators seized four financial institutions in Arizona, Nevada and Pennsylvania with combined assets of $1.82 billion and deposits of $1.65 billion. The FDIC was unable to find a buyer for the largest of those four banks, Community Bank of Nevada, based in Las Vegas, and encouraged customers to move their deposits elsewhereThere have been 77 U.S. bank failures this year, including 32 since July 1. More banks have failed in 2009 than any year since 1992.

Friday's four seizures of smaller banks will cost the deposit-insurance fund an estimated $874.8 million, according to the FDIC.

To help stop the bleeding, federal officials are discussing ways to relieve banks of some of their bad assets, such as troubled real-estate loans. One plan under discussion, referred to within the government as "Spinco," would allow banks to spin off bad assets into a separate entity, which would be owned by existing bank shareholders, according to people familiar with the plans. The new entity would have an FDIC guarantee that would enable it to raise money. The plan is in early stages of discussion, these people say.

BB&T, which recently repaid the $3.1 billion capital infusion it got under the federal Troubled Asset Relief Program, has been growing through a string of acquisitions. The Colonial acquisition is one of BB&T's biggest ever. BB&T will pick up hundreds of branches in Texas and throughout the southern U.S.

As Colonial's chairman and CEO, Mr. Lowder, 67 years old, repeatedly rebuffed overtures from potential suitors, pushing Colonial to keep growing. He orchestrated 68 acquisitions in five states. And he focused on real-estate lending such as residential mortgages and construction projects. Even when the real-estate boom seemed to be ending, and regulators were warning banks to scale back on such lending, Mr. Lowder forged ahead.

"We've always been a real-estate bank," he said in a 2006 interview. "We understand real-estate lending. For us, we think it's a good, safe market to be in."

Mr. Lowder developed a reputation on Wall Street for being involved in every corner of the bank. "It was a very old-school type of banking model where the CEO really ran things and there wasn't a whole lot of debate," says Kevin Fitzsimmons, a banking analyst with Sandler O'Neill & Partners.

As he was building the bank, Mr. Lowder was pursuing other interests that made him a major figure in Alabama, particularly at his alma mater, Auburn University.

As a trustee there since 1983, appointed by Gov. George Wallace, he wielded considerable clout, particularly in the university's vaunted football program. In the mid-1990s, he won a fierce legal and political campaign against Alabama's governor and state lawmakers to retain his seat on Auburn's board. He used Colonial's corporate jet to recruit for the Auburn Tigers football team, according to an Auburn spokesman. ESPN named him in 2006 the most powerful booster in college sports.

Ever since the banking crisis erupted, Colonial has been regarded as a potential casualty as swelling loan defaults depleted its capital buffers. Efforts by Mr. Lowder's team to stabilize the bank repeatedly fell short. In June, Mr. Lowder announced he was retiring, handing the reins to two of the bank's longtime directors. Mr. Lowder couldn't be reached for comment on Friday.

Colonial's downfall illustrates the problems with the current patchwork bank-regulatory system. In 2008, Colonial's primary regulator, the Office of the Comptroller of the Currency, began raising concerns about the bank's commercial-real-estate portfolio. That June, Colonial said it was ditching its OCC charter, opting instead for state regulation in Alabama.

Last fall, despite the worries of some federal regulators about the bank's troubles, the Treasury Department granted Colonial preliminary approval to receive taxpayer funds through TARP.

The $550 million in bailout cash it was slated to get was conditioned on Colonial raising at least $300 million of capital from private investors. That was a tall order, given the bank's woes. Earlier this year, Colonial lined up a capital injection from Florida mortgage lender Taylor, Bean & Whitaker Mortgage Corp. that would have required the company to yet again switch its main regulator, this time to the federal Office of Thrift Supervision.

But that deal fell apart this summer after Colonial and Taylor Bean were raided by federal agents as part of a criminal probe. Taylor Bean has since been forced to shut down.

The FDIC, Federal Reserve Bank of Atlanta, and state of Alabama all slapped Colonial with severe restrictions this year. But by that time, many of the bank's problems were beyond repair.

Federal bank regulators recently began working on a private agreement to prohibit any bank with significant problems from switching charters to escape tough regulation. The Obama administration's proposed overhaul of banking rules would try to make this impossible.

At a Colonial branch in Atlanta on Friday afternoon, customers came and went with no indication that BB&T already had dispatched employees to Colonial markets to prepare for the takeover. "It's business as usual," said Brian Rouse, an assistant bank manager, adding that customers could deposit and withdraw funds normally. There were no long lines inside the branch, an automated-teller machine or drive-through.

Also on Friday, the Office of Thrift Supervision seized Dwelling House Savings and Loan Association, selling most of the tiny Pittsburgh thrift to PNC Financial Services Group Inc.

The FDIC said Friday night that regulators closed Community Bank of Nevada, Community Bank of Arizona, of Phoenix, and Union Bank, based in Gilbert, Ariz.

Community Bank of Nevada had assets of assets of $1.52 billion and deposits of $1.38 billion at the end of June. The FDIC created a new institution to be known as the Deposit Insurance National Bank of Las Vegas.

The agency said the firm will be run by Nevada State Bank and will be open for about 30 days "to allow depositors access to their insured deposits and time to open accounts at other insured institutions."

MidFirst Bank of Oklahoma City agreed to assume the deposits of Community Bank of Arizona and Union Bank, except for $88 million in brokered deposits. MidFirst also agreed to buy $136.5 million in assets from the two banks, and the FDIC said it will hold onto additional assets to sell at a later date.

As part of the deal, the FDIC and MidFirst entered a loss-sharing arrangement on approximately $55.1 million of Community Bank of Arizona's assets.
—Mike Esterl, Damian Paletta, Matthias Rieker and Deborah Solomon contributed to this article.

Write to Dan Fitzpatrick at and David Enrich at

Friday, August 14, 2009

Wal-Mart, Nordstrom and American Apparel report mixed second-quarter results

Nearly all U.S. retail sectors suffered in July

By Andrea Chang, Los Angeles Times

August 14, 2009

Three major retailers reported quarterly earnings Thursday, with mixed results that underscored the continued problems plaguing the economy.

Discount giant Wal-Mart Stores Inc. said its second-quarter profit beat expectations but also reported that sales fell; trendy clothing company American Apparel Inc. said earnings plummeted 34% compared with a year earlier; and upscale department-store chain Nordstrom Inc. reported that its profit declined 27% but raised its full-year forecast.

"The earnings reports tell me that we're not even close to seeing the end of this recession," said Britt Beemer, chairman of America's Research Group, a consumer behavior firm. "If Wal-Mart can't break even for [comparable]-store sales, this economy is still in terrible shape."

Consumers' frugal spending continues to affect merchants in all sectors. The Commerce Department said Thursday that retail sales fell 0.1% in July, month-over-month; analysts had expected a 0.7% gain.

Although car sales, aided by the government's "cash for clunkers" program, jumped 2.4%, there was widespread weakness. Gasoline stations, department stores, electronics sellers and furniture stores all reported declines.

Wal-Mart, which has grabbed market share from competitors during the recession because of its array of low-priced necessities, reported virtually flat second-quarter profit compared with last year.

The company said it made $3.44 billion, or 88 cents a share, for the three months ended July 31; it reported a profit of $3.45 billion, or 87 cents, a year earlier. Still, the earnings beat Wall Street expectations and were at the high end of the company's forecast range.

"Customers around the world are forced to do more with less, and they rely on Wal-Mart to help them save money," Chief Executive Mike Duke said in a statement.

"In a sales environment more difficult than we expected, we managed our operations in a disciplined manner," he said.

But it wasn't all good news for the world's largest retailer, which reported that sales at its U.S. stores open at least a year -- known as comparable-store sales and considered to be an important measure of a retailer's health -- slid 1.2% compared with a year earlier. Total net sales fell 1.4% year-over-year to $100.1 billion.

Despite the sales decline, "we believe that our comparable-store sales continued to outperform the retail sector almost everywhere we do business," Duke said.

Industry watchers had eagerly awaited the company's quarterly sales performance -- its first since it stopped reporting sales on a monthly basis after posting April results.

Wal-Mart has said it decided to stop reporting monthly sales to encourage Wall Street to take a longer-term view of the company. The move also has helped the discount giant avoid the volatility that can come with reporting sales on such a frequent basis. Analysts have worried that the absence of monthly data from the retail behemoth could make it more difficult to gauge how the industry is doing.

Wal-Mart, based in Bentonville, Ark., has been one of the few bright spots in the retail industry during the economic downturn. Walmart U.S. said it expected comparable-store sales during the third quarter ending Oct. 30 to be between flat and 2%.

At American Apparel, profit for the second quarter was $4.5 million, or 6 cents a share, down from $6.8 million, or 10 cents, a year earlier.

The Los Angeles clothing company, known for its colorful basics and racy ad campaigns, reported net sales of $136.1 million for the quarter that ended June 30, a 2.3% increase year-over-year. Comparable-store sales fell 10%.

"Our team has been active in rationalizing our cost structure and operating more efficiently, as well as reinvigorating and repositioning the brand in our key metropolitan markets," CEO Dov Charney said in a statement. "We believe that our business is well positioned for the long-term and that the company will emerge from this consumer downturn with an enhanced ability to deliver on revenue and profitability targets."

But American Apparel also said that "based on continuing challenging conditions," it expected that its full-year earnings would range from a net loss of $1 million to a profit of $4 million.

Nordstrom's second-quarter profit fell to $105 million, or 48 cents a share, from $143 million, or 65 cents, in the same period last year. The 27% decline matched analysts' expectations for the retailer, which has struggled in recent months and slashed prices as consumers scrimp on luxury purchases.

The Seattle chain's net sales fell 6.2%, to $2.14 billion, from $2.29 billion in the second quarter of last year. Sales in stores open at least a year fell 9.8%.

Still, Nordstrom said its performance for the quarter ended Aug. 1 was better than it expected and raised its full-year earnings forecast to a range of $1.50 to $1.65 a share, from a range of $1.25 to $1.50.

On Thursday, Wal-Mart shares rose $1.37, or 2.7%, to $51.88. American Apparel and Nordstrom reported their earnings after the markets closed; during regular trading, American Apparel shares rose 8 cents, or 2%, to $4 and Nordstrom shares rose 34 cents, or 1.2%, to $29.76.

Beemer of America's Research Group said that based on consumer spending patterns, he didn't expect a retail turnaround before Labor Day 2010.

"The consumer has got to come back in a pretty big way if the economy is going to recover," he said.

Commercial Property Values Off 17 Percent in First Half

| 14 Aug 2009 | 02:37 PM ET

U.S. commercial real estate market values fell by more than 17 percent in the first half of the year, outstripping their decline for all of 2008, according to the Investment Property Databank (IPD).

Last year, values fell 12.2 percent, according to the report released Friday.

U.S. commercial real estate values in the first half of 2009 fell more steeply than UK values, said IPD, which analyzes commercial real estate data in global major markets.

"For global real estate investors this may come as a surprise, given that Britain was the most significant real estate market to suffer in 2008," IPD Managing Director Simon Fairchild said in a statement.

U.S. values in the second quarter declined by 6.9 percent, easing somewhat from the 10.8 percent drop in the first quarter, IPD said.

Declines were sharpest in office properties, down 7.8 percent, with industrial properties — warehouse and distribution centers — falling 7.5 percent and apartment building values off by 5.8 percent. Retail properties, such as shopping centers and malls, recorded the shallowest decline, at 5.1 percent.

Year-to-date office and industrial property led the decline, each down 18.2 percent. Apartment building values fell 16.5 percent. Retail was down 14.1 percent.

Returns generated by monthly rent edged up 0.2 percentage point to 1.6 percent, softening the decline in overall returns to 5.4 percent.

"Pressure on market values — in both the US and the UK — appears to be easing, though not necessarily at an end," Fairchild said.

Wednesday, August 12, 2009

Fed Grapples With Extended Stay

AUGUST 12, 2009


The Federal Reserve, with $900 million on the line, is getting actively involved in the biggest hotel bankruptcy, an awkward role for the central bank as it tries to shore up the financial system.

On one hand, the Fed is clearly concerned that the bankruptcy of the 680-property Extended Stay Inc. chain has exposed major fault lines in the commercial real-estate market, which threatens to drag down the economy just as it is starting to show signs of recovery.

On the other, the Fed's role is tricky because it is facing off against financial firms it has to deal with in other rescue matters. For example, Cerberus Capital Management LP is on the other side of the Fed in the Extended Stay bankruptcy, but the firm had to work closely with the Fed and the government in the bailouts of Chrysler and GMAC, which Cerberus controlled.

The Fed, through a fund called Maiden Lane, wound up holding about $900 million in Extended Stay debt in the wake of Bear Stearns's failure. A team at the New York Fed is working with BlackRock Inc. and other private-sector advisers to try to maximize its recovery on that debt. But under a controversial plan proposed by Extended Stay and endorsed by a small group of creditors, the Fed's position could take big hits.

Now the Fed is walking a fine line as it tries to balance its dueling interests. The Fed is trying to draw lessons from the bankruptcy that it can use to help rebuild a market for commercial mortgage-backed securities, or CMBS, a source of financing that real-estate developers and investors have heavily relied on until the credit-market crisis.

But before investors trust the CMBS market again, the flaws need to be understood and corrected. Many of these flaws are being exposed by the Extended Stay bankruptcy, and the New York Fed is looking into the complex financing arrangement that sits at the core of the company's demise.

Most recently, the Fed moved to support an effort by the U.S. Trustee Diana Adams, who is overseeing the bankruptcy, to appoint an examiner to probe the collapse. Among other things, the examiner would delve into the pre-Chapter 11 negotiations between Extended Stay Chief Executive David Lichtenstein and some creditors. In court papers, Ms. Adams notes that other creditors have alleged "fraud and dishonesty" in those talks. Therefore, "the appointment of an examiner is warranted," she said.

Fed Chairman Ben Bernanke recently told lawmakers that the potential wave of defaults on hundreds of billions of dollars of commercial mortgages presents a "difficult" challenge. Many observers believe the first step to fend off the looming threat is to restart the CMBS market, which used to provide one-third of the financing to owners of office buildings, hotels, stores and other commercial property.

Wall Street firms created CMBS by slicing and dicing commercial mortgages into layers of debt with different levels of risk and rewards. In theory, holders of all layers would be represented by a debt servicer who would negotiate with the borrower for them in case of a default.

When a group of investors led by Mr. Lichtenstein acquired Extended Stay for $8 billion -- about $4.1 billion of that coming from CMBS -- the deal was structured with a "bad-boy" provision to keep him from putting the company into bankruptcy. Under that provision, Mr. Lichstenstein would have been personally liable for $100 million if he did that.

But none of the measures designed to protect CMBS investors worked as expected. First, in the days leading up to its Chapter 11 filing on June 15, Mr. Lichtenstein struck a deal with only a small group of big CMBS holders, including Cerberus and Centerbridge Partners LP. The deal, which needs to be approved by the bankruptcy court, would give little to nothing to the majority of other creditors including the Fed.

At the same time, the small group of investors that supported the deal agreed to shield Mr. Lichtenstein from the "bad-boy" provision. That deal "must be investigated in order to preserve the integrity of the Chapter 11 process," said Stephen Meister, an attorney at Meister Seelig & Fein LLP, who represents two junior creditors who filed a lawsuit.

In a bankruptcy-court filing, the Fed noted that "the factors that led to the collapse [of the company] may aid the financial markets and policy makers in their efforts to avoid similar situations as the securitization market attempts to restart."

Defenders of Extended Stay's bankruptcy filing argue that the complex debt structure made it all but impossible for the company to get all its creditors to agree on a plan. The proponents also argue that the creditor lawsuits have no merit because there is no legal contract binding Cerberus and Centerbridge to the plan proposed by Extended Stay, even though they verbally agreed to it.

Mr. Lichtenstein "understood that a bankruptcy filing could result in lawsuits against him personally, but he put [the company's] interests first," said David Friedman, an attorney at Kasowitz, Benson, Torres & Friedman LLP, who represents Mr. Lichtenstein.

Maiden Lane, the fund created by the Fed, took over $30 billion of assets from the Bear Stearns collapse and hotel debt accounts for 79% of the commercial mortgages held by that fund. In addition to the Extended Stay hotel debt, the fund also holds about $4 billion backed by Hilton Hotels, according to people familiar with the matter.

The Fed provided a 10-year, $29 billion loan to the fund to acquire the Bear assets. While it might take a loss on the Extended Stay debt, the Fed doesn't expect to suffer a loss on the loan. If there is a loss on the loan, J.P. Morgan Chase & Co., which bought Bear Stearns in March 2008, would be on the hook for the first $1 billion of loss.

The Extended Stay bankruptcy is just the latest real-estate collapse to roil the $700 billion market for CMBS. The market also went into an uproar earlier this year in the wake of the bankruptcy filing by mall giant General Growth Properties Inc.

Write to Lingling Wei at and Jon Hilsenrath at

Tuesday, August 11, 2009

Vacancies Suppress Southern California Recovery

AUGUST 10, 2009

By JIM CARLTON Wall Street Journal

ONTARIO, Calif. -- One drag on recovery in Southern California is illustrated by three new office buildings near the LA-Ontario International Airport. One is 60% leased. The other two sit empty.

A home-construction site near Riverside, Calif., stands idled in February. In Southern California's San Bernardino and Riverside counties, housing permits have plunged 96% from 45,299 in 2005 to a projected 2,000 this year.

While real estate is in a funk across the U.S., Southern California's economy is more reliant on the construction than many other places. So until these vacant buildings and hundreds of others like them fill up, the prospects for a rebound in construction and the broader economy here are bleak.

At its peak four years ago, construction was the fourth-largest employer in the Inland Empire counties of San Bernardino and Riverside, according to Jack Kyser, chief economist at Los Angeles Economic Development Corp., a nonprofit research group. The housing industry contributed more than $24 billion in revenue to the Southern California economy in 2008, or more than double the U.S. gross revenue from Hollywood movies, according to the Building Industry Association of Southern California.

Much has changed. "New construction is now literally stopped," said Katherine Aguilar Perez, executive director of the Urban Land Institute's office in Los Angeles. The industry has shed jobs as new building starts have plummeted.

The greater Los Angeles area has lost about 90,000 construction jobs, or about 15% of the total in the past year, more than any other metropolitan area, according to the Associated General Contractors of America. The Inland Empire, east of Los Angeles, has lost about 60,000 construction jobs since 2006, or 49% of its total, according to John Husing, a consulting economist in Redlands, Calif.

Meanwhile, the number of housing permits in the five-county greater Los Angeles region has dropped 85% from 88,187 in 2005 to a projected 12,990 this year, Mr. Kyser said. The fall has been even steeper in San Bernardino and Riverside counties, where housing permits have plunged 96% from 45,299 in 2005 to a projected 2,000 this year, said Mr. Husing.

Even big builders have suspended much of their work. Lewis Group of Cos., for example, says it has put on hold two big master-planned communities: the 1,100-home Shady Trails in Fontana, where fewer than 300 units have been completed, and the 8,000-home Preserve in Chino, where about 1,300 homes have been completed. "We're going to going to just wait until we see a recovery," says Randall Lewis, executive vice president of the Upland, Calif. developer.

As a result, construction won't be poised to play its frequent role of leading the region of almost 25 million people out of the recession. "It's going to be difficult this time, because it won't be one sector you can point to lead the way," Mr. Kyser said.

Right now, vacancy rates show no signs of turning around. Office vacancies in San Bernardino and Riverside counties have more than tripled, to 24.6% from 8% in 2006, according to estimates by broker CB Richard Ellis. At the same time, the Inland Empire's retail vacancy rate shot up to 10.6% in the second quarter from about 5% in 2006, according to CB.

That retail vacancy rate has spelled financial trouble for many malls. In Corona, Calif., owners of the Promenade Shops at Dos Lagos defaulted on their $125 million loan last fall and say they have since tried to work out a restructuring with the lender. Officials of the mall's owner, Poag & McEwen Lifestyle Centers LLC, say they hope to avoid foreclosure.

The high level of office and retail vacancies suggests builders in those markets may have the toughest time in coming months. Until now, home builders have shouldered the brunt of the construction fall. Since 2007, the Building Industry Association of Southern California, which represents mostly home builders, has seen its membership fall 33% to 1,600 members from 2,400 as a result of bankruptcies and other factors, said spokeswoman Julie Senter.

The builders who have survived have done so largely by cutting staff as much as 90%. "The builders have had to scramble like mad to keep their doors open," said Mark Knorringa, chief executive of the Building Industry Association of Riverside County, an industry trade group.

One midsize builder, Jennings Pierce Jr., said he cut his work force from 85 in 2005 -- when he built 405 homes in the Inland Empire -- to 15 this year. He now expects to construct fewer than 50 homes in 2009. "We're doing our best, but it hasn't been pretty," said Mr. Pierce. His revenue has fallen from $125 million in 2005 to a projected $4.3 million this year.

Another builder, Hileman Co., said it had employed 200 workers for office-building projects in early 2008 but had none now. All the work is hold. The Los Angeles developer owns 530,000 square feet of office space in Southern California, including one of the three new buildings near L.A.-Ontario International Airport. The company has dropped rents about 20% in one of its properties to lure tenants to fill space left by a mortgage company that vacated in 2008, while another six-story building sits vacant.

"I have to say it's been a struggle," said Jack Hileman, the firm's founder.

It has been even more difficult for laid-off workers like George Marquecho. Mr. Marquecho, 55 years old, who lost his job as a construction laborer a year ago, said he and his wife and teenage son have had to forgo movies, restaurants and amusement parks so they can pay bills with unemployment checks a third the amount of his former income. "It's hard for guys like me just to put food on the table and meet all our obligations," he said.

Write to Jim Carlton at

Toxic assets still festering

The Congressional Oversight Panel says the economy is still at risk because bad loans remain on banks' balance sheets.

Jennifer Liberto, senior writer
August 11, 2009: 3:42 AM ET

WASHINGTON ( -- The economy may show signs of life, but so-called toxic assets are still a major threat to any recovery, a bailout watchdog group warned on Tuesday.

If the economy worsens and unemployment rises further, the troubled assets on bank balance sheets could lose even more value, according to the Congressional Oversight Panel, which keeps tabs on the $700 billion bailout of the financial sector.

The report reminds Congress that the bailout was initially pitched to help deal with troubled assets, hence the name: Troubled Asset Relief Program. Yet the TARP program has not relieved banks of their troubled loans.

The bailout money has instead been used to help banks boost their capital to withstand future losses. Capital injections help ease pressure and potentially free up money for lending -- but the toxic assets are still festering.

"If the economy worsens...then defaults will rise and the troubled assets will continue to deteriorate in value," the report says. "If the losses are severe enough, some financial institutions may be forced to cease operations."

Chaired by Harvard University Professor Elizabeth Warren, the 5-member watchdog panel also cited other concerns, including:

Valuing assets: For example, the report notes that in April regulators gave banks more leeway in how they assign value to assets on their books. Before the rule change, banks had been required to 'mark to market.' The problem was that market prices had been beaten so low that banks would have been forced to incur losses on assets that they were willing to hold on to.

Now, however, the greater latitude for valuation creates confusion about the health of the banks.

PPIP: The report comes as federal agencies are about to kick off a new bailout program called Public Private Investment Program (PPIP). It's meant to more directly address problem securities, but it has been off to a slow start and the report said it's "unclear" whether banks will participate.

Health of smaller banks: The report identifies small banks as a major source of future problems, since they have greater concentrations of commercial loans. And they also won't benefit as much from the federal PPIP program, because smaller banks tend to hold whole loans -- the PPIP program will be aimed at securities.

In addition, the recent 'stress tests' to assess the health of the banking system focused only on the 19 largest banks.
Size of the problem

Nobody really knows how big the pool of troubled assets is because there's no agreed upon definition of troubled assets. The panel looked at "level three" assets, which are considered tough to put a value on. Among the top 19 stress tested financial firms, federal officials found $657.5 billion in "level 3" assets in the first three months of 2009, a 14.3% hike in those assets from three months earlier.

The panel recommends, as it did in an earlier report, that bank supervisors repeat stress tests if economic conditions worsen. And the panel suggests that Treasury must consider new ways to restart the market for troubled assets, if PPIP falls flat.

It also suggests that federal agencies should push banks toward more disclosure of the terms and volume of troubled assets on banks books, to allow markets to flow better.

Not all members of the Congressional Oversight Panel agreed with the report's findings. Republican Congressman Jeb Hensarling, R-Texas, suggested that the toxic asset market is "already beginning to heal itself" and that further intervention could be "inappropriate -- if not counterproductive."

Monday, August 10, 2009

Maguire Properties Updates

Maguire Properties Warns of Loan Defaults

Creditors to Get Seven Buildings With $1.06 Billion in Debt; Vacancies and Falling Rents Pressure Landlords

BY CHRISTINA S.N. LEWIS, Wall Street Journal

Maguire Properties Inc., one of the largest office-building owners in Southern California, is planning to hand over control of seven buildings with some $1.06 billion in debt to creditors, the latest sign that rising vacancies and falling rents are causing stress in the commercial real-estate sector.

Maguire, which borrowed heavily during the go-go years to make disastrous top-of-the-market investments, mostly in Orange County, notified the buildings' mortgage holders Friday that it expected "imminent default" on the loans. The buildings are all worth less then their mortgages and aren't generating enough cash to pay debt service and finance leasing expenses.

Maguire Properties' Loss Widens

By KERRY GRACE BENN, Wall Street Journal

Maguire Properties Inc.'s second-quarter loss widened on write-downs as the developer's revenue was flat.

Commercial real-estate investment trusts like Maguire have been slammed recently by rising foreclosures and delinquencies. Maguire has been struggling since its purchase of a portfolio of office buildings in Southern California's Orange County in early 2007, just before the crash of the subprime-mortgage industry. It has been selling off properties, and is planning to hand over control of seven buildings with $1.06 billion in debt to creditors.

In the latest quarter, Maguire recorded $384.7 million in write-downs related to the properties.

Maguire Properties, one of the largest office landlords in Southern California, on Monday posted a loss of $375.7 million, or $7.95 a share, compared with a year-earlier loss of $105.9 million, or $2.32 a share. The results included 76 cents a share this year and $1.21 a share last year in losses from discontinued operations.

Funds from operations, an important profitability measure for REITs, widened to a loss of $7.10 a share from a loss of $1.18 a share. Excluding items, funds from operations slipped to eight cents a share from nine cents a share.

Revenue was $134.78 million.

The company completed about 452,000 square feet in new leases and renewals in the quarter.

Write to Kerry Grace Benn at

Saturday, August 8, 2009

Hooray, The Decreasing Rate of Decline! CREFA Commentary 8.8.09

We still remain very bearish and cannot, in good faith, share in the end of the recession celebration which was declared this week, particularly as this so called recovery will continue to adversely affect trailing CRE.

Consumers cut debt for the fifth straight month in June at an annual rate of 5% or $2.5 trillion. We believe that further "adjustments" are on the way and in the meantime the stock market is soaring euphorically and many investors may be missing out or have jumped in late on what is most likely a nice prolonged bear rally. The bet is that the momentum of soaring consumer confidence will outweigh downstream economic shocks.

We checked the government's press release on today's unemployment numbers. Although 250,000 non-farm jobs were lost (but unemployment still decreased from 9.5% to 9.4%), it looks like they estimated that about 100,000 farm jobs were created. It turns out 270,000 previously unemployed people left the workforce and are no longer counted as unemployed. Magic, that's how unemployment falls from 9.5% to 9.4% even though 250,000 non-farm jobs were lost.

Also we note the fact that the persons working part time because they cannot find a full time job is 8.8M or 5.7% of the work force and that the number of people who are discouraged and given up looking are 2.3M or 1.5%. Thus, the total unemployed and underemployed are 16.6% or 1 in every 6 Americans. It's no wonder retail trade unemployment is accelerating (44,000 losses in July vs 27,000 average over prior 3 months). It remains to be seen how many more retailers end up going BK in the next year or two. With consumer spending contributing 70% of GDP this unemployment / consumer deleveraging spiral (not to mention increased consumer and mortgage defaults) could very well be the next very large shoe to drop.

After reading more of the BLS press release with our morning coffee, following are a couple of observations to note:

1. The sampling error at the 90% confidence interval on one of the two surveys used is a whopping 430,000 jobs (approx 0.3% swing factor) and the "Technical Note" section describing the surveys does not say exactly how the two surveys are reconciled to come up with final numbers (supposedly the other survey is 107,000 jobs). Thus, given this month's 250,000 job decrease, you would be 90% confident the true number is between negative 680,000 and a positive 180,000 (total swing of 0.6%).

2. Seasonal adjustments are also made based on historical trends which sounds reasonable in theory. However, this adjustment resulted in an "increase" of 28,000 jobs in the motor vehicles and parts industry. Something looks out of whack there, it seems to me that number could be estimated much better based on current info without trending??

3. BLS estimates new business "births" (employment increases) based on the last five years historical results. Although the last year should give a good estimate, We don't think the previous four years are very representative.

4. Lastly, how does BLS reconcile the fact that there has been about a 4% decrease in employment (in about the last year) and relatively small decreases in incomes with the fact that individual income tax receipts are down approximately 22% for the year? This seems to us to be the biggest disconnects of all.

Be careful. The data is not yet definitive enough to justify uncorking the champagne yet.

Friday, August 7, 2009

Deleveraging the most leveraged economy in history

Comstock Partners Newsletter 8.6.09

We are in the process of deleveraging the most leveraged economy in history. Many investors look at this deleveraging as a positive for the United States. We, on the other hand, look at this deleveraging as a major negative that will weigh on the economy for years to come and we could wind up with a lost couple of decades just as Japan experienced over the past 20 years. It is true that Japan didn't act as quickly as we did but our debt ratio presently is much worse than Japan's debt ratios throughout their deleveraging process.

Presently, the stock market is exploding to the upside, which you could say argues against the case we are attempting to make in this special report. However, if you step back and look at the larger picture, you can see that the stock market is still down over 35% from the highs reached in 2007 and also down over 33% from the highs reached in early 2000. In fact, the market now is acting in the same manner as it did in early 2000 at the peak of the dot com bubble and again in 2006 & 2007 at the combined housing and stock market bubble.

This seems to us to be a "mini bubble" of stocks reacting to an abundance of "money printing" by governments all over the world since stocks are rising worldwide. Of course, if the U.S. doesn't recover there will be no worldwide recovery since the rest of the world is still dependent upon the U.S. consumers' appetite for their goods and services (despite the so called growth of domestic consumption in China and India). We, however, don't believe that the U.S. massive stimulus programs and money printing can solve a problem of excess debt generation that resulted from greed and living way beyond our means. If this were the answer Argentina would be one of the most prosperous countries in the world. This excess debt actually resulted from the same money printing and easy money that we are now using to alleviate the pain.

Most investors believe the bailouts, stimulus plans, and quantitative easing will lead to inflation. In fact, almost all of the bearish prognosticators are negative because of the fear that interest rates will rise once the inflation starts to work its way into the economy. They point to the doubling of the monetary base which they believe will soon lead to rising prices as more dollars are created chasing the same amount of goods. We, on the other hand, are not as concerned about the doubling of the monetary base because we believe the excess money will need the money multiplier and increases in velocity in order to increase aggregate demand and eventually inflation. As long as velocity (turnover of money) is stagnant we expect the increases in the monetary base and all the quantitative easing will lead to a stagnant economy and deflation until the consumer goes into the same borrowing and spending patterns that was characteristic of the 1990s through 2007.

Remember, over the past decade (when we believe the secular bear market started) the total debt in the U.S. doubled from $26 trillion in 2000 to just over $52 trillion presently (peaking a few months ago at $54 trillion). This consists of $14 trillion of gross Federal, State and Local Government debt and $38 trillion of private debt. We expect the private debt to continue declining in the future as the deleveraging of America unfolds, while the government debt will very likely explode to the upside as the government tries to slow down the private deleveraging by helping out the entities and individuals in the most trouble with debt (such as over-extended homeowners).

We wrote a special report in January of this year titled "Substituting Debt for Savings and Productive Investment" in which we explained why the U.S. economy historically prospered because of hard working Americans saving a substantial amount of their income which was used for productive investment. Unfortunately, all of this changed over the past few decades and got worse over the past decade. In fact, we stated in the report that it took $1.50 of debt to generate $1 of GDP in the 1960s, $1.70 to generate $1 of GDP in the '70s, $2.90 in the '80s, $3.20 in the '90s, and an unbelievable $5.40 of debt to generate $1 of GDP in the latest decade. Over the past two decades, while most investors thought this trend could continue indefinitely, we have been warning them of the catastrophic problems associated with this ballooning debt.

The attached chart of total debt relative to GDP shows exactly how much debt grew in this country relative to GDP (it is now 375% of GDP). The total debt grew to over $52 trillion relative to our current GDP of approximately $14 trillion. This is worse than the debt to GDP relationship in the great depression (even when the GDP imploded) and much greater than the debt to GDP that existed in Japan in 1989. Even if you took the debt to GDP when the U.S. entered the secular bear market in early 2000 and compared that to 1929 and Japan in late 1989, our debt to GDP still exceeded both (by a substantial margin relative to 1929). The approximate numbers at that time were about 275% in the U.S. in early 2000, 190% in 1929, and about 270% in Japan in 1989.

We expect the total debt in the U.S. to decline during the deleveraging period directly ahead, with the government debt exploding while the private debt collapses. The private debt in Japan was almost the reverse of the U.S. where most of our excess debt was in the household sector and most of the excess debt in Japan was in the corporate sector. The debt to GDP figures in Japan were not easy to come by from the typical sources until the mid 1990s and had to be estimated, but should be pretty close to the numbers used above. Our sources on the above Japanese debt figures came from Ned Davis Research and the Federal Reserve Bank of San Francisco. NDR's report, "Japan's Lost Decade-- Is the U.S. Next?" have great statistics and information and the Fed's report "U.S. Household Deleveraging and Future Consumption Growth" is well worth reading.

The Fed study charted the peak of the debt related bubble of the stock and real estate assets in Japan in 1991 (1989 for stocks and 1991 for real estate) and overlaid it with the peak of U.S. debt associated with the same assets in 2008. They concluded that if we are able to liquidate our debt at the same rate as Japan we would have to increase our savings rate from the present 6% (artificially high due to the recent stimulus paid to households) today to around 10% in 2018. If U.S. households were to undertake a similar deleveraging, the collective debt-to-income ratio which peaked in 2008 at 133% (H/H debt vs. Disposable Personal Income) would need to drop to around 100% by 2018, returning to the level that prevailed in 2002.

If the savings rate in the U.S. were to rise to the 10% level by 2018 (following the Japanese experience), the SF Fed economists calculate that it would subtract ¾ of 1% from annual consumption growth each year. We did a weekly comment about this very subject on June 25 of this year and came to a similar conclusion. In that same report we showed that from 1955 to 1985 that consumption accounted for around 62% of GDP. Because of the debt driven consumption over the past few years at the end of March 2009 consumption accounted for over 70% of GDP. If the percentage dropped to the normal low 60% area of GDP it would subtract about $1 trillion off of consumption (or from $10 trillion to $9 trillion). We also showed in that same report that H/H debt averaged 55% of GDP over the past 55 years and was 64% as late as 1995. It has since soared to over 100% of GDP giving a big boost to spending that will be reversed as the deleveraging takes place over the next few years.

Other problems we have in the U.S. that will exacerbate the deleveraging are excess capacity, unemployment rates skyrocketing (putting a damper on wages), credit availability contracting, and dramatic declines in net worth. The attached chart of capacity utilization is self evident that excess capacity in the U.S. has just dropped to record lows with the manufacturing capacity dropping to under 65% and total capacity utilization is just a touch better at 68%. It is very hard to imagine corporations adding fixed investment at this time. With unemployment rates close to 10% and rising, it is unlikely that wages will grow anytime soon. The charts on credit availability and net worth reductions are self explanatory and will also put a damper on consumer spending rising anytime soon.

We expect that the U.S. deleveraging will follow along the path of Japan for years as real estate continues to decline and the deleveraging extracts a significant toll from any growth the economy might experience. We also expect that, just like Japan, the stock market will also be sluggish to down during the next few years as the most leveraged economy in history unwinds the debt.

Thursday, August 6, 2009

Biggest tax revenue drop since 1932

Recession's toll comes as Congress and president try to fund programs

The Associated Press

updated 4:55 p.m. PT, Mon., Aug 3, 2009

WASHINGTON - The recession is starving the government of tax revenue, just as the president and Congress are piling a major expansion of health care and other programs on the nation's plate and struggling to find money to pay the tab.

The numbers could hardly be more stark: Tax receipts are on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression, while the federal deficit balloons to a record $1.8 trillion.

Other figures in an Associated Press analysis underscore the recession's impact: Individual income tax receipts are down 22 percent from a year ago. Corporate income taxes are down 57 percent. Social Security tax receipts could drop for only the second time since 1940, and Medicare taxes are on pace to drop for only the third time ever.

The last time the government's revenues were this bleak, the year was 1932 in the midst of the Depression.

"Our tax system is already inadequate to support the promises our government has made," said Eugene Steuerle, a former Treasury Department official in the Reagan administration who is now vice president of the Peter G. Peterson Foundation.

"This just adds to the problem."

Existing programs feeling the pinch

While much of Washington is focused on how to pay for new programs such as overhauling health care — at a cost of $1 trillion over the next decade — existing programs are feeling the pinch, too.

Social Security is in danger of running out of money earlier than the government projected just a few months ago. Highway, mass transit and airport projects are at risk because fuel and industry taxes are declining.

The national debt already exceeds $11 trillion. And bills just completed by the House would boost domestic agencies' spending by 11 percent in 2010 and military spending by 4 percent.

For this report, the AP analyzed annual tax receipts dating back to the inception of the federal income tax in 1913. Tax receipts for the 2009 budget year were available through June. They were compared to the same period last year. The budget year runs from October to September, meaning there will be three more months of receipts this year.

Is there a way out of the financial mess?

A key factor is the economy's health. The future of current programs — not to mention the new ones Obama is proposing — will depend largely on how fast the economy recovers from the recession, said William Gale, co-director of the Tax Policy Center.

"The numbers for 2009 are striking, head-snapping. But what really matters is what happens next," he said. "If it's just one year, then it's a remarkable thing, but it's totally manageable. If the economy doesn't recover soon, it doesn't matter what your social, economic and political agenda is. There's not going to be any revenue to pay for it."

Decline points to deep recession

A small part of the drop in tax receipts can be attributed to new tax credits for individuals and corporations enacted in February as part of the $787 billion economic stimulus package. The sheer magnitude of the tax decline, however, points to the deep recession that is reducing incomes, wiping out corporate profits and straining government programs.

Social Security tax receipts are down less than a percentage point from last year, but in May the government had been projecting a slight increase. At the time, the government's best estimate was that Social Security would start to pay out more money than it receives in taxes in 2016, and that the fund would be depleted in 2037 unless changes are enacted.

Some experts think the sour economy has made those numbers outdated.

"You could easily move that number up three or four years, then you're talking about 2013, and that's not very far off," said Kent Smetters, associate professor of insurance and risk management at the University of Pennsylvania.

Best- and worst-case scenarios

The government's projections included best- and worst-case scenarios. Under the worst, Social Security would start to pay out more money than it received in taxes in 2013, and the fund would be depleted in 2029.

The fund's trustees are still confident the solvency dates are within the range of the worst-case scenario, said Jason Fichtner, the Social Security Administration's acting deputy commissioner.

"We're not outside our boundaries yet," Fichtner said. "As the recovery comes, we'll see how that plays out."

The recession's toll on Social Security makes it even more urgent for Congress to address the fund's long-term solvency, said Sen. Herb Kohl, D-Wis., chairman of the Senate Aging Committee.

"Over the past year, millions of older Americans have watched their retirement savings crumble, making the guaranteed income of Social Security more important than ever," Kohl said.

Social Security on agenda next year

President Barack Obama has said he wants to tackle Social Security next year, after he clears an already crowded agenda that includes overhauling health care, addressing climate change and imposing new regulations on financial companies.

Medicare tax receipts are also down less than a percentage point for the year, pretty close to government projections. Medicare started paying out more money than it received last year.

Meanwhile, the recession is taking a toll on fuel and industry excise taxes that pay for highway, mass transit and airport projects. Fuel taxes that support road construction and mass transit projects are on pace to fall for the second straight year. Receipts from taxes on jet fuel and airline tickets are also dropping, meaning Congress will have to borrow more money to fund airport projects and the Federal Aviation Administration.

Last week, Congress voted to spend $7 billion to replenish the highway fund, which would otherwise run out of money in August. Congress spent $8 billion to replenish the fund last year.

Rep. Richard Neal, D-Mass., chairman of the House subcommittee that oversees fuel taxes, is working on a package to make the fund more self-sufficient. The U.S. Chamber of Commerce, which doesn't back many tax increases, supports increasing the federal gasoline tax, currently 18.4 cents per gallon.

Neal said he hasn't endorsed a specific plan. But, he added, "You can't keep going back to the general fund."

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.