CALPERS-Funded Land Partnership Goes Bankrupt

Expect more hits to pension plans and state government agencies as investments go under. The unfortunate thing for them is that they will not be able to go to the Fed for a 'mulligan' like the investment banks. The state agencies will try to go to the taxpayers and property owners in their states, however.

What sense does it make for state pension funds to invest in high risk ventures if the losses are not realized by their 'shareholders,' the state employees? This is why we favor no bailouts of pension funds who get caught up in bad investments.

This underscores why the Fed bailout of Bear Stearns and JPM was the worst policy decision in a generation.

CALPERS-Funded Land Partnership Goes Bankrupt
June 9, 2008

LOS ANGELES (AP) ― A 15,000-acre California real estate partnership that has the nation's largest public employees pension fund as a big investor has filed for Chapter 11 bankruptcy protection.

LandSource Communities Development LLC's assets include 15,000 acres of undeveloped land north of Los Angeles in the Santa Clarita Valley, among the largest land deals to falter amid the national housing glut.

The California Public Employees' Retirement System, an investor in the partnership that provides pension, health care and other retirement services for about 1.5 million public employees, did not immediately return calls Monday.

LandSource issued a news release late Sunday to announce the bankruptcy filing in U.S. Bankruptcy Court in Delaware.

LandSource had been trying for months to restructure a $1.24 billion debt, the company said. It received a default notice on April 22 after missing a payment when a decline in the assessed value of that Southern California land holding triggered an additional charge.

"LandSource believes chapter 11 provides the most effective means for the partnership to preserve the values of its business...while it works with creditors to achieve a long-term restructuring," spokeswoman Tamara Taylor said in the release.

Attempts to reach Taylor and LandSource before business hours were unsuccessful.

LandSource operates in California, Arizona, Florida, New Jersey, Nevada and Texas. The partnership announced it has received a $135 million line of credit from a group of lenders led by Barclays Bank, allowing it to fund operations during the Chapter 11 period.

CalPERS, with $254.8 billion in assets, is involved in LandSource through its participation in MW Housing Partners, an investment fund managed by MacFarlane Partners LLC.

MW Housing Partners acquired 68 percent of the Santa Clarita property from home builder Lennar Corp. and LNR Property Corp., a unit of Cerberus Capital Management

Feds Warn on Another Wave of Bad Debt Write-Offs

This is not over yet, not by a long shot.

The Fed and its reckless mismanagement of the US financial system has created a problem that is interlocked and interwoven, laced heavily with mispriced risk and a potential avalanche of defaults. Individual actors grow personally rich on the wreckage of whole sections of the US economy.

This is why the Fed wants the additional power and responsibility to oversee the banks, because it would allow them to control the 'solution' and the discovery process.

We are witness to one of the greatest financial frauds in recorded history.

Lenders Facing Another Wave of Write-Offs
June 8, 2008
Mortgage News Daily

Federal regulators are warning the world to get ready for the next wave of problems in the banking world.

Up to now banks have been struggling to deal with the piles of delinquent debt from earlier subprime lending to homeowners and the dozens of federal, state, and lender originated programs being proposed are all designed to address this crisis.

That situation is only getting worse according to information released last week by the Mortgage Bankers Association (MBA) which reported that 6.35 percent of all one-to-four family home loans outstanding at the end of the fourth quarter were delinquent, an increase of 53 basis points from the previous quarter and 151 basis points from the first quarter of 2007. These figures do not include loans that have already entered the foreclosure process. Once again this quarter, the rate of foreclosure starts and the percent of loans in the process of foreclosure are the highest recorded since 1979.

But, while lenders and investors have been working to raise the necessary capital reserves to withstand looming write-offs and losses from this consumer-based mess, a new group of bank customers have been watching their own situation get worse.

Home builders, condominium developers, and land speculators are facing growing problems making payments on their loans and, with home sales finishing up a disappointing spring sales season, these construction related loans look even shakier. Both borrowers and lenders are being hit for a double whammy as sale prices of homes and condos and the value of raw land continue to fall. This erosion of loan collateral makes it difficult if not impossible to get out of loans in one piece even where there are buyers available.

According to an article in the Wall Street Journal, those banks which are heavily tied to home construction loans have begun to dump them, many at steep discounts, a precursor to billions of dollars in new losses.

The Journal cites IndyMac Bancorp Inc as among those banks with large portfolios of troubled loans tied to land and housing. IndyMac is reportedly trying to unload $540 million in loans made to finance land purchases and home construction projects. The newspaper says that winning bids on some of the loan packages were a "grab bag" of collateral types including partially built subdivisions, condo buildings, and large parcels of raw land, averaged $0.60 on the dollar but some brought in only about $0.20 cents.

KeyBank has an even larger problem - $935 million in land and construction loans while Wachovia Corp is seeking bids on a $350 million portfolio.

In testimony before the Senate Banking Committee on Thursday several bank regulators testified on the seriousness of the situation. Federal Deposit Insurance Corporation Chairman Sheila Bair pointed to banks that are not diversified or with high exposures to residential construction and development as being of particular concern. Also smaller banks are not in a good position to offset losses and even larger banks in states like Nevada and Arizona that have been hard hit by the housing crisis are already back on their heels and probably not ready to confront another round of write-offs.

The Journal quoted an analytic report sent on Thursday by housing research firm Zelman & Associates to its clients that projected that, over the next five years, U.S. banks could "charge off" as bad debt 10 to 26 percent of their loans tied to residential construction and land. In dollars this would amount to $65 billion to $165 billion.

In Thursday's Senate committee hearing Office of Thrift Supervision Director John Reich testified that the number of savings-and-loan associations at "a heightened risk of failure" jumped from 12 at the end of March to 17 today. Four banks have already failed this year, more than in the prior three years combined.

Regulators said they have increased scrutiny of banks with high concentrations of real-estate loans.

Meredith Whitney Delivers a Body Shot While Tim Geithner Hallucinates

Ten billion is starting to seem like very little to write down. That's because we are become insensitive to the economic rot that is being uncovered, in large part because of the actions of the Fed and Treasury to hide the problems, papering over the deep gouge in the foundation of the financial system, diverting us with smooth talk and facile arguments.

The next shoe is about to drop. It will come out of the credit card and Alt-A mortgage debt, and the severe cutbacks in consumer spending. A reasonable look at the math shows that consumers hit the wall in the US in the past two years, and have been 'running on fumes.' Their real wage growth has been strangled by the financial engineering of the multinational corporations, who never seem to learn that a successful parasite does not kill its host.

Tim Geithner, Ben Bernanke's graduate assistant at the NY Fed, is speaking this afternoon about reforming the financial system. Its almost too much to bear to listen to the financial engineers asking for more power, even as schemes of their own construction are collapsing all around them. Tim has spent most of his adult life in large institutions such as academia, the Treasury and now the Fed.

Timmy doesn't realize that in the real world you normally don't get MORE power when you fuck things up, at least not if you are in a competitive and thriving organization, and/or if you are under adult superivision. But nice try promoting Paulson's plan to a friendly audience. Its DOA.

The pain which is to be delivered to all holders of US dollars as a price for this naive exercise in academic hubris will be of epic proportions.

Protect yourself.


Citi, Merrill, UBS Face Monoline Losses, Whitney Says
By Jeff Kearns and Bradley Keoun

June 9 (Bloomberg) -- Citigroup Inc., Merrill Lynch & Co. and UBS AG may post losses of $10 billion on bond insurance after MBIA Inc. and Ambac Financial Group Inc. lost their top credit ratings, Oppenheimer & Co. analyst Meredith Whitney said.

MBIA and Ambac, the world's largest bond insurers, had their AAA ratings cut two levels by Standard & Poor's June 5, which trimmed ratings on more than $1 trillion of securities they guaranteed. The downgrades may limit the so-called monoline insurers' ability to write new policies, putting further pressure on earnings, she wrote today in a note to investors.

``The limited earnings potential of monolines poses a risk to the value of the insurance and hedges on the subprime-related securities provided to the banks and brokers,'' Whitney wrote. ``The collateral damage could be in excess of an additional $10 billion.''

Whitney, one of the first bank analysts last year to gauge the depth of the U.S. credit crisis, said in January that losses tied to the bond insurers for all banks might top $40 billion. She didn't update her estimate. Citigroup, Merrill and UBS have taken more than $10 billion of writedowns related to the insurers, she wrote.

Citigroup, the biggest U.S. bank, and Merrill, the world's biggest brokerage, have ``underperform'' stock ratings from Whitney. Both companies are based in New York. She doesn't cover Zurich-based UBS, the European bank hardest hit by the U.S. subprime contagion.
UBS had $6.3 billion of ``exposure'' to bond insurers at the end of March, Whitney said. Citigroup had $4.8 billion and Merrill had about $3 billion, she wrote.

Citigroup rose 12 cents to $20.18 at 11:31 a.m. in New York Stock Exchange composite trading, Merrill Lynch fell 28 cents, or 0.7 percent, to $38.74, and UBS slid 80 centimes to 23.82 francs in Zurich trading.

To contact the reporter on this story: Jeff Kearns in New York at jkearns3@bloomberg.net; Bradley Keoun in New York at bkeoun@bloomberg.net.

Lehman to Post Loss Much Greater Than Expected

Lehman Aims to Raise More Capital
Second-Quarter Loss Likely to Be Greater Than Was Expected
By SUSANNE CRAIG
June 9, 2008
Wall Street Journal

Lehman Brothers Holdings Inc. is close to raising more than $5 billion of fresh capital from an array of investors including the New Jersey Division of Investment, according to a person familiar with the matter.

The move comes as the firm is set to report a second-quarter loss of more than $2 billion, this person said. Until recently, most analysts who follow Lehman have been predicting a loss of about $300 million.

On Sunday afternoon, the firm was still pulling together final details of the capital raising, which could be announced Monday or Tuesday. Additional capital raisings are sure to follow for other banks.

Barclays PLC, the big British bank, also is moving toward raising capital from outside investors such as those in the Middle East or Asia, according to people familiar with the matter. Last month, the bank left the door open for a capital injection but skipped seeking money from existing shareholders in a rights issue.

Lehman canvassed the globe in its capital raising but in the end found a group of primarily U.S. investors. Lehman's stock has tumbled about 50% this year as concerns have mounted over its financials and its exposure to the mortgage market.

So far, the firm has strong commitments from the New Jersey Division of Investment, which manages the state's $80 billion of pension funds and recently invested in Merrill Lynch & Co., and from C.V. Starr, the investment vehicle of Maurice R. "Hank" Greenberg, former chairman and chief executive officer of American International Group Inc. A significant foreign investment remained a possibility. (Who is the governor of NJ again? Oh yeah, Jon Corzine, late of Goldman Sachs - Jesse)

Lehman officials didn't respond to calls seeking comment, nor did New Jersey officials. A spokesman for C.V. Starr declined to comment.

So far, Friday's market turmoil hasn't deterred the outside investors, but Lehman may decide to see if markets stabilize on Monday before announcing its plans. A big capital increase from Lehman could help calm nervous investors and stabilize the broader market. The capital raising would come primarily through common shares, the first such issue since Lehman went public in 1994. (A little market timing here gentlemen? - Jesse)

So far this year, Lehman has raised almost $6 billion, but that was mostly in the form of preferred shares, a stock-bond hybrid that doesn't dilute the ownership of common shareholders. While a common-share issue would hurt Lehman's already-suffering shareholders by diluting their ownership stake, rating companies and regulators are likely to look favorably toward a greater capital cushion.

Lehman's larger-than-expected second-quarter losses stem partly from asset write-downs and hedges used to offset losses in real estate and other securities, according to people familiar with the matter. The firm bet that indexes tracking markets such as real-estate securities and leveraged loans would fall. If that happened, it would book profits that would make up some of its losses from holding these securities and loans.

However, in an unexpected twist, some of the indexes rose, even as the assets they were supposed to hedge against continued to lose value or stayed relatively flat.

Write to Susanne Craig at susanne.craig@wsj.com