New Geography

Tag: Finance

  • Commercial Real Estate Bust of 2010

    Coming soon to a market near you: a bust in commercial real estate that will make the subprime mortgage crisis look like a picnic. The other shoe drops in 2010.

    Federal Deposit Insurance Corporation Chairman Sheila Bair told a Senate committee on October 14 that commercial real estate loan losses between now and the end of 2010 pose the most significant risk to U.S. financial institutions. Although you can’t read it online, on October 7, 2009 Wall Street Journal reporters Lingling Wei and Maurice Tamman (Eastern edition, pg. C.1, Fed Frets About Commercial Real Estate) reported on a presentation prepared by an Atlanta Fed real-estate expert who is worried “about the banking industry’s commercial real-estate exposure.”

    Since July, the Federal Reserve has been pumping billions of dollars into commercial-mortgage-backed securities (CMBS, same things as the residential-MBS I’ve written about before in this space, only for shopping malls instead of houses). To accomplish this, the Fed uses the Term Asset-Backed Securities Loan Facility or TALF program. It is one of several alphabet-soup programs the Fed is using to pass a couple of trillion dollars to the stock market through private corporations (not just regulated banking institutions). For example, between March and July 2009, Harley-Davidson Inc. and other non-banks raised $65 billion in sales of bonds backed by everything from motorcycle loans to credit card debt. The Fed made $35 billion in TALF loans to investors buying those securities, which sparked a market rally. That market rally, however, is not in the commercial real estate market – it’s in the securities market. Since its inception, TALF has put between $2 billion and $11 billion per month into the securities market.

    TALF lends money to anyone willing to buy CMBS (or student loans, car loans, etc.). The Fed reasons that, as long as banks can move loans off their books by repackaging and selling them as bonds, they will make more loans. So they justify giving money to non-banks to buy the bonds because the money will go to the banks. Get it?

    Unfortunately, as vacancy rates rise, banks are increasingly reluctant to make new commercial real estate loans. This is obviously the case since Office of Thrift Supervision deputy director Timothy Ward told Congress this week that they will be issuing guidelines on doing loan workouts. A loan work out is what industry experts call “extend and pretend” – extend the terms and pretend like they are paying you. CRE loans, furthermore, are shorter in duration than home mortgages – typically 5 years instead of 30 years. That means a lot of loans will be coming due before the economy picks up enough to fill all those offices with rent-paying businesses. The value of commercial mortgages at least 60 days behind on payments jumped sevenfold in September – to $22.4 billion – or almost 4 percent of all commercial mortgages repackaged and sold as bonds. That’s about the same as the 90 day past-due rate seen for all residential mortgages (including those not sold off by the banks) in the first quarter of 2009.

    As of October 14, 2009, the TALF balance is $43.2 billion and growing. From what we are hearing now, it may not be enough.

  • Bad Times Getting Worse for Older Americans

    Olivia S. Mitchell, of the Wharton School at the University of Pennsylvania, told ABC News that “roughly $2 trillion has been lost in 401(k)s and pension plans during the recession.” (According to The Economist, worldwide private pension funds lost $5.4 trillion last year. I wonder if/when the media will start calling it a depression?)

    As stock values go down, the value of the company pension plan investments fall with it. In good times, companies can put cash into the plans to make up the short fall. But with all the financial turmoil around us now, companies don’t have the cash and are unable to borrow it. Some companies are capping payouts and some are offering lump-sum payouts instead of, or in combination with, monthly payments. Other companies are abandoning traditional pensions – where the payouts are defined in advance of retirement – for 401(k) plans – where the contributions are defined instead and the payouts are left uncertain. That puts the risk of bad investments and market collapses on the backs of the workers instead of the companies.

    For employees who are in traditional pension plans, the Pension Benefit Guaranty Corporation (PBGC) was created in 1974 to insure pensions. If your employer goes bankrupt, your pension could still be OK if the plan pays insurance premiums to PBGC. However, the coverage is limited to $54,000 a year for workers who retire at age 65, less if you retire early. The PBGC’s investment assets went down 12 percent between September 2007 to September 2008 (latest financial statements available). That’s on top of a large (albeit falling) deficit of $11 billion (their liabilities are greater than their assets). This is the company that is supposed to protect your pension if your company goes into bankruptcy. Technically, they can’t meet today’s obligations…

    If your employer is in financial trouble and you are expecting to earn more than the pension insurance will cover you may need to think about working during retirement to make up the difference. According to an article published by Wharton in 2007, the Senior Citizens Freedom to Work Act “repealed the Social Security earnings limit, allowing workers 65 through 69 to earn income without losing Social Security benefits.” Good thing, too. Looks like they’ll need to keep working to make it through the depression.

  • Betting against the USA — told ya’ so!

    More than once in this space, I’ve said that derivative financial products set up a perverse incentive where investors have more to gain from the failure of companies and homeowners than their success. If you haven’t seen it yet, take a look at the longer version of my description of the causes and consequences of the current crisis to understand how failed financial innovations, like credit default swaps, contributed to the meltdown of 2008. I wrote that article back in November.

    Once again, only Bloomberg.com is out front on this story. More hedge funds are catching onto the casino-like qualities of betting against America’s economic success. Reporters Salas, Harrington and Paulden could have quoted my NewGeography writings directly: “companies [have] more credit-default swaps outstanding than the bonds the contracts protected…” and, referring to Clear Channel Communications, “some of its creditors stand to profit from its failure.”

    Told ya’ so!

  • Geithner’s Collusive Capitalism

    Jo Becker and Gretchen Morgenson (she reported on the lack of mortgages behind mortgage-backed securities) did a long piece on Treasury Secretary Timothy F. Geithner in the New York Times. They paint a stark picture of Secretary Geithner’s brand of “Collusive Capitalism”: lunch at the Four Seasons restaurant with execs from Citigroup, Goldman Sachs and Morgan Stanley; private dinners at home with the head of JPMorgan Chase.

    Most importantly, Becker and Morgenson raise the question of why – with all that frequent contact – Geithner never sounded the alarm about these banks? Indeed, as I’ve pointed out before, Geithner took no steps to prevent $2 trillion in US Treasury bond trades go unsettled for 7 months – until it was over, when he called a meeting of the same bankers that caused the problem to have them do a study, take a survey, make some suggestions, etc. The one action that needed to be taken – to enforce finality of settlement – was never on the table.

    When the banks behaved recklessly in lending, trading, issuing derivatives and generally fueling the Bonfire of their Vanities, according to Becker and Morgenson, Geithner’s idea was to have the federal government “guarantee all the debt in the banking system.” As Martin Weiss asks in his ads for Money and Markets, “Has U.S. Treasury Chief Geithner LOST HIS MIND?”

  • Which are the places dominant in finance?

    The financial services sector (finance, insurance, real estate, management) lies at the heart of the economic crisis and recession. This is the sector that doubled in its share of the labor force over the last 30 years, creating vast but uneven wealth. It is instructive to see which American cities are most culpable in these excesses.

    New York dominates, as it has for centuries, especially if we include neighboring Fairfield county, CT (Bridgeport, Stamford, Greenwich), based on its very high share (20 %) of resident employees in finance. This does not include the very high share of incomes that financial services represents in the New York area, as discussed in our recent report on the city’s middle class.

    But Washington, DC has by far the highest share; there are also high shares in neighboring Baltimore and Richmond. These figures illustrate the rising relative power of center of government in the contemporary political economy. Los Angeles is roughly equivalent, but with a slightly lower share than New York. Chicago, the economic capital of the interior, tops off the big four centers of control.

    The next tier of five major regional capitals, all also Federal Reserve cities, are Dallas, Atlanta, Philadelphia, Boston and San Francisco, with Boston and San Francisco among places with the highest shares in finance. They are followed by four regional capitals on the path to financial stardom – if you can use that term today – including Miami, Houston and Seattle and Phoenix, as well as another federal reserve city, Minneapolis.

    Several major metropolitan areas are far less important in finance than in earlier times. These include the Rust Belt cities of Detroit, Cleveland, St. Louis, Pittsburgh and Cincinnati. These, in turn, are being challenged by the growing smaller metro areas and regional capitals of Denver, Portland, San Diego, Sacramento and Tampa-St. Petersburg.

    Finally smaller, often growing metropolises with high shares in finance include, most obviously Charlotte, but also Austin, Columbus, Madison, Raleigh, Des Moines and Olympia, WA, all state capitals and/or university towns. But the highest shares, after Bridgeport are located smaller areas in Florida, Palm Coast and Fort Walton Beach.

    Place
    Total Population (millions)
    Total labor force (millions)
    Number in Finance (thousands)
    % finance
    New York 18.8 9.9 1535 15.5
    Los Angeles 12.9 6.6 970 14.7
    Chicago 9.5 4.9 750 15.3
    Dallas 6.1 3.1 502 16.2
    Philadelphia 5.8 2.95 457 15.5
    Houston 5.6 2.7 383 14.2
    Miami 5.4 2.8 409 14.6
    Washington 5.3 3 645 21.5
    Atlanta 5.3 2.7 464 17.2
    Boston 4.5 2.5 440 17.6
    Detroit 4.5 2.15 299 13.9
    San Francisco 4.2 2.2 411 18.7
    Phoenix 4.2 2.1 305 14.5
    Riverside-SB 4.1 1.8 205 11.4
    Seattle 3.3 1.8 310 17.2
    Minneapolis 3.2 1.8 313 17.4
    San Diego 3 1.5 245 16.3
    St.Louis 2.8 1.4 202 14.4
    Tampa St. Pete 2.7 1.3 203 15.6
    Baltimore 2.7 1.4 235 16.8
    Denver 2.5 1.4 232 16.6
    Pittsburgh 2.4 1.2 158 13.2
    Portland 2.2 1.15 177 15.4
    Cincinnati 2.1 1.1 158 14.4
    Cleveland 2.1 1.06 139 13.1
    Sacramento 2.1 1 161 16.1
    Orlando 2 1.1 171 15.5
    Bridgeport 0.9 0.47 94 20
    Palm Coast 0.06 0.031 6 20
    Ft Walton 0.15 0.09 17 19
    San Jose 1.8 0.9 171 19
    Boulder 0.29 0.175 33 19
    Olympia 0.24 0.1 18 18
    Raleigh 1.05 0.55 96 17.4
    Des Moines 0.55 0.31 53 17
    Oxnard 0.8 0.43 73 17
    Manchester-Nash 0.4 0.2 34 17
    Charlotte 1.65 0.85 145 17
    Austin 1.6 0.86 142 16.5
    Tallahassee 0.35 0.19 32 16.6
    Columbus OH 1.75 0.95 152 16
    Richmond VA 1.21 0.68 110 16.2
    Anchorage 0.36 0.195 31 16
    Madison  WI 0.56 0.34 54 16

  • We Sneezed, They Got Pneumonia

    Don’t worry about China taking over the US economy. Despite what all the talking heads on TV and the radio talk shows are saying, there isn’t another country out there that hasn’t been hammered at least as badly as we have by the financial meltdown. The problem with any other country attacking the US dollar, for example, is that they are all holding a lot of US dollars. You probably remember last year they were worried about the fact that we import so many goods that we have big “trade imbalances” – meaning that we buy more of their goods than they buy of ours.

    Now remember this: we pay for those imports with dollars. So, again, if the dollar is worth less (or worthless) then they are not going to be getting as much for their imports. Raising the price of their goods, that is, simply charging more dollars won’t do them any good either. We’re in a recession, and Americans are tightening their belts. Demand for imported goods, like demand for all goods except luxury goods, is price sensitive. The more they charge, the less we buy. According to an article on CNN.com, our belt tightening has ended the “Road to riches for 20 million Chinese poor.”

    Furthermore, it’s in the best interest of countries around the world that the US dollar stays strong. The door does swing both ways. According to Jack Willoughby at Barrons.com, “European banks provided three-quarters of the $4.7 trillion in cross-border loans to the Baltic countries, Eastern Europe, Latin America and emerging Asia. Their emerging-markets exposure exceeds that of U.S lenders to all subprime loans.”

    To support all of that exposure, the European Central Bank has been obtaining dollars from the U.S. Federal Reserve in currency swaps. The value of these swaps, where dollars are exchanged for other currency at a fixed and renewable exchange rate, went from $0 to $560 billion this year.

    And the Federal Reserve printing presses keep rolling along.

  • Maps of United States Manufacturing and Finance Industry

    For our War of the Regions piece I went through BLS data and calculated location quotients for a few key diverging industries, namely manufacturing and securities, commodities and investments side of the finance industry. These are the kind of numbers that really benefit from geographic visualization.

    A LQ tells us not where the most jobs are in any given industry, but how much of a state’s employment is clustered in the given industry.

    I’ve been following FortiusOne for a while but this is the first time I’ve gotten a chance to play around with their GEOCommons Finder! and Maker!, a new social production platform for agglomerating, sharing and visualizing geographic data. It’s a fantastic platform.

    Click on the map images here to explore them on the GEOCommons platform. You can see a lot of dark color in the rust belt, but at this point, the states of Indiana, Wisconsin, Arkansas, Iowa, Alabama, and Mississippi are at or ahead of Michigan and Ohio in state dependence on Manufacturing. Part of this is due to growth in the South and Great Plains, and part is due to manufacturing job losses in the Rust Belt, causing the concentration there to slip.

    Finance here is limited to Securities, Commodity Contracts, and Other Financial Investments and Related Activities (NAICS 523). Not surprisingly, this industry is clustered in the Northeast. You see Illinois, Minnesota, and Colorado shaded darker due to the role of Chicago, Minneapolis, and Denver as regional trade centers.

    Take some time to explore GEOCommons and some of the other visualizations created by others, and watch for more maps in this space as we do the same.

  • Nothing’s the Matter With Kansas

    Local and Regional banks in the Great Plains are doing just fine, thanks, according to Bill Wycoff, a bank president in southeast Kansas. Bill wrote in the WSJ Saturday that

    “Here in the heart of Kansas, the sky isn’t falling and Chicken Little isn’t running around without a head. Community banks like mine are still making loans and serving the needs of customers. … My father always told me that character repaid many more debts than collateral ever would. Community banks form long-term relationships with customers.”

    He’s had to go out of his way to combat recent media coverage and hysteria about the financial industry:

    “All of the media pressure about this terrible crisis has really worried people. We community bankers must spend time reassuring folks that everything will be fine. The best way I have found to do that is to make more loans this September than we made a year ago, offer new products, and serve a fantastic group of customers with home loans at our bank where all is well and none are facing foreclosure.”

    Here in the prairie, we see many small town banks opening branches in adjacent metropolitan areas to tap some of the solid economic growth. Growth here may not be explosive, but it is built upon the productive economy and professional and business services. The Great Plains has consistently bested the national rate of job growth since 1990, and many local banks have launched advertising campaigns in the past weeks to say “everything is all right.”

  • Manhattan Sinking

    Anyone in New York recently can see that the swagger is now gone. With the economy losing its primary engine – a relative handful of financial hotshots- the whole plutonomic system seems to be under major stress. The state and city budgets also seem to be heading south in a big way.

    You can see this strolling through Soho and peering into empty restaurants and nearly empty shops. Clerks and waiters now actually seem to want you to enter. The $350 children’s sweaters are now on the sales rack, for about a third the price.

    Wall Street area is in even worse shape, says friend of the New Geography, Jonathan Bowles of the Center for an Urban Future. Yet there are signs of dynamism. Jonathan and I went to lunch on 32nd Street, also known as Little Korea. Here the restaurants and stores, many of them tied to the global garment trade, seem as busy as ever. Good value, hard work and plain old sticktoitivness will still pay off, even in a recession.

    New York will bounce back but the impetus likely won’t come from the investment bankers or the fashionistas. Instead, look for the Koreans, Indians, Africans and other newcomers — and the skilled media and other artisans now mostly living in Brooklyn and Queens — to pick up the slack. A more affordable, less luxury-obsessed city is good news for them. It makes running a business or buying a house or condo a possible dream. These are the folks most capable of reinventing the city in the post-bubble age.

  • New York’s loss is Chicago’s Gain?

    The Chicago Tribune reported recently on the state of the finance industry in the Chicago area. Reports indicate smaller, more nimble finance companies in Chicago are tapping an exodus of traders, bankers and investment managers:

    Employment in the securities and commodity industries has held steady in the Windy City, showing an unusual resilience while marquee names such as Citigroup, Merrill Lynch and Lehman Brothers hemorrhage billions of dollars in connection with subprime mortgages. Members of the Chicago trading community say the transparency and technology provided by the futures and options exchanges has insulated them from losses the International Monetary Fund estimates will total $1 trillion.

    Looking at the historical numbers, Chicago passed NYC in banking employment in 2001, but that industry is in slow decline in Chicago after peaking in late 2006. Securities jobs in Chicago have remained steady, while this sector in New York City began its sharp decline in September 2007. I’d say any evidence of Chicago growth based on New York’s finance job loss is still anecdotal. (Click the chart for a bigger image.)

    Chicago Trib link via Steve Bartin.