Explaining Southern California's economy

Let's hope Stockton can use mediation to avoid bankruptcy

Justin Sullivan/Getty Images

STOCKTON, CA - APRIL 29: Cars drive through downtown Stockton April 29, 2008 in Stockton, California. As the nation continues to see widespread home loan foreclosures, Stockton, .California led the nation with the highest foreclosure rate. One out of every 30 homes in Stockton is in foreclosure, close to seven times the national average for a metro area in the U.S. (Photo by Justin Sullivan/Getty Images)

The town of Stockton is lurching toward a Chapter 9 municipal bankruptcy. But thanks to a law that Gov. Jerry Brown recently signed, before a California municipality can head to bankruptcy court, it needs to submit to mediation. What this means is that the city and its creditors sit down a less formal environment than a court of law and try to iron out a solution. Generally speaking, this means that bondholders (for example) will accept a "haircut" on debt up front, rather than fighting it out on court.

If a mediation can lead to a successful resolution, it can be a real boon for the city that's in trouble. Bankruptcy is expensive. The lawyers have to be paid and the whole process has to be financed so that the municipality can continue to operate while its litigating. We're talking tens of millions of dollars.

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Ben Bernanke tells Congress that we need negative interest rates

Bernanke Testifies Before House Financial Services Committee

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WASHINGTON, DC - FEBRUARY 29: Federal Reserve Bank Board Chairman Ben Bernanke testifies before the House Financial Services Committee on Capitol Hill February 29, 2012 in Washington, DC. Bernanke was testifying about the Fed's Semiannual Monetary Policy Report. (Photo by Chip Somodevilla/Getty Images)

Federal Reserve Chairman Ben Bernanke testified this morning in front of the House Financial Services Committee. Reuters has a nice, brisk summary of his main responses to questioning from members of Congress. There were two very interesting exchanges, resulting in some cryptic replies from Big Ben. Here's the first, on interest rates, which the Fed wants to keep as low as possible through 2014:

It is arguable that interest rates are too high, that they are being constrained by the fact that interest rates can't go below zero. We have an economy where demand falls far short of the capacity of the economy to produce. We have an economy where the amount of investment in durable goods spending is far less than the capacity of the economy to produce. That suggests that interest rates in some sense should be lower rather than higher. We can't make interest rates lower, of course. (They) only can go down to zero. And again I would argue that a healthy economy with good returns is the best way to get returns to savers.

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Retired auto exec LaSorda to run struggling electric carmaker Fisker

Vanity Fair & Fisker Automotive Toast Dreamworks Pictures Golden Globes Best Drama Nominations "The Help" And "War Horse"

Charley Gallay/Getty Images for Vanity Fair

LOS ANGELES, CA - JANUARY 13: Marti Eulberg (L) and Ciara attend Vanity Fair & Fisker Automotive Toast Dreamworks Pictures Golden Globes Best Drama Nominations 'The Help' And 'War Horse' at Cecconi's Restaurant on January 13, 2012 in Los Angeles, California. (Photo by Charley Gallay/Getty Images for Vanity Fair)

I don't really think this is good news. Fisker Automotive, the startup electric carmaker, is really starting to huff and puff just as rival Tesla Motors is preparing to blast off. Founder Henrik Fisker has handed over the leadership reins to Tom LaSorda, a veteran of Detroit and specifically of Chrysler. But LaSorda labored at Chrysler during the automaker's failed marriage to Germany's Daimler. And when Daimler dumped Chrysler in to the arms of private-equity firm Cerberus Capital Management, LaSorda was content to play second banana to what I consider one of the least effective CEOs every to grace the Motor City, Robert Nardelli, who previously had caused all manner of problems for Home Depot.

It should be pointed out that Fisker only current vehicle, the Karma, isn't even a pure EV. It's a plug-in hyrbrid, with a drivetrain similar to the Chevy Volt. Unlike the Volt, which sells for roughly $41,000 (before tax credits of up to $7,500), the Karma goes for $103,000. A cheaper model, dubbed "Nina," is on the drawing board, but as the Wall Street Journal reports, Fisker lost the $529 million Department of Energy loan guarantee it need to move forward on the vehicle.

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California's debt crisis: We'll figure something out

Mercer 10006

Justin Sullivan/Getty Images

The California State flag.

California just kicked off a $2 billion municipal bond offering that will run through tomorrow. So far, it's looking pretty solid, according to the Wall Street Journal/Dow Jones Newswires, with $550 million sold so far to retail investors. Institutional investors will get their shot later this week. 

The bond sale highlights the paradox of the Golden State:

California's bond offering comes after Standard & Poor's sweetened its outlook on the state to positive from stable earlier this month. At the time, the ratings agency said it could upgrade the Golden State, depending on its ability to better align its cash performance and budget assumptions.

California is "the most heavily indebted state, but it also has the biggest economy," said Paul Montaquila, vice president of fixed-income trading at San Francisco-based Bank of the West, whose capital markets group has $10 billion of total assets under management. "For as bad as things may seem to be, the state always figures something out."

Montaquila said his firm's clients, which range from ultra high-net-worth individuals to mid-tier corporations, placed an order for California bonds. He added that the state's debt offered better yields than other similarly maturing fixed-income assets, like Treasurys.

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Strategic mortgage defaults: Nothing wrong with that!

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MIAMI, FL - NOVEMBER 10: Renzo Salazar, from Real Signs of Ace Post Holding Inc., places a bank owned sign on top of a for sale sign in front of a foreclosed home on November 10, 2011 in Miami, Florida.

The L.A. Times' Michael Hiltzik is appalled at the moralizing going on around "strategic defaults" — a default on a mortgage undertaken from a position of cold, hard financial calculation, rather than from some sentimental notion that a borrower should always, always pay, no matter what cards life deals him:

What often gets overlooked in the debate over walkaways is why it should matter. A default is a default, isn't it? [Old Dominion University's Michael J.] Seiler, for one, disagrees — he argues that defaults for noneconomic reasons have a uniquely corrosive effect on social behavior.

That's based on the notion that borrowers have a moral obligation to pay their debts. Yet a mortgage contract is a legal document, not moral catechism. It doesn't require you to make your payment regardless of your financial state; only that you recognize that if you don't, you might lose your house.

Mortgage lenders customarily try to price the likelihood of delinquency or default into the loan; that's why borrowers with the best credit scores typically pay the lowest interest rates. Nor is the credit score a gauge of moral purity — it's an empirical reflection of the borrower's debt load and bill-paying record.

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