Goldman Sachs Wants QE2 and Then Some

Meredith Whitney Overreaches in Muni Default Call – There will be between 50 and 100 “significant” municipal bond defaults in 2011, totaling “hundreds of billions” of dollars.  So said banking analyst and new municipal bond expert Meredith Whitney on the “60 Minutes” show on Sunday, in perhaps the boldest, most overreaching call of her career.  Hundreds of billions of dollars? The one-year record, set in 2008, is $8.2 billion. You can see how an estimate of “hundreds of billions” would get people’s attention.  There are a lot of reasons to be doubtful about the health of the municipal market right now, as elucidated by “60 Minutes” correspondent Steve Kroft. Tax revenue is down, public pension and health-care liabilities are up, the federal government’s bailout money to the states is running out and the chances that those funds will be replenished are remote.  And yet — hundreds of billions of dollars in default? The number is in the realm of the fabulous. If pressed, I would say that we might see between 100 and 200 municipal defaults next year, maybe totaling in the $5 billion or $10 billion range.

Rising Health Insurance Premiums Prompt New Rules — Pushing to restrain skyrocketing health insurance premiums, the Obama administration Tuesday set out new rules requiring insurers to justify any increase of more than 10% a year. And administration officials outlined new efforts to increase federal review of premiums if state regulators do not have the capacity to protect consumers.  "Year after year, insurance company profits soar, while Americans pay more for less healthcare coverage," Secretary of Health and Human Services Kathleen Sebelius said Tuesday in announcing the regulation, which was authorized by the new healthcare law President Obama signed in March. "The Affordable Care Act is bringing unprecedented transparency and oversight to insurance premiums to help rein in the kind of excessive and unreasonable rate increases that have made insurance unaffordable for so many families." The reporting requirement falls short of the kind of rate review that many Democrats, including the president, wanted to put into the healthcare law.

New Jersey to Issue $2 Billion of Debt to Terminate Interest-Rate Swaps – New Jersey’s Economic Development Authority plans to issue as much as $2 billion of bonds early next month to refinance school-construction debt and terminate $1.7 billion of interest-rate swaps.  The agency will pay an estimated $296 million to end the swaps, which it entered into beginning in 2002. The refinancing will save the state about $278 million in debt payments, which will cover all except $18 million of the termination fees, said Andrew Pratt, a spokesman for Treasurer Andrew Sidamon-Eristoff. The transaction also will allow the state to reduce its risk as it projects higher costs next year for letter-of-credit- backed agreements amid new financial regulations, Pratt said. It’s unclear how much the rules, which require banks to set aside money to back such borrowing, may raise the state’s costs, he said.

Philadelphia Schools Facing Big Budget Shortfall – Philadelphia School District officials are staring down a gap of $430 million or more in next year’s budget, and the deficit could surpass the half-billion mark under worst-case scenarios, according to officials briefed on the district’s finances.  In October, the district’s chief financial officer, Michael Masch, warned the public that the 2011-12 budget could be grim, with $234 million in stimulus money drying up without funds to replace it. Additional costs for staffing, health benefits and charter schools have made the situation worse, according to one of the sources briefed on the looming crisis. Each district department head may be asked to come up with reduction proposals of 12 percent, 24 percent, and 36 percent

City, county debate pension problems – Even as Cincinnati City Council grappled with plans to erase a $54 million budget deficit, two meetings Wednesday at the opposite end of Downtown began shaping the next major financial challenge – one involving sums with considerably more zeroes – that will confront council in 2011. Both meetings – one at the Hamilton County Courthouse, the other at City Hall – dealt with the financially troubled Cincinnati Retirement System, and the outcomes in each will have much to say about how, even whether, the city can dig out of a projected $1 billion-plus long-term pension hole. "With retirees’ basic pensions protected by law, City Hall views spiraling health costs as the one major existing expense that could be trimmed to help stabilize the $2 billion city pension fund, which experts warn could become insolvent within 20 years unless major changes are made

Schwarzenegger Leaves California’s Brown Burdened With Bonds  (Bloomberg) — Arnold Schwarzenegger swore after his first month as California governor that he’d rip up the state’s credit cards. Instead, the Republican former action- movie hero pushed through at least $52 billion of borrowing. Debt of the world’s eighth-largest economy almost tripled in Schwarzenegger’s seven years, to $91 billion on June 30 from $34 billion in 2003, state Treasury figures show. Californians owed $2,362 per person last year, up from $977 before he went to work. Under Schwarzenegger, the state’s workforce grew 9.9 percent to 348,213, according to his finance office. When Democrat Jerry Brown takes over the biggest U.S. municipal borrower on Jan. 3, he’ll inherit interest and principal payments that consume 7.1 percent of general-fund spending, twice what greeted Schwarzenegger. That will rise to 10 percent in 2012, leaving less for services and to tackle a budget deficit that may reach $28 billion in 18 months

US to Keep Note Auction Sizes Unchanged on Deficit Concern, Dealers Say – The Treasury will sell $99 billion of two-, five- and seven-year notes next week for a third straight month amid prospects for a rising budget deficit, according to the Federal Reserve’s primary dealers. The U.S. had scaled back auction sizes after earlier expanding debt sales to finance annual budget deficits exceeding $1 trillion. It sold $118 billion in two-, five- and seven-year debt at each of six monthly sales of the three maturities from November 2009 through April. The $858 billion bill President Barack Obama signed Dec. 17 extending tax cuts for two years spurred speculation federal borrowing will need to increase. “The Treasury had been cutting issue sizes, but there is no room to cut further given that the budget will be higher than it would have been a few months ago before the tax legislation,” “It’s going to be very hard for them to cut amounts any time soon.”

Homeless Squatting In Foreclosed City Homes (Video) – Legally, they’re known as “squatters,” people who live in a place without a deed or tenant agreement. They’ve been living in the houses for months without anyone noticing. “It’s just wonderful to have a house, to have heat, to have food in your refrigerator,” said a woman who moved into a three-bedroom house last week with her two children, including a 3-week-old newborn. The homeless individuals and families didn’t move into the houses on their own. They were helped by Take Back the Land Rochester, a local chapter of a national organization. The group identifies foreclosed properties in good condition and becomes a sort of landlord, arranging to have the utilities turned on and securing the houses. CNN Money featured the group’s efforts in Rochester. Take Back the Land has taken over four city houses in the last four months. Three are occupied by individual families and another is occupied by five unrelated people. “We think that houses should be used for people,”

Thefts of metal – About 188 news stories past week

Officials Warn of Catalytic Converter Thefts  – After a rash of catalytic converter thefts in the Columbus area, Ohio Department of Insurance Director Mary Jo Hudson released a list of ways to protect yourself from becoming a victim.  According to a press release issued by Hudson’s office, thieves have been stealing catalytic converters and selling them for scrap metal.The converters contain precious metals such as palladium, platinum and rhodium. Converters can be sold for up to $200.   Hudson offered the following tips to protect your vehicle:

    • Always park in well-lit or protected public parking lots.
    • Park your car at home in your garage
    • Ask your mechanic to weld the heads on the catalytic converter bolts or shear them off
    • Install a cage around the converter
    • Take part in future catalytic etching events

Goldman Sachs Wants QE2 and Then Some – Few monetary policy moves by the Federal Reserve have elicited as much controversy as its decision early last month to engage in "quantitative easing" by buying some $600 billion worth of long-dated government bonds over the next eight months. Republican bigwigs have termed the move wildly inflationary, debauching the dollar by "monetizing the debt" in order to finance profligate government spending. Likewise, various foreign government officials — led by finance types in China and Germany — have accused the U.S. of using QE2 to beggar its trading partners and boost exports by cynically driving the value of the dollar lower. At the same time, critics have noted that rates on government bonds have gone up, not down, in the weeks since the Fed announced the plan.  Yet, no less a figure than Goldman Sachs’ chief U.S. economist, Jan Hatzius, says that the attacks on QE2 are ridiculous; he thinks that perhaps even more quantitative easing may be called for to ensure that the U.S. economy achieves a self-sustaining recovery: "With short rates at near zero, quantitative easing is the last lever left, so it makes sense to employ it. The Fed isn’t talking about flooding the world with dollars, after all."


Economists See Slower Housing Recovery – The recovery of housing prices will take at least four more years, according to a monthly survey of 110 leading economists and real estate experts, significantly longer than previously estimated. Housing prices will rise only 7.2 percent by 2014 and the aggregate value of U.S. single-family homes four years from now will be roughly $1 trillion less than the economists projected in May, said Terry Loeb of MacroMarkets, the firm conducting the survey, which is based upon the projected path of the S&P/Case-Shiller U.S. National Home Price Index over the coming five years.   ”For the first time, in this month’s survey, our panelists provided their expectations through 2015. Less than 3% of the panel expects negative change in 2015,   Yet, at +7.2%, the average projection of cumulative home price performance through 2014 reached its lowest point since survey inception for the second consecutive month,”

16 U.S. Cities That Could Face Bankruptcy in 2011 – 2011 will be the year of the municipal default. At least that’s what analysts like Meredith Whitney predict, as do bond investors that have been fleeing the muni market. There are many reasons to be worried. First, the expiration of Build America Bonds will make it harder for cities to raise funds. Second, city revenues are crashing and keep getting worse. Property taxes haven’t reflected the total damage from the housing crash. High joblessness is cutting into city revenues, while increasing costs for services. The next default could be a major city like Detroit, or it could be one of hundreds of small cities that are on the brink. Did we leave off your ailing city?

Asia’s baby shortage sets demographic timebomb ticking – East Asia’s booming economies have for years been the envy of the world, but a shortfall in one crucial area — babies — threatens to render yesterday’s tigers toothless. Some of the world’s lowest birth rates look set to slash labour forces in Singapore, South Korea and Taiwan, where fewer workers will support more retirees and their ballooning health care and pension costs. Shuffling along in the vanguard of ageing Asia is Japan, whose population started slowly shrinking three years ago, and where almost a quarter of people are over 65 while children make up just 13 percent. On current trends, Japan’s population of 127 million will by 2055 shrivel to 90 million, its level when it kicked off its post-war boom in 1955, warns the National Institute of Population and Social Security Research. Asian population giant China may still be near its prime, with armies of young rural workers flocking to its factories. But, thanks to the 30-year-old one-child policy, its demographic timebomb is also ticking.

Debt Struggles Set to Deepen for Peripheral Europe: Euro Credit — Europe’s most indebted nations, already struggling to find buyers for their bonds, will face more competition as the region begins issuing new securities to fund Ireland’s rescue package. The European Financial Stabilization Mechanism and European Financial Stability Facility will raise as much as 34.1 billion euros ($44.6 billion) for Ireland in 2011, the European Commission said Dec. 21. So-called peripheral nations also will vie for funds against AAA-rated Germany and France, which plan to sell a combined 486 billion euros of debt next year. Spain’s funding needs are 90 billion euros and Portugal may require 19 billion euros, analysts at Credit Agricole SA estimate. Portuguese 10-year bond yields rose by almost half a percentage point in the past two weeks as investors bet the country may follow Ireland in seeking aid after European Union officials deferred a decision on whether to let the EFSF buy bonds of the most indebted countries. EU leaders also failed to agree on topping up the temporary 750 billion-euro emergency fund of which the EFSM and the EFSF form the main pillar. “The crowding out effect is a big problem for Spain as they have to come to the market pretty quickly and they have lots to do,”

Senate Approves $725 Billion Defense Spending Bill – As the busy lame duck session of Congress winds down, the Senate Wednesday approved a defense spending bill, authorizing the Pentagon to spend $725 billion in fiscal 2011, including nearly $160 billion to fight the wars in Iraq and Afghanistan.  The Senate passed the 2011 Defense Authorization bill by unanimous consent, but it will need to go back to the House for final approval, as the Senate version stripped out a provision to provide reparations to World War II survivors in Guam. Senate Majority Leader Harry Reid, D-Nev., said, "Supporting our troops and giving them the resources they need to succeed is one of our most important duties."

Text: Fitch Downgrades Hungary to BBB-; Outlook Negative – Fitch has downgraded Hungary’s long-term currency issuer rating to BBB- from BBB. Furthermore, he outlook for the rating remains ‘Negative’, suggesting that a further downgrade may be forthcoming. The following is the verbatim text issued by the rating agency outlining the reasons for the downgrade:  "The downgrade of Hungary’s ratings reflects a material worsening in the underlying medium-term budget position, while relatively high levels of public, external and domestic foreign-currency bank debt leave the country vulnerable to negative shocks," says Ed Parker, Head of Emerging Europe in Fitch’s Sovereigns team.

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