Wednesday, June 27, 2012 – To Your Health; Spanish Junk; Barclays Bad; Falcone Flunks; Bhopal Veggie Garden; Goodnight Stockton

To Your Health; Spanish Junk; Barclays Bad; Falcone Flunks; Bhopal Veggie Garden; Goodnight Stockton 
– by Sinclair Noe

DOW + 92 = 12,627
SPX + 11 = 1331
NAS + 21 = 2875
10 YR YLD -.01 = 1.62%
OIL +.27 = 80.48
GOLD + 1.60 = 1575.20
SILV – .17 = 27.04
PLAT – 18.00 = 1415.00

According to the Centers for  Medicare and Medicaid Services, health spending accounts for about 18% of the GDP of the United States. So, tomorrow’s ruling by the Supreme Court on President Obama’s health care plan is pretty important, but so far the economists can’t seem to figure out the implications. This is not to say I have any advance info on the Supreme Court decision. 

They might say the Act is fine as it is, they might say they will eliminate the mandate but leave the rest unchanged, they might throw out the whole thing.  If they vote against Obamacare it will be seen as a highly partisan act. What better way to show the Court’s impartiality than to affirm the constitutionality of legislation that may be unpopular? That might be a stretch; I think I’ll stick with the idea that we’ll have to wait till tomorrow.

The only safe bet is that there will be unintended consequences. For example, what if the Supremes strike down the mandate portion but leave the rest intact? The Obama administration put a mandate in the Affordable Care Act because the law requires insurers to charge the same premium regardless of health status. Without a mandate, it would make sense for the healthy to drop their insurance until they got sick and needed it. But if only the unhealthy bought insurance, premiums could rise sharply to cover insurance companies’ higher costs. At the extreme, this could blow up the insurance market altogether. 

The National Association of Realtors Pending reports home sales climbed 5.9% in May, with an index reaching 101.1. The index was 13.3% above May 2011 levels. Earlier this week, the Commerce Department reported sales of new homes at two-year highs. Also, S&P/Case-Shiller reported that home prices climbed in April. Also today, the Commerce Department reported durable-goods orders rose a seasonally adjusted 1.1% last month.

Spain is poised for a downgrade to junk by Moody’s Investors Service. Moody’s cut  28 Spanish banks yesterday including a two-step cut for Banco Santander and a three-level reduction for BBVA, a week after it lowered Spain’s rating to Baa3, on the cusp of junk. Spain remains on review for another cut by Moody’s after they requested a $125 billion international bailout for its banks and on speculation losses from its real estate industry will worsen. A one-notch move to Ba1 will likely see all the country’s banking system in junk territory, with the possible exception of Santander. Spain’s short-term borrowing costs nearly tripled at auction, underlining the country’s precarious finances as it struggles against depression and juggles with a debt crisis among its newly downgraded banks.

So, it’s not just the Spanish banks that are begging for a bailout, it is looking like the nation will also be looking for a bailout. To put it another way; Greece has collapsed; the contagion has spread. Spain is on the edge of collapse. Italy is next.

Oh yeah, French bonds look shaky, and Germany was downgraded yesterday. 

No worries, the Euro-big wigs will have another emergency summit in Brussels starting tomorrow. Maybe it was always a choice between orderly, or disorderly breakup. The idea of European countries working together in harmony sounds good; the idea of European countries bailing out Euro-banks is just stupid. The death certificate for the EU will likely read: “Cause of death: procrastination”. The European Union is crumbling. Have a waffle. 

Federal Reserve Bank of Chicago President Charles Evans said the U.S. central bank didn’t provide enough stimulus last week and called for new easing including more asset purchases to spur economic growth. Evans said: “We should be doing more accommodation than what was adopted under the Twist.” While the move “has small effects,” Evans said, “its larger effect is that it indicates the Fed is continuing to think more accommodation is important and worthwhile.”

The FOMC expanded Operation Twist, its maturity- extension program, by $267 billion through the end of the year. Chairman Ben S. Bernanke said at a press conference the Fed is prepared to do more. Evans said: “Right off the bat, I’d be willing to do more on the basis of the current data”. He doesn’t vote on policy this year.

Last week Microsoft introduced a new tablet computer, called Surface, it has a kickstand and a cover that folds out to serve as a keyboard. Very clever. It will be available for sale in a couple of months. Today, Google revealed its own tablet and it is priced at a sharp discount compared to Apple’s iPad. The new tablet will run on the latest version of Google’s operating system Android 4.1, called Jelly Bean. The Nexus 7 will sell for $199 and will be available in mid-July. The line between software and hardware has now been breached in the face of total domination by Apple.  

British bank Barclays says it will pay around $452 million in penalties to US and UK regulators to settle a probe into attempted manipulation and false reporting relating to two global benchmark interest rates that form the basis for hundreds of trillions of dollars of transactions. Libor, or the London Interbank Offered Rate, and Euribor, or the Euro Interbank Offered Rate, are benchmark reference rates that indicate the interest rate that banks charge when lending to each other. Almost all other rates are at least partially based upon the Libor or Euribor as a baseline. The CFTC said that Barclays traders and employees attempted to manipulate and made false reports concerning Libor and Euribor in order to benefit their derivatives trading positions. This misconduct took place on many occasions and sometimes on a daily basis over a period of four years, starting in 2005. What does it take for these people to end up in jail? 

Apparently the trick is to have the backing of a major bank, the individual traders  are easy prey for the regulators, but the traders for the big banks have “Get Out of Jail Free” cards. Phillip Falcone, the founder of hedge fund Harbinger Capital Partners LLC, was sued by the Securities and Exchange Commission. The SEC said in its lawsuit that Falcone misappropriated client assets, favored selected investors and manipulated bond prices. 

Robert Khuzami, the SEC’s enforcement director, said in a statement: “Today’s charges read like the final exam in a graduate course in how to operate a hedge fund unlawfully. Clients and market participants alike were victimized as Falcone unscrupulously used fund assets to pay his personal taxes, manipulated the market for certain bonds, favored some clients at the expense of others and violated trading rules intended to prohibit manipulative short sales.”

The SEC is seeking disgorgement of ill-gotten gains, unspecified financial penalties and a bar prohibiting Falcone, 49, from serving as an officer or director of any public company.

The SEC action is the second blow in less than two months for Falcone, who built a $26 billion hedge fund by 2008 with a successful bet against subprime mortgages. LightSquared Inc., Harbinger Capital’s biggest investment, filed for bankruptcy in May.

Falcone in 2009 took out a $113 million loan from his Special Situations fund to pay personal taxes. The loan was disclosed in the fund’s annual financial statement the following March. At the time he borrowed the money, clients were barred from pulling money from the fund. Falcone subsequently repaid the loan with interest. That same year, with client capital locked up, Harbinger allowed Goldman Sachs Group, which at the end of 2008 had $1 billion invested in two Harbinger funds, to redeem some money from the firm.

Dow Chemical’s ’s Union Carbide won dismissal of a lawsuit alleging polluted soil and water produced by its former chemical plant in Bhopal, India, injured area residents, one of at least two pending cases tied to the installation known for the 1984 disaster that killed thousands.

U.S. District Judge John Keenan in Manhattan yesterday ruled Union Carbide and its former chairman, Warren Anderson, weren’t liable for environmental remediation or pollution-related claims made by residents near the plant, which had been owned and operated by a former Union Carbide unit in India. Sure, a chemical spill that killed thousands of people, no need for further cleanup. I’m sure everything is nice and clean. I’m sure that Judge would want his children planting a nice little vegetable garden in the shadows of the Bhopal chemical factory.

Exxon Mobil Chief Executive Officer Rex Tillerson says supplying electricity to the “billions of people living in abject poverty” is a more important goal than curbing greenhouse-gas emissions. Tillerson says electricity will do more to improve the quality of life for people who still cook food by burning animal dung than trying to prevent climate change, which will be “manageable.” And even if global warming destroys the planet, maybe ExxonMobil can get the same judge that ruled in favor of Union Carbide. 

Stockton is broke. They will file for bankruptcy. Talks with bondholders and unions failed. Stockton California will now become the biggest US city to seek court protection from creditors. The City of  Stockton released a statement yesterday after its council voted 6-1 to adopt a spending plan for operating under bankruptcy protection. The statement says: “The city is fiscally insolvent and must seek Chapter 9 bankruptcy protection. In addition to the bankruptcy petition, the city will file a motion with the courts to share information from the confidential mediation.”

In the past three years, Stockton was slammed by the collapse of the housing market and city officials dealt with $90 million in deficits through a series of drastic cuts. They eliminated one-fourth of the city’s police officers, one-third of the fire staff, and 40 percent of all other employees. They also cut wages and medical benefits. To plug next year’s anticipated $26 million budget shortfall, they couldn’t find more cuts, and so they turned to the courts to avoid chaos. The budget for the fiscal year beginning July 1 calls for defaulting on $10.2 million in debt payments and cutting $11.2 million in employee pay and benefits under union contracts that could be voided by the bankruptcy court. Stockton’s bankruptcy might resemble the 2008 case of another California city, Vallejo, which exited court protection last year. It is expected that Stockton City workers who have retired will see a sit to health care benefits, possibly a cut to zero. Bondholders and current employees will probably also have to take less. 

The Stockton bankruptcy is not expected to create a sell-off in the $3.7 trillion dollar muni-bond market. The BK was anticipated. The average cumulative default rate in the past four decades was 0.13 percent for municipal bonds versus 11.2 percent for corporate debt. The overall default rates in municipal bonds are extremely low and Stockton is a small participant in the $3.7 trillion market.

A taxable Stockton pension bond sold in 2007 and due September 2037 traded June 25 as high as 80.68 cents on the dollar, down from when it traded as high as 102.03 cents on the dollar on Feb. 15. 

Bankruptcy would allow the city to break contracts with creditors without the threat of lawsuits, though it won’t assure the city’s recovery. Chapter 9 BK does not wipe out debts but merely allows for restructuring. In February, the city began a process during which it is required by state law to review its finances with help from a “neutral observer” who is picked in cooperation with creditors. That review is similar to a mediation process in which creditors have a right to participate. Stockton was the first city to test a new state mediation law, Assembly Bill 506, which is less than six months old. The results have been called tedious, at best; policy analysts issued a report on the use of the new law, titled “Death by a Thousand Meetings”.

According to a June 5th fiscal report, the city has cut services so much the past two years that “public safety is at a crisis level”. Unemployment, at 15.4 percent in April, was almost double the national average; Stockton ranked third in murders last year among large California cities, behind Los Angeles and Oakland; One in every 195 homes in Stockton’s metropolitan area received a foreclosure filing in May, the fifth-highest rate in the nation.

When the economy crashed and the construction bubble burst, Stockton was battered by foreclosures and lost income from property taxes and other fees. Multi-year labor contracts for city workers carrying escalating costs and generous retirement plans added to the burden. In addition, expensive city investments – a promenade, sports arena and hotel – failed to produce an economic boon. There is a state investigation into whether Stockton’s financial devastation was entirely due to shortsighted optimism or if there was corruption. The state mediation law requires assigning blame. It will make interesting reading, and I’ll lay dimes to donuts, the assignment of blame will be misplaced.

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