Eleven weeks after Congress settled on a stimulus package that provided $135 billion to limit layoffs in state governments, many states are finding that the funds are not enough and are moving to lay off thousands of public employees.
The state of Washington settled on a budget two weeks ago that will mean 1,000 layoffs at public colleges and several times that many in elementary and high schools.
The governor of Massachusetts, who cut 1,000 positions late last year, just announced 250 layoffs, with more likely to come soon.
Arizona has already laid off 800 social service workers this year and is facing the likelihood of deeper cuts over the next two. The state no longer investigates all complaints of child or elder abuse.
"Don't be a child or a vulnerable adult in Arizona," said Tim Schmaltz of the Protecting Arizona's Family Coalition.
The layoffs are one early indication of how the stimulus funding could be coming up short against the economic downturn. As the stimulus plan was being drawn up, there was agreement among the White House, congressional Democrats and many economists that a key goal was to keep states from making big layoffs at a time when 700,000 Americans were losing their jobs every month.
The House passed a stimulus bill with $87 billion in extra Medicaid funding for states, as well as $79 billion in "stabilization" money to plug gaps in states' budgets for education and other areas.
But in the Senate, the stabilization funding was cut by $40 billion to secure the support of the three Republicans who were needed for a filibuster-proof 60 votes -- Sens. Susan Collins and Olympia J. Snowe of Maine and Sen. Arlen Specter of Pennsylvania -- as well as to gain the support of conservative Democrats such as Sen. Ben Nelson of Nebraska. The senators wanted to reduce the package to less than $800 billion, and several wanted to make room for a $70 billion patch of the alternative minimum tax.
Supporters of the final $787 billion bill, which included $25 billion less in state aid than the House plan, said it would help states avoid severe cuts. But tax revenue is coming in even lower than feared.
Ray Scheppach, executive director of the National Governors Association, told a Senate committee last month that states are facing a $200 billion deficit over the next two years. At least a dozen states, including California, Georgia and New Jersey, have ordered furloughs of workers, and increasingly, layoffs loom as the next step.
Western Washington University in Bellingham is bracing for 400 layoffs of staff members and adjunct faculty. The college is the largest employer in its county.
"There was all the talk at the time about how the stimulus package wasn't big enough, and that is true here," said faculty union president Bill Lyne. "It's barely letting us keep our noses above water."
Jake Thompson, a spokesman for Nelson, defended the stimulus, saying that forestalling state layoffs had not been its main goal. "This is a stimulus bill, not a state bailout bill," he said. "While the economic recovery bill will undoubtedly help states with their budgets and employment, the primary intent was to stimulate the economy."
Collins was equally blunt: "The fundamental purpose of the stimulus bill is to save and create jobs and help get our economy moving again," she said. "The bloated House-passed bill stood no chance of passing the Senate."
The White House, meanwhile, has conceded that the final package was smaller than it had expected. Shortly before the bill was signed, Chief of Staff Rahm Emanuel said, "We clearly thought that economic activity needed [a larger stimulus], but it was more important to get it done than argue about just that."
Officials in some states say they are grateful for and satisfied with the money. Maine has had to lay off 250 people, but because of the stimulus it will be able to avoid more layoffs, even after discovering a new $570 million shortfall. "Without any recovery funds . . . we would be in a very, very different situation," said Maine finance commissioner Ryan Low.
Virginia Gov. Timothy M. Kaine (D) said the state would have had to cut 7,000 jobs without the stimulus but ended up eliminating 1,500 mostly open slots. Maryland avoided layoffs with furloughs and by using an unusually large share of its stimulus funds in next year's budget.
In some states, layoffs are occurring partly because legislators are not taking every step to avoid them. Republican lawmakers in Missouri want to use less than a third of the state's $2.1 billion in flexible stimulus funds to close budget shortfalls. They want to proceed with cutbacks and return $1 billion of the money to residents in the form of tax cuts. Using the money to plug budget gaps, they argue, will leave a deficit once the stimulus money is gone in 2011.
Scott Pattison, executive director of the National Association of State Budget Officers, noted that some cuts may be justified. "You never want to see an individual be removed, but sometimes lost in the discussions is whether some of these positions should be eliminated," he said.
But in most states facing big layoffs, officials say they made the easy trims long ago. For instance, Florida's court system has cut 200 employees in the past 18 months. Judges lack staff members to prepare materials for trials at a time when property crimes and foreclosures are up significantly. The state cut so many hearing officers for traffic infractions that drivers started to realize that there was no one to hear cases and contested more tickets. This meant a big drop in revenue -- leading the state to rehire some of the officers.
Thursday, 14 May 2009
The Next Mammoth Failures
Just in the past few days, the United States has moved dramatically closer to the final fork in the road that I set forth in my online video of April 7th:
Either a prolonged, agonizing depression that dooms our country to decades of stagnation, decline, and poverty … or a painful-but-shorter depression that paves the way for a wholesome, sustainable recovery.
Either a government that pursues the dogma of “too-big-to-fail” to the bitter end, rewarding wild risk-takers and punishing taxpayers … or a government that pro-actively guides the natural process of failure, rewarding those who save for the future and can reinvest in America.
I’ll tell you which way we’re headed — and how it will impact your investments — in a moment. But first, an update on what we’re doing about it:
Yesterday, we printed out your petitions appealing for the better scenario; and tomorrow, I will deliver them to Capitol Hill.
I had hoped readers would sign at least 10,000 petitions; instead, they signed 53,547. I had hoped we’d get a good number from the most populous states; instead, we got large participation from all 50. I had expected only U.S. residents would join; instead, citizens residing overseas joined from 45 different countries around the world.
The most urgent and pressing issue …
What to Do With Failed Corporate
Giants, Monoliths, and Mammoths
The great dilemma today is not just companies that have already filed for Chapter 11 like Chrysler … but also those that would be in bankruptcy today had it not been for taxpayer bailouts — Fannie Mae, Freddie Mac, Merrill Lynch, General Motors, Citigroup, AIG, and others.
The great debate is not merely what to do with big companies that have already hit the skids … but also how to deal with those that could meet a similar fate in the not-too-distant future — Ford, JPMorgan Chase, Wells Fargo, Goldman Sachs, SunTrust, Fifth Third Bank, and many more.
And the greatest challenge of all will not be strictly about the failure of giant corporations. It will also be about the next big shoe to fall — the failure of the U.S. government to fund its bailout follies without severe consequences.
Where do we stand? I see two phases in the evolution of this crisis:
Current Phase: Prolonged Agony
Right now, we have nearly all the pain of failure but little hope of resolution. And nowhere is this “worst-of-both-worlds” outcome clearer than in the Chrysler failure …
First, despite the infusion of another $4.5 billion in taxpayer money to finance Chrysler in bankruptcy, its Chapter 11 filing last week is wrecking havoc on the auto industry anyhow:
* We have a supposedly “temporary” — but TOTAL — shutdown of Chrysler production, pushing U.S. auto-parts suppliers to the edge of bankruptcy and disrupting the flow of parts to General Motors and even Ford.
* We see Chrysler auto dealers going broke in large numbers.
* And we see a new phase in the collapse of auto financing, as lenders recoil in horror.
Second, despite massive commitments of taxpayer funds to back up the warranties on millions of Chrysler and GM automobiles, consumer confidence in the ailing auto industry has plunged, helping to drive all auto sales even deeper into the gutter.
Every major auto maker, whether failing or not, has reported dramatic sales declines from year-earlier levels: Not just Chrysler, which got whacked with a massive 48 percent loss in sales … but also General Motors, down 33 percent … Toyota, down 42 percent … and even Ford, supposedly better off, suffering a 32 percent hit to sales.
Third, despite hopes and assurances that the Chrysler bankruptcy will be “quick and easy,” we can already see signs of an imminent barrage of creditor lawsuits and claims hitting the courts. Their demands: Liquidate the company! Sell off the assets! Distribute the cash based on the contractual pecking order that gives first dibs to secured creditors!
In sum, we have BOTH a huge burden to taxpayers AND widespread pain for all those who rely on the auto industry for their livelihood!
In the final reckoning, the bailouts have bought nothing more than prolonged agony.
Next Phase: Tougher Love
The true pessimists of our time are those who assume the current pattern will simply continue indefinitely.
These pessimists include former U.S. Treasury Secretary Paulson, who literally dropped to his knees last September to beg Congress for $700 billion to save the nation from a Wall Street meltdown.
They include Treasury Secretary Geithner, who’s so terrified of bank failures that he’s zealously pursuing the crazy goal of guaranteeing ALL bank credit.
They include Federal Reserve Chairman Ben Bernanke, who’s so plagued by Depression-era nightmares that he’s been willing to abandon the Fed’s history, destroy the Fed’s balance sheet, and sell the nation’s monetary soul to the devil of unbridled money printing.
Plus, among them are all the Wall Street pundits and cheerleaders chanting for more.
In contrast, I am an optimist in this sense: I am very confident their days are numbered and our nation will soon step up to the tougher task of truly putting this crisis behind us.
My optimism is not derived from wishful thinking or armchair philosophizing. It’s steeped in practical, hard-nosed realities:
Hard-nosed reality #1
The market is not dead!
Even the most elaborate of government bailouts are not immune to powerful market forces. That’s why Fannie Mae and Freddie Mac shares plunged to zero. That’s why Bank of America and Citigroup shares have lost over four-fifths of their peak value (even after the recent rallies). And that’s why Chrysler finally wound up in bankruptcy court last week, despite repeated government promises to the contrary.
“Isn’t the government fighting to intervene massively in the market?” you ask.
Yes, of course. But fighting is one thing; winning is another. The undeniable fact is that the markets are not dead. They’re still alive, kicking, and massively powerful. Despite delusional bureaucrats who may think otherwise, it’s the marketplace — and not their mad-science experiments — that’s ultimately driving the course of history.
Hard-nosed reality #2
Easy to promise, hard to deliver!
Anyone in power can step up to a podium, make speeches, and say they’re going to spend or lend trillions of dollars. But even if directives are written and laws are passed, what’s promised on paper is not the same as what actually happens in practice.
Right now, for example, the total tally of the government’s bailout operations and commitments is $14.7 trillion. But among that, only $2.5 trillion has actually been spent or lent so far. Meanwhile, in 2008 alone, U.S. households lost $12.8 trillion according to Fed data, or over FIVE times the bailouts thus far.
Hard-nosed reality #3
No free lunch!
Anyone who thinks all the funding for the bailouts is going to simply appear out of thin air must also believe in the tooth fairy. The facts:
* Congress cannot raise taxes without sinking the economy even faster.
* The Treasury can’t borrow the money without driving interest rates through the roof for everyone.
* And the Federal Reserve can’t print the money without destroying global confidence in the U.S. dollar and credit markets, gutting the economy even more.
Each of these — singly or in combination — will sabotage the same bailouts they’re seeking to finance. Each, even if pursued initially, will soon backfire.
Hard-nosed reality #4
The truth always comes out!
Last week, I told you about Six Egregious Lies perpetrated by Washington and Wall Street.
But I also showed you how the truth has already begun to pour forth — via leaked confidential memos, such as AIG’s confessions of a likely insurance industry collapse, and dire official forecasts like the IMF’s latest prediction of a massive global decline.
Hard-nosed reality #5
Not everyone is stupid!
There is a fast-growing, informed minority — skeptical investors and independent citizens — now rising in rebellion against federal bailouts.
That’s why our petition drive against senseless bailouts has been such a resounding success!
That’s why, two months ago, Thomas M. Hoenig, President of the Kansas City Federal Reserve, defied his own chairman … declaring that the “too-big-to-fail” doctrine has failed … recommending regulatory tough love for any failed bank, no matter how big. (See his paper “Too Big Has Failed.”)
That’s why, one week ago, FDIC Chairman Sheila Bair demonstrated equal defiance against her fellow regulators, stating, point blank:
“The notion of ‘too big to fail’ … is a 25-year-old idea that ought to be tossed into the dustbin …
“[It has] eroded market discipline for those who invest and lend to very large institutions. And this intervention, in turn, has given rise to public cynicism about the system and anger directed at the government and financial market participants. …
“Everybody should have the freedom to fail in a market economy. Without that freedom, capitalism doesn’t work. … Ultimately, this would benefit those better managed institutions and make the financial system and the economy stronger and more resilient.”
Finding it hard to believe that one of our nation’s top regulators is openly attacking the shaky thesis underlying most of the government’s bailout operations? Then read her speech for yourself.
This doesn’t mean we agree with everything these voices stand for. But it does go to show how the days of unlimited bailouts are numbered … and the epic fork in the road is now rapidly approaching.
The Consequences for Investors
This is bad news for investors who are again taking risks — and good news for all Americans willing to make the sacrifices needed to get this crisis over with as soon as possible.
It means that:
* The supposedly “too-big-to-fail” banks like Citigroup or corporations like General Motors WILL ultimately be allowed to fail after all; their shareholders, wiped out; their creditors, suffering massive losses.
* In the stock market, the seven-week rally we’ve seen will end; the financial stocks will give up all their gains and the broad averages will plunge to new lows.
* Credit markets will freeze up once more, the government’s stimulus package will be overwhelmed, and any pause in the economic decline will be over.
But it also means that any temporary revival of inflation will soon die … the dollar will ultimately remain viable … and we can still look forward to a real recovery in the future.
That’s why I’m optimistic and why I’m delivering over 53,500 petitions to Washington tomorrow.
In the meantime, here’s what I suggest you do:
First, review my one-hour video of April 7. (To download it now, click here.)
Second, get your savings to safety. Just follow the instructions in my free report on banking survival.
Third, if you haven’t done so already, learn how to convert this great crisis into an equally great profit opportunity for yourself and your family with my new book, The Ultimate Depression Survival Guide, now #2 on both Wall Street Journal and New York Times bestseller lists.
I don’t make any money from the sales of the book, because I am donating all of my royalties to a national charity, the Campaign to End Child Homelessness. (Click here for our press release.) But I am confident it will help YOU make money both during and after this crisis.
Good luck and God bless!
Martin
Either a prolonged, agonizing depression that dooms our country to decades of stagnation, decline, and poverty … or a painful-but-shorter depression that paves the way for a wholesome, sustainable recovery.
Either a government that pursues the dogma of “too-big-to-fail” to the bitter end, rewarding wild risk-takers and punishing taxpayers … or a government that pro-actively guides the natural process of failure, rewarding those who save for the future and can reinvest in America.
I’ll tell you which way we’re headed — and how it will impact your investments — in a moment. But first, an update on what we’re doing about it:
Yesterday, we printed out your petitions appealing for the better scenario; and tomorrow, I will deliver them to Capitol Hill.
I had hoped readers would sign at least 10,000 petitions; instead, they signed 53,547. I had hoped we’d get a good number from the most populous states; instead, we got large participation from all 50. I had expected only U.S. residents would join; instead, citizens residing overseas joined from 45 different countries around the world.
The most urgent and pressing issue …
What to Do With Failed Corporate
Giants, Monoliths, and Mammoths
The great dilemma today is not just companies that have already filed for Chapter 11 like Chrysler … but also those that would be in bankruptcy today had it not been for taxpayer bailouts — Fannie Mae, Freddie Mac, Merrill Lynch, General Motors, Citigroup, AIG, and others.
The great debate is not merely what to do with big companies that have already hit the skids … but also how to deal with those that could meet a similar fate in the not-too-distant future — Ford, JPMorgan Chase, Wells Fargo, Goldman Sachs, SunTrust, Fifth Third Bank, and many more.
And the greatest challenge of all will not be strictly about the failure of giant corporations. It will also be about the next big shoe to fall — the failure of the U.S. government to fund its bailout follies without severe consequences.
Where do we stand? I see two phases in the evolution of this crisis:
Current Phase: Prolonged Agony
Right now, we have nearly all the pain of failure but little hope of resolution. And nowhere is this “worst-of-both-worlds” outcome clearer than in the Chrysler failure …
First, despite the infusion of another $4.5 billion in taxpayer money to finance Chrysler in bankruptcy, its Chapter 11 filing last week is wrecking havoc on the auto industry anyhow:
* We have a supposedly “temporary” — but TOTAL — shutdown of Chrysler production, pushing U.S. auto-parts suppliers to the edge of bankruptcy and disrupting the flow of parts to General Motors and even Ford.
* We see Chrysler auto dealers going broke in large numbers.
* And we see a new phase in the collapse of auto financing, as lenders recoil in horror.
Second, despite massive commitments of taxpayer funds to back up the warranties on millions of Chrysler and GM automobiles, consumer confidence in the ailing auto industry has plunged, helping to drive all auto sales even deeper into the gutter.
Every major auto maker, whether failing or not, has reported dramatic sales declines from year-earlier levels: Not just Chrysler, which got whacked with a massive 48 percent loss in sales … but also General Motors, down 33 percent … Toyota, down 42 percent … and even Ford, supposedly better off, suffering a 32 percent hit to sales.
Third, despite hopes and assurances that the Chrysler bankruptcy will be “quick and easy,” we can already see signs of an imminent barrage of creditor lawsuits and claims hitting the courts. Their demands: Liquidate the company! Sell off the assets! Distribute the cash based on the contractual pecking order that gives first dibs to secured creditors!
In sum, we have BOTH a huge burden to taxpayers AND widespread pain for all those who rely on the auto industry for their livelihood!
In the final reckoning, the bailouts have bought nothing more than prolonged agony.
Next Phase: Tougher Love
The true pessimists of our time are those who assume the current pattern will simply continue indefinitely.
These pessimists include former U.S. Treasury Secretary Paulson, who literally dropped to his knees last September to beg Congress for $700 billion to save the nation from a Wall Street meltdown.
They include Treasury Secretary Geithner, who’s so terrified of bank failures that he’s zealously pursuing the crazy goal of guaranteeing ALL bank credit.
They include Federal Reserve Chairman Ben Bernanke, who’s so plagued by Depression-era nightmares that he’s been willing to abandon the Fed’s history, destroy the Fed’s balance sheet, and sell the nation’s monetary soul to the devil of unbridled money printing.
Plus, among them are all the Wall Street pundits and cheerleaders chanting for more.
In contrast, I am an optimist in this sense: I am very confident their days are numbered and our nation will soon step up to the tougher task of truly putting this crisis behind us.
My optimism is not derived from wishful thinking or armchair philosophizing. It’s steeped in practical, hard-nosed realities:
Hard-nosed reality #1
The market is not dead!
Even the most elaborate of government bailouts are not immune to powerful market forces. That’s why Fannie Mae and Freddie Mac shares plunged to zero. That’s why Bank of America and Citigroup shares have lost over four-fifths of their peak value (even after the recent rallies). And that’s why Chrysler finally wound up in bankruptcy court last week, despite repeated government promises to the contrary.
“Isn’t the government fighting to intervene massively in the market?” you ask.
Yes, of course. But fighting is one thing; winning is another. The undeniable fact is that the markets are not dead. They’re still alive, kicking, and massively powerful. Despite delusional bureaucrats who may think otherwise, it’s the marketplace — and not their mad-science experiments — that’s ultimately driving the course of history.
Hard-nosed reality #2
Easy to promise, hard to deliver!
Anyone in power can step up to a podium, make speeches, and say they’re going to spend or lend trillions of dollars. But even if directives are written and laws are passed, what’s promised on paper is not the same as what actually happens in practice.
Right now, for example, the total tally of the government’s bailout operations and commitments is $14.7 trillion. But among that, only $2.5 trillion has actually been spent or lent so far. Meanwhile, in 2008 alone, U.S. households lost $12.8 trillion according to Fed data, or over FIVE times the bailouts thus far.
Hard-nosed reality #3
No free lunch!
Anyone who thinks all the funding for the bailouts is going to simply appear out of thin air must also believe in the tooth fairy. The facts:
* Congress cannot raise taxes without sinking the economy even faster.
* The Treasury can’t borrow the money without driving interest rates through the roof for everyone.
* And the Federal Reserve can’t print the money without destroying global confidence in the U.S. dollar and credit markets, gutting the economy even more.
Each of these — singly or in combination — will sabotage the same bailouts they’re seeking to finance. Each, even if pursued initially, will soon backfire.
Hard-nosed reality #4
The truth always comes out!
Last week, I told you about Six Egregious Lies perpetrated by Washington and Wall Street.
But I also showed you how the truth has already begun to pour forth — via leaked confidential memos, such as AIG’s confessions of a likely insurance industry collapse, and dire official forecasts like the IMF’s latest prediction of a massive global decline.
Hard-nosed reality #5
Not everyone is stupid!
There is a fast-growing, informed minority — skeptical investors and independent citizens — now rising in rebellion against federal bailouts.
That’s why our petition drive against senseless bailouts has been such a resounding success!
That’s why, two months ago, Thomas M. Hoenig, President of the Kansas City Federal Reserve, defied his own chairman … declaring that the “too-big-to-fail” doctrine has failed … recommending regulatory tough love for any failed bank, no matter how big. (See his paper “Too Big Has Failed.”)
That’s why, one week ago, FDIC Chairman Sheila Bair demonstrated equal defiance against her fellow regulators, stating, point blank:
“The notion of ‘too big to fail’ … is a 25-year-old idea that ought to be tossed into the dustbin …
“[It has] eroded market discipline for those who invest and lend to very large institutions. And this intervention, in turn, has given rise to public cynicism about the system and anger directed at the government and financial market participants. …
“Everybody should have the freedom to fail in a market economy. Without that freedom, capitalism doesn’t work. … Ultimately, this would benefit those better managed institutions and make the financial system and the economy stronger and more resilient.”
Finding it hard to believe that one of our nation’s top regulators is openly attacking the shaky thesis underlying most of the government’s bailout operations? Then read her speech for yourself.
This doesn’t mean we agree with everything these voices stand for. But it does go to show how the days of unlimited bailouts are numbered … and the epic fork in the road is now rapidly approaching.
The Consequences for Investors
This is bad news for investors who are again taking risks — and good news for all Americans willing to make the sacrifices needed to get this crisis over with as soon as possible.
It means that:
* The supposedly “too-big-to-fail” banks like Citigroup or corporations like General Motors WILL ultimately be allowed to fail after all; their shareholders, wiped out; their creditors, suffering massive losses.
* In the stock market, the seven-week rally we’ve seen will end; the financial stocks will give up all their gains and the broad averages will plunge to new lows.
* Credit markets will freeze up once more, the government’s stimulus package will be overwhelmed, and any pause in the economic decline will be over.
But it also means that any temporary revival of inflation will soon die … the dollar will ultimately remain viable … and we can still look forward to a real recovery in the future.
That’s why I’m optimistic and why I’m delivering over 53,500 petitions to Washington tomorrow.
In the meantime, here’s what I suggest you do:
First, review my one-hour video of April 7. (To download it now, click here.)
Second, get your savings to safety. Just follow the instructions in my free report on banking survival.
Third, if you haven’t done so already, learn how to convert this great crisis into an equally great profit opportunity for yourself and your family with my new book, The Ultimate Depression Survival Guide, now #2 on both Wall Street Journal and New York Times bestseller lists.
I don’t make any money from the sales of the book, because I am donating all of my royalties to a national charity, the Campaign to End Child Homelessness. (Click here for our press release.) But I am confident it will help YOU make money both during and after this crisis.
Good luck and God bless!
Martin
Sour commercial real estate loans threaten to hurt regional banks
Delinquencies are snowballing on construction loans and mortgages for office buildings, malls and apartments. The trend is particularly worrisome in Southern California.
E. Scott Reckard
May 13, 2009
The slumping market for commercial real estate -- viewed by many as the next big shoe to drop on the economy -- now threatens to drag down regional banks as they struggle to collect on loans made against shopping centers and office buildings.
Seriously overdue loans against commercial developments have shot up dramatically in recent months, as delinquencies snowball on construction loans and mortgages for office buildings, malls and apartments.
That's bad for giants like Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co. But it's even worse for smaller banks, which stepped up lending to local developers and businesses as a way to stay afloat after the national institutions grabbed big-ticket consumer businesses such as home loans, credit cards and checking accounts.
That's especially true in California, where unemployment exceeds 11% and commercial real estate is being pummeled.
"Commercial lending is our bread and butter, the lion's share of our business," said Dominic Ng, chairman of East West Bancorp, which with $12 billion in assets is the second-largest bank based in Los Angeles County.
The Pasadena bank, which has expanded over many years from its Chinese American base into Southern California's banking mainstream, set aside $226 million to cover loan losses last year, up from $12 million in 2007. The bank lost $49 million in 2008, compared with a profit of $161 million in 2007.
Land development and construction loans, the main problem so far for East West, total about 20% of the bank's loan portfolio. Now Ng says he is nervously watching delinquencies on commercial mortgages -- about 40% of East West's loans.
Uncollectable commercial mortgages quadrupled over the last three quarters of 2008, according to data reported to regulators. Uncollectable commercial construction loans increased eightfold during the same period.
Most of the loans were secured not only by the properties but also by the personal fortunes of the developers. Now, many have been wiped out by the recession, making the loans uncollectable.
"Some of the borrowers say: 'Go ahead, come after me. I have absolutely nothing left,' " Ng said. "The net worth completely disappeared in 12 months."
East West's plight is repeated at financial institutions throughout the state, as well as other places hit hard by the real estate crash, including Florida, Nevada, Arizona and Oregon.
According to the data filed with regulators, uncollectable commercial loans tripled at City National Corp. of Beverly Hills in the last three quarters of 2008, as did similar loans at California Bank & Trust of San Diego.
Throughout the banking sector, seriously delinquent loans for construction and land development shot up nearly ninefold over the last two years, according to the Federal Deposit Insurance Corp.
At one of the banks hit hardest by such lending, Los Angeles-based Preferred Bank, Chairman Li Yu said he was hopeful that tanking housing prices were beginning to stabilize.
"The same thing cannot be said of commercial real estate," Yu said. "That has to do with the economy and joblessness."
According to Yu and others, the troubles in commercial real estate are really just beginning. Even though the percentage of such loans that are uncollectable is way up, the overall numbers are small.
But industry watchers say the wave is building.
As commercial loans go bad, it will be particularly hard on regional banks, said Joe Morford, a San Francisco-based analyst for RBC Capital Markets, because their main customers are the small and medium-size businesses whose ranks include many developers.
"They exist for the small-business customer, the real estate developer and the entrepreneur," Morford said, a role that makes their health crucial for the greater economy. Morford has warned investors to be cautious about all three of the biggest L.A. County-based banks: East West, City National, and Cathay General Bancorp of Los Angeles.
Morford said in a report last week that commercial real estate and business lending problems are worrisome at Zions Bancorp, a Salt Lake City lender that is the parent of California Bank & Trust and operates in 10 Western states; and Umpqua Holdings Corp., an Oregon bank that operates from Napa, Calif., to Bellevue, Wash. He rates Umpqua, Zions, East West, Cathay and City National "sector perform," his middle rating, but says he is "particularly concerned" about these banks.
He recently has taken road trips to the Central Valley, Inland Empire and Orange County to show investors just how battered the California economy really is, e-mailing them photos of "for lease" signs on offices, warehouses, retail shops and condominiums.
Ng, of East West Bank, said his institution would remain solid because it had been conservative in the amount it lent on commercial properties.
Other bankers also said they expected to steer through the commercial real estate troubles, although many acknowledged that losses in the sector would rise.
"There's no doubt these are tough times for commercial real estate, and the risks are real," said Zions Chief Financial Officer Doyle Arnold, who predicted "elevated" loan losses for several quarters. "But we believe we can manage the risks better than anyone in the business."
Umpqua Chief Financial Officer Ronald L. Farnsworth said that despite analysts' worries, his bank expected only "small issues" from commercial real estate. He noted that the company used an analysis of rents charged at the buildings instead of their overall value when making the loans.
Cathay Chief Financial Officer Heng Chen said his company also made loans based on rental income rather than the appraised value of commercial properties.
"We are seeing some problems in commercial real estate, but hopefully it doesn't get much worse," Chen said.
City National Bank spokesman Cary Walker would not comment.
Bank analyst Mike Mayo said many of the assumptions used by banks in making commercial real estate loans were overly optimistic.
"While [residential] mortgage losses may be halfway to the peak, card and consumer losses may only be about one-third of the way, and industrial and commercial real estate problems (except construction) seem in the early stages," Mayo wrote in a recent report for Calyon Securities.
The contrast between the commercial loan-oriented regional banks and the more home-loan and consumer-oriented giant banks was apparent last week, when the government released the results of its stress tests on 19 banks with $100 billion or more in assets.
The list was topped by the small club of banks with assets exceeding $1 trillion -- Wells Fargo, Bank of America, JPMorgan Chase and Citigroup Inc. But it also included a number of large regional banks.
In assessing what two years of worsening recession would do to these banks, the Federal Reserve showed BofA and Wells Fargo with more than four times as much potential exposure to home lending losses as to commercial real estate losses.
The story was different at smaller banks. Fifth Third Bancorp of Cincinnati was exposed to slightly more potential losses on commercial real estate than on home loans. At Regions Financial Corp. of Birmingham, Ala., potential commercial real estate losses were more than twice as high as those predicted on home lending.
As such regional banks struggle with commercial loan losses, it's likely that some will be sold, said banking consultant Bert Ely of Alexandria, Va.
Several Southern California community banks already have failed in recent months as a result of exposure to construction lending. PFF Bank & Trust of Pomona, Alliance Bank of Culver City, 1st Centennial Bank of Redlands and First Heritage Bank of Newport Beach were shut down by regulators and taken over by healthier banks.
The trend of sales under fire is likely to continue, encouraged by bank regulators, said Sung Won Sohn, a former Wells Fargo chief economist and executive vice president who now teaches economics at Cal State Channel Islands.
"Southern California is over-banked," Sohn said.
E. Scott Reckard
May 13, 2009
The slumping market for commercial real estate -- viewed by many as the next big shoe to drop on the economy -- now threatens to drag down regional banks as they struggle to collect on loans made against shopping centers and office buildings.
Seriously overdue loans against commercial developments have shot up dramatically in recent months, as delinquencies snowball on construction loans and mortgages for office buildings, malls and apartments.
That's bad for giants like Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co. But it's even worse for smaller banks, which stepped up lending to local developers and businesses as a way to stay afloat after the national institutions grabbed big-ticket consumer businesses such as home loans, credit cards and checking accounts.
That's especially true in California, where unemployment exceeds 11% and commercial real estate is being pummeled.
"Commercial lending is our bread and butter, the lion's share of our business," said Dominic Ng, chairman of East West Bancorp, which with $12 billion in assets is the second-largest bank based in Los Angeles County.
The Pasadena bank, which has expanded over many years from its Chinese American base into Southern California's banking mainstream, set aside $226 million to cover loan losses last year, up from $12 million in 2007. The bank lost $49 million in 2008, compared with a profit of $161 million in 2007.
Land development and construction loans, the main problem so far for East West, total about 20% of the bank's loan portfolio. Now Ng says he is nervously watching delinquencies on commercial mortgages -- about 40% of East West's loans.
Uncollectable commercial mortgages quadrupled over the last three quarters of 2008, according to data reported to regulators. Uncollectable commercial construction loans increased eightfold during the same period.
Most of the loans were secured not only by the properties but also by the personal fortunes of the developers. Now, many have been wiped out by the recession, making the loans uncollectable.
"Some of the borrowers say: 'Go ahead, come after me. I have absolutely nothing left,' " Ng said. "The net worth completely disappeared in 12 months."
East West's plight is repeated at financial institutions throughout the state, as well as other places hit hard by the real estate crash, including Florida, Nevada, Arizona and Oregon.
According to the data filed with regulators, uncollectable commercial loans tripled at City National Corp. of Beverly Hills in the last three quarters of 2008, as did similar loans at California Bank & Trust of San Diego.
Throughout the banking sector, seriously delinquent loans for construction and land development shot up nearly ninefold over the last two years, according to the Federal Deposit Insurance Corp.
At one of the banks hit hardest by such lending, Los Angeles-based Preferred Bank, Chairman Li Yu said he was hopeful that tanking housing prices were beginning to stabilize.
"The same thing cannot be said of commercial real estate," Yu said. "That has to do with the economy and joblessness."
According to Yu and others, the troubles in commercial real estate are really just beginning. Even though the percentage of such loans that are uncollectable is way up, the overall numbers are small.
But industry watchers say the wave is building.
As commercial loans go bad, it will be particularly hard on regional banks, said Joe Morford, a San Francisco-based analyst for RBC Capital Markets, because their main customers are the small and medium-size businesses whose ranks include many developers.
"They exist for the small-business customer, the real estate developer and the entrepreneur," Morford said, a role that makes their health crucial for the greater economy. Morford has warned investors to be cautious about all three of the biggest L.A. County-based banks: East West, City National, and Cathay General Bancorp of Los Angeles.
Morford said in a report last week that commercial real estate and business lending problems are worrisome at Zions Bancorp, a Salt Lake City lender that is the parent of California Bank & Trust and operates in 10 Western states; and Umpqua Holdings Corp., an Oregon bank that operates from Napa, Calif., to Bellevue, Wash. He rates Umpqua, Zions, East West, Cathay and City National "sector perform," his middle rating, but says he is "particularly concerned" about these banks.
He recently has taken road trips to the Central Valley, Inland Empire and Orange County to show investors just how battered the California economy really is, e-mailing them photos of "for lease" signs on offices, warehouses, retail shops and condominiums.
Ng, of East West Bank, said his institution would remain solid because it had been conservative in the amount it lent on commercial properties.
Other bankers also said they expected to steer through the commercial real estate troubles, although many acknowledged that losses in the sector would rise.
"There's no doubt these are tough times for commercial real estate, and the risks are real," said Zions Chief Financial Officer Doyle Arnold, who predicted "elevated" loan losses for several quarters. "But we believe we can manage the risks better than anyone in the business."
Umpqua Chief Financial Officer Ronald L. Farnsworth said that despite analysts' worries, his bank expected only "small issues" from commercial real estate. He noted that the company used an analysis of rents charged at the buildings instead of their overall value when making the loans.
Cathay Chief Financial Officer Heng Chen said his company also made loans based on rental income rather than the appraised value of commercial properties.
"We are seeing some problems in commercial real estate, but hopefully it doesn't get much worse," Chen said.
City National Bank spokesman Cary Walker would not comment.
Bank analyst Mike Mayo said many of the assumptions used by banks in making commercial real estate loans were overly optimistic.
"While [residential] mortgage losses may be halfway to the peak, card and consumer losses may only be about one-third of the way, and industrial and commercial real estate problems (except construction) seem in the early stages," Mayo wrote in a recent report for Calyon Securities.
The contrast between the commercial loan-oriented regional banks and the more home-loan and consumer-oriented giant banks was apparent last week, when the government released the results of its stress tests on 19 banks with $100 billion or more in assets.
The list was topped by the small club of banks with assets exceeding $1 trillion -- Wells Fargo, Bank of America, JPMorgan Chase and Citigroup Inc. But it also included a number of large regional banks.
In assessing what two years of worsening recession would do to these banks, the Federal Reserve showed BofA and Wells Fargo with more than four times as much potential exposure to home lending losses as to commercial real estate losses.
The story was different at smaller banks. Fifth Third Bancorp of Cincinnati was exposed to slightly more potential losses on commercial real estate than on home loans. At Regions Financial Corp. of Birmingham, Ala., potential commercial real estate losses were more than twice as high as those predicted on home lending.
As such regional banks struggle with commercial loan losses, it's likely that some will be sold, said banking consultant Bert Ely of Alexandria, Va.
Several Southern California community banks already have failed in recent months as a result of exposure to construction lending. PFF Bank & Trust of Pomona, Alliance Bank of Culver City, 1st Centennial Bank of Redlands and First Heritage Bank of Newport Beach were shut down by regulators and taken over by healthier banks.
The trend of sales under fire is likely to continue, encouraged by bank regulators, said Sung Won Sohn, a former Wells Fargo chief economist and executive vice president who now teaches economics at Cal State Channel Islands.
"Southern California is over-banked," Sohn said.
Cargo Ships Treading Water Off Singapore, Waiting for Work
SINGAPORE — To go out in a small boat along Singapore’s coast now is to feel like a mouse tiptoeing through an endless herd of slumbering elephants.
One of the largest fleets of ships ever gathered idles here just outside one of the world’s busiest ports, marooned by the receding tide of global trade. There may be tentative signs of economic recovery in spots around the globe, but few here.
Hundreds of cargo ships — some up to 300,000 tons, with many weighing more than the entire 130-ship Spanish Armada — seem to perch on top of the water rather than in it, their red rudders and bulbous noses, submerged when the vessels are loaded, sticking a dozen feet out of the water.
So many ships have congregated here — 735, according to AIS Live ship tracking service of Lloyd’s Register-Fairplay in Redhill, Britain — that shipping lines are becoming concerned about near misses and collisions in one of the world’s most congested waterways, the straits that separate Malaysia and Singapore from Indonesia.
The root of the problem lies in an unusually steep slump in global trade, confirmed by trade statistics announced on Tuesday.
China said that its exports nose-dived 22.6 percent in April from a year earlier, while the Philippines said that its exports in March were down 30.9 percent from a year earlier. The United States announced on Tuesday that its exports had declined 2.4 percent in March.
“The March 2009 trade data reiterates the current challenges in our global economy,” said Ron Kirk, the United States trade representative.
More worrisome, despite some positive signs like a Wall Street rally and slower job losses in the United States, is that the current level of trade does not suggest a recovery soon, many in the shipping business say.
“A lot of the orders for the retail season are being placed now, and compared to recent years, they are weak,” said Chris Woodward, the vice president for container services at Ryder System, the big logistics company.
Western consumers still adjusting to losses in value of their stocks and homes are in little mood to start spending again on nonessential imports, said Joshua Felman, the assistant director of the Asia and Pacific division of the International Monetary Fund. “For trade to pick up, demand has to pick up,” he said. “It’s very difficult to see that happening any time soon.”
So badly battered is the shipping industry that the daily rate to charter a large bulk freighter suitable for carrying, say, iron ore, plummeted from close to $300,000 last summer to a low of $10,000 early this year, according to H. Clarkson & Company, a London ship brokerage.
The rate has rebounded to nearly $25,000 in the last several weeks, and some bulk carriers have left Singapore. But ship owners say this recovery may be short-lived because it mostly reflects a rush by Chinese steel makers to import iron ore before a possible price increase next month.
Container shipping is also showing faint signs of revival, but remains deeply depressed. And more empty tankers are showing up here.
The cost of shipping a 40-foot steel container full of merchandise from southern China to northern Europe tumbled from $1,400 plus fuel charges a year ago to as little as $150 early this year, before rebounding to around $300, which is still below the cost of providing the service, said Neil Dekker, a container industry forecaster at Drewry Shipping Consultants in London.
Eight small companies in the industry have gone bankrupt in the last year and at least one of the major carriers is likely to fail this year, he said.
Vessels have flocked to Singapore because it has few storms, excellent ship repair teams, cheap fuel from its own refinery and, most important, proximity to Asian ports that might eventually have cargo to ship.
The gathering of so many freighters “is extraordinary,” said Christopher Pålsson, a senior consultant at Lloyd’s Register-Fairplay Research, the consulting division of Lloyd’s Register-Fairplay. “We have probably not witnessed anything like this since the early 1980s,” during the last big bust in the global shipping industry.
The world’s fleet has nearly doubled since the early 1980s, so the tonnage of vessels in and around Singapore’s waters this spring may be the highest ever, he said, cautioning that detailed worldwide ship tracking data has been available only for the last five years.
These vessels total more than 41 million tons, according to the AIS Live tracking service. That is nearly equal to the entire world’s merchant fleet at the end of World War I, and represents almost 4 percent of the world’s fleet today.
Investment trusts have poured billions of dollars over the last five years into buying ships and leasing them for a year at a time to shipping lines. As the leases expire and many of these vessels are returned, losses will be heavy at these trusts and the mainly European banks that lent to them, said Stephen Fletcher, the commercial director for AXS Marine, a consulting firm based in Paris.
In previous shipping downturns, vessels anchored for months at a time in Norwegian fjords and other cold-weather locations. But stringent environmental regulations in practically every cold-weather country are forcing idle ships to warmer anchorages.
But that raises security concerns. Plants grow much faster on the undersides of vessels in warm water. “You end up with the hanging gardens of Babylon on the bottom and that affects your speed,” said Tim Huxley, the chief executive of Wah Kwong Maritime Transport, a shipping line based in Hong Kong.
One of the company’s freighters became so overgrown that it was barely able to outrun pirates off Somalia recently, Mr. Huxley said. The freighter escaped with 91 bullet holes in it.
Another of the company’s freighters close to Singapore was hit last December by a chemical tanker that could not make a tight enough turn in a crowded anchorage; neither vessel was seriously damaged.
Capt. M. Segar, the group director for the hub port of the Maritime and Port Authority of Singapore, said in a written reply to questions that many vessels were staying just outside the port’s limits. They do not have to pay port fees there.
Singapore has reported to the countries of registry for administrative action about 10 to 15 ships that have anchored in sea lanes in violation of international rules in the last two weeks, Captain Segar said.
Ships are anchoring at other ports around the world, too. There were 150 vessels in and around the Straits of Gibraltar on Monday, and 300 around Rotterdam, the Netherlands, according to the AIS Live tracking service.
But Singapore, close to Asian markets, has attracted far more.
“It is a sign of the times,” said AIS Martin Stopford, the managing director of Clarkson Research Service in London, “that Asia is the place you want to hang around this time in case things turn around.”
One of the largest fleets of ships ever gathered idles here just outside one of the world’s busiest ports, marooned by the receding tide of global trade. There may be tentative signs of economic recovery in spots around the globe, but few here.
Hundreds of cargo ships — some up to 300,000 tons, with many weighing more than the entire 130-ship Spanish Armada — seem to perch on top of the water rather than in it, their red rudders and bulbous noses, submerged when the vessels are loaded, sticking a dozen feet out of the water.
So many ships have congregated here — 735, according to AIS Live ship tracking service of Lloyd’s Register-Fairplay in Redhill, Britain — that shipping lines are becoming concerned about near misses and collisions in one of the world’s most congested waterways, the straits that separate Malaysia and Singapore from Indonesia.
The root of the problem lies in an unusually steep slump in global trade, confirmed by trade statistics announced on Tuesday.
China said that its exports nose-dived 22.6 percent in April from a year earlier, while the Philippines said that its exports in March were down 30.9 percent from a year earlier. The United States announced on Tuesday that its exports had declined 2.4 percent in March.
“The March 2009 trade data reiterates the current challenges in our global economy,” said Ron Kirk, the United States trade representative.
More worrisome, despite some positive signs like a Wall Street rally and slower job losses in the United States, is that the current level of trade does not suggest a recovery soon, many in the shipping business say.
“A lot of the orders for the retail season are being placed now, and compared to recent years, they are weak,” said Chris Woodward, the vice president for container services at Ryder System, the big logistics company.
Western consumers still adjusting to losses in value of their stocks and homes are in little mood to start spending again on nonessential imports, said Joshua Felman, the assistant director of the Asia and Pacific division of the International Monetary Fund. “For trade to pick up, demand has to pick up,” he said. “It’s very difficult to see that happening any time soon.”
So badly battered is the shipping industry that the daily rate to charter a large bulk freighter suitable for carrying, say, iron ore, plummeted from close to $300,000 last summer to a low of $10,000 early this year, according to H. Clarkson & Company, a London ship brokerage.
The rate has rebounded to nearly $25,000 in the last several weeks, and some bulk carriers have left Singapore. But ship owners say this recovery may be short-lived because it mostly reflects a rush by Chinese steel makers to import iron ore before a possible price increase next month.
Container shipping is also showing faint signs of revival, but remains deeply depressed. And more empty tankers are showing up here.
The cost of shipping a 40-foot steel container full of merchandise from southern China to northern Europe tumbled from $1,400 plus fuel charges a year ago to as little as $150 early this year, before rebounding to around $300, which is still below the cost of providing the service, said Neil Dekker, a container industry forecaster at Drewry Shipping Consultants in London.
Eight small companies in the industry have gone bankrupt in the last year and at least one of the major carriers is likely to fail this year, he said.
Vessels have flocked to Singapore because it has few storms, excellent ship repair teams, cheap fuel from its own refinery and, most important, proximity to Asian ports that might eventually have cargo to ship.
The gathering of so many freighters “is extraordinary,” said Christopher Pålsson, a senior consultant at Lloyd’s Register-Fairplay Research, the consulting division of Lloyd’s Register-Fairplay. “We have probably not witnessed anything like this since the early 1980s,” during the last big bust in the global shipping industry.
The world’s fleet has nearly doubled since the early 1980s, so the tonnage of vessels in and around Singapore’s waters this spring may be the highest ever, he said, cautioning that detailed worldwide ship tracking data has been available only for the last five years.
These vessels total more than 41 million tons, according to the AIS Live tracking service. That is nearly equal to the entire world’s merchant fleet at the end of World War I, and represents almost 4 percent of the world’s fleet today.
Investment trusts have poured billions of dollars over the last five years into buying ships and leasing them for a year at a time to shipping lines. As the leases expire and many of these vessels are returned, losses will be heavy at these trusts and the mainly European banks that lent to them, said Stephen Fletcher, the commercial director for AXS Marine, a consulting firm based in Paris.
In previous shipping downturns, vessels anchored for months at a time in Norwegian fjords and other cold-weather locations. But stringent environmental regulations in practically every cold-weather country are forcing idle ships to warmer anchorages.
But that raises security concerns. Plants grow much faster on the undersides of vessels in warm water. “You end up with the hanging gardens of Babylon on the bottom and that affects your speed,” said Tim Huxley, the chief executive of Wah Kwong Maritime Transport, a shipping line based in Hong Kong.
One of the company’s freighters became so overgrown that it was barely able to outrun pirates off Somalia recently, Mr. Huxley said. The freighter escaped with 91 bullet holes in it.
Another of the company’s freighters close to Singapore was hit last December by a chemical tanker that could not make a tight enough turn in a crowded anchorage; neither vessel was seriously damaged.
Capt. M. Segar, the group director for the hub port of the Maritime and Port Authority of Singapore, said in a written reply to questions that many vessels were staying just outside the port’s limits. They do not have to pay port fees there.
Singapore has reported to the countries of registry for administrative action about 10 to 15 ships that have anchored in sea lanes in violation of international rules in the last two weeks, Captain Segar said.
Ships are anchoring at other ports around the world, too. There were 150 vessels in and around the Straits of Gibraltar on Monday, and 300 around Rotterdam, the Netherlands, according to the AIS Live tracking service.
But Singapore, close to Asian markets, has attracted far more.
“It is a sign of the times,” said AIS Martin Stopford, the managing director of Clarkson Research Service in London, “that Asia is the place you want to hang around this time in case things turn around.”
Foreclosures: 'April was a shocker'
A record number of foreclosure filings took place during April, but the number of repossessions fell 11%.
ROAD TO RESCUE
* Census: U.S. becoming more diverse
* White House on rescue: How we're doing
* Parsons: White House won't run Citi
* Treasury pressed banks to take bailout
* U.S. moving ahead on bank oversight
Top 10 states
Where rates of foreclosure filings are the highest.
Rank State Households per foreclosure
1 Nevada 68
2 Florida 135
3 California 138
4 Arizona 164
5 Idaho 255
6 Utah 312
7 Georgia 344
8 Illinois 384
9 Colorado 387
10 Ohio 411
Source:RealtyTrac
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15 yr fixed mtg 4.64%
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NEW YORK (CNNMoney.com) -- Foreclosures in April exceeded even March's blistering pace with a record 342,000 homes receiving notices of default, auction notices or undergoing bank repossessions, according to a regular industry report.
One of every 374 U.S. homes received a filing during the month, the highest monthly rate that RealtyTrac, an online marketer of foreclosed properties, has recorded in four-plus years of record keeping.
"April was a shocker," said Rick Sharga, a spokesman for RealtyTrac. "I would have bet on a dip because March foreclosures were so high."
Instead, filings inched up 1% from March and rose 32% compared to April 2008.
There were 63,900 bank repossessions, the last stop in the foreclosure process. More than 1.3 million homes have now been lost to foreclosure since the market meltdown began in August 2007.
The increasing foreclosures will force RealtyTrac to rethink its forecasts, according to Sharga. "We had been predicting 3.4 million filings for the year," he said, "but we'll blow those numbers out of the water."
The lion's share of April's filings were in the early stages of the process, such as notices of default, according to James Saccacio, RealtyTrac's CEO.
Bank repossessions actually fell 11% for the month, compared with March. That's due, according to Saccacio, to the many legislative and company moratoriums that have prevented the foreclosure process from starting on delinquent loans.
Because fewer loans entered the process in past months, there were fewer getting all the way to repossession. But now that those moratoriums are over, the volume of foreclosure filings is increasing.
"It's likely that we'll see a corresponding spike in [repossessed properties] as these loans move through the foreclosure process over the next few months," Saccacio said in a prepared statement.
Ten states accounted for 75% of all foreclosure activity, and they fell generally into two categories: one-time bubble markets and the Rust Belt.
California easily outpaced every other state with with 96,560 filings. Other hard-hit former boom states were Florida, Nevada and Arizona.
Those Rust Belts states with the most filings were Illinois, Ohio and Michigan.
Georgia, Texas and Virginia filled out the rest of the top 10 list.
Nevada, with one filing for every 68 households, had the highest foreclosure rate in the land. Florida, with one for every 135 households, ranked second; and California, with one for every 138, was third.
Las Vegas continued to be the worst-hit metro area. It had more than 14,000 filings in April, one for every 56 households and 20% more than in March.
The Cape Coral-Fort Myers, Fla., area was second with one in 57, a 31% month-over-month rise. Merced, Calif., where home prices have plunged almost two-thirds from their peak, had the third-highest rate.
Five other California metro areas ranked in the top 10: Modesto was fourth, Riverside-San Bernardino fifth, Bakersfield sixth, Vallejo seventh and Stockton eighth. Miami and Orlando rounded out the list.
Raised expectations
Not helping, of course, is the steady erosion of home prices. The National Association of Realtors reported record home price losses Tuesday.
"[The home price decline] will lead to more foreclosures," said Mike Larson, a real estate analyst for Weiss Research.
The loss of home value put many more mortgage borrowers underwater, meaning they owe more on their loans than their homes are worth. That increases foreclosure rates in two ways: Underwater borrowers have no home equity to draw on to pay for unexpected expenses such as big medical bills or major car or home repairs. That's makes them more likely to miss payments. And when home values fall far below mortgage balances, homeowners often walk away from their loans.
"There has been much more 'deed-in-lieu-of foreclosure' activity lately," said Sharga. This is a transaction in which borrowers simply tell their banks that they're not going to pay their mortgage and hand back their keys, and deeds, to their lenders.
"People are making the rational financial decision to walk away from underwater homes," he said.
ROAD TO RESCUE
* Census: U.S. becoming more diverse
* White House on rescue: How we're doing
* Parsons: White House won't run Citi
* Treasury pressed banks to take bailout
* U.S. moving ahead on bank oversight
Top 10 states
Where rates of foreclosure filings are the highest.
Rank State Households per foreclosure
1 Nevada 68
2 Florida 135
3 California 138
4 Arizona 164
5 Idaho 255
6 Utah 312
7 Georgia 344
8 Illinois 384
9 Colorado 387
10 Ohio 411
Source:RealtyTrac
Quick Vote
How is the paycheck stimulus tax break affecting your economic situation?
*
It's helpful
*
It's not a big deal
*
I don't get the break
Current Mortgage Rates
Type Overnight avgs
30 yr fixed mtg 4.98%
15 yr fixed mtg 4.64%
30 yr fixed jumbo mtg 6.37%
5/1 ARM 4.60%
5/1 jumbo ARM 5.10%
Find personalized rates:
NEW YORK (CNNMoney.com) -- Foreclosures in April exceeded even March's blistering pace with a record 342,000 homes receiving notices of default, auction notices or undergoing bank repossessions, according to a regular industry report.
One of every 374 U.S. homes received a filing during the month, the highest monthly rate that RealtyTrac, an online marketer of foreclosed properties, has recorded in four-plus years of record keeping.
"April was a shocker," said Rick Sharga, a spokesman for RealtyTrac. "I would have bet on a dip because March foreclosures were so high."
Instead, filings inched up 1% from March and rose 32% compared to April 2008.
There were 63,900 bank repossessions, the last stop in the foreclosure process. More than 1.3 million homes have now been lost to foreclosure since the market meltdown began in August 2007.
The increasing foreclosures will force RealtyTrac to rethink its forecasts, according to Sharga. "We had been predicting 3.4 million filings for the year," he said, "but we'll blow those numbers out of the water."
The lion's share of April's filings were in the early stages of the process, such as notices of default, according to James Saccacio, RealtyTrac's CEO.
Bank repossessions actually fell 11% for the month, compared with March. That's due, according to Saccacio, to the many legislative and company moratoriums that have prevented the foreclosure process from starting on delinquent loans.
Because fewer loans entered the process in past months, there were fewer getting all the way to repossession. But now that those moratoriums are over, the volume of foreclosure filings is increasing.
"It's likely that we'll see a corresponding spike in [repossessed properties] as these loans move through the foreclosure process over the next few months," Saccacio said in a prepared statement.
Ten states accounted for 75% of all foreclosure activity, and they fell generally into two categories: one-time bubble markets and the Rust Belt.
California easily outpaced every other state with with 96,560 filings. Other hard-hit former boom states were Florida, Nevada and Arizona.
Those Rust Belts states with the most filings were Illinois, Ohio and Michigan.
Georgia, Texas and Virginia filled out the rest of the top 10 list.
Nevada, with one filing for every 68 households, had the highest foreclosure rate in the land. Florida, with one for every 135 households, ranked second; and California, with one for every 138, was third.
Las Vegas continued to be the worst-hit metro area. It had more than 14,000 filings in April, one for every 56 households and 20% more than in March.
The Cape Coral-Fort Myers, Fla., area was second with one in 57, a 31% month-over-month rise. Merced, Calif., where home prices have plunged almost two-thirds from their peak, had the third-highest rate.
Five other California metro areas ranked in the top 10: Modesto was fourth, Riverside-San Bernardino fifth, Bakersfield sixth, Vallejo seventh and Stockton eighth. Miami and Orlando rounded out the list.
Raised expectations
Not helping, of course, is the steady erosion of home prices. The National Association of Realtors reported record home price losses Tuesday.
"[The home price decline] will lead to more foreclosures," said Mike Larson, a real estate analyst for Weiss Research.
The loss of home value put many more mortgage borrowers underwater, meaning they owe more on their loans than their homes are worth. That increases foreclosure rates in two ways: Underwater borrowers have no home equity to draw on to pay for unexpected expenses such as big medical bills or major car or home repairs. That's makes them more likely to miss payments. And when home values fall far below mortgage balances, homeowners often walk away from their loans.
"There has been much more 'deed-in-lieu-of foreclosure' activity lately," said Sharga. This is a transaction in which borrowers simply tell their banks that they're not going to pay their mortgage and hand back their keys, and deeds, to their lenders.
"People are making the rational financial decision to walk away from underwater homes," he said.
The public pension bomb
For years, states all across the country have been starving their retirement plans. Here's a look at how the crisis is playing out in New Jersey, where the bill is coming due, and the state doesn't have the money to pay it.
(Fortune Magazine) -- Even as the nation's economy is showing some tentative signs of bottoming out, another calamity looms: the public pension bomb.
For years, states nationwide have shortchanged the retirement programs that cover teachers, police, and other public employees; now the stock market plunge has wiped out billions of dollars from already underfunded plans. California, New York and Illinois are among the states scrambling to plug multibillion-dollar holes in their pension systems. The growing obligations raise the specter of higher taxes, diminished services, or even another round of costly federal bailouts.
0:00 /04:26Big Apple's bruised finances
"States have long needed to reduce their unfunded liabilities, and widespread investment losses have made it even more necessary to put money in," says Lance Weiss, author of a 2006 Deloitte study of state pensions. "But the market crash also means there's less money available to use for contributions. Everything is coming together to create a crisis."
To better understand this ticking time bomb it helps to focus on a single state, and New Jersey makes a compelling case study. For one thing, its situation is dire. In June 2008 the state estimated that the plan - one of the nation's largest, covering teachers, state employees, firefighters, and police - had $34 billion less than it needed to meet its obligations. Since then the market value of the plan has dropped from $82 billion to $56 billion (a new estimate of underfunding is due in July).
Also, New Jersey is in some ways ahead of the pack in trying to deal with the crisis - Gov. Jon Corzine, a Democrat, made addressing the problem a central theme of his 2005 campaign - and the obstacles it is encountering shed light on the hard choices facing other states.
"The pension obligations could spark a huge problem for New Jersey," says Thomas Kean, a former Republican governor. "They must be paid because they are absolutely an obligation of the state, but as it is, the budget is balanced with chewing gum and sealing wax."
To figure out how such a wealthy state (with a median household income of $65,933, New Jersey ranks No. 1) dug itself into this hole, set the clock back almost 20 years.
In 1990 the country was hit by a recession, and the new Democratic governor, James Florio, responded with a wildly unpopular $2.8 billion income and sales tax increase to balance the budget. Two years later, facing another budget shortfall, he turned to the state pension system for help. With almost unanimous support in the legislature, he pushed through the Pension Revaluation Act of 1992.
We'll spare you the minutiae of pension accounting and just say that the law permitted the state to recognize investment gains in the fund more quickly than under previous rules. It also lifted the projected rate of return on the fund's investments to 8.75% from 7% (since lowered to 8.25%). These "adjustments" had a big impact: According to an official Benefits Review Task Force report published in 2005, they allowed the state to cut its pension contributions by more than $1.5 billion in 1992 and 1993.
Republican Christine Todd Whitman, running on a tax-cutting platform, defeated Florio in the 1993 governor's race. To help pay for her promised tax cuts, Whitman, like her predecessor, turned to the pension fund. In 1994, at her urging, the legislature adopted another pension "reform" act that allowed her to reduce state and local contributions to the plan by nearly $1.5 billion in 1994 and 1995, according to the task force report. Florio's and Whitman's accounting changes were "the one-two punch from which the retirement system has never recovered," says Douglas Forrester, who was the assistant state treasurer under Kean.
Seeking to make up lost ground without putting up more money, the state's leaders looked to the magic of the stock market. In 1997 New Jersey sold $2.75 billion of bonds paying 7.6% interest, putting the proceeds into the pension fund to be invested for higher returns.
At that time Whitman said the ironically named Pension Security Plan would save taxpayers about $45 billion. It hasn't worked out that way. The fund has earned less than 6% annually since the bonds were issued.
"This is classically referred to as arbitrage," says U.S. Rep. Leonard Lance, a Republican who served in the New Jersey legislature from 1991 through 2008. "It's a questionable strategy in the private sector, and it's certainly not acceptable as a matter of public policy."
That wasn't the state's last venture into high finance. The system, along with almost every other investor, suffered sharp losses after the dotcom bust of 2001. Democrat James McGreevey, who became governor in 2002, hoped that professional money managers would improve the plan's returns. At the time New Jersey was the only state other than Texas to run its pension fund without outside help.
McGreevey appointed Orin Kramer, a money manager who had been finance chair of his unsuccessful 1997 gubernatorial campaign, as head of the State Investment Council, which sets policy for the pension plan. Kramer pushed the council to turn over some of the fund's assets to Wall Street professionals and to diversify into alternative investments such as hedge funds and private equity. But it took time for Kramer to devise a strategy and put it into action, so money didn't flow to alternative investments until 2006, on the eve of the bear market that would crush nearly all asset categories.
"Our asset-allocation model was based on the idea that there was no correlation between our alternatives and bonds and equities," says James Marketti, retired president of Communications Workers of America Local 1032, who has been a member of the state's investment council since September 2008. "It turns out they were perfectly correlated."
For all the miscues, New Jersey's pension woes can't be blamed on particularly poor investment results. An examination of state reports shows that the fund's returns have more or less tracked the broad stock market's. The real problem has been the underfunding.
Meanwhile, the obligations keep mounting: Even while they were neglecting pension contributions, New Jersey politicians were sweetening the pot. In 2001 benefits for the state's two largest groups of workers, government employees and teachers, were increased by 9%, creating an additional $4.2 billion in liabilities. In 1999 the state approved a "20 and out" measure that allowed firefighters and local police to collect pensions equal to 50% of their pay after 20 years of service - a perk previously available only to the state police. Benefits added since 1999 have increased liabilities by more than $6.8 billion, according to official estimates.
Today New Jersey seems locked in a downward spiral. "New Jersey and many other systems have negative cash flows, meaning that contributions are less than the benefits we pay out," says William Clark, director of the New Jersey Division of Investment, which manages the pension fund. "You can't make your money back when it's flowing out of the system."
Gov. Corzine's efforts to prop up the plan have had mixed results. After taking office he boosted contributions, injecting about $1 billion in 2007 and a similar amount in 2008. He planned to add another $1 billion in 2009, but in response to budget pressures now wants to spread that money over two years. And the legislature just passed a "pension holiday" bill that allows municipalities to skip their pension contributions for 2009.
Corzine has also imposed reduced benefits on state workers. Since 2007 he has raised the retirement age to 62, increased the salary requirement for pension eligibility, increased employee contributions, and capped pension income. But unions are fighting his request that members take unpaid furloughs and give up some or all of the wage hikes they are due.
"We believe reopening contracts should be a last resort as we seek to find other ways to free up money," says Anthony Miskowski, secretary of CWA Local 1033. "If we budge on the contracts, the unions are dead." But after a pause, he acknowledges that something has to give: "We'll be forced someday to be more flexible."
And those are baby steps compared with the sweeping measures recommended by consultants like Deloitte for all states facing pension crises. They include reducing benefits for current and future employees, pegging cost-of-living increases to actual inflation, cutting early-retirement programs, and forcing the states to stick with adequate funding plans. That's more of a wish list than a practical plan of action. "These are all politically sensitive solutions," says Deloitte's Weiss. "The unions are screaming, but states have to stop the bleeding."
If New Jersey reaches the point where one or more of the funds in its system runs out of money, the state will have to pay retirees out of annual revenue, adding another burden to the budget. That's how the state covers retiree health-care costs, expected to hit $1.1 billion this year. (An attempt to pre-fund those expenses began in the 1980s but was sacrificed to budget pressures in 1994.)
It would then have to slash services or boost taxes to balance the budget, a pair of ugly options. The Tax Foundation says New Jersey charges the highest state and local taxes in the country, the highest residential and commercial property taxes, and some of the highest sin taxes in the nation on cigarettes and alcohol.
If union concessions, cost cutting, and higher taxes are not enough, then what? Inevitably, New Jersey and other states would turn to Uncle Sam for help. The pressure on Congress would be great. "How will they say no to state workers when they've said yes to bankers?" asks Marketti.
Even so, Congress might balk at opening the door to a series of multibillion-dollar state bailouts. In that case, we might well see a wave of municipal or even state bankruptcies as pension obligations overwhelm local budgets. To Leonard Lance, the pension blowup is one more consequence of the financial recklessness that defined an era. "In so many areas there has been inappropriate spending," he says. "Now we all have to pay."
(Fortune Magazine) -- Even as the nation's economy is showing some tentative signs of bottoming out, another calamity looms: the public pension bomb.
For years, states nationwide have shortchanged the retirement programs that cover teachers, police, and other public employees; now the stock market plunge has wiped out billions of dollars from already underfunded plans. California, New York and Illinois are among the states scrambling to plug multibillion-dollar holes in their pension systems. The growing obligations raise the specter of higher taxes, diminished services, or even another round of costly federal bailouts.
0:00 /04:26Big Apple's bruised finances
"States have long needed to reduce their unfunded liabilities, and widespread investment losses have made it even more necessary to put money in," says Lance Weiss, author of a 2006 Deloitte study of state pensions. "But the market crash also means there's less money available to use for contributions. Everything is coming together to create a crisis."
To better understand this ticking time bomb it helps to focus on a single state, and New Jersey makes a compelling case study. For one thing, its situation is dire. In June 2008 the state estimated that the plan - one of the nation's largest, covering teachers, state employees, firefighters, and police - had $34 billion less than it needed to meet its obligations. Since then the market value of the plan has dropped from $82 billion to $56 billion (a new estimate of underfunding is due in July).
Also, New Jersey is in some ways ahead of the pack in trying to deal with the crisis - Gov. Jon Corzine, a Democrat, made addressing the problem a central theme of his 2005 campaign - and the obstacles it is encountering shed light on the hard choices facing other states.
"The pension obligations could spark a huge problem for New Jersey," says Thomas Kean, a former Republican governor. "They must be paid because they are absolutely an obligation of the state, but as it is, the budget is balanced with chewing gum and sealing wax."
To figure out how such a wealthy state (with a median household income of $65,933, New Jersey ranks No. 1) dug itself into this hole, set the clock back almost 20 years.
In 1990 the country was hit by a recession, and the new Democratic governor, James Florio, responded with a wildly unpopular $2.8 billion income and sales tax increase to balance the budget. Two years later, facing another budget shortfall, he turned to the state pension system for help. With almost unanimous support in the legislature, he pushed through the Pension Revaluation Act of 1992.
We'll spare you the minutiae of pension accounting and just say that the law permitted the state to recognize investment gains in the fund more quickly than under previous rules. It also lifted the projected rate of return on the fund's investments to 8.75% from 7% (since lowered to 8.25%). These "adjustments" had a big impact: According to an official Benefits Review Task Force report published in 2005, they allowed the state to cut its pension contributions by more than $1.5 billion in 1992 and 1993.
Republican Christine Todd Whitman, running on a tax-cutting platform, defeated Florio in the 1993 governor's race. To help pay for her promised tax cuts, Whitman, like her predecessor, turned to the pension fund. In 1994, at her urging, the legislature adopted another pension "reform" act that allowed her to reduce state and local contributions to the plan by nearly $1.5 billion in 1994 and 1995, according to the task force report. Florio's and Whitman's accounting changes were "the one-two punch from which the retirement system has never recovered," says Douglas Forrester, who was the assistant state treasurer under Kean.
Seeking to make up lost ground without putting up more money, the state's leaders looked to the magic of the stock market. In 1997 New Jersey sold $2.75 billion of bonds paying 7.6% interest, putting the proceeds into the pension fund to be invested for higher returns.
At that time Whitman said the ironically named Pension Security Plan would save taxpayers about $45 billion. It hasn't worked out that way. The fund has earned less than 6% annually since the bonds were issued.
"This is classically referred to as arbitrage," says U.S. Rep. Leonard Lance, a Republican who served in the New Jersey legislature from 1991 through 2008. "It's a questionable strategy in the private sector, and it's certainly not acceptable as a matter of public policy."
That wasn't the state's last venture into high finance. The system, along with almost every other investor, suffered sharp losses after the dotcom bust of 2001. Democrat James McGreevey, who became governor in 2002, hoped that professional money managers would improve the plan's returns. At the time New Jersey was the only state other than Texas to run its pension fund without outside help.
McGreevey appointed Orin Kramer, a money manager who had been finance chair of his unsuccessful 1997 gubernatorial campaign, as head of the State Investment Council, which sets policy for the pension plan. Kramer pushed the council to turn over some of the fund's assets to Wall Street professionals and to diversify into alternative investments such as hedge funds and private equity. But it took time for Kramer to devise a strategy and put it into action, so money didn't flow to alternative investments until 2006, on the eve of the bear market that would crush nearly all asset categories.
"Our asset-allocation model was based on the idea that there was no correlation between our alternatives and bonds and equities," says James Marketti, retired president of Communications Workers of America Local 1032, who has been a member of the state's investment council since September 2008. "It turns out they were perfectly correlated."
For all the miscues, New Jersey's pension woes can't be blamed on particularly poor investment results. An examination of state reports shows that the fund's returns have more or less tracked the broad stock market's. The real problem has been the underfunding.
Meanwhile, the obligations keep mounting: Even while they were neglecting pension contributions, New Jersey politicians were sweetening the pot. In 2001 benefits for the state's two largest groups of workers, government employees and teachers, were increased by 9%, creating an additional $4.2 billion in liabilities. In 1999 the state approved a "20 and out" measure that allowed firefighters and local police to collect pensions equal to 50% of their pay after 20 years of service - a perk previously available only to the state police. Benefits added since 1999 have increased liabilities by more than $6.8 billion, according to official estimates.
Today New Jersey seems locked in a downward spiral. "New Jersey and many other systems have negative cash flows, meaning that contributions are less than the benefits we pay out," says William Clark, director of the New Jersey Division of Investment, which manages the pension fund. "You can't make your money back when it's flowing out of the system."
Gov. Corzine's efforts to prop up the plan have had mixed results. After taking office he boosted contributions, injecting about $1 billion in 2007 and a similar amount in 2008. He planned to add another $1 billion in 2009, but in response to budget pressures now wants to spread that money over two years. And the legislature just passed a "pension holiday" bill that allows municipalities to skip their pension contributions for 2009.
Corzine has also imposed reduced benefits on state workers. Since 2007 he has raised the retirement age to 62, increased the salary requirement for pension eligibility, increased employee contributions, and capped pension income. But unions are fighting his request that members take unpaid furloughs and give up some or all of the wage hikes they are due.
"We believe reopening contracts should be a last resort as we seek to find other ways to free up money," says Anthony Miskowski, secretary of CWA Local 1033. "If we budge on the contracts, the unions are dead." But after a pause, he acknowledges that something has to give: "We'll be forced someday to be more flexible."
And those are baby steps compared with the sweeping measures recommended by consultants like Deloitte for all states facing pension crises. They include reducing benefits for current and future employees, pegging cost-of-living increases to actual inflation, cutting early-retirement programs, and forcing the states to stick with adequate funding plans. That's more of a wish list than a practical plan of action. "These are all politically sensitive solutions," says Deloitte's Weiss. "The unions are screaming, but states have to stop the bleeding."
If New Jersey reaches the point where one or more of the funds in its system runs out of money, the state will have to pay retirees out of annual revenue, adding another burden to the budget. That's how the state covers retiree health-care costs, expected to hit $1.1 billion this year. (An attempt to pre-fund those expenses began in the 1980s but was sacrificed to budget pressures in 1994.)
It would then have to slash services or boost taxes to balance the budget, a pair of ugly options. The Tax Foundation says New Jersey charges the highest state and local taxes in the country, the highest residential and commercial property taxes, and some of the highest sin taxes in the nation on cigarettes and alcohol.
If union concessions, cost cutting, and higher taxes are not enough, then what? Inevitably, New Jersey and other states would turn to Uncle Sam for help. The pressure on Congress would be great. "How will they say no to state workers when they've said yes to bankers?" asks Marketti.
Even so, Congress might balk at opening the door to a series of multibillion-dollar state bailouts. In that case, we might well see a wave of municipal or even state bankruptcies as pension obligations overwhelm local budgets. To Leonard Lance, the pension blowup is one more consequence of the financial recklessness that defined an era. "In so many areas there has been inappropriate spending," he says. "Now we all have to pay."
Auto dealer cuts: Painful surgery
For automakers, there will be little short-term gain from culling dealers, but the time to do it is now.
DETROIT'S DOWNFALL
* Auto dealer cuts: Painful surgery
* GM stock touches $1, lowest since Depression
* For a healthy GM, look overseas
* GM falls to 76-year low as execs sell stock
* Ford seeks to raise cash with offering
NEW YORK (CNNMoney.com) -- Hundreds of General Motors dealers will find out this week if their businesses will be sacrificed as cries for automakers to cut costs rise from Wall Street and Capitol Hill.
The automaker, its dealers and outside experts agree that shuttering dealerships won't save much money and could cause significant short-term pain.
But experts say GM (GM, Fortune 500) has a rare chance, with bankruptcy looming, to strip dealers of their franchise contracts quickly and set themselves up for long-term benefits.
"It's a once-in-a-lifetime opportunity for GM," said Bruce Belzowski, an auto industry expert at the University of Michigan.
Meanwhile, dealer groups are launching last ditch battles against the cuts, arguing that drastic closings could hamper a fragile American economy.
Difficult surgery
GM plans to reduce the number of dealerships by more than 40% by the end of next year. That means 2,600 of GM's almost 6,300 dealerships will close.
0:00 /1:22Toyota: Worst results ever
Many dealers are on the way out anyway, closing simply because of the economic downturn and the tight credit market. More will be closed or sold off as GM sheds its Hummer, Saturn, Saab and Pontiac brands.
Others will be pushed out by GM. As many as 1,500 dealership contracts will be selectively pulled by the automaker because the dealerships are poor performers or because they are in locations already saturated with dealers selling the same brands.
"We might be over-dealered in some of the metro areas where competition has moved in," said GM spokeswoman Susan Garontakos.
Ordinarily, automakers have to negotiate individually with each dealer whose contract they want to terminate. When GM shut down its Oldsmobile brand in the early 2000's, it's estimated that it cost the carmaker more than $1 billion, much of that in payouts to compensate dealers.
Dealers, which are independently owned and operated businesses, are protected by strong state franchise laws, in part because they are so important to local economies. Almost 20% of a state's sales taxes typically come from auto dealerships, for instance. Dealerships also offer good, high-paying jobs.
Dealers fight back
The National Automobile Dealer's Association and dealer groups for both GM and Chrysler are fighting the cuts. Dealership supporters are highlighting the negative impacts of the cuts as they campaign in the courts and in Washington to save at least some of their dealerships.
The cuts, as planned, will result in the loss about 140,000 jobs, according to NADA.
Since they are independently owned and operated businesses, an auto dealership does not cost a manufacturer much money, the groups point out. Instead, dealerships are a source of income since they - not customers - actually buy cars from the manufacturers.
That's something often lost on outside observers, said Gary Dilts, formerly head of sales at Chrysler and now a senior vice president at J.D. Power and Associates.
"There seems to be almost a sense that these dealerships are a financial burden to the carmakers, and they're really not," he said.
Also, the carmakers themselves may have to buy back excess inventory. The remaining dealerships may not be able to step in immediately and pick up sales, said John McEleney, chairman of the NADA.
"When a dealership closes, a manufacturer loses market share for about 18 months," he said.
Reduced competition, especially around big cities, will lead to higher car prices for consumers, McEleney said. Even as car prices plunge, customers seem resistant to return.
High inventories are already a problem for GM, which has announced steps to deal with it. The automaker will be closing many of its factories for as much 11 weeks this summer, Garontakos pointed out. That should help prevent the backlog of unsold cars and trucks from getting worse.
Long-term gains
The upside of cuts is that the surviving dealers can present a better image for the manufacturer and over time, said Dilts, the surviving dealer network will be able to pick up lost sales volume as the economy improves.
More profitable dealers can spend more on store upgrades, build more service bays to take care of customers and provide better salaries and higher commissions to attract the best employees.
"We feel that customers like to visit nice, clean, upgraded facilities," said Garontakos.
Just reducing the sheer number of dealerships isn't the goal for GM.
"They're going to leave their 'power stores' together in their key markets," said Dilts.
GM's dealership network gives it certain advantages over a rival like Toyota said GM sales spokesman John McDonald.
Asian car dealers are concentrated in urban areas with relatively few locations in America's vast rural areas. Car and truck shoppers who live far from urban centers feel more comfortable buying a GM product because they can count on service at a dealership close to home.
"That's why the have 60% market share in pickup trucks," agreed Belzowski
So GM is likely to trim more dealers in urban areas with many locations covering a relatively small zone while preserving its coverage in the vast rural expanses where competitors are few.
Hard and fast
Dealers understand that Detroit automakers need to reduce the number of dealerships to better match today's actual market share, McEleney said.
"It's the depth and speed of these cuts that we object to," he said.
The automaker may want to err on the side of caution: Cutting too many dealers, rather than not enough, while the opportunity to do so relatively cheaply is at hand.
GM has increased the speed and number of planned dealer closings in response to pressure from the Treasury Department, to which it owes its very survival.
A source familiar with Treasury's thinking denied that the government had set any specific targets or goals for GM's dealer programs.
Given the severity of the problems, even officials in Washington may be surprised to see just how much pain must be inflicted to save the struggling auto companies, Belzowski said.
"There's more blood on the floor than, I'm sure, the administration would like to have seen," he said, "and now it's going to be dealer blood, as well."
DETROIT'S DOWNFALL
* Auto dealer cuts: Painful surgery
* GM stock touches $1, lowest since Depression
* For a healthy GM, look overseas
* GM falls to 76-year low as execs sell stock
* Ford seeks to raise cash with offering
NEW YORK (CNNMoney.com) -- Hundreds of General Motors dealers will find out this week if their businesses will be sacrificed as cries for automakers to cut costs rise from Wall Street and Capitol Hill.
The automaker, its dealers and outside experts agree that shuttering dealerships won't save much money and could cause significant short-term pain.
But experts say GM (GM, Fortune 500) has a rare chance, with bankruptcy looming, to strip dealers of their franchise contracts quickly and set themselves up for long-term benefits.
"It's a once-in-a-lifetime opportunity for GM," said Bruce Belzowski, an auto industry expert at the University of Michigan.
Meanwhile, dealer groups are launching last ditch battles against the cuts, arguing that drastic closings could hamper a fragile American economy.
Difficult surgery
GM plans to reduce the number of dealerships by more than 40% by the end of next year. That means 2,600 of GM's almost 6,300 dealerships will close.
0:00 /1:22Toyota: Worst results ever
Many dealers are on the way out anyway, closing simply because of the economic downturn and the tight credit market. More will be closed or sold off as GM sheds its Hummer, Saturn, Saab and Pontiac brands.
Others will be pushed out by GM. As many as 1,500 dealership contracts will be selectively pulled by the automaker because the dealerships are poor performers or because they are in locations already saturated with dealers selling the same brands.
"We might be over-dealered in some of the metro areas where competition has moved in," said GM spokeswoman Susan Garontakos.
Ordinarily, automakers have to negotiate individually with each dealer whose contract they want to terminate. When GM shut down its Oldsmobile brand in the early 2000's, it's estimated that it cost the carmaker more than $1 billion, much of that in payouts to compensate dealers.
Dealers, which are independently owned and operated businesses, are protected by strong state franchise laws, in part because they are so important to local economies. Almost 20% of a state's sales taxes typically come from auto dealerships, for instance. Dealerships also offer good, high-paying jobs.
Dealers fight back
The National Automobile Dealer's Association and dealer groups for both GM and Chrysler are fighting the cuts. Dealership supporters are highlighting the negative impacts of the cuts as they campaign in the courts and in Washington to save at least some of their dealerships.
The cuts, as planned, will result in the loss about 140,000 jobs, according to NADA.
Since they are independently owned and operated businesses, an auto dealership does not cost a manufacturer much money, the groups point out. Instead, dealerships are a source of income since they - not customers - actually buy cars from the manufacturers.
That's something often lost on outside observers, said Gary Dilts, formerly head of sales at Chrysler and now a senior vice president at J.D. Power and Associates.
"There seems to be almost a sense that these dealerships are a financial burden to the carmakers, and they're really not," he said.
Also, the carmakers themselves may have to buy back excess inventory. The remaining dealerships may not be able to step in immediately and pick up sales, said John McEleney, chairman of the NADA.
"When a dealership closes, a manufacturer loses market share for about 18 months," he said.
Reduced competition, especially around big cities, will lead to higher car prices for consumers, McEleney said. Even as car prices plunge, customers seem resistant to return.
High inventories are already a problem for GM, which has announced steps to deal with it. The automaker will be closing many of its factories for as much 11 weeks this summer, Garontakos pointed out. That should help prevent the backlog of unsold cars and trucks from getting worse.
Long-term gains
The upside of cuts is that the surviving dealers can present a better image for the manufacturer and over time, said Dilts, the surviving dealer network will be able to pick up lost sales volume as the economy improves.
More profitable dealers can spend more on store upgrades, build more service bays to take care of customers and provide better salaries and higher commissions to attract the best employees.
"We feel that customers like to visit nice, clean, upgraded facilities," said Garontakos.
Just reducing the sheer number of dealerships isn't the goal for GM.
"They're going to leave their 'power stores' together in their key markets," said Dilts.
GM's dealership network gives it certain advantages over a rival like Toyota said GM sales spokesman John McDonald.
Asian car dealers are concentrated in urban areas with relatively few locations in America's vast rural areas. Car and truck shoppers who live far from urban centers feel more comfortable buying a GM product because they can count on service at a dealership close to home.
"That's why the have 60% market share in pickup trucks," agreed Belzowski
So GM is likely to trim more dealers in urban areas with many locations covering a relatively small zone while preserving its coverage in the vast rural expanses where competitors are few.
Hard and fast
Dealers understand that Detroit automakers need to reduce the number of dealerships to better match today's actual market share, McEleney said.
"It's the depth and speed of these cuts that we object to," he said.
The automaker may want to err on the side of caution: Cutting too many dealers, rather than not enough, while the opportunity to do so relatively cheaply is at hand.
GM has increased the speed and number of planned dealer closings in response to pressure from the Treasury Department, to which it owes its very survival.
A source familiar with Treasury's thinking denied that the government had set any specific targets or goals for GM's dealer programs.
Given the severity of the problems, even officials in Washington may be surprised to see just how much pain must be inflicted to save the struggling auto companies, Belzowski said.
"There's more blood on the floor than, I'm sure, the administration would like to have seen," he said, "and now it's going to be dealer blood, as well."
Car dealers fight rapid closures; 180,000 workers could lose jobs
DETROIT — Car dealers from around the nation will be in Washington Wednesday to urge President Obama's automotive task force to let the economics, not the government, decide which car dealers should shut down, and when.
The task force has been pushing General Motors(gm) to trim its dealer ranks faster than the several years originally planned as part of its overall restructuring. Speeding up that process will only dump 180,000 more workers onto unemployment rolls in a recession, the dealer group argues.
John McEleney, president of the National Automobile Dealers Association, says he understands that fewer dealerships are needed. But since dealers are independent business owners and get little financial support from the automaker, he argues, they aren't adding to GM's financial problems.
"We understand the realities of the marketplace, but we just think this is the worst time to be doing this," says McEleney, who says the delegation will include about 150 dealers. "By forcing the issue, it's going to have some real negative consequences in many communities, where dealers are the biggest private employers and are involved in the local communities supporting charities."
GM, which is operating on $15.4 billion in U.S. loans, now plans to cut 2,600 of its 6,200 U.S. dealers in 18 months. In its original plan released in February, GM said it would cut 400 dealers a year until 2012. The administration said that was not fast enough.
The task force also has pressed Chrysler to quickly trim its storefronts from 3,200 outlets, and that process now is being worked out in bankruptcy court. In filings with the court, Chrysler said about 50% of its dealers make up 90% of its sales.
John Bowis, president of Chevy Chase Cars in Bethesda, Md., recently sent a letter to customers saying he would no longer sell Chevrolet vehicles, and instead will sell Nissans along with his current Acuras. The move was his decision, and gave him time to find a new automaker to work with.
"I feel very fortunate that I got out when I did, because I'm very worried about my friends who are GM dealers," Bowis says. "It's going to be a tough road for them."
Many dealers are looking at their options, trying to sign new franchise agreements, selling their stores or finding a way to wind down operations slowly, Bowis says. Forcing them to close too fast could create more problems than the auto task force anticipates, he says.
"They may be saving General Motors and they may be saving some UAW jobs, but they are going to create a snowball effect with local bankruptcies all over the country. It was happening through attrition anyway. I'm a perfect example of that."
The task force has been pushing General Motors(gm) to trim its dealer ranks faster than the several years originally planned as part of its overall restructuring. Speeding up that process will only dump 180,000 more workers onto unemployment rolls in a recession, the dealer group argues.
John McEleney, president of the National Automobile Dealers Association, says he understands that fewer dealerships are needed. But since dealers are independent business owners and get little financial support from the automaker, he argues, they aren't adding to GM's financial problems.
"We understand the realities of the marketplace, but we just think this is the worst time to be doing this," says McEleney, who says the delegation will include about 150 dealers. "By forcing the issue, it's going to have some real negative consequences in many communities, where dealers are the biggest private employers and are involved in the local communities supporting charities."
GM, which is operating on $15.4 billion in U.S. loans, now plans to cut 2,600 of its 6,200 U.S. dealers in 18 months. In its original plan released in February, GM said it would cut 400 dealers a year until 2012. The administration said that was not fast enough.
The task force also has pressed Chrysler to quickly trim its storefronts from 3,200 outlets, and that process now is being worked out in bankruptcy court. In filings with the court, Chrysler said about 50% of its dealers make up 90% of its sales.
John Bowis, president of Chevy Chase Cars in Bethesda, Md., recently sent a letter to customers saying he would no longer sell Chevrolet vehicles, and instead will sell Nissans along with his current Acuras. The move was his decision, and gave him time to find a new automaker to work with.
"I feel very fortunate that I got out when I did, because I'm very worried about my friends who are GM dealers," Bowis says. "It's going to be a tough road for them."
Many dealers are looking at their options, trying to sign new franchise agreements, selling their stores or finding a way to wind down operations slowly, Bowis says. Forcing them to close too fast could create more problems than the auto task force anticipates, he says.
"They may be saving General Motors and they may be saving some UAW jobs, but they are going to create a snowball effect with local bankruptcies all over the country. It was happening through attrition anyway. I'm a perfect example of that."
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