Why a Housing Bailout Won't Help
"We are working with borrowers to keep them in their homes, but a lot of them really don't want to stay."
So spoke the chairwoman of a Southern California home lender to the Los Angeles Times, inadvertently putting her finger on why trying to bail out the mortgages behind today's uptick in the foreclosure rate may be self-defeating, and why many in Congress rightly have gotten cold feet.
![[Why a Housing Bailout Won't Help]](http://s.wsj.net/public/resources/images/OB-BM307_oj_bw0_20080520192343.jpg) |
| Corbis |
Look at a very instructive map found on the Web site of RealtyTrac.com. Not only are the big foreclosure hotspots concentrated in just three or four parts of the country – but a disproportionate share of foreclosures are concentrated in a single, nearly contiguous blob reaching from Sacramento to the environs of Las Vegas and Phoenix.
Another hotspot is southern Florida, and along Interstates 25 and 70 in Colorado.
Many of these homebuyers are underwater not just because they bought more house than their incomes could support, and not just because prices are falling. They were also betting on commute patterns and demographic expectations that are proving invalid.
These were bets on location, location, location – premised on the idea that people would be willing to live hours from anywhere for a chance to own a single-family home they could actually afford. No federally sponsored haircut can put these housing bets back in the money, or stop these houses from coming back on the market at distress prices.
Lo, the economy has not descended into a depression, the credit markets are healing, banks are raising new capital and putting their mistakes behind them. No wonder many in Congress – maps in hand – have lately begun to ask why taxpayers back home should pay for housing disasters elsewhere.
Then why do so many Wall Street types, including legendary (and shrill) bond investor Bill Gross, insist the economy is doomed without a concerted federal rescue of underwater homeowners? Good question.
Proponents say a bailout would benefit all homeowners, halting foreclosures and propping up prices. But it wouldn't. Even by the generous reckoning of the Congressional Budget Office, only a small fraction of the soon-to-be-foreclosed would voluntarily take up the House plan or Monday's proposed Senate version on its offer.
Of course that overlooks the possibility of a concerted effort by mortgage investors to get their worst customers into the government plan, which would pay 85 cents on the dollar for mortgages now selling for 50 cents or less. True, the House bill gamely seeks to exclude speculators and homeowners who lied about their incomes. But an ill-equipped FHA would be a sitting duck for lenders who tacitly permit nonpayers to remain in homes just long enough to pass the bag to government.
Remember, the estimated $400 billion in subprime mortgage losses are widely distributed among funds that are capable of swallowing them without folding. The bust once did seem to threaten the financial system, but only because uncertainty over who owned the losses poisoned investor confidence in asset markets and financial institutions generally.
The Fed seems to have fixed that problem. But the Fed can't fix the housing correction, though the housing correction was never the end of the world.
Data may show the first national home-price decline since the 1940s, but housing markets are local, and virtually every local market has experienced housing booms and busts at some point. Plenty of homeowners have had the experience of being underwater on their mortgages (show of hands here) without walking away – because they didn't take out more loan than they could afford to plant themselves in communities that now appear to have little future.
A real quandary for policy makers may soon be how to handle the subprime debris – the physical waste – of housing complexes far from town, unwanted by anybody with the wherewithal to maintain them. Here, a word on bubbles. Dropping a bundle to build a new fiber network as the Internet is taking off is not necessarily a bad idea. The decision by other people to do the same is what makes it a bad idea. That's what happened in housing too – helped by cheap money from the Fed and a credit-manufacturing process that gave too many homebuyers a one-way bet on home prices.
One sure way to guarantee bubbles without end is to institutionalize that one-way bet. That's what a bailout would end up doing for those ultimately responsible for directing a large chunk of the nation's savings into unwanted, uneconomic housing.
Obama says White House nod within reach
©AFP/Getty Images - Chip Somodevilla
WASHINGTON (AFP) - Barack Obama's camp Wednesday celebrated a potent milestone on the road to the Democratic presidential nomination after sharing the spoils with Hillary Clinton in the two latest contests.
Thumped Tuesday by Clinton in the socially conservative state of Kentucky, Obama won liberal Oregon handily to come within a mere 69 delegates of the 2,026 needed to win the party nod.
The Illinois senator, 46, held a victory rally late Tuesday in Iowa, the midwestern battleground state where he scored a shock win in the very first nominating contest in January.
"We have returned to Iowa with a majority of delegates elected by the American people," he told some 7,000 jubilant supporters who roared back, "Obama '08."
"You have put us within reach of the Democratic nomination for president of the United States of America."
Obama, seeking to become the first black US president, sewed up a majority of "pledged" delegates elected in more than five months of coast-to-coast nominating contests.
©AFP - Robyn Beck
That majority leaves Clinton's fate entirely in the hands of Democratic "superdelegates," nearly 800 party grandees who pundits believe are unlikely to overturn the popular will of the regular delegates.
But Tuesday's results, especially in Kentucky, hinted at a continuing racial divide among Democratic voters and the Obama campaign was loath to alienate Clinton and her hard-bitten supporters.
"We don't think the race is over," Obama's communications director Robert Gibbs said on MSNBC, while stressing that reaching a majority of regular delegates was an "important marker" for the superdelegates to note.
"We respect Senator Clinton. She has been a tough and tenacious competitor," Gibbs added, looking to the end of the primary season on June 3.
"We believe that this campaign will go on probably for two more weeks and then we'll have a pretty clear idea of who that nominee will be."
The former first lady and current New York senator, 60, vowed to keep fighting at least until after the remaining voters in Puerto Rico, Montana and South Dakota have spoken.
"It's not just Kentucky bluegrass that's music to my ears. It's the sound of your overwhelming vote of confidence even in the face of some pretty tough odds," she told raucous supporters in Louisville, Kentucky.
"I'm going to keep making our case until we have a nominee, whoever she may be," Clinton said with a wide smile at her victory party.
Both Obama and Clinton were heading to Florida Wednesday. The Sunshine State's primary results, like Michigan's, were voided by Democratic bosses over a scheduling row.
©AFP/Getty Images - Chip Somodevilla
Clinton, however, claims she has won the popular vote, if Michigan and Florida are counted, and argues she would therefore be the strongest nominee.
She is hoping to persuade officials of the party's rules and bylaws committee to put the two election battlegrounds back into play, when they meet at a crucial meeting on May 31.
But the often-bitter campaign appeared to be winding down as both candidates went out of their way to assure a united front against Republican John McCain in the November election.
At the same time, Obama heaped some of his warmest praise yet on Clinton.
"No matter how this primary season ends," he said, "Senator Clinton has shattered myths and broken barriers and changed the America in which my daughters and yours will have come of age."
©AFP/Getty Images - Eric Thayer
But Tuesday's results held warning signs for Obama, with white, working-class voters as strident as ever in their backing for Clinton. Exit polls in Kentucky suggested that 41 percent of Clinton supporters would vote for McCain.
"Senator Obama could win them," Clinton's communications chief Howard Wolfson said of blue-collar voters in swing states. "We believe we will win them."
But New Mexico Governor Bill Richardson, a Hispanic politician who backs Obama, told CNN that Obama had won "every demographic" in overwhelmingly white Oregon.
"So this talk that he can't win among white voters is just wrong. In addition to that, what you're seeing is Democrats uniting around Senator Obama," he said.
With all precincts reporting in Kentucky, Clinton won 65 percent to 30 percent. With 88 percent of precincts reporting, Obama had a 58-42 percent edge in Oregon.
The Democrats
Still unresolved
Is Hillary Clinton still campaigning to be the presidential nominee, or for something else?
ON TUESDAY May 20th, as expected, two states produced a split decision in America's Democratic primaries. Kentucky voted for Hillary Clinton, by a stonking 35-point margin. Barack Obama won in Oregon, by a smaller but still impressive margin. Both candidates planned to campaign next in Florida, a big, swing state.
Mr Obama wants to pull the state his way in November's general election, when he expects to be the Democratic nominee against John McCain. Mrs Clinton, by contrast, wants to highlight the fact that Florida's delegates were stripped because the state voted too early for Democratic Party rules. Because a majority of Floridians voted for her anyway, she is trying to reinstate the state's delegates, and somehow cling to the notion that she can win the nomination.
What is she playing at? After Tuesday, Mr Obama’s commanding lead has been further cemented, despite Kentucky. He has finally secured a majority of pledged delegates (not including Florida and Michigan). Although he did not explicitly declare victory in the campaign, he is all but there, with just three primaries to come. He calls the nomination “within reach”. Mrs Clinton invoked Florida in her victory speech, along with another state, Michigan (which also voted for her, mainly because Mr Obama took his name off the ballot after it too broke party rules by voting early). She implies that if only their delegates are seated, the race looks different. It does not. If she does well in the final contests, and counts the disputed Florida and Michigan votes, she may come out with a popular-vote lead over Mr Obama. But even with those states she would lack delegates.
To overcome her rival she would have to convince a vast majority of the remaining 180 or so uncommitted party-insider superdelgates to overturn the big pledged-delegate lead that Mr Obama has built. That, too, looks unlikely. Ever since primaries two weeks ago in North Carolina and Indiana, superdelegates have been breaking heavily in his favour. That seems unlikely to change.
One theory is that Mrs Clinton is playing her cards to get the vice-presidency. This would be her best shot at becoming the first woman president: after eight years of serving as Mr Obama's second. She may have hinted at that, speaking of party unity and saying that she and Mr Obama saw “eye to eye” about beating John McCain, even as they stood “toe to toe” battling each other.
Mr Obama, presumably, would not be especially keen to pick her. She has done well among working-class white Democrats in the Appalachian mountains, who may break for Mr McCain in the autumn. But another vice-president might do just as well. Names bandied about include Jim Webb, a Vietnam-veteran senator and critic of the Iraq war from Virginia, or Sam Nunn, a conservative former senator from Georgia and expert on nuclear proliferation. Neither would be as likely as Mrs Clinton, and her husband, to distract from the nominee's message of change.
Another possibility is that she has her eye on becoming the Senate majority leader, a prize that she might expect after her strong showing this year, in exchange for bowing out.
But some of her foes think she has more sinister aims. Besides talk of unity, she took a few shots at Mr Obama in her Kentucky speech, implying that she was best positioned to win in November. Perhaps she is preparing herself, in the case of Mr Obama being defeated by Mr McCain, to seek the presidency in 2012. She would be well positioned, having run a long and strong race, to take on an elderly President McCain (he would be 76), or to rival a weaker non-incumbent.
For now, at least, Mr Obama is sanguine. He gave a confident speech in Iowa, repeating calls for hopeful change and taking a few harder-edged shots at Mr McCain. He is in general-election mode, trading barbs with the Republicans over the wisdom of negotiating with dictators. He even complimented Mrs Clinton, saying “we all admire her courage, her commitment and her perseverance.” Such admiration will fade, however, if her perserverance comes to look more like sabotage.
Euro Strengthens as Ifo Says German Business Confidence Rose
May 21 (Bloomberg) -- The euro gained one cent against the dollar after Germany's Ifo business confidence index unexpectedly rose, bolstering the argument for the European Central Bank to keep interest rates high to stem inflation.
The British pound fell against the dollar after the minutes of this month's Bank of England meeting signaled policy makers remain reluctant to lower interest rates amid accelerating inflation. Australia's dollar reached a 24-year high against the U.S. currency as crude oil rose above $130 a barrel.
``The Ifo number had significant impact on currency markets and continues to give the euro legs,'' said Dustin Reid, a senior currency strategist at ABN Amro Bank NV in Chicago. ``We don't see the ECB cutting rates this year.''
The euro climbed to $1.5749 as of 10:19 a.m. in New York, from $1.5646 yesterday. It touched 80.256 pence per pound, the highest since April 24, from 79.490 yesterday, and rose to 162.99 yen, from 162.22. The yen was little changed at 103.52 per dollar, from 103.68.
The Munich-based Ifo institute said its index, based on a survey of 7,000 executives, rose to 103.5, from 102.4 in April. Economists predicted a decline to 102, according to the median of 44 forecasts in a Bloomberg News survey. Germany is the biggest economy in the euro region.
The yield advantage of a two-year German bund over a comparable Treasury note rose 3 basis points, or 0.03 percentage point, to 1.72 percent. The spread was 1.34 percent on May 13.
`Premature' Conclusion
The dollar has fallen 2.2 percent versus the euro since May 8, when it touched $1.5285, a 4.6 percent rebound from its record low of $1.6019 on April 22. A report on May 23 from the National Association of Realtors is forecast to show sales of previously owned homes in April fell for the eighth time in nine months, according to a Bloomberg News survey.
``The dollar rally was a bit premature,'' said Robert Sinche, head of global currency strategy at Bank of America Corp. in New York, in an interview on Bloomberg Radio yesterday. ``There have been some glimmers of hope that maybe the U.S. economy was not as soft as some previously thought, but we think that conclusion was a bit premature.''
The ECB shelved a planned interest-rate increase last year to assess the economic impact of the credit squeeze. It has left its benchmark rate at a 6 1/2-year high of 4 percent since June. ECB President Jean-Claude Trichet said last month there is ``strong short-term upward pressure on inflation' and the economy has ``sound'' fundamentals.
The pound fell 0.3 percent to 1.9635 versus the dollar as the British central bank's minutes from the May 8 meeting showed its Monetary Policy Committee voted 8-1 to leave the main rate at 5 percent as consumer-price growth held above the 2 percent target for a seventh month.
Commodity Currencies
A government report tomorrow may show retail sales in Europe's second-largest economy fell in April. Sales at U.K. stores dropped 0.5 percent, after sliding 0.4 percent in March, according to the median of 30 forecasts in a Bloomberg News survey of economists.
Currencies influenced by commodity prices climbed as the price of crude oil rose above $130 a barrel for the first time and gold gained for a fifth day. The Australian dollar touched 96.52 U.S. cents, the highest since 1984, from 95.86 cents yesterday, and Canada's currency rose 0.7 percent to C$1.0152 per U.S. dollar. Commodities including oil account for about half of Canada's exports.
The correlation coefficient between oil prices and the euro- dollar exchange rate has been 0.95 for the past year, indicating they have moved in the same direction 95 percent of the time.
Fed Minutes
The Dollar Index traded on ICE futures in New York, which tracks the greenback against the currencies of six trading partners, was 72.121 after touching a one-month low of 71.981.
The minutes of the Federal Reserve's April 30 meeting, to be released today, may show policy makers voiced concern that rising commodity prices could fan inflation. Central bankers at that session cut the benchmark interest rate for overnight loans between banks by a quarter-percentage point to 2 percent.
Futures on the Chicago Board of Trade show traders see an 88 percent likelihood the Fed will keep its target rate for overnight lending between banks at 2 percent on June 25. The balance of bets is for a reduction to 1.75 percent.
``It is understandable for the dollar to weaken,'' said Satoru Ogasawara, foreign exchange analyst and economist at Credit Suisse Group in Tokyo. ``The Fed thinks downside risks to the economy are persistent.''
Oil Rises Above $132 on U.S. Supply Drop, Bank Price Forecasts
May 21 (Bloomberg) -- Crude oil rose to a record above $132 a barrel as U.S. stockpiles unexpectedly dropped and banks raised price forecasts in the past week on expectations supply constraints and demand growth will persist.
Supplies fell 5.32 million barrels to 320.4 million last week, the biggest drop in four months, the Energy Department said. Oil for December 2016 delivery rose more than $20 a barrel, or 17 percent, after Goldman Sachs Group Inc. on May 16 raised its outlook to $141 a barrel for the second-half of the year.
``What we have here is a situation where essentially higher prices aren't generating any more supply,'' Paul Sankey, an analyst at Deutsche Bank Securities in New York said in an interview with Bloomberg radio. ``What we have to do is keep pricing the commodity higher until demand starts falling,'' which ``is around $150 a barrel.''
Crude oil for July delivery rose $2.78, or 2.2 percent, to $131.76 a barrel at 10:58 a.m. on the New York Mercantile Exchange, after reaching $132.08. Prices are 99 percent higher than a year ago.
Brent crude oil for July settlement rose $3.33, or 2.6 percent, to $131.17 a barrel on London's ICE Futures Europe exchange. The contract touched $131.57 today, the highest since trading began in 1988.
An inventory increase of 300,000 barrels was forecast, according to the median of responses by 15 analysts surveyed by Bloomberg News before the report's release.
The department released its weekly report on inventories at 10:30 a.m. in Washington.
The crude-oil market is ``well supplied,'' Libya's top oil official Shokri Ghanem said today, rejecting calls for the Organization of Petroleum Exporting Countries to increase production to curb prices. OPEC, which pumps more than 40 percent of the world's oil, isn't planning to meet before its next scheduled conference in September to review production, he said.
`Playing With Fire'
``OPEC is playing with fire,'' said Rick Mueller, director of oil practice at Energy Security Analysis Inc. in Wakefield, Massachusetts. ``While they may be right from a fundamental standpoint about crude supplies, at this time it will take more than words from them to bring prices down. We will need to see more gestures like the Saudis made, to lower prices.''
Saudi Oil Minister Ali al-Naimi told reporters on May 16 that the kingdom is planning a 300,000 barrel-a-day output increase, to bring June production to 9.45 million barrels a day.
``Once prices hit $150 or $200 like our friends at Goldman are saying, we are looking at $5 or $6 gasoline, which will really hurt demand and cause a recession,'' Mueller said.
Goldman analyst Arjun N. Murti said in a May 16 report that ``the possibility of $150-$200 per barrel seems increasingly likely over the next six-24 months.'' Murti first wrote of a ``super spike'' in March 2005, predicting crude may trade between $50 and $105 a barrel through 2009.
Airline Pain
Airlines have been hit by higher jet fuel costs. The price of the fuel, the largest expense at many airlines, has climbed 84 percent in the past year and traded at a record $3.9684 a gallon in New York Harbor today.
AMR Corp.'s American Airlines, the world's largest carrier, will slash U.S. capacity as much as 12 percent, retire at least 75 jets and cut an unspecified number of jobs in response to fuel prices and slowing demand.
The planned capacity reduction is more than twice what American had announced in April, and represents the third cut this year, AMR said today at its annual meeting. The Fort Worth, Texas-based company will add a $15 fee for the first checked bag.
Obama's Oregon Win Brings Him to Nomination's Brink (Update1)
May 21 (Bloomberg) -- Barack Obama, by winning yesterday's Oregon primary, now has a majority of pledged delegates to the Democratic convention, a benchmark that party leaders said would be the standard for gaining the nomination.
Oregon was one of two presidential primaries on a day that rendered a split decision. Obama had 58 percent of the vote to Hillary Clinton's 42 percent in Oregon with 88 percent of precincts reporting. Clinton won Kentucky's primary by a 36-point margin.
With 1,956 delegates, according to an Associated Press tally, Obama is now 70 delegates shy of the 2,026 total number needed to clinch the nomination. The results from yesterday's primaries left Clinton with 1,776 delegates, or 250 short of the nomination threshold, the AP said.
There were 52 delegates at stake in Kentucky and 51 in Oregon. Obama won at least 39 delegates in the two states and Clinton won at least 54, according to AP. The delegates were still being allocated from the Oregon race, AP said.
Party leaders such as House Speaker Nancy Pelosi, who is chairwoman of the Democratic convention, have said the lawmakers and party officials who will vote as superdelegates shouldn't overturn the will of voters.
``We've never had a nominee in the modern era who won a majority of the pledged delegates who did not win the nomination,'' said Tad Devine, a strategist for Democrat John Kerry's 2004 presidential bid.
`Within Reach'
Obama, 46, went last night to Iowa, where he won the first contest in the Democratic race on Jan. 3. That victory gave what was then a long-shot campaign the burst of momentum that has carried him to the brink of the nomination.
``We have returned to Iowa with a majority of delegates elected by the American people, and you have put us within reach of the Democratic nomination for president,'' Obama told supporters at a rally in Des Moines.
He stopped short of declaring victory in the nomination race. His next challenge is uniting the party after an extended and sometimes bitter campaign against Clinton, who has rejected the idea that Obama has a lock on the nomination. In his Iowa speech, he expressed his admiration for Clinton and called for Democrats to close ranks now for that fight ahead against Republican John McCain.
``The hardest and most important part of our journey still lies ahead,'' he said.
Swaying Superdelegates
Along with winning more pledged delegates than Clinton, the Illinois senator keeps rolling up superdelegates, including two yesterday. That brings his superdelegate tally to 306.5, compared with Clinton's 279.5. In the past two weeks, he has outpaced Clinton in such endorsements by better than 10-to-1.
David Axelrod, Obama's chief strategist, said it's ``very likely'' that Obama will have enough pledged delegates and superdelegates to sew up the nomination by June 3, when the primaries end.
Clinton is trying to sway the roughly 200 superdelegates yet to declare. Party leaders are pushing them to pay attention to the primary and caucus results.
It would be ``a problem for the party if the verdict would be something different than the public has decided,'' Pelosi said in a Bloomberg interview in February.
Diehard Supporters
Obama, who has already turned his attention to the race against McCain, now must win over diehard Clinton supporters, including women and blue-collar workers. Those voters mostly have gone to Clinton, 60, in swing states such as Pennsylvania, Ohio and West Virginia and bolstered her margin in Kentucky.
The New York senator won 66 percent of Kentucky Democrats making less than $50,000 a year and 68 percent of those without a college education, Fox News reported, citing exit polls. And 32 percent of Kentucky's Democratic primary voters said they would vote for McCain over Obama, the polls showed.
Democratic strategist Peter Fenn, who is neutral in the race, said Obama ``has to be very concerned about these voters'' and ``prove to people he's a unifying force.''
That challenge is illustrated by Memorye Hegedus, 62, a retired bookkeeper from Covington, Kentucky, who said she and her friends are sending whatever they can afford to keep Clinton's campaign going.
``I'll never vote for Obama; I'll vote for McCain,'' Hegedus said.
Numbers Dispute
Clinton's strategy focuses on counting Michigan and Florida. The two states were stripped of their delegates and the results not counted by the national party organization because they held early primaries. A party committee is scheduled to meet May 31 to determine what to do about those delegations.
Clinton and her supporters argue that the votes, and the delegates, in Michigan and Florida must be counted toward the nomination.
``Democrats in those two states cast 2.3 million votes, and they deserve to have those votes counted,'' Clinton said last night. She contends the nominee needs 2,210 delegates, rather than the 2,026 under the current rules.
Last year, Clinton and the other candidates agreed to the penalties imposed on the two states and skipped campaigning in Michigan and Florida. Obama withdrew his name from Michigan's ballot, though he remained on Florida's.
Democratic strategists and independent analysts say there may not be any harm in the race playing out, provided the rhetoric stays civil.
``The differences with McCain on the economy, Iraq, and health care are so stark that the fall campaign will almost certainly bring more than nine out of 10 Democrats back into the fold,'' said William Galston, a senior fellow at the Washington- based Brookings Institute and former domestic policy aide to Bill Clinton.
U.S. Stocks Fall, Led by Financials, on Credit-Rating Concern
May 21 (Bloomberg) -- U.S. stocks fell for a second day, led by financial companies, on concern computer errors at Moody's Investors Service may result in bond downgrades and lower earnings at banks.
Moody's Corp. tumbled the most in two years after the world's second-largest credit-rating company said it is investigating whether it may have mistakenly assigned Aaa ratings to debt securities that later fell in value. Lehman Brothers Holdings Inc., the fourth-biggest U.S. securities firm, retreated after its second-quarter earnings estimate was slashed 93 percent by Merrill Lynch & Co. analysts. Home Depot Inc. led a retreat in consumer shares after crude oil climbed above $132 a barrel.
The Standard & Poor's 500 Index lost 4.04 points, or 0.3 percent, to 1,409.36 at 11:19 a.m. in New York. The Dow Jones Industrial Average slid 91.11, or 0.7 percent, to 12,737.57. The Nasdaq Composite Index fell 5.03, or 0.2 percent, to 2,487.23. Six stocks dropped for every five that rose on the New York Stock Exchange.
The S&P 500 Financials Index slumped to the lowest level since April 15 as 81 of its 92 companies retreated.
Moody's slumped 12 percent to $38.85. Some senior staff at Moody's were aware in early 2007 that constant proportion debt obligations, funds that used borrowed money to bet on credit- default swaps, should have been ranked four levels lower, the Financial Times said, citing internal Moody's documents. Moody's altered some assumptions to avoid having to assign lower grades after it corrected the error, the paper said.
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