Opening Bell

LAT on Nafta; Portfolio's Eisinger on muni insurance; Euro-planes for the USAF; price of sawdust, etc.

The New York Times leads its front page with a report that cities and states are beginning to squawk at the system Wall Street has set up to rate the bonds they issue.

Wall Street almost always rates municipalities as far greater default risks than they are, increasing their cost of borrowing and lining the pockets of the monoline bond insurance industry and the hopelessly conflicted ratings agencies.

The Times story comes days after a Jesse Eisinger column in Portfolio dissected and eviscerated the municipal-bond-insurance business as a “racket.” If you want to know what the deal is with this industry, Eisinger’s column is the much better piece. We laud the NYT for going big with the story, but it’s low on hard numbers.

Portfolio says that since 1970, only about one in 1,000 municipal bonds went bad while one in ten corporate bonds did. Despite this (which is largely because of that awesome power known as taxation), cities and states are rated lower than corporations.

The municipalities’ credit ratings are too low. If rating agencies properly assessed them according to investors’ true risk of loss, muni bonds would have lower interest rates without the expense of insurance…

About two-thirds would probably be triple-A if they were rated with the same criteria used to rate corporate bonds.

The Wall Street Journal goes above the fold on its Money & Investing front with a good report on the high returns the turmoil is bringing to the normally staid municipal-bond market. It includes a telling stat: municipal bonds rated BBB have a default rate of 0.32 percent, about half that of corporate bonds given the top AAA rating.

Now that the firewall of the bond insurers has proven to be worth not much (despite ratings’ firms temporary reprieve last week), government officials are asking why they’re paying billions of dollars a year on $2.6 trillion in bonds to what is essentially a protection racket. The NYT:

“We are learning essentially that the emperor may have no clothes, that there is no real reason to require these towns to have insurance in many instances,” said Richard Blumenthal, the attorney general of Connecticut, who is investigating the ratings firms on antitrust grounds. “And it simply serves the bottom lines of the ratings agencies, the insurers or both.”

We couldn’t agree more with Eisinger that the implicit insurance requirements are out of line and with this essential point:

How the rating agencies handle municipalities really ought to be a bigger scandal. Think about it: Credit-rating agencies screwed up the mortgage-securities business because they were too lax in their ratings. They’re screwing up munis because they are too punitive. In both cases, they manage to benefit from their “mistaken” ratings.

The WSJ says Countrywide’s problems continue to accumulate. It takes a look on A2 at one of the mortgage company’s securities filings and finds It disclosed that fully half of the loans it holds are for homes in California and Florida. Whoa, Nellie! Those markets are the worst in the country and have a long way to tumble before they hit bottom.

Also, Countrywide borrowers were at least three months late on 5.4 percent of adjustable-rate mortgages, up big from the 0.6 percent rate of the year before. Twenty-seven percent of its subprime borrowers are at least a month late on their payments, up from 19 percent a year ago.

The Journal in a C1 Heard on the Street piece says commercial real estate is about to start hitting banks square on the jaw as prices begin to dip. The paper leans heavily on a Goldman Sachs report that expects values in the industry to tumble by a quarter or more by 2010 and that the fallout will last longer than that of the subprime debacle.

Wall Street’s big problem is it has $141 billion in exposure to commercial real estate, about $7 billion of which will have to be written down this quarter, according to Goldman’s estimate.

We would have liked to have seen the story look beyond Wall Street to the regular banks that are the biggest commercial real estate lenders. Those banks have hundreds of billions of loans for things like condominium projects that are going to go bust. The real pain in the economy will emanate from there.

The Los Angeles Times uses election-year politics as an excuse to take a decent look at Nafta fourteen years on. It finds it hasn’t quite worked out as promised.

Since Nafta was ratified in 1994, the U.S. has lowered costs for consumers but also contributed to the loss of more than three million manufacturing jobs, while our trade deficit with Canada and Mexico has skyrocketed more than fifteen-fold to $138.5 billion in 2007. And one of the big promises—that free trade would decrease illegal immigration—has proven laughable.

It may be considered “populist” to be skeptical about the overall benefits of free trade, but that’s because it’s, well, popular to be anti-free-trade.

Six in 10 Republican voters said that free trade had hurt the U.S. and that they would support tougher import restrictions, according to a Wall Street Journal-NBC News poll in October.

“We’re seeing the strongest opposition to free trade expansion in recent memory,” said Eric Farnsworth, vice president of the Council of the Americas, a Washington-based business group that promotes open markets in the Western Hemisphere. “NAFTA has become symbolic of the fears and apprehensions of globalization in general.”

It’s not just the protectionist Americans: Mexicans are anti-Nafta by two to one.

USA Today on the cover of its Money section takes a look at how free-trade policies have played out in Rust Belt Ohio. Its story is a bit too on-the-one-hand-on-the-other-hand for our taste.

One study, by Martin Baily, chairman of the Clinton administration’s Council of Economic Advisers, and Harvard University’s Robert Lawrence concluded that trade causes no more than 3% of all mass layoffs.

More important in the loss of manufacturing jobs, they say, is that computerized tooling has made factories far more efficient. In 1995, for example, it took 2.4 man-hours of work to produce 1 ton of steel at Cleveland’s main steel plant, then owned by LTV. This year, the current owner, India’s Mittal Steel, estimates it will produce a ton of steel using precisely half as much labor.

Trade policy critics, such as Robert Scott of the Economic Policy Institute, insist that NAFTA and expanded trade with low-wage countries such as China are to blame for more than half the manufacturing jobs lost since 2000. Demand for foreign-made goods is crowding out sales of products made in the USA. “The NAFTA model is broken,” he says.

The WSJ says the Dems’ Nafta bashing, which dominates in Ohio, stops at the border in Texas, where the pact is viewed more positively.

The Financial Times leads its front page with a report on the political backlash in the U.S. against this weekend’s awarding of a $35 billion aircraft contract to EADS, the European maker of Airbus planes, instead of homegrown Boeing. American defense company Northrop Grumman is EADS’s partner in the bid.

The paper says it’s boosting “protectionist” sentiment in the U.S. and quotes Senator Sam Brownback of Kansas:

“It’s stunning to me that we would outsource the production of these airplanes to Europe instead of building them in America,” said Sam Brownback, the Republican senator for Kansas, where Boeing has a site. “I’ll be calling upon the secretary of defence for a full debriefing.”

The FT says the planes will be assembled in Alabama.

The NYT on its C1 says OPEC is likely to change its mind about cutting oil production when it meets this week because prices are near inflation-adjusted records.

…leaders in OPEC nations are facing contradictory pressures. Even as the United States economy sputters and many consumers scale back their use of energy, oil prices are rising—something that appears to baffle the OPEC leaders.

Meanwhile, the WSJ reports on A1 that Americans are beginning to use less gasoline. It says gas consumption has dipped 1.1 percent in the last month and a half, the largest drop in sixteen years (other than the blip after Hurricane Katrina). The Journal says gas inventories are at their highest point since 1994.

A U.K. government committee is telling the financial industry to clean up its act by making their complex products easier to understand—or the government will do it for them, the WSJ says on A2. Hey, here’s some common sense.

The committee concluded after interviewing bank executives, among others, that complex debt products were at the “heart” of the credit market’s woes. Central to these problems was that products such as collateralized debt obligations—pools of debt repackaged into pieces with differing levels of risk and return—were so complex, so opaque and so badly explained that no one, let alone investors, truly understood their risks, the report concluded.

If banks aren’t doing a better job of explaining such risks within six months to a year, “then regulation would be the only way to sort it out,” said John McFall, the member of Parliament who led the inquiry, in an interview.

Mr. McFall said that one bank executive, in his testimony to the committee, said that he wasn’t an “expert” in products such as CDOs, a statement Mr. McFall views as emblematic of what went wrong. “If you have an executive of a big bank not understanding what a CDO is, what chance has an ordinary” person, Mr. McFall said.

Can we import this guy to Washington?

In economic news, the Journal has an interesting page-one “ahed” that reports on one unforeseen fallout from the housing bust—the price of sawdust has skyrocketed.

The price of a 23-ton trailer load of sawdust has jumped to $2,000 from $400 or so two years ago. But Mr. Stulce isn’t happy: He simply can’t find enough sawdust, and the shortage is costing him $30,000 a month in lost sales. He has laid off 10 of his 22 employees.

Opening Bell is your guide to the top business stories of the day from all over. But I can’t read everything out there—it’s 3 a.m., for Pete’s sake! If you’re an editor or reader who sees good work in local or regional papers—anything besides the WSJ, FT, NYT, and Bloomberg—send it my way at

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.