Opening Bell: Wrong Track

Consumer confidence dives again; so do home prices; real estate crimes; Buffett on porn; etc.

Consumer confidence plummeted, raising fears of a deeper recession if the pessimism translates into lower spending.

The Wall Street Journal splashes the news across four columns on page one, while The New York Times stuffs it on C3. It was the lowest reading from the Conference Board’s consumer measure in sixteen years, but consumers’ expectations were even worse—their outlook for the next six months soured to the worst since records began forty-one years ago.

“This is incredibly awful,” the Times quotes an analyst saying. Bloomberg says the drop was far worse than expected.

The survey found that consumers are increasingly pessimistic about their job prospects and chances of getting raises. Barron’s Econoday calls the no-confidence news a “very rare statement of discontent” notable for the fact that “there is an expansion still underway and this is not a time of war, which makes the results difficult to figure.”

Um, actually it’s still a time of wars.

Room to drop

Adding to the gloom, home prices fell 15.3 percent in April from a year earlier, the worst showing in twenty years, and prices were off 1.4 percent from March alone, according to the Case-Shiller index , which measures twenty metropolitan areas (The Office of Federal Housing Enterprise Oversight, which has a broader measure but which doesn’t include houses bought with subprime mortgages, says prices declined 4.6 percent from a year ago. The Journal notes that home prices have fallen back to where they were in 2004 and the Times quotes an economist saying they may go further.

“House prices still have room to drop a lot more,” wrote Patrick Newport, an economist at Global Insight, a research firm in Lexington, Mass.

“Given the current level of unsold homes on the market, the number of foreclosures already in or about to enter the pipeline and the run-up in prices over 2000-6, this index is likely to drop much more,” he wrote.

Just 2.2 percent of consumers expect to buy a house in the next six months, the Journal says. That’s the lowest number in twenty-five years.

It’s all pointing to deepening economic decline, especially once the one-time boost from the government tax-rebate cash drop dissipates. The WSJ:

“The final quarter [of 2008] could be a big mess,” said John Lonski, chief economist at Moody’s Investors Service. He noted a host of risks to growth through early next year: rising prices of goods and services, continued pain in the housing market, and a possible slowdown in consumer spending once the impact of federal economic-stimulus checks fades. “That might be when we finally observe back-to-back quarterly declines” in gross domestic product, which typically signify recession, he said.

The Times on C1 says “approval is near” for the housing bill rumbling through Congress. It would refinance mortgages into fixed-rate loans with federal guarantees (something The Washington Post says was proposed by Credit Suisse) and give tax credits for first-time buyers.

Room to rise

Everybody notes that the news makes it less likely—or at least more difficult—for the Federal Reserve to raise interest rates later this year to fight inflation. The question is will the anemic economy put the brakes on price increases or has a stagflationary phenomenon really taken hold?

The Financial Times on page one says the “spectre of inflation returned to haunt the economy” as companies like Dow Chemical moved to pass on soaring energy and commodities prices to their customers. It was the second time in the last month that Dow Chemical said it would raise prices (by 25 percent, on top of last month’s 20 percent hike), news the NYT puts on C1 and the Journal on B3. The NYT:

Dow’s announcement is the latest indication that companies are beginning to pass along the burden of high energy prices to consumers. Until now, those prices had largely been absorbed by company profits because market competition prevented retailers from increasing prices at their stores even as skyrocketing costs continued to strain earnings. But extreme pressure is building in the production chain.

The bum news, along with a negative earnings outlook from economic bellwether UPS, sent stocks down to their lowest level in three months, which was around the time of the Bear Stearns crisis.

Illinois acts where feds don’t

The NYT on C1 and the Journal on A12 report that the state of Illinois is filing a civil suit against Countrywide and its CEO Angelo Mozilo for defrauding borrowers. The Chicago Tribune runs wire copy.

The lawsuit requests that a judge grant relief to borrowers by requiring Countrywide “to rescind or reform all the questionable loans it sold” since 2004. The Times notes the investigation has been ongoing since the fall and found some interesting information:

In reviewing one Illinois mortgage broker’s sales of Countrywide loans, the complaint said the “vast majority of the loans had inflated income, almost all without the borrower’s knowledge…”

“People were put into loans they did not understand, could not afford and could not get out of,” (the AG) said. “This mounting disaster has had an impact on individual homeowners statewide and is having an impact on the global economy. It is all from the greed of people like Angelo Mozilo.”

The Times reports that the lawsuit says nearly 60 percent of the lender’s subprime borrowers who were put in hybrid adjustable-rate mortgages, which required minimal payments in early years (interest-only, for instance), couldn’t have afforded a regular mortgage where they had to pay the principal.

The lawsuit just adds to Countrywide’s mounting woes. It’s also being investigated by the FBI, the Securities and Exchange Commission and the Federal Trade Commission, for crimes including securities fraud, and it faces a number of shareholder lawsuits, along with one by the United States Trustee for abusing the bankruptcy system. The Times notes, while the Journal doesn’t, that the Illinois suit adds to the risks Bank of America is taking on in its buyout of Countrywide.

Bloomberg has an interesting report that Bank of America’s purchase of Countrywide may be covered almost entirely by tax writeoffs from the lender’s losses, or as it says, “financed by 138 million tax-paying Americans.”

Crime blotter

In other real-estate crime news, the Journal on A1 and the Times on C3 say Raffaello Follieri, a strange character who touted ties to the Vatican to drum up real-estate business, was charged in federal court for fraud, conspiracy, and money laundering. The twenty-nine-year-old had ties to Ron Burkle and Bill Clinton and once entertained John McCain on a yacht off the coast of Montenegro. Follieri once claimed he was chief financial officer of the Vatican and could buy church property on the cheap.

In another story, the Journal on A3 says the FBI and state regulators are investigating a Philadelphia real-estate loan broker with ties to former vice-presidential candidate Jack Kemp for allegedly committing millions of dollars in fraud.

Stupid banking tricks

The Journal has a good C1 story saying small banks are about to get hit by interest reserves they accounted for from real-estate developers who are going bust. Regulators have already issued cease-and-desist orders to several banks for how they use those reserves and they are wary that the practice is easy to use to cover up failing loans.

Small banks, which are more exposed relative to bigger banks, have $280 billion of outstanding construction loans overall, mostly to condominium developers and home builders. When the loans were made, the banks calculated the interest that would be paid and put that money aside in “interest reserves.” In essence, the banks pay themselves until the loan becomes due or the property generates cash flow.

Regulators fear this practice can be abused to keep recording loans as performing even though the underlying real-estate projects are failing.

But as projects are delayed or can’t be sold, those interest reserves are running out, which the Journal says may augur a “sudden jump” in defaults. The paper analyzed data from 8,000 banks for the report.

The Chicago Tribune says the Chicago office-building market is the worst since 1990. No buildings have sold in the second quarter and companies are taking properties off the market.

And now…

The Los Angeles Times reports Chrysler will offer wireless Internet in its new cars starting this year, a first for an automaker.

Perhaps not surprisingly, safety advocates were less than overwhelmed by Chrysler’s innovation.

“Surfing the Web is something people really don’t have any business doing while they drive,” said Jonathan Adkins, spokesman for the Governors Highway Safety Assn. “It’s definitely a distraction.”


The Quote of the Day comes from Warren Buffett, as reported by Bloomberg, responding to a question about why companies should sell to Berkshire Hathaway rather than private equity:

”You can sell it to Berkshire, and we’ll put it in the Metropolitan Museum; it’ll have a wing all by itself; it’ll be there forever,” he says at the February meeting. “Or you can sell it to some porn shop operator, and he’ll take the painting and he’ll make the boobs a little bigger and he’ll stick it up in the window, and some other guy will come along in a raincoat, and he’ll buy it.”

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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.