Opening Bell: Is Housing Bill Tough Enough?

May not ‘put a floor’ under the market; stimulus checks have little impact; former AOL execs indicted; etc.

The Senate finally nailed down a deal on a housing bill, something The Wall Street Journal deems worthy of page one, but which The Washington Post briefs on D2. The New York Times splits the difference, and puts it on C1.

The bill, similar to one that already passed in the House, would let the government back as much as $300 billion in refinanced mortgages, which the papers say could help 500,000 borrowers. Lenders would have to cut borrowers’ principal, write off the losses, and pay a monthly fee to insure taxpayers against losses. That helped the Bush administration change its position from veto threat to “willing to consider,” the NYT reports.

But the whole thing is an exercise in futility if banks don’t cut borrowers some slack, which the WSJ writes is a real possibility:

One practical issue: Lenders thus far appear reluctant to voluntarily write down the value of loans, even though this may be a cheaper option than foreclosure. Nonetheless, congressional staffers said the expanded FHA program is expected to help between 500,000 and one million people refinance into more affordable loans.

Thomas Lawler, a housing economist in Leesburg, Va., says he doubts the package will “put a floor” under the market, as Sen. Dodd predicted. Writing down the principal owed by distressed borrowers will be only the “last resort” of lenders, which are more inclined to reduce interest payments or give borrowers more time to repay their loans, Mr. Lawler said.

The bill would also create a new agency to regulate Fannie Mae and Freddie Mac, the government-sponsored enterprises that underpin the housing market by buying mortgages from lenders. The legislation must still be passed by the full Senate and reconciled with the House’s version.

How the cookie crumbles

The NYT reports on C1 that NexCen Brands, a buyout firm that owns Bill Blass and Athlete’s Foot among other brands, is about to go bust and said it had launched investigation of its accounting practices. The company is getting hit by the consumer slowdown and credit crisis, the paper says, and is likely to be taken under by cookies. Great American Cookies, that is, which it bought in October and has to make a big payment on soon. It had failed to disclose to investors that it had to make that payment, something that sparked the investigation. (The WSJ puts the story on C6 and doesn’t mention the investigation for some reason.)

But we think the Times is being kind to this company by blaming its woes primarily on the economy’s problems. Check out this business plan:

NexCen was created in 2006 with an unusual business plan. Unlike most buyout firms, which hope to sell off acquisitions quickly for a profit, it intended to create a conglomerate whose disparate divisions in food, fashion, furniture and sports would play off one another.

The idea was for Bill Blass designers to make athletic clothing to be sold at The Athlete’s Foot, or for Athlete’s Foot store operators to branch out and open a MaggieMoo’s or a Pretzel Time.

We’ve long known that when corporate executives start blathering about “synergy” that it’s time to raise the skeptical eyebrow. But come on! Shoes and pretzels? Bill Blass and the Athlete’s Foot?

Have we got a beauty for you!

The Journal on page one writes that car sales may have been another bubble of the last decade. It reports that sales peaked in 2000 and leveled off until two years ago when they started falling so significantly that the market won’t beat its previous record until 2012.

The paper says automakers pushed sales to “artificial highs” with aggressive pricing, no-interest loans, and low-margin sales to rental companies.

The industry’s miscalculations hold broader consequences for the U.S. economy. The auto industry is the nation’s largest manufacturing sector, accounting for almost 4% of U.S. gross domestic product. It employs about 2.5 million people directly or indirectly, and spends tens of billions of dollars a year in research and development.

Oh, what a tangled web…

The papers report that the Securities and Exchange Commission filed civil fraud charges against eight former AOL and Time Warner executives, including a chief financial officer, who it says were instrumental in illegitimately inflating advertising revenues by more than $1 billion beginning with the run-up to its merger with Time Warner. Four of the former execs settled, agreeing to pay a combined $8.1 million.

The Journal:

At the heart of the SEC’s inquiry was an alleged scheme in which AOL made so-called round-trip transactions to inflate revenue, by giving vendors money to buy online advertising they didn’t want or need. In 2005, the SEC sued Time Warner over related allegations. It also charged that AOL aided and abetted securities frauds at other companies… Time Warner settled the charges, paying a $300 million fine, and restated its earnings three times to correct its reported revenue.

SupCo spares the bond market

The Journal leads its Business & Finance news summary with the Supreme Court upholding the rights of states to offer tax breaks on municipal bonds, something the WaPo on D1 says “averts what might have been a calamitous upheaval in the bond market.” And that’s saying something: it’s a $2.6 trillion market. The move reverses a Kentucky Court of Appeals ruling, which the state’s supreme court let stand, that said such breaks violate the interstate commerce clause of the Constitution.

The Times on C3 says the ruling “was far from assured” and the WSJ writes that a different decision would have made it more expensive for state’s to borrow money. Bloomberg says the court didn’t “explicitly resolve” whether the tax breaks are constitutional.

Hello, my name is America, and I’m an addict

The Financial Times leads its front page with a report that for the first time in thirty-one years, American use of foreign oil “significantly” declined—at least as a percentage of its overall oil consumption. The paper says “high prices, more efficient cars, and the use of ethanol” are responsible for the shift, which the Department of Energy projects will continue until 2015, when it will begin to rise again.

But the story wasn’t exactly bulletproofed before it was published. It says foreign oil use will fall from 60 percent to 50 percent in seven years, but then goes on to say that the percentage was 58.2 percent last year, which would have been the apparent peak. And there appears to be a grand total of one source—the government—for the story.

Meanwhile, oil prices, you guessed it, hit another record yesterday, coming to rest at more than $127 a barrel.

Does the FAA bully whistleblowers?

The Journal continues its airline-maintenance scandal reporting, writing on A3 that investigators are looking into more than nine cases of alleged intimidation or punishment of whistleblowers by the Federal Aviation Administration—something the paper says shows the problems there could be more widespread than expected, especially since they were in several different regional offices. That seems to suggest a coordinated policy, or at least significant pressure, from the top.

Surprise! Stimulus checks aren’t boosting anything

In economic news, the index of leading indicators edged up 0.1 percent last month in a reading that doesn’t suggest a recession is under way.

The Journal writes that retailers aren’t expecting much of a boost from the $110 billion in stimulus checks now being mailed out and direct-deposited.

Surveys suggest creditors, savings accounts and gas stations will benefit much more from rebates than retailers, or the broader economy, will.

“What consumers are making, what worth they have in their home and what they’re able to spend—those are all still trending to the worse,” says Stifel Nicolaus retail analyst David Schick. “There’s no reason consumer spending should pick up.”

The government raised its forecast for 2008 food inflation by half a point, pushing it to 4.5 percent to 5.5 percent. That’s just a month after it raised its estimate last.

Lowe’s earnings dropped as same-store sales plunged more than 8 percent from a year ago, as they housing bust damped home-improvement purchases.

Bloomberg reports that financial analysts, including Meredith Whitney, who’s been one of the most prescient during the credit crisis, predicted the crisis will go into 2009 and beyond, with banks writing off another $170 billion in the next year and a half.

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 rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.