Opening Bell: New Fronts in the Credit Crunch

FT and WSJ make predictions; gas prices crushing rural poor; about that AOL whistleblower; etc.

The Financial Times and The Wall Street Journal pull out their crystal balls to predict what the credit crunch will squash next. It’s not a good sign that they come up with two different answers.

The FT on page one says regional lenders in the U.S. are the next to get hit hard as home-equity loans become “the next front” of the crisis. That doesn’t seem like too controversial a thesis, so the paper should have been able to come up with a comment from someone other than an unnamed “Wall Street executive.”

Homeowners, of course, used their houses like ATMs during the fevered run-up in prices that took hold in many markets, especially on the coasts. Now, with the boom going the other way, that’s eroding whatever equity margin was left for many of these borrowers.

The FT says home-equity loans are about 11 percent to 13 percent of the portfolios of the top thirty banks, but that rises to more than 20 percent at some banks and there’s $625 billion of the things outstanding.

The Journal on C1 says wait a minute, something called “Corporate synthetic collateralized debt obligations” could be the next area of woe.

If you’re still reading after that last sentence, synthetic CDOs are investments that sell insurance against debt defaults (credit-default swaps). Corporate synthetic CDOs sold swaps on corporate bonds, and the Journal says the downturn in the economy is making these bets look “shakier.”

That could trigger downgrades in the $6 trillion market, forcing some investors to sell their securities or at least post significant losses.

Fitch Ratings is getting ready to revisit its ratings on the confangled things, and an outside report says it could downgrade about half of the $50 billion of them it rates. But the WSJ says the problems “probably won’t be as bad” as those of mortgage CDOs.

$4 gasoline hits rural poor hardest

The WSJ and The New York Times each post page-one stories flagging the dawn of $4 a gallon gasoline across the U.S.

The Times weaves the news into a nice report out of how the burden is falling disproportionately on rural Americans. On average, people in the U.S. spend 4 percent of their income on fuel (though the WSJ says that number is 6 percent of “wage income”), but in a handful of rural southern counties the number tops 13 percent, “rivaling what families spend on food and housing.”

Anthony Clark, a farm worker from Tchula, (Mississippi) says he prays every night for lower gasoline prices. He recently decided not to fix his broken 1992 Chevrolet Astro van because he could not afford the fuel. Now he hires friends and family members to drive him around to buy food and medicine for his diabetic aunt, and his boss sends a van to pick him up for the 10-mile commute to work.

A trip from Tchula to the nearest sizable town about 15 minutes away can cost him $25 roundtrip—for the driving and the waiting. That is about 10 percent of what he makes in a week.

The Times story is a document of the pain gripping Americans on the margins of the economy, and while it focuses on rural areas, it’s worth remembering that these things are happening to those on the fringes of the urban economies, too, (though probably less because of the shorter drives) the majority of which don’t have decent alternative-transportation systems.

Sociologists and economists who study rural poverty say the gasoline crisis in the rural South, if it persists, could accelerate population loss and decrease the tax base in some areas as more people move closer to urban manufacturing jobs. They warn that the high cost of driving makes low-wage labor even less attractive to workers, especially those who also have to pay for child care and can live off welfare and food stamps.

“As gas prices rise, working less could be the economically rational choice,” said Tim Slack, a sociologist at Louisiana State University who studies rural poverty. “That would mean lower incomes for the poor and greater distance from the mainstream.”

Suddenly, commuter towns don’t look so good

Jumping off from that part of the Times story, we’re likely to see a landmark shift in the living patterns of Americans if the high price of getting places continues—and who thinks it’s going to go down much? Bloomberg takes note of this in a story on how gas prices are hurting consumer wealth by reducing the value of houses in far-out suburbs.

Emerging suburbs and exurbs—commuter towns that lie beyond cities and their traditional suburbs—grew about 15 percent from 2000 to 2006, nearly three times as fast as the U.S. population, as Americans moved further out in search of more affordable houses or the bigger ones that are sometimes derided as McMansions.

“It was drive until you qualify” for a mortgage, says Robert Lang, director of the Metropolitan Institute at Virginia Tech in Alexandria, Virginia. “You can’t do that anymore. Your cost of transportation will spike too much.”

That’s the Quote of the Day.

Reading the bond leaves

The Journal on C1 says that bond prices across the world are signaling rising economic distress, something that could knock out “an important prop from under the stock market” (and, we’d add, the broader U.S. economy, which has been shored up somewhat by rising exports).

In Europe, long-term bond yields are below short-term yields, a rare occurrence called an “inverted yield,” which almost always precedes an economic downturn as investors flock to the safety of long-term bonds. But in Asia, bond yields are signaling worries about inflation, the paper says.

This reflects the tug of war at work in the global economy. Many developed economies are still hurting because of the collapse of real-estate markets and the credit crunch. Wednesday the Eurostat statistics agency said retail sales in the 15 countries that share the euro fell in April for the third straight month, surprising analysts who had been predicting an increase.

On the other side of the divide are the strong-growth emerging economies whose demand for raw materials and energy has driven prices higher. They are now seeing the challenges of that boom. In India, the government last week was forced to increase retail prices of fuel products. The result, analysts say, will likely be upward pressure on the country’s lofty inflation rate, which could lead to higher interest rates and ultimately slower growth.

Housing crisis? What housing crisis?

The Washington Post reports on D1 that the housing bust be damned! You can still buy homes with no money down with money from government-sponsored enterprises Fannie Mae and Freddie Mac.

Never fear, these borrowers have to go to “homeowner education” programs. It gets even better, the two allow some borrowers to get up to 105 percent financing by adding a piggyback loan to the mortgage.

Fannie Mae mentioned the continued availability of 105 percent financing last month in a news release announcing that it was abandoning a policy that required extra down payments in markets where home prices were declining. The company’s new policy allows buyers to borrow up to 97 percent of the purchase price with conventional mortgages.

Even as it eased the requirement, Fannie Mae said in the news release that down payments “are a critical success factor in homeownership.”

Ya think?

Hold nose, take money

The Journal says on its Money & Investing front that Lehman Brothers is going to get that big infusion of capital—more than $5 billion in total, including some from the state of New Jersey’s pension funds.

It also wonders somewhat incoherently (next to a story about who’s bailing out a bank with $5 billion) in a separate C1 column who’s going to rescue the banks next. Lots of the private-equity and sovereign-wealth funds that poured into banks and investment banks over the last several months have seen their investments decline big time. It raises the possibility of “Algeria, Angola, Libya and Zimbabwe” as well as Kazakhstan.

Selling stakes to funds of authoritarian or unstable regimes in frontier markets doesn’t quite mesh with Wall Street’s lofty image of itself. But it created this mess, and beggars can’t be choosers.

Wrong man?

The Times on C1 looks at the weird story of a former AOL chief financial officer who blew the whistle on that firm’s fraudulent activities early this decade but is now being charged by the feds with financial fraud, along with seven other former executives.

The Times seems to come down on the side of the former exec, Joseph A. Ripp, quoting a litany of former colleagues and even prosecutors saying he was upstanding and was the “white hat” in the matter. The former editor in chief of Time Incorporated calls the charge “almost Kafkaesque.”

And indeed, it would be a bizarre turn of events if someone who blew the whistle on the ad-revenue inflation he found at AOL when he came over from Time Warner during the merger is ultimately found to be responsible for it. It seems the federales might not have even known about the stuff if it hadn’t been for Ripp, and other agencies (he’s being prosecuted by the Securities and Exchange Commission) have said he was the good guy in the matter.

IRS is after Anschutz

The Journal on A1 reports that the IRS is trying to get one heckuva tax bill out of billionaire Philip Anschutz. The government says he owes it $144 million in back taxes, and the Journal says the “court battle is part of a broad attempt by tax authorities to crack down on complex transactions used to defer paying capital-gains taxes.”

The paper says executives at other big companies have used “variable prepaid forward contracts” like Anschutz did, though it isn’t clear whether they did so for tax purposes, though it’s “typical” of such deals. Not one of the six companies, including Starbucks, Tyson Foods, and Cablevision Systems, would comment.

Much attention in the current presidential campaign has focused on tax breaks for the wealthy, including the cutting of the capital-gains tax rate to 15% early in the Bush administration. But less noticed is how some of the wealthiest Americans sometimes don’t even pay that full 15% rate, by deferring their taxes for many years. In Mr. Anschutz’s case, the transaction is scheduled to defer the taxes for nearly a decade.

Critics say such transactions could undermine the progressive nature of the income-tax system, because the deferrals effectively lower the taxes paid by the extremely wealthy.

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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.