Opening Bell: The Incredible Shrinking Tribune

Zell slashes pages, people; foreclosures gone wild; UBS ready to sing; AIG faces criminal investigation; etc.

The Tribune Company is slashing its papers’ newshole and employees in a bid to stay afloat under its staggering debt. Across the company it will drop 500 pages of editorial content—about 12.5 percent of the total, The Wall Street Journal says on B8—every week in a bid to bring the level down to balance evenly with advertising. The Los Angeles Times alone will lose eighty-two pages of news a week.

To add to the woes, it looks like the LAT, Chicago Tribune, Baltimore Sun, and the like are about to get Gannett-ized. The New York Times on C3:

In his note to employees, (CEO Sam) Zell wrote that Tribune papers would be redesigned, beginning with The Orlando Sentinel, on June 22. Surveys show readers want “maps, graphics, lists, ranking and stats,” he wrote. “We’re in the business of satisfying customers, and we will respond to what they say they want.”

The Chicago Tribune reports that the company is looking at the productivity of reporters at its various papers to determine who it can eliminate without killing its copy output. The Times says the average LAT reporter churns out fifty-one pages of news a year, compared to more than three hundred apiece by reporters at the Sun and The Hartford Courant. The LAT says the changes will be in effect companywide by the end of September.

We’d like to think the bean counters would weight some of these numbers for quality, but we won’t get our hopes up.

It’s just more bad news for journalism, of course. The LAT, for instance, losing eighty-two pages of news (and who knows how many reporters and editors) is bad enough. But how much more newshole that was allotted to, you know, basics like in-depth reporting will be lost to “maps, graphics, lists, ranking and stats”?

Can a bunch of banks fail?

The Journal leads its front page with a report that the real-estate problems of banks have only just begun.

Banks are starting to unload billions of dollars of loans to builders of houses and condos—at huge losses. IndyMac Bancorp is selling half a billion dollars worth of loans at prices that reflect losses of up to 80 percent.

The losses have barely begun to be registered on balance sheets, but could be triggered by banks having to mark their debt holdings to the new market levels shown by the distressed sales. The Journal quotes a report saying up to 26 percent of loans that financed home construction and land purchases could be written off over the next five years because of tumbling asset values—up to $165 billion in losses. But so far, just 0.7 percent has been written off. The hundreds of billions of dollars in losses we’ve all heard about are largely tied to homebuyers’ mortgages, not construction loans.

The totals are much worse than the inflation-adjusted numbers from the commercial real estate bust of the late 1980s and early 1990s, which helped spark the savings and loan crisis and send the economy into recession. But while regulators expect a wave of small bank failures—the number of at-risk S&L’s has risen from twelve to seventeen in just two months—the chairwoman of the Federal Deposit Insurance Corporation says she doesn’t think any big banks will go under.

The Journal uses the congressional testimony of Federal Reserve Vice Chairman Donald Kohn and other bank regulators as its jumping-off point, and Bloomberg writes that Kohn said banks aren’t reserving capital fast enough to keep up with their losses and that that will limit their ability to lend, hurting the economy.

The Journal says regulators have had private talks with Treasury about “the potential fallout from a large number of bank failures.” In a C1 story, it reports that the troubled National City bank has been placed on a “serious” and “fairly rare” form of probation by federal regulators because of its bad practices.

National City probably isn’t alone in operating under such a memorandum of understanding. Regulators, hoping to fend off a wave of bank failures, have been pushing lenders to raise more capital, curtail their growth, and improve their risk-management and underwriting practices. Banking experts estimate that a handful of midsize banks recently have entered MOUs.

Ironically, European banks have been hit harder than their U.S. counterparts by the financial crisis that began in the U.S., the Financial Times reports on page one, showing just how good Wall Street was in unloading its junk until everyone caught on and it got stuck with a good portion of it.

Homeowners hit some sour benchmarks

The Journal says the banks had hoped a spring thaw in the housing-market freeze would ease their woes, but it hasn’t happened. News yesterday showed we’re in an ice age.

The NYT on C1 writes that one in eleven homeowners in the U.S. are in trouble, with their mortgages either late or in foreclosure. It was the highest level since a mortgage group started tracking the numbers in 1979.

Perhaps most insidiously, home loans to borrowers with good credit are now going bad in addition to the notorious subprime mortgages that burst the bubble in the first place—something the Journal emphasizes in its A5 story on the data. It says prime mortgages are now going into foreclosure faster than subprime mortgages, at least in overall numbers if not percentages.

In an amazing stat, the WSJ says one in ten houses built after 2000 are vacant, compared to one in fifty pre-2000 homes. The NYT says adjustable-rate mortgages are driving the defaults, but in a bad sign “people who took out such mortgages are falling behind even before those loans reset to a higher adjustable rate.”

Thirty-six percent of all mortgages in foreclosure are in California and Florida, the LAT says. In a separate story, it looks at Temecula, California, marketed as the “Napa of Southern California” where “children’s playrooms (are) larger than the average Manhattan apartment,” and where neighbors now paint the dirt lawns of abandoned houses green to keep up appearances. Some 15 percent of its homes are in some form of foreclosure.

We like this vivid piece of reporting (the type that is likely in its final days with the above news), which contains our Cement Pond Quote of the Day:

At a home off Loma Linda Road, Kersten used an electric screwdriver to open the gate of an abandoned house. The backyard was enormous — and apocalyptic looking, with weeds growing unfettered and a rusting swing set swaying in the breeze.

The pool was bright green, with a dead bird and other debris floating in the middle. Kersten dipped a cup in the muck, then peered into his sample. “Oh, yeah,” he said. He retrieved pesticide from his truck, then began spraying it into the pool.

“Watch,” he said. “The pool is going to start to percolate.”

In seconds, the water churned with thousands of larvae and pupae, each trying to escape the poison. Kersten locked the gate again, saying he would do his best to keep pace.

The NYT says on C4 that the attorney general—to the chagrin of Democrats—is declining to form a task force to investigate mortgage fraud, which it overstates in saying is “at the root of the nation’s housing crisis.”

The Journal in a separate A5 story says the housing bust helped send net household wealth down 2.9 percent in the first quarter, “a worrying sign for consumer spending.”

Americans still shopping

That consumer slowdown wasn’t much in evidence in May, as shoppers sent sales up at a much higher rate than had been expected. The Journal on B1 credits the federal government’s cash drop of stimulus checks and quotes an industry spokesman saying the gains may be illusory, lasting just a couple of months until the checks are spent.

Sales at stores open at least a year—a key measure of retail health—rose 2.8 percent or twice what analysts were conservatively predicting, the Times says on C1. That sent stocks up 1.7 percent on the day. Discount retailers like Wal-Mart led the way, though Target’s sales fell.

Bloomberg says its monthly survey of economists projects the country shed jobs for the fifth straight month in May, something that will put a damper on spending. Its survey says payrolls fell by 60,000 last month. The official numbers are out this morning.

“We’ve never seen a run of negative payroll numbers like this without the economy being in a recession,” said Avery Shenfeld, senior economist at CIBC World Markets in Toronto. “We are in a mild recession. We expect to see a few months of declines that are worse than this.”

A criminal investigation for AIG?

The WSJ reports on its Money & Investing cover that insurance giant American International Group may face a criminal investigation over whether it overvalued credit-default swaps—contracts that insure against a debt default and were used to hedge bets on subprime mortgages and other assets.

The Justice Department is asking for information from the Securities and Exchange Commission’s inquiry into AIG. The Journal says the firm has already written down $20 billion in bad swaps.

UBS about to roll over on rich Americans

The Times reports on C1 that Swiss banking giant UBS is running scared and may give up 20,000 names of the rich American clients of its private-banking arm that’s under investigation for aiding tax evasion. The paper calls it a “step that would have once been unthinkable to Swiss bankers, whose traditions of secrecy date to the Middle Ages.”

Federal investigators believe some of the clients may have used offshore accounts at UBS to hide as much as $20 billion in assets from the Internal Revenue Service. Doing so may have enabled these people to dodge at least $300 million in federal taxes on income from those assets, according to a government official connected with the investigation.

The Times says the ex-UBS banker Bradley Birkenfeld will spill his guts in court on Monday.

“He’s going to sing like a parakeet,” one of Mr. Birkenfeld’s former clients said.

Loopholes blow bubble in commodities markets

The Washington Post says on page one that loopholes provided by the Commodity Futures Trading Commission are allowing big investors to load up on “massive amounts of oil contracts,” fueling what critics, including lawmakers, say is a speculative rise in prices.

This is interesting:

Over the past five years, investors have become such a force on commodity markets that their appetite for oil contracts has been equal to China’s increase in demand over the same period, said Michael Masters, a hedge fund manager who testified before Congress on the subject last month. The commodity markets, he added, were never intended for such large financial players…

George Soros, one of the nation’s leading investors, testified in a Senate hearing this week that index funds were contributing to the rapid rise in commodity prices and were possibly creating a bubble. If it were to burst, sending prices tumbling, the fallout could wreak havoc on banks, retiree funds and colleges across the nation.

“I find commodity index buying eerily reminiscent of a similar craze for portfolio insurance, which led to the stock market crash of 1987,” Soros said.

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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.