Mish's Global Economic Trend Analysis

Bankrupt Miami in Fiscal Emergency, Breaks Employee Contracts, Hikes Property Taxes; What You Can Do.

Posted: 30 Aug 2010 07:16 PM PDT

Miami is bankrupt. Unfortunately the city refuses to admit it.

In an enormously foolhardy attempt to make ends meet, in spite of the fact that Miami home prices have been hammered and 1-in-8 are unemployed, the County keeps pouring on the painful tax and fee increases.

As you recoil from your tax warning notice today, ponder this: those multiple tax hikes aren't the only charges set to rise. Besides Miami-Dade County's plan to raise every taxpayer's rates 12.2% for operations and an incredible 56% for capital spending on undisclosed projects, it also plans to raise retail water and wastewater rates 5%.

And though County Manager George Burgess proposed the 5% water and wastewater hikes, that's not because water and sewer are running in the red. They're already quite profitable. But by raising rates, the county can dip into water and sewer cash and add $25 million to its operating spending cache while claiming it's keeping our cost down. And for that $25 million slice the county would be right — unless you happen to drink water or flush a toilet.

"If you keep taking money it just goes to reason you're going to be charging more so all the residents are paying more," Commissioner Carlos Gimenez told us. "It's actually a hidden tax. You're just hiding it in water and sewer."

One Miami-Dade worker in eight can't get a job and commissioners don't seem to notice. Instead, as the economy strangles the public and values of homes fall, the county plans double-digit tax hikes on every dollar of remaining value. Before the commission finally clamps the screws on taxpayers or, as it should, relieves pressure by backing off its massive increases, it will hold budget hearings at 5 p.m. Sept. 13 and 23.

What can we do?

One suggestion: Let your commissioner know you'll be taking names of those who vote to raise tax rates even a penny in today's economy. Remind them that the purpose of government is not to remain bloated. Another suggestion: Wear a red "Cut Tax Rate" T-shirt to the hearings. Have your friends do the same. Remember, commissioners only count the hundreds of votes in the room, not the hundreds of thousands of suffering taxpayers back home fighting foreclosure.

Miami Breaks Employee Contracts

Inquiring minds are reading Broke City Breaking Employee Contracts

The city of Miami is so broke it's forcing employees to take pay cuts, even though they're under contract. Mayor Tomas Regalado said he's never seen a financial mess like this before, and his options are grim.

"It's either that or we layoff 1,000 employees or we raise taxes to the max, and we're not raising taxes to the max," the mayor said.

Mish Comment: If you are looking for one of the most disingenuous comments in history there you have it. The only reason it is not a blatant lie is the ending phrase "to the max". Regalado is clearly incompetent and needs to be removed.

The city is operating under a state of "fiscal urgency," declared earlier this summer. The budget deficit for next fiscal year is about $110 million. The proposed cuts in salary, pension contributions and health insurance costs amounts to about $86 million in savings for the city.

That fiscal urgency declaration allows city commissioners to impose salary cuts on employees, despite their contracts.

Charlie Cox, who represents about 1,100 general service workers, said employees with valuable knowledge will retire or find work elsewhere. "We're going to have a ton of people leave the city and the institutional knowledge will be gone," he said.

Mish Comment: Hello Charlie. Good luck in finding jobs with excessive benefits in this market. Hell, you don't need luck you need a miracle.

Good riddance, the sooner you leave the better Miami will be. Every position vacated will be a gain to the city.

Miami's police officers, firefighters and other union workers are all expected to choke down cuts. One police union official said the Fraternal Order of Police will sue the city if the cuts are imposed

Mish Comment: It is the right of the FOP to file a lawsuit. I hope they do. The correct response for the city would be to immediately declare bankruptcy so the overpaid union clowns can see just what benefits they get in bankruptcy court, ideally nothing.

Hell, the correct response is for Miami to declare bankruptcy now, whether the FOP is stupid and arrogant enough to sue or not. Miami is bankrupt, and the sooner the mayor and city council admit it the better.

Budget Hearing 5 p.m. September 13 and 23

If you live in Miami and you do not show up at the hearing you are part of the problem. You better show up because union will, en masse, and they will pack the halls demanding still more tax increases so they can go on receiving huge wages and even bigger pension benefits.

In the meantime, please flood the mayor's office and all of the commissioners with phone calls, emails, and faxes.

Mayor Tomas P. Regalado
E-mail: tregalado@miamigov.com
Email Mayor Tomas P. Regalado
305-250-5300 VOICE
305-854-4001 FAX

Commissioner Wifredo (Willy) Gort
District 1
Email: wgort@miamigov.com
Email Commissioner Wifredo (Willy) Gort
305-250-5430 VOICE
305-250-5456 FAX

Commissioner Marc Sarnoff (Chairman)
District 2
E-mail: msarnoff@miamigov.com
Email Commissioner Marc Sarnoff
305-250-5333 VOICE
305-579-3334 FAX

Commissioner Frank Carollo (Vice Chairman)
District 3
E-mail: fcarollo@miamigov.com
Email Commissioner Frank Carollo
305-250-5380 VOICE
305-250-5386 FAX

Commissioner Francis Suarez
District 4
E-mail: fsuarez@miamigov.com
Email Commissioner Francis Suarez
305-250-5420 VOICE
305-856-5230 FAX

Commissioner Richard P. Dunn
District 5
E-mail: rpdunn@miamigov.com
Email Commissioner Richard P. Dunn
305-250-5390 VOICE
305-250-5399 FAX

Please flood the Mayor and all the commissioners with emails. Have your friends do the same (unless of course you want your taxes to rise for the sole benefit of unions and city employees).

If you are not in a public union or a city employee, please say so. Include your name and address and let them know you will not vote for anyone who raises taxes.

Those email links above contain a sample heading line. Please modify it so they do not all look alike.

In the body, let the mayor and commissioners know that Miami is bankrupt and politicians giving into union extortion is the reason. As I said, union thugs will show up en masse demanding more taxes, more benefits, and higher wages. Let the mayor and commissioners know that you support bankruptcy to avoid union ripoffs.

Finally, if you live in Miami, please have your friends do the same.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Banks Recruit Investors to Oppose Honest Valuation of Assets; Just how Unprepared are Banks for Major Losses?

Posted: 30 Aug 2010 09:46 AM PDT

Reader "Henry" has a question on the loan loss provision chart I posted in Former Fed Vice Chairman vs. Mish: Is the Fed Out of Ammo?

Henry writes ...

Hello Mish,

Thanks for writing and sharing your wonderful column. It has been very informative and educational.

Could you please help us mere mortals decipher the ALLL/LLRNPT chart in a follow up post?

I have difficulty reconciling the units, and I suspect I'm not the only one. Exactly what does that chart depict?

Thanks.

Henry

From my previous post ...

Assets at Banks whose ALLL Exceeds their Nonperforming Loans

The ALLL is a bank's best estimate of the amount it will not be able to collect on its loans and leases based on current information and events. To fund the ALLL, the bank takes a periodic charge against earnings. Such a charge is called a provision for loan and lease losses.

One look at the above chart in light of an economy headed back into recession and a housing market already back in the toilet should be enough to convince anyone that banks already have insufficient loan loss provisions.

That is one of the reasons banks are reluctant to lend. Lack of creditworthy customers is a second. Quite frankly would be idiotic to force more lending in such an environment.

To further clarify, the chart depicts the ratio of loan loss provisions to nonperforming loans across the entire banking system (all banks). There are 33 ALLL charts by bank size and region for inquiring minds to consider. The above chart is the aggregate.

The implication what the chart suggests is that banks believe nonperforming loans are NOT a problem (or alternatively they are simply ignoring expected losses to goose earnings).

The implication what I suggest is banks earnings have been overstated. Why? Because provisions for loan losses are a hit to earnings. I believe losses are coming for which there are no provisions.

The chart depicts a form of "extend and pretend" and overvaluation of assets on bank balance sheets. The Fed and the accounting board ignore this happening (encourage is probably a better word), hoping the problem will get better. With more foreclosures and bankruptcies on the horizon, I suggest it won't.

Magnitude of the Problem

The above analysis is only in percentage terms. Let's see if we can figure out in dollar terms how big the problem is. A few more charts that will help do just that.

Nonperforming Total Loan Percentage

The above chart shows that 5.5% of loans are non-performing.

Total Loans and Leases

The above chart shows there are $7 trillion in total loans and leases. Of that 5.5% is nonperforming. Thus there are $385 billion of "admitted" nonperforming loans.

At the start of the recession, the first chart shows that banks had made a loan loss allowance for about 90% of non-performing loans. Now the figure is under 20%.

We are still not there yet, and this is where it gets fuzzy. Not all losses will be 100%, Some might be 10% others 80%. I cannot quantify the losses, I can just state there is a huge problem with insufficient loan loss provisions.

Charts Understate the Problem

The above charts understate the problem because there are hundreds of billions of dollars in nonperforming bank assets held off bank balance sheets.

We can add still more to the problem because of absurd mark-to-market valuations and the Fed and FDIC playing games with what constitutes a "nonperforming loan".

Banks Oppose Rule Changes

Inquiring minds note Wells Fargo "Strongly" Opposes FASB's Rules on Loan Values

Wells Fargo & Co., the largest home lender in the U.S., said it disagrees with an accounting board's plan that would require banks to report the fair value of loans on their books.

"We strongly oppose the expansion of fair value as the primary balance-sheet measurement attribute for virtually all financial instruments," Wells Fargo Controller Richard Levy wrote in the Aug. 19 letter. "It will only serve to cement a short-term focus on fair-value measures."

Wells Fargo, based in San Francisco, said the proposal would lead investors to put more emphasis on short-term results, eroding support for the banking system. The lender also said the new rule would mean deriving values for illiquid instruments like loans from subjective "Level 3" valuations such as models.

All Major Banks Oppose Honest Reporting

Virtually all the banks are against honest reporting. Wells Fargo is leading the pack because of all the nonperforming Pay Option ARM and problem housing assets on its books.

The louder a bank screams, the more unprepared it is to deal with nonperforming loans and mark-to-market valuations of garbage held on its balance sheet.

Banks Recruit Investors To Kill Fair Value Proposals

Banks are so opposed to common sense rules that they have even recruited investors in a Campaign to Kill FASB Fair-Value Proposal

Banking lobbyists have launched an e- mail and Web campaign to mobilize investors against a proposed expansion of fair-value accounting rules that may force banks such as Citigroup Inc. and Wells Fargo & Co. to write down billions of dollars of assets.

The American Bankers Association opposes the Financial Accounting Standards Board's plan to apply fair-value rules to all financial instruments, including loans, rather than just to securities. The group says the rule could make strong banks appear undercapitalized.

Fair-value, also known as mark-to-market accounting, forces companies to adjust the value of most securities they hold to market prices each quarter. It became one of the biggest flash points of the financial crisis when banks barraged lawmakers and the Securities and Exchange Commission with complaints that the rule exacerbated their problems because they had to record losses on mortgage bonds they had no intention of selling.

FASB in April 2009 relaxed that requirement after being pressured by lawmakers on a House Financial Services subcommittee. At the time, FASB Chairman Robert Herz said Congress stepped in because of complaints from banks and their trade groups.

The change raises the stakes for the 26 biggest U.S. banks, which currently value loans at $94.8 billion more than market prices, Barclays Capital analyst Jason Goldberg said.

San Francisco-based Wells Fargo said the fair value of its loans was $721.1 billion, or 3 percent less than the carrying value. Regions Financial Corp., based in Birmingham, Alabama, estimated loans were worth $70.2 billion, 15 percent less than the value reported on its balance sheet.

Thus, the above charts and discussion only forms a framework of discussion for what losses banks are hiding on their balance sheets and off their balance sheets.

The starting point for discussion is not pretty, and beneath the surface the actual magnitude of the problem is worse than it looks.

Undercapitalized Banks

Banks are undercapitalized across the board because of these issues. Unfortunately, as noted above, it is purposely hard to accurately untangle this mess because of the lobbying effort by banks and the Fed's willingness to encourage extend-and-pretend games.

Those of you who keep asking "Why are banks reluctant to lend?" now have another solid reason.

Moreover, Obama administration policy errors compound the above problems. The result turns up in small business hiring trends.

Small Business Trends

Small Business Trends - Yet Another Disaster

Wells Fargo/Gallup Small Business Index Hits Record Low, Future Expectations Dip Below Zero First Time Ever

Another Atlas Shrugs - Small Business Owners Chime In

Small Businesses are Not Hiring - Why Should They?

Structurally High Unemployment For A Decade

The icing on the cake is that because of massive overcapacity and tapped out, deleveraging consumers, and misguided policies by the Obama administration, businesses do not want to borrow, expand, or hire.

The combined result is an amazingly toxic brew that will keep unemployment elevated for as long time.

Flashback August 18, 2009: Structurally High Unemployment For A Decade

Consumer demand is dead. That demand is not coming back anytime soon, and there is no driver for jobs if it doesn't.

Harsh Reality From Bernanke

In the Incredible Shrinking Boomer Economy I noted a harsh reality quote of Bernanke:

"It takes GDP growth of about 2.5 percent to keep the jobless rate constant. But the Fed expects growth of only about 1 percent in the last six months of the year. So that's not enough to bring down the unemployment rate."

Pray tell what happens if GDP can't exceed 2.5% for a couple of years? What about a decade (or on and off for a decade)?

If you have come to the conclusion that we are going to have structurally high unemployment for a decade, you have come to the right conclusion. Ask yourself: Is that what the stock market is priced for?

People manage to get hyperinflation out of this. The idea is laughable.

Addendum

Off Balance Sheet Accounting at Citigroup and Wells Fargo

Inquiring minds may be interested in Wells Fargo's Balance Sheet: Scaring the Horses regarding off balance sheet exposure at Wells Fargo and Citigroup. The article is from February 2009, but the off balance sheet problem still exists.

Here is another Flashback, this one from April 16, 2009: Wells Fargo's Profit Looks Too Good to Be True: Jonathan Weil

FDIC Allows Banks To Hide Insufficient Capital

Dateline December 15, 2009: FDIC Approves Giving Banks Reprieve From Capital Requirements

The Federal Deposit Insurance Corp. gave banks including Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. a reprieve of at least six months from raising capital to support billions of dollars of securities the firms will be adding to their balance sheets.

Bank regulators including the FDIC and Federal Reserve want to permit a phase-in of capital requirements that rise starting next month under a change approved by the Financial Accounting Standards Board. The rule, passed in May, eliminates some off- balance-sheet trusts, forcing banks to put billions of dollars of assets and liabilities on their books.

Executives from Citigroup, JPMorgan, Bank of America, Wells Fargo & Co., Capital One Financial Corp. and the American Securitization Forum met FDIC officials Dec. 2 to discuss capital requirements related to the FASB measure.

The executives proposed that "the transition period should extend beyond 2010 to a point in the economy where unemployment is lower and issuers are less capital-restrained from growing their balance sheet and providing credit," according to a paper the ASF presented the FDIC.

Citigroup suggested three years to offset assets and liabilities brought onto balance sheets, Chief Financial Officer John Gerspach said in an Oct. 15 letter to regulators. Requiring banks to "assume the risk-based capital effects immediately, or even over one year, is an undeniably severe penalty," he wrote.

Banks in general are sitting on assets, not marked-to-market, both on and off their balance sheets, for which they have made no loan loss provisions, while credit risk for new loans is exceptionally high.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Mish's Global Economic Trend Analysis

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