Tag Archives: Goldman Sachs

How 2 US Senators Profited From America’s Mortgage Crisis

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Bob Corker and Mark Warner speaking in an interview with Zillow about mortgage-finance reform

“The idea that Wall Street came out of this thing just fine, thank you, is just something that just grates on people. They think you didn’t just come out fine because it was luck. They think you guys just really gamed this thing real well.”

So said then-Senator Edward E. Kaufman, a Democrat from Delaware, at the Congressional hearing in the spring of 2010 where assorted members of Congress lambasted Goldman Sachs’ activity in the run-up to the financial crisis.

But it turns out two members of Congress actually made money from that crisis, according to publicly available documents. During the crisis years, two now-senators, Mark Warner (D-Va.) who was the governor of Virginia until his Senate term began in 2009, and Bob Corker (R-Tenn.), who took office in 2007, were invested in a fund that appears to have made sizable profits from Goldman products that were designed to bet against the real estate market.

There’s no evidence either Senator was aware of the specific strategy, although both have reported millions of dollars of income from the fund. A little bit of ancient history: Back in the spring of 2010, the SEC charged Goldman Sachs with fraud over a deal called Abacus 2007-AC1. Abacus 2007-AC1 was a so-called CDO, which in essence requires investors to wager against each other. One set of investors was betting that homeowners would continue to pay their mortgages. Others, who were short, were betting there would be massive defaults.

In this particular deal, Goldman allowed a hedge fund client, Paulson Capital Management, to take the short position and help choose which securities would go into it. The SEC alleged that Goldman hadn’t told the long investors that Paulson’s team essentially had designed the CDO to fail. According to a report done by the US Senate Permanent Subcommittee on Investigations, three long investors together lost about $1 billion from their Abacus investments, while the Paulson hedge fund profited by about the same amount.

Goldman paid $550 million to settle the SEC’s charges in the summer of 2010. A young vice president who had worked on the deal, Fabrice Tourre, was eventually found liable in a civil suit brought by the SEC, making him one of the few to face any repercussions from the crisis era.

https://i0.wp.com/l3.yimg.com/bt/api/res/1.2/.uBm6WWMUtsQlgEwGwaO2g--/YXBwaWQ9eW5ld3NfbGVnbztxPTg1/http://media.zenfs.com/en_us/News/ap_webfeeds/f52b286aaeaf4b8aa5b612ab109fa6ac.jpgSenate Foreign Relations Committee Chairman Sen. Bob Corker, R-Tenn., listens on Capitol Hill in Washington

But Abacus 2007-AC1 wasn’t unique. In fact, it was merely the last in a series of Abacus CDOs. According to the Senate report, these were “pioneered by Goldman to provide customized CDOs for clients interested in assuming a specific type and amount of investment risk” and “enabled investors to short a selected group” of securities. Many of the Abacus deals were tied in part to the performance of subprime residential mortgage-backed securities, but some were also tied to the performance of commercial mortgage-backed securities.

Because AIG provided insurance on at least some of the Abacus deals, the Abacus deals were also part of the collateral calls that Goldman made to AIG, and part of the reason that taxpayers ended up bailing out AIG. Plenty of well-known hedge funds availed themselves of Goldman’s Abacus deals, according to a document Goldman provided the Financial Crisis Inquiry Commission. The list of those who were short various Abacus deals includes Moore Capital Management, run by billionaire Louis Bacon; Magnetar, an Illinois-based fund run by Alec Litowitz; Brevan Howard, a European hedge fund management company; and FrontPoint Partners (which shows up in the movie “The Big Short”).

There are also some lesser known names in the document, including Pointer Management, a Tennessee-based fund which was founded in 1990 by Joseph Davenport, a Chattanooga area businessman and former Coca-Cola executive, and Thorpe McKenzie, also from Chattanooga, according to the Campaign for Accountability.

Specifically, Pointer took short positions in an Abacus deal called ABAC07-18, as did FrontPoint Partners and several others. According to several sources, this Abacus deal was based entirely on securities tied to commercial real estate, rather than residential real estate. While few people have heard about this particular Abacus deal, it too resulted in Goldman making a collateral call on AIG. According to a document Goldman submitted to the FCIC, it looks as if by late 2008, AIG had posted a total of $308 million in collateral to Goldman in connection with Abacus 2007-18.

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And it too was controversial — so controversial that at a meeting of the Financial Crisis Inquiry Commission on October 12, 2010, the commissioners voted to refer the matter to the Department of Justice, citing “potential fraud by Goldman Sachs in connection with Abacus 2007-18 CDO.”

In its write-up, the FCIC quoted Steve Eisman, the FrontPoint trader whose character figures prominently in “The Big Short.” According to his interview with the FCIC, Eisman seemed to feel that Goldman might have gamed the rating agencies, and might have brought in outside investors so that the firm could justify marking the deal down immediately, meaning long investors would suffer and short sellers would make money.

According to Eisman’s testimony, he said to the Goldman traders, “So you put this stuff together and you went to the agencies to get a rating and the biggest issue with the rating is the correlation of loss, and you presented a correlation analysis that was lower than you actually thought it was but the rating agencies were stupid, so they’d buy it anyway. So assuming your correlation analysis was correct, you took the short side, sold it to the client, and then [did the deal with me to get a mark].” One of the Goldman traders responded, according to Eisman’s testimony, “Well, I wouldn’t put it in those terms exactly.”

Eisman went on to say he believed Goldman “wanted another party in the transaction so if we have to mark the thing down, we’re not just marking it to our book.” He added that, “Goldman was short, and we [FrontPoint] were short. So when they go to a client and say we’re marking it down, they can say well it wasn’t just our mark.”

The FCIC noted that if Goldman did agree with Eisman’s characterization, this could raise legal issues for Goldman as to whether the firm deliberately misled the rating agencies, thereby leading to a material omission in the offering documents for Abacus 2007-18 and violating securities laws. The FCIC also noted that if Goldman indeed knew it was expecting to lower the value of the security as the firm was creating it, and brought in other investors only to make that look more genuine, that could be another potential violation of securities laws. Anyway. Nothing came of this, just as nothing came of any of the FCIC’s other referrals to the Justice Department.

According to a document Goldman submitted to the FCIC, the short investors did very well: Pointer appears to have been paid $120 million in “termination payments” in 2008 and 2009. (Although commercial real estate held up fairly well in the end, prices also collapsed in the crisis.) The documents don’t make it clear what, if any, upfront investment was required; the monthly coupon rate was small.

“This amount of money that’s going into AIG, there is no upside now,” Corker told Politico in early 2009 about the taxpayer bailout of the company. “This is all just like gone money.”

Gone where? Well, what is clear is that Corker especially, but also Warner, made money from their overall investments in Pointer.  According to his disclosure forms, Corker’s investment in Pointer first shows up in 2006. He put the value of his investment between $5 million and $25 million. In July 2007, several months before the effective dates for Pointer’s Abacus deals, he put an additional $1 million to $5 million into Pointer. From 2006 to 2014, he reported total income from Pointer of between $3.9 million at the low end and $35.5 million at the high end (including funds from the sale of part of his stake in the fund in 2012.) He sold the rest of his stake in 2014 and reported a cash receivable from Pointer of between $5 million and $25 million that year.

According to Warner’s disclosure forms, he first invested in Pointer in 2007. He assigned his stake the same value range as Corker did his: between $5 million to $25 million. Warner, who sold his entire position in 2012, reported total income from Pointer of between $1.5 million and $10 million. There’s no evidence that either senator knew that a fund in which they had invested was shorting the real estate market.

A letter from Pointer’s chief compliance officer says that Corker “can neither exercise control nor have the ability to exercise control over the financial interest held by Pointer.” Nonetheless, Corker and the principals of Pointer have known each other for a long time. According to the Campaign for Accountability, in 2004, Corker named Joseph Davenport among his co-chairs of his campaign committee ahead of his 2006 election; Pointer employees and their spouses have contributed $76,840 to Corker’s campaigns and $55,000 to his Rock City PAC, says CfA. And several business entities tied to Corker list the same address as Pointer. There aren’t any obvious ties between Warner and Pointer.

Pointer did not return a call for comment. A spokesperson for Warner declined to comment.  Corker’s spokesperson says, “This is yet another ridiculous narrative being peddled by a politically-motivated special interest group that refuses to disclose its donors. This dark money entity has an abysmal track record for accuracy, and just like the other unfounded claims they have leveled against Senator Corker, this too is completely baseless.” (They are apparently referring to the Campaign for Accountability, although this story was sourced from publicly available documents.)

It’s also a little ironic that Corker and Warner were the co-sponsors of the Corker Warner bill, which set out to reform the housing finance system. Let’s give them some credit. Since they already benefited from the last crisis, maybe they’re trying to protect us from the next one?

by Bethany McLean | Yahoo Finance

 

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Pension Funds Sue Big Banks over Manipulation of $12.7 Trillion Treasuries Market

At least two government pension funds have sued major banks, accusing them of manipulating the $12.7 trillion market for U.S. Treasury bonds to drive up profits, thereby costing the funds—and taxpayers—millions of dollars.

As with another case earlier this year, in which major banks were found to have manipulated the London Inter bank Offered Rate (LIBOR), traders are accused of using electronic chat rooms and instant messaging to drive up the price that secondary customers pay for Treasury bonds, then conspiring to drop the price banks pay the government for the bonds, increasing the spread, or profit, for the banks. This also ends up costing taxpayers more to borrow money.

In the latest complaint, the Oklahoma Firefighters Pension and Retirement System is suing Barclays Capital, Deutsche Bank, Goldman Sachs, HSBC Securities, Merrill Lynch, Morgan Stanley, Citigroup and others, according to Courthouse News Service. Last month State-Boston Retirement System (SBRS) filed a similar complaint against 22 banks, many of which are the same defendants in the Oklahoma suit.

“Defendants are expected to be ‘good citizens of the Treasury market’ and compete against each other in the U.S. Treasury Securities markets; however, instead of competing, they have been working together to conclusively manipulate the prices of U.S. Treasury Securities at auction and in the when-issued market, which in turn influences pricing in the secondary market for such securities as well as in markets for U.S. Treasury-Based Instruments,” the Oklahoma complaint states.

The State-Boston suit, which named Bank of America Corp’s Merrill Lynch unit, Citigroup, Credit Suisse Group, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan Chase, UBS and 14 other defendants, makes similar charges.

SBRS uncovered the scheme when it hired economists to analyze Treasury securities price behavior, which pointed to market manipulation by the banks.

“The scheme harmed private investors who paid too much for Treasuries, and it harmed municipalities and corporations because the rates they paid on their own debt were also inflated by the manipulation,” Michael Stocker, a partner at Labaton Sucharow, which represents State-Boston, said in an interview with Reuters. “Even a small manipulation in Treasury rates can result in enormous consequences.”

Both the suits are seeking treble unnamed damages from the financial institutions involved. The LIBOR action earlier this year involved a settlement of $5.5 billion.

The U.S. Justice Department has reportedly launched its own investigation into the alleged Treasury market conspiracy.

by Steve Straehley in allgov.com

To Learn More:

Banks Rigged Treasury Bonds, Class Claims (by Lorraine Baily, Courthouse News Service)

State-Boston Retirement System, on behalf of itself and v. Bank of Nova Scotia (Courthouse News Service)

Lawsuit Accuses 22 Banks of Manipulating U.S. Treasury Auctions (by Jonathan Stempel, Reuters)

Four Banks Guilty of Currency Manipulation but, as Usual, No One’s Going to Jail (by Steve Straehley and Noel Brinkerhoff, AllGov)

In Stadium Property Finance, Goldman Sachs Dominates

http://www.trbimg.com/img-555ffb71/turbine/la-la-sp-carson-stadium3-jpg-20150522/750/750x422By Tim Logan for Los Angeles Times

When San Diego Chargers executives needed help raising $1.7 billion for a football stadium in Carson, they turned to the professionals: Goldman Sachs.

The giant investment bank has become a major player in the high-stakes stadium financing game, crafting 30 deals with pro teams in the last decade.

Goldman has seized an opportunity in an era when cities and states are increasingly leery of subsidizing sports palaces for billionaires. The firm offers the next-best thing: upfront Wall Street money, along with help crafting creative deals that maximize a team’s profits and minimize its taxes.

Along the way, the bank and the investors it recruits pull in seven-figure returns and can even influence where franchises end up playing.

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The firm has financed some of the biggest deals in sports, including the new Yankee Stadium in New York and the San Francisco 49ers’ new Levi’s Stadium in Santa Clara, Calif. Now Goldman is at the center of the Chargers and Oakland Raiders plan for a new stadium in Carson, where it has crafted a complex public-private partnership to build the nation’s most expensive stadium.

The stadium plan still needs approval from the NFL, and the league could choose to go with a competing plan for a $1.86-billion stadium in Inglewood from St. Louis Rams owner Stan Kroenke, the league’s second-richest owner.

But Goldman’s money and influence give confidence to the Carson plan’s boosters.

“Inglewood likes to say they have the money, because they have Kroenke and he’s worth $6.3 billion,” said Carson Mayor Albert Robles. “Actually, we have more money — because we have Goldman Sachs.”

The Chargers first hired Goldman several years ago to advise them on a new stadium in San Diego. But talks with the city stalled amid disagreements over sites and public financing. When the team then looked to Los Angeles, Goldman had a ready blueprint in the $1.3-billion deal to build Levi’s Stadium.

It is the first NFL stadium built in California since the mid-1960s, financed in a city about the same size as Carson with little upfront tax money and big potential profits for the team.

“It showed that, in a big market, you can do this,” said Mark Fabiani, who’s in charge of stadium efforts for the Chargers. “That definitely affected our thinking.”

The Chargers drove the stadium planning before inviting the Raiders to join earlier this year.

In Santa Clara, and in Carson, Goldman’s plan was to create a public authority to build and own the stadium, using the proceeds of a construction loan raised from private investors. The loan would be paid back using revenue from sponsorships, high-end seating and non-NFL events at the stadium and, in a two-team stadium in Carson, using as much as $800 million in personal seat licenses — upfront payments that allow fans to buy season tickets.

The structure of the deal would also save both teams a lot of money in the long run, said John Vrooman, a sports economist at Vanderbilt University.

Using a tax-exempt public authority to sell personal seat licenses and sponsorships allows the teams to avoid many taxes on those sales, saving them tens, perhaps hundreds, of millions of dollars, Vrooman said. The teams would also avoid property taxes on the building, though they would pay rent and other local taxes on the private use of a public facility.

Public agency bonds for the stadium would be tax exempt and sell at lower interest rates.

“Goldman Sachs’ job is to use, if not disguise, every public funding tax shelter and loophole,” Vrooman said.

Goldman’s investors also prefer the opportunities for private profits in L.A., which San Diego can’t match. That makes the Carson stadium a much safer bet. Building something similar in San Diego without generous public subsidies would require the Chargers to borrow more money at higher interest rates. The economics don’t work, Fabiani said.

“In L.A., the naming rights are worth more. Suite sales are worth more. Sponsorships are worth more,” he said. “In San Diego we just don’t have those advantages. Even though we’d like to do the same thing in San Diego, we couldn’t finance it.”

Goldman declined to make members of its stadium financing team available for interviews. But at a recent Carson City Council meeting, Tim Romer, who heads the firm’s West Coast public-sector financing operation, said he’s confident that this plan can succeed in the L.A. market.

 

“We’re committed to making this happen,” he said. “We’ve concluded the financing is viable.”

Some have their doubts. Tony Manolatos, a spokesman for San Diego’s stadium task force, says Goldman’s plan in Carson leans too heavily on personal seat licenses. To raise $800 million, the Chargers and Raiders both would have to sell more seat licenses than anyone except the Dallas Cowboys and 49ers ever have — in a market where neither team has deep roots — while competing with each other.

“No one has ever sold that amount of [personal seat licenses] in a new market,” he said.

San Diego officials last week countered with an offer that includes $242 million in city and county subsidies, $173 million in construction bonds and $225 million from the sale of city-owned land near the stadium. The Chargers would put up $300 million and the NFL would pay $200 million. Team officials say they’re reviewing the proposal.

If Goldman is right, their investors should see a solid return. The Santa Clara deal generated about $75 million in interest and fees, according to financing documents, with more potentially to come when construction bonds are refinanced later this year. In Carson — where the stadium would cost $400 million more — financiers could easily recoup $100 million.

“They’re basically the middlemen,” said Roger Noll, a Stanford University economist who watched the Santa Clara stadium deal unfold.

Goldman should have no trouble raising money, said Randy Gerardes, a senior municipal bond analyst at Wells Fargo Securities.

“A market like L.A. is attractive,” Gerardes said. “Just like it’s attractive to the NFL, it’s attractive to investors. There’s a lot of money there, a big corporate base.”

tim.logan@latimes.com Twitter: @bytimlogan Copyright © 2015, Los Angeles Times

OPEC Forecasts $110 Nominal Price Through End Of This Decade:

OPEC’s World Oil Outlook And Pivot To Asia

https://i0.wp.com/www.sweetcrudereports.com/wp-content/uploads/2013/06/OPEC-conference.jpgby Jennifer Warren

Summary

  • OPEC published its recent global oil market outlook, which offers a slightly different and instructional viewpoint.
  • OPEC sees its share of crude oil/liquids production reducing in light of increases in U.S. and Canada production.
  • OPEC also indicates a pivot toward Asia, where it sees the greatest demand for its primary exports in the future.

In perusing through OPEC’s recently released “World Oil Outlook,” several viewpoints are noteworthy. According to OPEC, demand grows mainly from developing countries and U.S. supply slows its run up after 2019. After 2019, OPEC begins to pick up the slack, supplying its products more readily. In OPEC’s view, Asia becomes a center of gravity given global population growth, up nearly 2 billion by 2040, and economic prosperity. The world economy grows by 260% versus that of 2013 on a purchasing power parity basis.

During the period 2013-2040, OPEC says oil demand is expected to increase by just over 21 million barrels per day (mb/d), reaching 111.1 mb/d by 2040. Developing countries alone will account for growth of 28 mb/d and demand in the OECD will fall by over 7 mb/d (p.1). On the supply side, “in the long-term, OPEC will supply the majority of the additional required barrels, with the OPEC liquids supply forecast increasing by over 13 mb/d in the Reference Case from 2020-2040,” they offer (p.1). OPEC shaved off 0.5 million barrels from their last year’s forecast to 2035. Asian oil demand accounts for 71% of the growth of oil demand.

Morgan Stanley pulled out the following items:

The oil cartel released its World Oil Outlook last week, showing OPEC crude production falling to 29.5 million barrels per day in 2015 and 28.5 million barrels per day in 2016. This year’s average of 30 million barrels per day has helped flood the market and push oil prices to multi-year lows.

In the period to 2019, this chart illustrates where the barrels will flow:

Prices

With regard to price, OPEC acknowledges that the marginal cost to supply barrels continues to be a factor in expectations in the medium and long term. This sentiment has been echoed by other E&P CEOs in various communiques this year. OPEC forecasts a nominal price of $110 to the end of this decade:

On this evidence, a similar price assumption is made for the OPEC Reference Basket (ORB) price in the Reference Case compared to that presented in the WOO 2013: a constant nominal price of $110/b is assumed for the rest of the decade, corresponding to a small decline in real values.

Real values are assumed to approach $100/b in 2013 prices by 2035, with a slight further increase to $102/b by 2040. Nominal prices reach $124/b by 2025 and $177/b by 2040. These values are not to be taken as targets, according to OPEC. They acknowledge the challenge of predicting the world economy as well as non-OPEC supply. The Energy Information Administration (EIA) forecast a price for Brent averaging over $101 in 2015 and West Texas Intermediate (WTI) of over $94 as of their October 7th forecast. (This will have likely changed as of November 12th after the steep declines of October are weighed into their equations.) WTI averaged around the $97 range for 2013 and 2014. Importantly, U.S. supply may ratchet down slightly (green broken line) in response to price declines, if they continue.

It’s also the cars, globally

In 2013, OPEC says gasoline and diesel engines comprised 97% of the passenger cars total in 2013, and will hold 92% of the road in 2040. The diesel share for autos rises from 14% in 2013 to 21% in 2040. Basically, the number of cars buzzing on roads doubles from now to 2040. And 68% of the increase in cars comes from developing countries. China comprises the lion’s share of car volume growing by more than 470 million between 2011-2040, followed by India, then OPEC members will attribute 110 million new cars on the road. These increases assume levels similar to advanced economy (OECD) car volumes of the 1990s. In spite of efficiency and fuel economy, oil use per vehicle is expected to decline by 2.2%.

Commercial vehicles gain 300 million by 2040 from about 200 million in 2011. There are now more commercial vehicles in developing countries than developed.

U.S. Supply and OPEC

According to OPEC, U.S. and Canada supply increases through the period to 2019, the medium term. After 2017, they believe U.S. supply tempers from 1.2 million barrels of tight oil increases between 2013 and 2014 to 0.4 million in 2015, and less incremental increases thereafter. This acknowledges shale oil’s contribution to supply, with other supply sources declining, i.e., conventional and offshore.

OPEC Suggests:

The amount of OPEC crude required will fall from just over 30 mb/d in 2013 to 28.2 mb/d in 2017, and will start to rise again in 2018. By 2019, OPEC crude supply, at 28.7 mb/d, is still lower than in 2013.

However, the OPEC requirements are expected to ramp back up after 2019. By 2040, they expect to be supplying the world with 39 mb/d, a 9 million barrel/d increase from 2013. OPEC’s global share of crude oil supply is then 36%, above 2013 levels of about 30%. A select few firms like Pioneer Natural Resources (NYSE:PXD), Occidental Petroleum (NYSE:OXY), Chevron (NYSE:CVX) and even small-cap RSP Permian (NYSE:RSPP) are staying the course on shale oil production in the Permian for the present. After the first of the year, they will evaluate the price environment.

How does this outlook by OPEC inform the future? From the appearances in its forecasts, OPEC has slightly lower production in the medium term (to 2019), a decline of 1.3 million b/d in 2019 from the 2014 production of 30 million b/d. Thus, the main lever for an increase in prices for oil markets is for OPEC to restrict production, or encourage other members to keep to the current quota of 30 million b/d. Better economic indicators also could help. However, Saudi Arabia, the swing producer, has shown interest in maintaining its market share vis-à-vis the price cuts it has offered China, first, and then the U.S. more recently.

The global state of crude oil and liquids and prices has fundamentally changed with the addition of tight oil or shale oil, particularly from the U.S. While demand particulars have dominated the price regime recently, the upcoming decisions by OPEC at the late November meeting will have an influence on price expectations. In an environment of softer perceived demand now because of global economics and in the future because of non-OPEC supply, it would seem rational for OPEC to indicate some type of discipline among members’ production.

Source: OPEC “2014 World Oil Outlook,” mainly from the executive summary.

The Next Housing Crisis May Be Sooner Than You Think

How we could fall into another housing crisis before we’ve fully pulled out of the 2008 one.

https://i0.wp.com/cdn.citylab.com/media/img/citylab/2014/11/RTR2LDPC/lead_large.jpgby Richard Florida

When it comes to housing, sometimes it seems we never learn. Just when America appeared to be recovering from the last housing crisis—the trigger, in many ways, for 2008’s grand financial meltdown and the beginning of a three-year recession—another one may be looming on the horizon.

There are at several big red flags.

For one, the housing market never truly recovered from the recession. Trulia Chief Economist Jed Kolko points out that, while the third quarter of 2014 saw improvement in a number of housing key barometers, none have returned to normal, pre-recession levels. Existing home sales are now 80 percent of the way back to normal, while home prices are stuck at 75 percent back, remaining undervalued by 3.4 percent. More troubling, new construction is less than halfway (49 percent) back to normal. Kolko also notes that the fundamental building blocks of the economy, including employment levels, income and household formation, have also been slow to improve. “In this recovery, jobs and housing can’t get what they need from each other,” he writes.

Americans are spending more than 33 percent of their income on housing.

Second, Americans continue to overspend on housing. Even as the economy drags itself out of its recession, a spate of reports show that families are having a harder and harder time paying for housing. Part of the problem is that Americans continue to want more space in bigger homes, and not just in the suburbs but in urban areas, as well. Americans more than 33 percent of their income on housing in 2013, up nearly 13 percent from two decades ago, according to newly released data from the Bureau of Labor Statistics (BLS). The graph below plots the trend by age.

Over-spending on housing is far worse in some places than others; the housing market and its recovery remain highly uneven. Another BLS report released last month showed that households in Washington, D.C., spent nearly twice as much on housing ($17,603) as those in Cleveland, Ohio ($9,061). The chart below, from the BLS report, shows average annual expenses on housing related items:

(Bureau of Labor Statistics)

The result, of course, is that more and more American households, especially middle- and working-class people, are having a harder time affording housing. This is particularly the case in reviving urban centers, as more affluent, highly educated and creative-class workers snap up the best spaces, particularly those along convenient transit, pushing the service and working class further out.

Last but certainly not least, the rate of home ownership continues to fall, and dramatically. Home ownership has reached its lowest level in two decades—64.4 percent (as of the third quarter of 2014). Here’s the data, from the U.S. Census Bureau:

(Data from U.S. Census Bureau)

Home ownership currently hovers from the mid-50 to low-60 percent range in some of the most highly productive and innovative metros in this country—places like San Francisco, New York, and Los Angeles. This range seems “to provide the flexibility of rental and ownership options required for a fast-paced, rapidly changing knowledge economy. Widespread home ownership is no longer the key to a thriving economy,” I’ve written.

What we are going through is much more than a generational shift or simple lifestyle change. It’s a deep economic shift—I’ve called it the Great Reset. It entails a shift away from the economic system, population patterns and geographic layout of the old suburban growth model, which was deeply connected to old industrial economy, toward a new kind of denser, more urban growth more in line with today’s knowledge economy. We remain in the early stages of this reset. If history is any guide, the complete shift will take a generation or so.

It’s time to impose stricter underwriting standards and encourage the dense, mixed-use, more flexible housing options that the knowledge economy requires.

The upshot, as the Nobel Prize winner Edmund Phelps has written, is that it is time for Americans to get over their house passion. The new knowledge economy requires we spend less on housing and cars, and more on education, human capital and innovation—exactly those inputs that fuel the new economic and social system.

But we’re not moving in that direction; in fact, we appear to be going the other way. This past weekend, Peter J. Wallison pointed out in a New York Times op-ed that federal regulators moved back off tougher mortgage-underwriting standards brought on by 2010’s Dodd-Frank Act and instead relaxed them. Regulators are hoping to encourage more home ownership, but they’re essentially recreating the conditions that led to 2008’s crash.

Wallison notes that this amounts to “underwriting the next housing crisis.” He’s right: It’s time to impose stricter underwriting standards and encourage the dense, mixed-use, more flexible housing options that the knowledge economy requires.

During the depression and after World War II, this country’s leaders pioneered a series of purposeful and ultimately game-changing polices that set in motion the old suburban growth model, helping propel the industrial economy and creating a middle class of workers and owners. Now that our economy has changed again, we need to do the same for the denser urban growth model, creating more flexible housing system that can help bolster today’s economy.

https://i0.wp.com/www.thefifthestate.com.au/wp-content/uploads/2012/10/High_Density_Housing_____20120101_800x600.jpg
Dream housing for new economy workers
?

Energy Workforce Projected To Grow 39% Through 2022

The dramatic resurgence of the oil industry over the past few years has been a notable factor in the national economic recovery. Production levels have reached totals not seen since the late 1980s and continue to increase, and rig counts are in the 1,900 range. While prices have dipped recently, it will take more than that to markedly slow the level of activity. Cycles are inevitable, but activity is forecast to remain at relatively high levels.  

An outgrowth of oil and gas activity strength is a need for additional workers. At the same time, the industry workforce is aging, and shortages are likely to emerge in key fields ranging from petroleum engineers to experienced drilling crews. I was recently asked to comment on the topic at a gathering of energy workforce professionals. Because the industry is so important to many parts of Texas, it’s an issue with relevance to future prosperity.  

 

Although direct employment in the energy industry is a small percentage of total jobs in the state, the work is often well paying. Moreover, the ripple effects through the economy of this high value-added industry are large, especially in areas which have a substantial concentration of support services.  

Petroleum Engineer

Employment in oil and gas extraction has expanded rapidly, up from 119,800 in January 2004 to 213,500 in September 2014. Strong demand for key occupations is evidenced by the high salaries; for example, median pay was $130,280 for petroleum engineers in 2012 according to the Bureau of Labor Statistics (BLS).  

Due to expansion in the industry alone, the BLS estimates employment growth of 39 percent through 2022 for petroleum engineers, which comprised 11 percent of total employment in oil and gas extraction in 2012. Other key categories (such as geoscientists, wellhead pumpers, and roustabouts) are also expected to see employment gains exceeding 15 percent. In high-activity regions, shortages are emerging in secondary fields such as welders, electricians, and truck drivers.  

The fact that the industry workforce is aging is widely recognized. The cyclical nature of the energy industry contributes to uneven entry into fields such as petroleum engineering and others which support oil and gas activity. For example, the current surge has pushed up wages, and enrollment in related fields has increased sharply. Past downturns, however, led to relatively low enrollments, and therefore relatively lower numbers of workers in some age cohorts. The loss of the large baby boom generation of experienced workers to retirement will affect all industries. This problem is compounded in the energy sector because of the long stagnation of the industry in the 1980s and 1990s resulting in a generation of workers with little incentive to enter the industry. As a result, the projected need for workers due to replacement is particularly high for key fields.

The BLS estimates that 9,800 petroleum engineers (25.5 percent of the total) working in 2012 will need to be replaced by 2022 because they retire or permanently leave the field. Replacement rates are also projected to be high for other crucial occupations including petroleum pump system operators, refinery operators, and gaugers (37.1 percent); derrick, rotary drill, and service unit operators, oil, gas, and mining (40.4 percent).  

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Putting together the needs from industry expansion and replacement, most critical occupations will require new workers equal to 40 percent or more of the current employment levels. The total need for petroleum engineers is estimated to equal approximately 64.5 percent of the current workforce. Clearly, it will be a major challenge to deal with this rapid turnover.

Potential solutions which have been attempted or discussed present problems, and it will require cooperative efforts between the industry and higher education and training institutions to adequately deal with future workforce shortages. Universities have had problems filling open teaching positions, because private-sector jobs are more lucrative for qualified candidates. Given budget constraints and other considerations, it is not feasible for universities to compete on the basis of salary. Without additional teaching and research staff, it will be difficult to continue to expand enrollment while maintaining education quality. At the same time, high-paying jobs are enticing students into the workforce, and fewer are entering doctoral programs.  

Another option which has been suggested is for engineers who are experienced in the workplace to spend some of their time teaching. However, busy companies are naturally resistant to allowing employees to take time away from their regular duties. Innovative training and associate degree and certification programs blending classroom and hands-on experience show promise for helping deal with current and potential shortages in support occupations. Such programs can prepare students for well-paying technical jobs in the industry. Encouraging experienced professionals to work past retirement, using flexible hours and locations to appeal to Millennials, and other innovative approaches must be part of the mix, as well as encouraging the entry of females into the field (only 20 percent of the current workforce is female, but over 40 percent of the new entries).

Industry observers have long been aware of the coming “changing of the guard” in the oil and gas business. We are now approaching the crucial time period for ensuring the availability of the workers needed to fill future jobs. Cooperative efforts between the industry and higher education/training institutions will likely be required, and it’s time to act.

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Single Family Construction Expected to Boom in 2015

https://i2.wp.com/s3.amazonaws.com/static.texastribune.org/media/images/Foster_Jerod-9762.jpgKenny DeLaGarza, a building inspector for the city of Midland, at a 600-home Betenbough development.

Single-family home construction is expected to increase 26 percent in 2015, the National Association of Home Builders reported Oct. 31. NAHB expects single-family production to total 802,000 units next year and reach 1.1 million by 2016.

Economists participating in the NAHB’s 2014 Fall Construction Forecast Webinar said that a growing economy, increased household formation, low interest rates and pent-up demand should help drive the market next year. They also said they expect continued growth in multifamily starts given the nation’s rental demand.

The NAHB called the 2000-03 period a benchmark for normal housing activity; during those years, single-family production averaged 1.3 million units a year. The organization said it expects single-family starts to be at 90 percent of normal by the fourth quarter 2016.

NAHB Chief Economist David Crowe said multifamily starts currently are at normal production levels and are projected to increase 15 percent to 365,000 by the end of the year and hold steady into next year.

The NAHB Remodeling Market Index also showed increased activity, although it’s expected to be down 3.4 percent compared to last year because of sluggish activity in the first quarter 2014. Remodeling activity will continue to increase gradually in 2015 and 2016.

Moody’s Analytics Chief Economist Mark Zandi told the NAHB that he expects an undersupply of housing given increasing job growth. Currently, the nation’s supply stands at just over 1 million units annually, well below what’s considered normal; in a normal year, there should be demand for 1.7 million units.

Zandi noted that increasing housing stock by 700,000 units should help meet demand and create 2.1 million jobs. He also noted that things should level off by the end of 2017, when mortgage rates probably will  rise to around 6 percent.

“The housing market will be fine because of better employment, higher wages and solid economic growth, which will trump the effect of higher mortgage rates,” Zandi told the NAHB.

Robert Denk, NAHB assistant vice president for forecasting and analysis, said that he expects housing recovery to vary by state and region, noting that states with higher levels of payroll employment or labor market recovery are associated with healthier housing markets

States with the healthiest job growth include Louisiana, Montana, North Dakota, Texas and Wyoming, as well as farm belt states like Iowa.

Meanwhile Alabama, Arizona, Nevada, New Jersey, New Mexico and Rhode Island continue to have weaker markets.