Audit Roundup: Working Class Blues

The Washington Post has a solid story this morning on the hardships facing the working class—illustrating them with the story of a Virginian named Regino Romero.

But with the economy sputtering, inflation increasing to levels not seen in nearly two decades and his family life in flux, he is struggling to survive economically. Although he has worked full time for nearly 14 years as a cook at the Hilton Crystal City hotel, he feeds his own family with help from a local food pantry.

Romero makes $13.84 an hour. Imagine a family trying to make it on the minimum wage of $6.55.

Romero's dilemma is not unlike that of many low-wage workers struggling to cope in an economy that has left them behind. A national survey by The Washington Post, Henry J. Kaiser Family Foundation and Harvard University found that large percentages of low-wage Americans struggle to pay for life's staples. Eight in 10 find it hard to pay for gasoline or save for retirement, while more than six in 10 said it was tough to afford health care. And roughly half said they were having difficulty affording food and housing.

Workers are more productive than ever, as the output per person has hit new highs in the past eight years. But rather than funding wage increases for most employees, the fruit of that new efficiency has largely bypassed all but the people in the best-paying jobs, as inflation-adjusted incomes for typical Americans edged downward from 2000 to 2007.

Now, as the global financial system strains to absorb its biggest shocks since the Great Depression, the once faraway world of Wall Street is making things worse for low-wage workers.

Even before last week's dramatic declines on Wall Street, credit markets had tightened, making borrowing more expensive — or impossible — for people and businesses whose credit histories are less than stellar. Already, most lenders are requiring higher down payments for mortgages and more collateral for other loans. Tighter credit means less spending and fewer jobs. Inevitably, those at the bottom of the income ladder are most vulnerable to all of those changes.

I'd like to see more reporting like this.

Meanwhile, The New York Times has a timely piece on families struggling to pay for college.

With the unemployment rate rising and a recession mentality gripping the country, financial aid administrators say they expect many more calls like the one from Ms. Jacobs. More families are applying for federal aid, and a recent survey found that an increasing portion of families expected to need student loans. College administrators worry that as fresh cracks appear in family finances, they will not have enough aid money to go around, given that their own endowment returns are disappointing, states are making cutbacks and fund-raising will become more difficult.

Speaking as part of a household with six-figure student-loan debt: Welcome to the club, if colleges even have the money to lend, that is!

Bloomberg takes a good look at the state of the credit markets, which are what we really need to pay attention to, but which are much harder to find information about than stock markets.

Prices of loans rated below investment grade declined to a record low 66.1 cents on the dollar, virtually guaranteeing investors get their money back, based on historical recovery rates, according to data compiled by Standard & Poor's. Yields on corporate bonds show investors expect 5.6 percent of the market will go bust, the highest default rate since the Great Depression…

While central banks injected $3 trillion into the global economy, credit markets are tumbling because banks are clamping down on lending, forcing investors to unload assets they bought with borrowed money…

``It's quite possible that we had priced in Armageddon,'' said Robert Gahagan, head of taxable fixed-income in Mountain View, California at American Century Investment Management, which oversees $23 billion in fixed-income assets.

And the selloffs causing bond prices to plunge probably won’t end anytime soon, according to the story, as hedge funds are forced to liquidate.

The Journal is good on the perilous state of the hedge-fund industry, including the latest closures, here.

Debt, of course, is essential to the modern hedge fund. That leverage has helped funds squeeze more gains out of many thinly profitable investment strategies such as merger arbitrage and senior loans of big companies. For example: A fund that borrows $5 for each $1 of equity can turn a 5% gain from a leveraged-loan investment into a 25% gain.

But, just as some homeowners are finding that a home declining in value can wipe out their down payment, hedge funds are learning how sensitive their investments are to even modest declines. One main problem: Collateral backing their borrowing is also falling in value, and banks are demanding more collateral in turn. Such collateral calls typically kick in when a fund loses 25% of value. That creates "forced selling" for funds, pushing stock-market averages lower.

The current mix of investor withdrawals, declining markets and banks withdrawing financing can be dangerous for even large hedge funds, says Antonio Munoz-Sune, head of the U.S. for fund of funds EIM. "The combination can take anyone down," regardless of size.

If you think there was a lot of screaming about bailing out Wall Street, imagine the caterwauling if we’re forced to bail out Greenwich, Connecticut. Their paychecks have been much, much bigger.

Breakingviews is smart today in pointing out that hedge funds’ compensation structures, like those at investment banks, led them to take on too much risk.

With a 2 percent fee to manage money and 20 percent of profits, hedge funds are structured to gamble other people’s money. There’s no clawback provision when the manager loses tons of money, as lots of hedgies are doing now. That needs to be reformed.

And breakingviews is very pessimistic about the economy, as well it should be.

The Journal says commercial real estate is the next shoe to drop, quoting a JPMorgan report that estimates 7 percent of the $3.4 trillion in outstanding debt will go bad in the next decade. That would be the highest rate since the commercial real estate depression of the late 1980s and early 1990s.

But it’s not clear to me from the Journal if that number includes condos, which are often considered commercial real estate loans, even though they’re residential projects. It seems to, though the paper confuses the issue here:

After years of plunging residential property valuations, commercial real estate is heading into the danger zone as office vacancies rise, stores close and hotel bookings fall…

Defaults on commercial real-estate debt remain less than 1%, compared with more than 10% at the worst point of that earlier collapse. Rents and vacancy rates have so far remained solid, enabling most properties to pay their debt service.

The major exception has been construction loans to single-family home builders and condo developers.

It seems to be saying that residential is the real problem with “commercial” real estate.

Finally, the Journal is good today with one of its classic page-one “aheds”, this one on “ICE Air” the illegal-immigrant repatriation airline whose business is soaring these days.

While U.S. airlines downsize and scrimp on amenities, one carrier is offering its passengers leather seats, ample legroom and free food. But frequent fliers probably don't want a ticket on what may be the fastest growing "airline" serving Central America.

This carrier is run by U.S. Immigration and Customs Enforcement, the federal agency responsible for finding and deporting undocumented immigrants. A crackdown on illegal immigration has led to a spike in deportations and the creation of a de facto airline to send the deportees home.