History > 2015 > USA > Economy (II)

Oil Companies Sit on Hands

at Auction for Leases

AUG. 19, 2015

The New York Times

By CLIFFORD KRAUSS

HOUSTON — With oil prices collapsing and companies in retrenchment, a federal auction in the Gulf of Mexico on Wednesday attracted the lowest interest from producers since 1986.

It was the clearest sign yet that the fortunes of oil companies are skidding so fast that they now need to cut back on plans for production well into the future.

The auction, for drilling leases, attracted a scant $22.7 million in sales from five companies, but energy analysts said that came as no surprise on a day when the American oil benchmark price plummeted by more than 4 percent. For the first time since the recession, it is approaching the symbolic $40-a-barrel level. Last summer, it was above $100 a barrel.

A glut on American and world markets is to blame for the depressed prices, but the unusually large daily decline occurred after the Energy Department, in a report, lowered its oil price projections and showed a considerable increase in inventories.

Until now, most companies have insisted that they would not sacrifice production in future years when they said oil prices were sure to rebound strongly. But in recent weeks, executives have expressed concern that the oil price collapse could last through 2016 and even 2017, and it is important that they tighten their belts even more.
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Oil Prices: What’s Behind the Drop? Simple Economics

The oil industry, with its history of booms and busts, is in a new downturn.

“The financial squeeze is tighter than people thought, so tight that the companies can’t even bargain-hunt for leases for future production,” said Michael C. Lynch, president of Strategic Energy and Economic Research, a consultancy. “It’s the long-term production profile that is suffering now, and they will pay for it later.”

The auction on Wednesday was more notable for the companies that were absent than for those that participated.

BHP Billiton dominated the bidding, and Anadarko Petroleum and BP picked up a few blocks. But ExxonMobil, Shell Oil and Chevron — giants that lead in the region — did not bother to participate at a time when they are focusing on cutting costs and are struggling to save cash to protect their dividends.

“This sale reflects today’s market conditions,” said Abigail Ross Hopper, director of the Department of Interior’s Bureau of Ocean Energy Management. “The continuing drop in oil prices and low natural gas prices obviously affect industry’s short-term investment decisions, but the gulf’s long-term value to the nation remains high.”

Offshore drilling, particularly in deep waters, is some of the most expensive exploration done by oil companies around the world. Nevertheless, since the 2010 BP Deepwater Horizon disaster that left 11 workers dead and soiled hundreds of miles of beaches, and the one-year drilling moratorium that followed, production in the gulf has flourished.

The Energy Department on Wednesday noted that with a total of 13 production projects coming on line this year and next, output in the gulf would increase from an average of 1.4 million barrels a day in the fourth quarter of 2014 to 1.6 million barrels a day in late 2016. That surge will partly offset an expected decline in onshore production because oil companies have reduced their rig count on land by more than 60 percent since last year.

The Energy Department, in its short-term energy outlook, projected a domestic production increase from an average of 8.7 million barrels a day last year to 9.4 million barrels a day in 2015 before overall output declines to nine million barrels next year. The resilient production in the United States, with rising production from Iraq and Saudi Arabia, has produced a surplus of oil around the globe of an estimated two million barrels a day.

One outgrowth of that surplus is the challenge of where to put all the oil.

Domestic storage alone rose 2.6 million barrels in mid-August, the report noted, because of an unexpected surge in imports and a drop in refinery processing after a breakdown in the BP refinery in Whiting, Ind.

Current crude stockpiles of 456 million barrels in the United States are at levels rarely if ever seen at this time of year since World War II. Once the summer driving season ends and other regional refineries begin their seasonal retooling, the domestic glut of crude is likely to grow even larger and the price of oil and gasoline will fall further, analysts said.

The Energy Department forecast that the American benchmark oil price would average $49 a barrel this year, $6 lower than it estimated last month. It forecast a price of $54 in 2016, $8 lower than it projected last month.

“Concerns over the pace of economic growth in emerging markets, continuing (albeit slowing) supply growth, increases in global liquids inventories, and the possibility of increasing volumes of Iranian crude entering the market contributed to the changed forecast,” the department report said.

Offshore drilling has suffered from the overall oil market downdraft. Hercules Offshore, a leading shallow-water gulf driller, filed for bankruptcy this month and Fitch Ratings has suggested that more bankruptcies among offshore drillers may be coming soon.

An oversupply of rigs is developing as contracts expire. Fitch recently estimated in a report that day rates for ultra-deepwater rigs, which have generally run between $400,00 to $600,000 in recent years, will come down to $325,000.

“The market remains challenging, and we are in the midst of a significant downturn in offshore drilling,” Anthony Kandylidis, executive vice president of Ocean Rig, a leading drilling contractor, told analysts this month as he announced the suspension of the company’s dividend. “The recent volatility in the price of oil and increased availability of drilling units do not allow for a short-term market improvement.”

Only five companies submitted 33 bids for 33 blocks spanning 190,000 acres of gulf waters in Wednesday’s auction, representing a sharp decline that reflects a growing consensus in the industry that the oil price is not going to recover anytime soon.

A version of this article appears in print on August 20, 2015, on page B1 of the New York edition with the headline: Oil Drillers Sit on Hands at Auction for Leases.

Oil Companies Sit on Hands at Auction for Leases,
NYT,
AUGUST 19, 2015,
http://www.nytimes.com/2015/08/20/business/
oil-drillers-sit-on-hands-at-auction-for-leases.html

The Problem With House Prices

AUG. 17, 2015

The New York Times

By THE EDITORIAL BOARD

The Opinion Pages | Editorial

In the housing bubble, prices rose beyond all reason. In the bust, they fell even more than they had risen. For a long time since then, they recovered in fits and starts.

Recently, however — as is fitting in a saner real estate market — house prices have been rising in line with personal income and other economic fundamentals in local areas. But a return to a more stable growth pattern does not mean that housing will once again become the economic engine it was in the decades before the bubble.

One reason is that millions of homeowners still owe hundreds of billions of dollars more on their mortgages than their homes are worth. Those borrowers tend to live in areas that were hard hit in the bust and still have weak economies, a mix that makes it nearly impossible to outgrow earlier losses. Their plight hurts the broader economy, because underwater homeowners are less likely to spend, relocate or build wealth.

One solution for many troubled borrowers would be to modify their loan terms. But as Gretchen Morgenson of The Times reported recently, banks are still unwilling to modify loans, despite rules imposed by regulators and legal settlements after the bust that were supposed to make it easier and fairer for borrowers to obtain relief.

The banks say they have broken no rules. But lawyers for borrowers, as well as a new report by the inspector general of the government’s main housing debt-relief program, indicate otherwise. In particular, it appears that banks are still able to make more money by delaying or denying modifications — and thereby earning more fees and interest — than by granting new loan terms.

Another reason that housing cannot propel the economy the way it once did is the growing inequality in incomes. That home prices are increasing in tandem with income is a sign of stability. But only investment income has been rising steadily in the recovery, while wages from work have stagnated. One result is that buying a home is still out of reach for many working people, particularly those who would have been first-time buyers in a healthier economy. Another result is that builders have largely focused on higher-end homes, leading to a low inventory of new starter homes.

The situation is evidence of the unrepaired damage from the bust. Aggressive intervention to provide debt relief and create good jobs is still needed, but has not been forthcoming. It is not too late for remedial steps, if only the political consensus to take them could be found.
 

A version of this editorial appears in print on August 17, 2015, on page A18 of the New York edition with the headline: The Problem With House Prices.

The Problem With House Prices,
NYT, AUGUST 17, 2015,
http://www.nytimes.com/2015/08/17/opinion/the-problem-with-house-prices.html

Fannie and Freddie are Back,

Bigger and Badder Than Ever

JULY 20, 2015

The New York Times

The Opinion Pages | Op-Ed Contributor

By BETHANY McLEAN

AFTER the financial crisis of 2008, there was one thing that almost everyone agreed on. The government-sponsored mortgage giants, Fannie Mae and Freddie Mac, had to go. While shareholders and executives reaped the profits from Fannie and Freddie in good times, taxpayers were stuck with the bill in a crisis. President Obama described their dysfunctional business model as “Heads we win, tails you lose.” But here we are, seven years after the crisis, and nothing has changed.

Fannie Mae and Freddie Mac were meant to make it easier for Americans to buy their own homes. By buying up mortgages issued by other lenders, they enabled the lenders to make more loans. Fannie and Freddie could then package the payments that Americans made on their home mortgages into securities to sell to investors, from big bond funds to foreign central banks. In this way, a saver in China financed the purchase of a home in Kansas.

In many ways, the system worked beautifully. But Fannie and Freddie accrued tremendous power and wealth because of the primacy of housing at the center of the American dream, combined with the perception that these loans had the full backing of the United States government. They abused that perception. Executives paid themselves lavish salaries, and the companies, particularly Fannie, relentlessly lobbied Congress to keep their advantages and dodge regulations.

In the 2008 crisis, when it looked as if Fannie and Freddie might go bankrupt, Henry M. Paulson Jr., then the Treasury secretary, argued that their fall would cause economic catastrophe. Foreign investors, stuck with their securities, would panic, and the mortgage market would shut down. So Fannie and Freddie were put into something called conservatorship, and are now government controlled, supported by a line of credit from the Treasury.

Conservatorship was supposed to be temporary — a “time out,” according to Mr. Paulson. We were going to stabilize the companies’ finances, reduce their importance to the mortgage market, and figure out a better system. But nothing happened. In fact, the situation has gotten even more precarious. In the years since the crisis, private lenders, for the most part, have been willing to make mortgages if they can immediately sell them to government agencies, mainly Fannie and Freddie. In other words, without Fannie and Freddie, there wouldn’t be much of a mortgage market.

To make things worse, the government decided to “sweep” almost all the duo’s profits into its own coffers, to be used as a slush fund for general government expenses. As Treasury Secretary Jacob J. Lew said in congressional testimony this spring, “As a practical matter it’s what has helped us reduce our overall deficit.” If there is another downturn in the real estate market and Fannie and Freddie suffer losses on their some $5 trillion in outstanding securities, taxpayers will again have to foot the bill. Jim Parrott, a senior adviser with the National Economic Council in the Obama administration and now a fellow at the Urban Institute, wrote that the current system was “the worst of all worlds: It attracts too little private capital, provides too little mortgage credit, and still poses too much risk to the taxpayer.”

There has been one serious attempt to get rid of Fannie and Freddie, a bipartisan bill sponsored by Senators Bob Corker (Republican of Tennessee) and Mark Warner (Democrat of Virginia) that did not make it out of the Senate.

But is it really practical to kill Fannie and Freddie? We as a society want much of what they provide, which is relatively consistent access, through good times and bad, for a wide section of society, to a 30-year fixed-rate mortgage. Critics argued that the Corker-Warner plan would essentially turn the mortgage market over to the big banks, and lead to fewer loans at higher rates.

At a time of economic uncertainty, when income inequality is a major issue, it is also not a great thing for social cohesion to require those at the lower end of the income scale to start paying far higher rates for their mortgages than those at the upper end, which most analysts agree would be the case if purely private capital financed the mortgage market.

If we can’t do any better, isn’t it time to fix what we have and ease Fannie and Freddie out of conservatorship? The first step is to stop sending all their dividends to the Treasury. That would allow them to start rebuilding capital, eventually to a level substantially higher than what they were allowed to operate with before the crisis. Then, let’s devise a tighter regulatory structure, one that limits the businesses in which Fannie and Freddie can operate, limits the incentives of their management teams to take risk, and limits their ability to lobby. We could cap the returns to shareholders, as utilities do.

Franklin D. Raines, Fannie’s former chief executive, suggests structuring them like mutual insurance companies, which are owned by their policyholders, who would in this case be homeowners, rather than shareholders. A guarantee fund, modeled after the Federal Deposit Insurance Corporation, could support the companies in times of stress as the F.D.I.C. does banks. It would not be perfect. But if the alternative is doing nothing, it’s a whole lot better than that.

Bethany McLean is the co-author of “The Smartest Guys in the Room” and author of the forthcoming book “Shaky Ground: The Strange Saga of the U.S. Mortgage Giants.”

A version of this op-ed appears in print on July 20, 2015, on page A19 of the New York edition with the headline: Our Doddering Mortgage Zombies.

Fannie and Freddie are Back, Bigger and Badder Than Ever,
NYT, JULY 20, 2015,
http://www.nytimes.com/2015/07/20/opinion/
fannie-and-freddie-are-back-bigger-and-badder-than-ever.html

Jimmy Lee,

Investment Banking Force,

Dies at 62

 

JUNE 17, 2015

The New York Times

By ANDREW ROSS SORKIN

James B. Lee Jr., a pioneering deal maker and among the most influential Wall Street investment bankers of his era, died on Wednesday. He was 62.

Mr. Lee, a vice chairman of JPMorgan Chase, died of a heart attack after working out in his home in Darien, Conn., the bank said.

Mr. Lee, who was universally known as Jimmy, was the behind-the-scenes consigliere to the world’s top corporate chieftains, hatching mergers and public offerings for companies as diverse as General Motors, Facebook and Alibaba. He was a constant presence in the lives of moguls like Rupert Murdoch of the News Corporation and Jeffrey Immelt of General Electric.

He was a throwback, part of a different generation of bankers on Wall Street who were trusted advisers to corporate America based on deep relationships and insights, even as much of investment banking had become commoditized.

Mr. Lee was a colorful character who was known for calling clients at all hours and signing emails “your pal.” More important, behind the trappings of Wall Street culture was a keen intellect. He was an early pioneer of syndicated loans and became a powerful force in the world of leveraged buyouts and private equity, financing deals for Henry Kravis of Kohlberg Kravis Roberts, Stephen A. Schwarzman of the Blackstone Group and the late Theodore J. Forstmann of Fortsmann Little.

Famous on Wall Street for the lengths he would go to woo a client, he bought a Corvette ZR1 to demonstrate his dedication to G.M. during its initial public offering and had hoodies made for Facebook’s I.P.O. as a sartorial homage to its founder, Mark Zuckerberg. He also looked the part of a high-powered banker, with slicked-back hair, pinstriped suits and two-toned shirts with cuff links.

He also often played the role of backstage mediator among companies and activist investors, helping to end contentious battles between Carl C. Icahn and Dell, for example, and mentoring Daniel S. Loeb, the founder of Third Point.

Inside JPMorgan, Mr. Lee was the firm’s rainmaker and one of its longest-serving executives. He often used the firm’s enormous balance sheet to finance complicated transactions. He was also a close friend and adviser to the bank’s chief executive, Jamie Dimon, whose office was just doors away from his. When the bank was under investigation by the Justice Department and Mr. Dimon was under pressure, Mr. Lee had Tom Brady, the quarterback of the New England Patriots, call Mr. Dimon to cheer him up and tell him to “hang in there.”

On Wednesday, Mr. Dimon called Mr. Lee “invaluable,” adding, “Jimmy was a master of his craft, but he was so much more — he was an incomparable force of nature.”

Mr. Lee was animated by the pursuit of the big deal, stoked by a competitive fire and a desire to be in the middle of the action.

In 2005, at a party honoring Mr. Lee, Mr. Dimon told a roomful of chief executives and buyout clients that “Jimmy Lee has probably lent a trillion dollars to the people in this room.” After pausing for effect, he added, “and almost all of it has been paid back.”

As word spread about Mr. Lee’s death on Wednesday, laudatory statements about him came pouring in from every corner.

“Jimmy loved Wall Street more than anyone I’ve ever known,” Mr. Loeb said. “He wasn’t driven by money or deals but by his passion for people. There was no more loyal friend to be had on Wall Street, nor anyone whose wise counsel I valued more. My last correspondence with Jimmy was a note from him titled ‘Bragging,’ where he told me about his son’s admission into a highly competitive securities analysis program at Columbia Business School. He signed off by telling me that despite his long and successful career, his ‘greatest accomplishment’ was his children” — his son, James, and two daughters, Elizabeth and Alexandra.

They survive him, as does his wife, also named Elizabeth.

James Bainbridge Lee Jr. was born on Oct. 30, 1952, in Danbury, Conn. His father ran the Frank H. Lee Hat Company and died of a heart attack when he was 47; Mr. Lee was 11 years old.

Mr. Lee talked about how his father’s death might have driven him to create special bonds and relationships.

“Jimmy was my closest friend in finance,” Mr. Schwarzman said. “It’s hard to explain. He always gave someone the sense — and it was true —that he cared desperately about you.”

Mr. Lee began his career with Chemical Bank in 1975 after graduating from Williams College. He played a key role in starting Chemical’s syndicated loan group in the 1980s, helping fuel a wave of buyouts, and built the investment banking business as the bank became a bigger player through mergers with Manufacturers Hanover and Chase Manhattan Bank. He climbed the ladder to run Chase’s investment banking business and eventually rose to become vice chairman of JPMorgan Chase after the 2000 merger that created the company.

He advised on some on the biggest deals, including United Airlines’ acquisition of Continental, General Electric’s sale of NBC Universal to Comcast and the News Corporation’s purchase of Dow Jones. He scrambled to help save the American International Group during the financial crisis and later helped underwrite its I.P.O.

He was fiercely loyal and considered leaving the firm only once. In his top desk drawer, he kept a copy of the term sheet to become the No. 2 at Blackstone. He most likely would have become a billionaire had he taken the job, because it was long before that firm went public. He would occasionally show it to friends, in part to demonstrate his loyalty to JPMorgan and his colleagues.

Mr. Schwarzman recounted how he had tried to recruit Mr. Lee away and nearly had a deal. “We had the press release ready,” Mr. Schwarzman said. Mr. Lee told him needed to speak with JPMorgan’s chief executive at the time, Bill Harrison. He called Mr. Schwarzman back and told him he couldn’t do it.

“I told him, ‘Don’t feel badly. You’re following your heart,’ ” Mr. Schwarzman said. “He had so much loyalty to the bank and the people there.”

A version of this article appears in print on June 18, 2015, on page B3 of the New York edition with the headline: James B. Lee, Deal Maker at JPMorgan, Dies at 62.

Jimmy Lee, Investment Banking Force, Dies at 62,
NYT, JUNE 17, 2015,
http://www.nytimes.com/2015/06/18/business/dealbook/
jimmy-lee-investment-banking-force-dies.html

Racial Penalties in Baltimore Mortgages

MAY 30, 2015

The New York Times

SundayReview | Editorial

By THE EDITORIAL BOARD

The mortgage crisis that brought the economy to its knees seven years ago was especially devastating for black communities, where homeowners who qualified for safe, traditional mortgages were often steered into ruinously priced loans that paid off handsomely for brokers and lenders while leaving borrowers vulnerable to foreclosure. The crisis left many middle-class minority communities strewn with abandoned houses, further widening the already huge wealth gap between African-Americans and whites.

A study published this month in the journal Social Problems lays out how this happened in Baltimore in the run-up to the recession and comes at a time when the banking industry and its friends in Congress are fighting proposed federal rules that would make it much easier to ferret out discrimination and enforce fair-lending laws.

The research, by the sociologists Jacob Rugh, Len Albright and Douglas Massey, focuses on 3,027 loans made in Baltimore from 2000 to 2008 by Wells Fargo, which in 2012 agreed to pay $175 million to settle allegations of predatory lending in Baltimore and elsewhere. The study takes into account credit scores, income, down payments — all of the information that was available to brokers and lenders when these loans were made.

It found that black borrowers in Baltimore, especially those who lived in black neighborhoods, were charged higher rates and were disadvantaged at every point in the borrowing process compared with similarly situated whites. Had black borrowers been treated the same as white borrowers, the authors say, their loan default rate would have been considerably lower. Instead, discrimination harmed individuals and entire neighborhoods.

Over the life of a 30-year loan, the researchers say, these racial disparities would cost the average black borrower an extra $14,904 — and $15,948 for the average black borrower living in a black neighborhood — as compared with white borrowers. That money might otherwise have been put into savings, invested in children’s education, or used to improve health or living standards.

The racial penalty was highest for black borrowers earning over $50,000. This is consistent with other studies showing that brokers who earned more fees for larger, higher-cost loans deliberately targeted black families of means. As the study notes, these facts show that whiteness still confers “concrete advantages in the accumulation of wealth through homeownership” and that pervasive racial disadvantage continues to “undermine black socioeconomic status in the United States today.”

The discrimination that was apparently widespread in the mortgage crisis has been difficult to document, partly because the data that lenders were required to report to the federal government did not include crucial information like the property value, the term of the loan, the total points and fees, the duration of any teaser or introductory interest rates, and the applicant’s or borrower’s age and credit score. The Dodd-Frank financial reform law of 2010 sought to remedy that problem by directing the Consumer Financial Protection Bureau to require lenders to report this information.

The bureau needs to resist the pressure and make the final rules as strong as possible. The additional information would make it easier to determine if lenders are operating in accordance with fair-housing law.

Beyond that, federal regulators need to conduct regular audits of lenders to make sure that racial disparities are flagged and corrected before they become entrenched.
 

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A version of this editorial appears in print on May 31, 2015, on page SR10 of the New York edition with the headline: Racial Penalties in Baltimore Mortgages.

Racial Penalties in Baltimore Mortgages,
NYT, MAY 30, 2015,
http://www.nytimes.com/2015/05/31/opinion/sunday/
racial-penalties-in-baltimore-mortgages.html