Affordable Housing Institute : US

By:David A. Smith

 

Nobody can see the cracks, can they?

 

After having wasted a perfectly good betrayal, after having winkled the Eurozone’s triumvirate out of several hundred million Euros of new financing, and after having shifted the Greek default risk from private banks (who have already learned that some animals are more equal than others) – after having had three last chances, the Greeks have by their election evidently decided to make no decision and either be completely bailed out with no end in sight, or barrel over a cliff

 

We sure showed them!

 

And that, as reported in the Financial Times, has meant a Greek exit has gone from unthinkable to inevitable.

 

With an exit looking possible, policymakers and investors are shifting focus to the consequences.

 

Once one starts contingency planning for a likelihood, the inevitability effect will take over.

 

It’s inevitable that the effect will come into play

 

The idea of a Greek exit from the eurozone is no longer fanciful.

 

Personally, I thought it was inevitable six months ago, when I wrote:

 

Here is the plain reality:

 

You can’t lend your way out of a solvency crisis.

 

If the ECB keeps pumping money in to the debtor nations, then the whole Euro will deflate.  Chancellor Merkel and President Sarkozy are going to have to choose between forcing political union, where France and Germany in effect take over the southern governments wholesale, or economic disunion, where the northern economies cut themselves free of the their southern albatross.

 

You stay the course even after I’m gone, okay, Angela?

 

The Euro is over.  Either that, or European democracy is.

 

Well the Greek voters, bless their vocal addled brains, have chosen their own anarchy over Brussels’ rigidity:

 

After 70% of voters in elections on May 6 supported parties that rejected the terms under which €174bn of international bailout loans were offered to Athens, many investors now see a fissure in the 17-member eurozone as increasingly likely.

 

Repeat after me: financing cannot solve a feasibility crisis, it can only solve a liquidity crisis.

 

While still urging Athens to stick to its agreements on austerity and reform, European governments are furiously thinking through the various scenarios.

 

This isn’t going to be pretty

 

If those hopes are dashed and Greece goes, what happens next?

 

As we’ll see, the short answer is broken crockery.

 

Whoops

 

1. Is Greece serious about quitting the eurozone?

 

Answer: No, because it is burying its head in the sand.

 

‘Greece’ doesn’t have to be serious, because ‘Greece’ is an abstraction, a personification of 12 million people, most of whom are financially clueless and fiercely angry.

 

Who knows? Opinion polls showing 80% of Greeks in favor of staying in the euro combine with the election result to offer a scene of confusion.

 

It’s fairly simple.  They believe anyone preaching austerity is lying or bluffing.

 

I sense you’re full of it

 

Greece’s European partners say Athens cannot have it both ways.

 

Athens cannot – unless the rest of Europe decides to give the Greeks a free ride, and that absolutely will not happen.

 

Everybody rides free!

 

But the siren call from the radical left coalition Syriza, that Greece is safe in the eurozone with its creditors poised to ease the harsh bailout, is music to the ears of hard-pressed citizens.

 

C’mon, Odysseus, that fiscal discipline is too, too hard tomaintain

 

Popular anger is running high at the prospect of three more years of austerity while Athens implements the rest of the reform program agreed with the EU and International Monetary Fund. “We desperately need a break … If my pension is cut again, I might as well commit suicide,” says Angelos Syrigos, 85, whose modest income has been slashed by 30% in the two years since the bailout began.

 

In effect, the whole continent of Europe has been on a defined benefit plan, and in the US, all of us in the private sector found out forty years ago they don’t work, and those of us in the public sector are discovering now that they don’t work.

 

Alexis Tsipras, Syriza’s charismatic 37-year-old leader, who emerged as a kingmaker following his party’s surge to second place at last Sunday’s inconclusive general election, is gaining in support. Opinion polls published at the weekend showed Syriza would win first place in a second election, with 20-25% of the vote.

 

I don’t have to be right, I just have to be the vote-winner

 

To be precise, in any Greek election, the winning candidate will be None of the above, and that’s a prescription for default, because it violates the basic principles of being a good delinquent borrower.

 

Mr. Tsipras insists Brussels and Berlin will not force Greece out of the euro because of the contagion effect this would have on Portugal, Ireland and Spain.

 

Especially if not punished

 

Never play showdown poker with a woman with a gun, Mr. Tsipras.  You might make her mad.

 

You won’t like me when I’m angry

 

Or you might make her make an example out of you, pour encourager les autres.

 

He has demanded a reversal of salary and pension cuts imposed by the bailout, as well as the hiring of 100,000 new public sector workers to reduce the impact of a 21% unemployment rate.

 

Well, neither of those things can happen while Greece is in the Eurozone.

 

Middle-aged Greeks are afraid of a eurozone exit, fearing a further collapse in property values, the crumbling of the banking system and high unemployment.

 

Unlike what you have now?

 

Now we see the violence inherent in the system!

 

“The gravity of the situation isn’t appreciated. Some people believe Syriza will change its tune, others that the Europeans make empty threats,” says Takis Michas, a political commentator. “The only thing that will focus minds is when the money to pay pensions and salaries just doesn’t arrive.”

 

That’s already happened in Alabama.

 

2. Is Europe ready to jettison one of its own?

 

Answer: Yes.

 

You’re just surplus costs

 

Eurozone officials had prepared contingency plans for a Greek exit – or “Grexit” as some have called it – after George Papandreou, then prime minister, proposed a national referendum in October on euro membership.

 

As they said in Broken Arrow (one of the great cheesy movies of modern times), “It’s bad enough we’ve lost a nuclear weapon, what’s worse is that we have a name for it!”

 

I wish we didn’t have a name for this

 

Indeed, Wolfgang Schauble, German finance minister, actively urged the referendum to halt the endless questioning once and for all, according to one senior European official.

 

Be sensible or I’ll mind-meld your head

 

Mr. Schauble, a sensible German, undoubtedly expected the Greeks to be sensible Germans too.  But they weren’t.

 

Even then, such officials were uncertain whether the rest of the currency union could survive the shockwaves unleashed by a return of the drachma – particularly in bailed-out countries such as Portugal and Ireland, where bank runs and market panic could follow on the assumption that others could follow Greece out of the eurozone door.

 

It could happen to you

 

But now, with a new, permanent €500bn rescue fund backed by the strength of an international treaty with multiple tools to buy sovereign bonds on the open market and inject capital into eurozone banks, some officials believe the contagion could be contained – much as it was after Athens finally defaulted on private bondholders last month.

 

Here is where Mr. Tsipras miscalculates because he fails to understand triage and the observant herd. 

 

“Two years ago a Greek exit would have been catastrophic on the scale of Lehman Brothers,” says a senior EU official involved in discussions about Greece’s future. “Even a year ago, it would have been extremely risky in terms of contagion and chain reaction in the banking system. Two years on, we’re better prepared.”

 

 

I hope that is true – but for Greece and the Eurozone, what matters is not whether it is true, but whether Europe’s leaders now convince themselves it is true.  After having convinced themselves for years that the problem would sort itself out, to convince themselves only one nation will go down should be easy enough.

 

The new eurozone firewall – now backed with additional resources for [sic: from] the IMF – is not the only reason some officials are becoming increasingly sanguine about losing Greece.

 

‘Sanguine’ is not a good word for your prospects, Mr. Tsipras.

 

So what? Sanguine is a French word

 

Spain and Italy, they say, have taken huge steps to put their economic houses in order, enabling them to bounce back quickly if credit markets suddenly dry up and their banks wobble.

 

If one has a limited supply of vaccine to contain a potential outbreak, one hoards it for those who behave well and may survive, rather than wasting it on those who not only may die, but who have brought out their sick condition.

 

Still, uncertainty over how Europe’s banks would be affected has continued to be the primary concern. Witnessing Greek bank customers suddenly having their euros turned into drachmas overnight, depositors in other peripheral banks might suddenly withdraw their cash and place it in seemingly safer euro accounts in Germany or elsewhere.

 

I expect they would, so more than likely the other European countries with wobbly Euro prospects will impose currency controls of their own. 

 

Such a massive run could destroy much of the eurozone periphery’s banking sector. “The ball is genuinely in their court,” says the EU official. “Those who understand the situation realize their room for maneuver is extremely limited. We simply have to wait.”

 

So Greece is almost certain to crack out of the Eurozone.  What then?

 

Must … read … blogs …

[Continued tomorrow in Part 2.]

By:David A. Smith

 

A threat to the established order?

 

All invention comes from building blocks, whether it is nature inventing amino acids out of atmospheric molecules, bloggers inventing posts out of words, or children inventing phantasms and improbably structures out of pieces like Tinker Toys:

 

Go, speed racer!

 

Lincoln Logs:

 

Castle Skull, in Lincoln Logs

 

Lego bricks:

 

Spilling my guts for you, once every business day

 

All of these are wonderful building blocks of the imagination, and yet each is limited – one can invent only within the vocabulary permitted by the manufacturer.  So if we innovate only within the creator’s limits.  Yet if we wanted to be truly creative, we’d be able to leap from Lego to Lincoln Logs to Tinker Toys, because to a child they’re all building blocks and they often wind up in the same big plastic bin anyway.

 

We’re monstrous, and ain’t that cool!

 

That brings us to a wonderful visual metaphor of both the proprietary nature of program design and the disruptive benefits of entrepreneurs, as illustrated by this children’s parable from Forbes:

 

Last year Golan Levin’s son decided to build a car. Aside from the minor inconvenience of being 4 years old, the younger Levin faced an engineering challenge. His Tinkertoys, which he wanted to use for the vehicle’s frame, wouldn’t attach to his K’Nex, the pieces he wanted to use for the wheels.

 

All children are born entrepreneurial: they want what they want and they don’t want to be told what they want is impossible.  And boys in particular, like adult entrepreneurs, love nothing better than trying to ram incompatible things together, which makes them the natural counterpart of governments, whose programs are building blocks.

 

Littler blocks lead to bigger visions

 

It took his father, an artist, hacker and professor at Carnegie Mellon, a year to solve that problem. In the process he cracked open a much larger one: In an age when anyone can share, download and create not just digital files but also physical things, thanks to the proliferation of cheap 3-D printers, are companies at risk of losing control of the objects they sell?

 

The boldfaced phrase irritates me beyond all reason.  Once the company sells the objects, then I own them and I can do what I want with them.  If I can find a way to play with them in unexpected ways, that’s my right. 

 

I don’t know what it is, but it’s interesting!

 

In March Levin and his former ­student Shawn Sims released a set of digital blueprints that a 3-D printer can use to create more than 45 plastic objects, each of which provides the missing interface between pieces from toy construction sets. They call it the Free Universal Construction Kit.

 

The sparks resulting from banging together incompatible things spontaneously ignite creativity and invention, and gives new life to old tools and blocks:

 

The tens of thousands of consumers who now own devices such as MakerBot’s $1,100 Thing-O-Matic can download those files and immediately print a plastic piece that connects their Lego bricks to their Fischertechnik girders, their Krinkles to their Duplos, or half a dozen other formerly incompatible sets of modular plastic blocks, sticks and gears.

 

Not a transporter, but not bad either

 

That’s exactly what we want to be doing in public policy – downloading patches that enable us to make (say) Medicare and housing work together, or New Markets Tax Credits and residential historic rehabs. 

 

One blog called it the “ultimate nerd dad triumph.” But as the project’s unprintable acronym implies, Levin and Sims are out to raise hackles—particularly those of intellectual property lawyers. “This isn’t a product. It’s a provocation,” says Levin.

 

Carnegie Mellon Professor Golan Levin with a pile of 3D-printed adapters between construction toy sets.

 

Of course he’s right.  Programs are designed in splendid isolation from one another, and certainly with blissful ignorance of what may come after, either in changing markets, new political imperatives, or new policies (nobody expected LIHTC).  Innovation is continuously required, and that means recombining old tools and using them alongside new ones in unexpected ways.

 

“We should be free to invent without having to worry about infringement, royalties, going to jail or being sued and bullied by large industries. We don’t want to see what happened in music and film play out in the area of shapes.”

 

If one cannot copyright the alphabet, one should be likewise unable to copyright a shape.

 

Uncopyrightable, and hence perfectly replicable

 

Levin and Sims didn’t just make near replicas of the commercial toys, they used a measurement tool called an optical comparator to copy the toys’ dimensions to within 3 microns.  Then they published those models on the Web.

 

Information wants to be free – and as Woody himself said, toys want to be played with.

 

Object + Animating spirit = Invention

 

“Our lawyers were a bit concerned,” admits Levin, so much so that the pair initially planned to release the project anonymously.

 

The patents on all the toys integrated in their kit expired years ago. But a copyright lasts many decades longer than a patent, and that’s the cudgel lawyers are using against downloadable objects.

 

Unfortunately, some of those running companies appear to be thinking far too much like bureaucrats:

 

A Lego spokesperson says the company has no problem with Levin and Sims’ work but is keeping an eye out for printed objects that infringe on its brand.

 

If I were running Lego or Tinker Toys, I’d embrace the kit with both arms, because increasing interoperability increases the utility of my pieces. 

 

Neither Hasbro nor any of the smaller companies that sell construction toys responded to requests for comment. So far the pair haven’t received a cease-and-desist letter.

 

Nor should they.  Rather they should be applauded, just as someone who finds how to interoperate Medicare and housing should be feted, not criticized.

 

Recombinant DNA, coming to a 3-D printer near you

 

As long as Levin and Sims stick with functional objects rather than aesthetic ones, they should be able to steer clear of copyright and trademark law, says Michael Weinberg, a lawyer with the nonprofit Public Knowledge who advised on the project. “You probably can’t stamp the name Lego on them, but if you don’t it’s hard to imagine what rights the companies could assert,” he says.  “The real lesson is the vast majority of physical things aren’t protected by intellectual property law.”

 

Free hardware from its chains!

 

Nor should they be.

 

Even so, Levin calls his project a “shot across the bow” of any company that wants to limit and control how their physical designs are copied, remixed or improved in the future. “Yes, it’s just a toy. But it’s also a harbinger of what’s to come. Things are going to get complicated.”

 

More likely, they’re going to get creative.

 

Just keep playing

By:David A. Smith

 

As China ages at warp speed, old notions of intergenerational family structure are giving way to economic pragmatism, and as shown in a recent article from the Economist (April 21, 2012), that is creating intriguing business opportunities that might just change the political ecosystem:

 

Social problem or housing opportunity?

 

Eighty-nine-year-old Zheng Jixuan is thrilled with the place where he will live out his dotage: a small but comfy room in the newly built wing of an old-people’s home in the city of Hangzhou, 180km (110 miles) south-west of Shanghai.

 

Hangzhou, on the Yangtze, river full of fish

 

Though Mr Zheng’s son lives in the same city, he does not have time to care for his father –

 

Not having time is, of course, a question of priorities.  Granted that Mr. Zheng’s son is probably sixty, and nearing the sunset of his prime earning years, his action probably makes overall intergenerational sense, though it is nevertheless revealing of a quiet sea change in Chinese attitudes toward the elderly.

 

– so old Mr Zheng has moved into the Hangzhou City Christian Nursing Home. As a retired doctor, he cheerfully tends to the minor ailments of other residents.

 

When it comes to elderly housing, I’ve often wondered why we haven’t yet developed a management or social model that will enable residents to pool their individual pre-retirement skills and hence both to enliven the community and add rental value.

 

The home is “better than in America,” he says, and good value at just $250 a month, paid from his pension.

 

Certainly sounds cheap enough, even adjusted for China’s cost of living.

 

Prices in comparison between sister cities

 

Mr Zheng’s nursing home draws together within its walls two profound changes in urban China:

 

[1] The growing number of old people whose children cannot or will not take care of them

[2] A government willingness to allow religious groups to take on the task.

 

As we saw in Old before rich?, China is facing a demographic inversion without precedent in human history, a population turning gray-heavy so rapidly that the question is not whether it will transform society, but how comprehensively.

 

The Hangzhou home enjoys a subsidy [inferentially, of the capital cost, not ongoing operations – Ed.] from the local government of 10,000 yuan ($1,600) for each new bed.

 

Funding has also come from Christian donors –

 

Aside from faith, religion has its uses, including promotion of charity. 

 

As far as I can tell, the connection between faith, home, and charity dates back to nomadic times.  One category was overnight accommodations for pilgrims. 

 

A wayfarer’s inn at every stop

 

Christians walking the Way of St. James to Santiago de Compostela stopped at abbeys strung along the major routes.

 

Did you Google the next abbey for a bed?

 

Caravanserai dotted the Arabian peninsula to aid Muslims on hajj.

 

Out of the sun and dust, and with a well or fountain contained within

 

Closely related to pilgrims’ housing were the almshouses, about which I’ve written before, some reserved for the destitute, others for the elderly – and hospitals arose out of the faith-based injunction to care for the sick. 

 

Religion has always been one way people form tribes across cultures, languages, and races, and so the duty to shelter or care for the traveler or the beggar becomes inculcated into practice.  That’s also how cultural or religious minorities make their way in a society that tolerates them without welcoming them.

 

– and the deputy director, Zhou Wenjie, says any new resident must be a Christian or at least open to becoming one. {Couldn’t require that in America! – Ed.]

 

Religious or faith-based charity can also bridge the gap between familial support (the extended family or clan) and government support (the municipality, province, or nation), and as they are private institutions, they have the mission entrepreneurial capacity to experiment.  In fact, a tradition of alms makes experimentation easy, since if the business fails, it was nevertheless charity.  Hence we should note surprised that they are growing, as evidently they are:

 

Non-government institutions account for about 20% of the 33,000 beds for the elderly in the city, says Sun Xiaodong, deputy director of another nursing home, the government-run Hangzhou Social Welfare Centre.

 

It’s both revealing and more than a little discouraging that when shifting from apartments to nursing homes, the unit of measurement (and of revenue) changes from apartments to beds, signaling the shrinking of horizons and closing in of the psychological frontier.

 

The ‘semi-private’ room:

Clean and serviced, but neither private nor quiet

 

But, he says, supply cannot keep up with demand.

 

Faith-based charitable housing is hugely needed, though the elderly are often the slowest adopters:

 

When Mr Sun’s nursing home opened in 1999, the first phase of 500 beds took four years to fill.

 

It was new and unfamiliar.  It was unproven.  More importantly, it went beyond the family, and asked the elderly to live with strangers.  The first who went had to have been unusually brave.

 

Then the herd observed:

 

Now, with a total of 1,400 beds, it has a waiting list of more than 1,000 names. Another 2,000-bed home is already being built, and there are plans for one that will house 5,000 pensioners.

 

Growing effective demand and replicable visible examples converge:

Shifting attitudes to the elderly in China’s cities have created a huge market opportunity. Mark Spitalnik, an American who runs China Senior Care in Hangzhou, began forming a business plan five years ago for a nursing home that would charge nearly $5,000 per month.

 

Aligned according to feng shui, or so they say

 

He did his market research on the golf course. (“Any guy that’s playing golf in China is in my target market, right?”)

 

I think I hit Mom crossing the fairway

 

As long as he has parents, he is.

 

Other American care-providers are now rushing in too.

 

Ironic, isn’t it?  We have more experience with elderly housing and nursing homes than the Chinese do.

 

Because the need is so great, Mr Sun, the care-home director, believes the government should encourage more private nursing homes, including those run by religious charities.

 

One senses the authorities are worried about religious charities as fomenters of dissent – but they need the housing. 

 

In late February the government issued a document that seemed to encourage religious groups to do charity work. The proposal applies only to officially-approved religious organisations, and the Communist Party remains cautious about the influence of religious groups.

 

Though the Party is suspicious of any gathering of believers that it does not control, if China wants to become nationally rich, rather than a plutocracy, it has to allow people to congregate, especially if the resulting congregation helps China address an exploding need.

 

Now you take the pictures of Benjamin Franklin out of daddy’s wallet …

 

Mr Spitalnik [the Hangzhou elderly home developer] says that if he told his Chinese golfing partners the idea for his business on the first tee, they would say it did not make sense, because China’s tradition of filial piety requires children to look after their parents. He says he could usually persuade them otherwise by the sixth tee.

 

Today, he says, such persuasion is no longer necessary.

If the emperor plays, all may play: Ming emperor Xuande, playing what appears to be golf

By: David A. Smith

 

The game’s easier that way

 

Most games are easier to play when you can manipulate the scoreboard – and while in social games that’s merely cheating, when it comes to financial markets, it’s both extremely damaging and criminal – and amazingly that appears to be just what has been happening for years and is only now coming to light, as reported in The Economist (April 14, 2012):

 

The LIBOR probes

 

Markets run on data – better data, better markets.  When it comes to the cost of capital, indices provide a great way to let the price of capital float up and down based on external factors (like the Federal funds rate) that are the foundation of anybody’s capital markets.  But tying rates to an index is predicated on the index being disinterested, independent of suasion or coercion. 

 

Court documents shed light on how LIBOR was allegedly manipulated

 

Treasury rates can be used as an index because they are constantly being set and reset by the markets, widely and deeply traded, and the push-and-pull of pricing assures them of being impossible to manipulate.

 

That is not so, I recently learned, of the other globally recognized rate:

 

LIBOR (the London inter-bank offered rate) is a financial benchmark set every day.

 

But unlike treasuries, set by auction, LIBOR:

 

It is supposed to be constructed by collating banks’ own honest estimates of what it costs for them to borrow money.  But regulators around the world suspect that LIBOR has been subject to manipulation.

 

Given how hard it is for regulators to detect manipulation or collusion, and how easy collusion would be to establish and maintain, I have to believe the worst, and that the regulators are right, LIBOR has been fiddled with.

 

Must be just natural market forces

 

Little information has been publicly released by the regulators that are investigating. But Canadian and American legal documents seen by The Economist paint a picture of what is alleged. It is not pretty.

 

Ain’t that pretty at all

 

Worse that not pretty, it’s criminal.

 

Suspicions that something was wrong with LIBOR were aroused in 2008 when financial risks began to pick up but the benchmark, which ought to have ticked upwards too, did not move.

 

Given the extraordinary interdependence of financial markets, failure of one to move would certainly be a clue.

 

Can you spot when things starting misbehaving?

 

That same year [August, 2008 – Ed.], a group of American academics circulated a paper showing that banks’ individual estimates of their borrowing costs were surprisingly close, given their different levels of risk. That suggested something fishy but was not conclusive proof, according to Rosa Abrantes-Metz of New York University Stern School of Business, one of the paper’s authors.

 

Looks fishy to me

 

The paper’s abstract deserves its own quote:

 

On May 29, 2008, the Wall Street Journal printed an article that alleged that several global banks were reporting unjustifiably low borrowing costs for the calculation of the daily Libor benchmark. Although the Journal acknowledged that its “analysis doesn’t prove that banks are lying or manipulating Libor,” it conjectured that these banks may “have been low-balling their borrowing rates to avoid looking desperate for cash.”

Readers will recall that the summer of 2008 was a crazy time in global finance, with Fannie and Freddie about to be seized, Lehman Brothers about to go under, and a half-dozen other financial institutions tottering on the edge.

 

While there are some apparent anomalies within the individual quotes, the evidence found is inconsistent with an effective manipulation of the level of the Libor. However, some questionable patterns exist with respect to the banks’ daily Libor quotes, especially for the period ending on August 8, 2007, for which the intraday variance for banks quotes is not statistically different from zero.

 

“Not statistically different from zero” is a careful statistician’s way of saying “moving in unison.”

 

We’re all following the same lead

 

A case brought by the Canadian Competition Bureau provides harder evidence that some banks’ submissions were being manipulated. The court documents suggest that a group of traders regularly contacted one another to discuss how to influence the yen LIBOR rate.

 

If this were an antitrust case, proof of collusion would secure a conviction.

 

If true, that would have breached two principles.

 

1. Traders are supposed to be separated from staff within the same bank who estimate LIBOR.

2. Traders from different banks should not be aligning their positions in this way.

 

Aligning positions would be price-fixing, and that would be illegal.  Keeping an ethical wall between trades and analysts is fundamental – and, ever since Sarbanes-Oxley 2002, has been legally mandatory in the US, so if any of these traders were doing business in America, they’re looking at jail.

 

Jail?  Moi?

 

The case filing summarises messages sent by Trader A, an employee of an unnamed whistle-blowing bank (which excerpt cites RBS to show how the alleged scheme worked):

 

“Look, if I trade with you, I must take up a contrary economic position.”

“Yes but that’s not the same as just saying, No it isn’t.”

“Yes, it is!”

 

“Trader A explained to one RBS IRD [Interest Rate Differential – Ed.] trader who his collusive contacts were and how he had and was going to manipulate Yen LIBOR.

 

Trader A also communicated his trading positions, his desire for a certain movement in Yen LIBOR and gave instructions for the RBS IRD trader to get RBS to make Yen LIBOR submissions consistent with Trader A’s wishes.

 

The RBS IRD trader acknowledged these communications and confirmed that he would follow through.

 

Trader A and the RBS IRD trader also entered into transactions that aligned their trading interests in regards to Yen LIBOR.”

 

If all that is true, then it’s game, set, and match, and Trader A will be heading for jail unless he/ she has plea-bargained in exchanging for testifying against the banks and their higher-ups.

 

Game over, whether you like it or not

 

RBS says that it has “legal and factual defences” against such claims.

 

Legal and factual defenses!

 

Good luck with that.  This type of fraud makes me furious because it is a violation of trust, including the trust vested in one by one’s employer, and for no desperate purpose, simply to make more or lose less.

 

The Canadian case opens a window into how LIBOR manipulation may have happened. Civil cases brought by banks’ customers in America suggest who might have suffered if the rate was being gamed.

 

These cases can be grouped into four types, according to Bill Butterfield and Anthony Maton of Hausfeld, a law firm.

 

Basically, all of the victims are counterparties of LIBOR-based transactions who were looking to the investment banks to be providing what they advertised they would provide – namely, efficient market-making.

 

1. Large individual investment firms seeking damages on their own.

2. Traders who were on the wrong side of LIBOR bets.

3. Investors in large companies’ LIBOR-linked debt who may have lost out on interest payments if LIBOR was set too low.

4. Customers that bought interest-rate swaps from banks. This last group includes the City of Baltimore, which is represented by Hausfeld and whose case is especially revealing.

 

A blue-collar town with a tough financial situation

 

The Economist is right; the last group is a revealing story of how finance is interconnected and how cheating with indices destroys commerce.

American cities borrow to finance the construction of large-scale public works like roads and sewerage systems.

 

Of course, this can get them into serious trouble, but not because of borrowing costs.

 

Heads you can lose, too

 

They can borrow most cheaply at floating rates but this option lacks the stability that fixed-rate borrowing gives. Swaps can help them get the best of both worlds. The city first borrows at a low floating rate [Not linked to LIBOR – Ed.]. It then buys an interest-rate swap from a bank. Under the swap deal it receives a LIBOR floating rate which cancels out the payments it must make to investors in its debt. In exchange the city pays the bank a fixed rate.

 

Baltimore entered into over $100m in interest-rate swaps, according to case documents. Lower LIBOR-linked payments to the city would have meant less money to cover the outgoing fixed-rate payments.

 

If LIBOR was artificially suppressed, the city would have been losing millions annually.

 

As I bracketed above, the swaps only make sense if the original floating rate borrowing was in something other than LIBOR (say, short-term Treasuries) where one index was manipulated and the other wasn’t.

 

If only it were that easy to spot

 

If the case is upheld, damages could be big. The American cases are being pursued under “class action” litigation. This means that if Baltimore’s case is upheld other cities sold the same products will also be able to claim damages.  Across America 40 states allow municipalities to enter into swap agreements. The total estimated amount in 2010 was $250 billion-500 billion, according to an IMF paper.

 

What’s more, cases are being brought under the Sherman Act, America’s antitrust law, which allows for triple damages.

 

Senator John Sherman, the “Ohio Icicle,” whose 1890 Act is still important

 

Assume the worst and damages for American cities alone could go as high as $40 billion.

 

Sock it to ‘em.

 

Sock it … to me?

[Continued from yesterday's Part 1.]

 

By: David A. Smith

 

In yesterday’s post, using stories from The Economist and a followup in Reuters, April 4, 2012), we saw that Detroit was on the brink of either running out of cash (by early May), or going into municipal bankruptcy, or accepting aid and financing assistance from the State of Michigan, but with strings attached akin to a receivership.  While for many in Detroit the outside control was a bitter pill, for the state it was a simple necessity:

 

What happens when the people leave: dying Detroit neighborhood near Comerica Park

 

The financial advisory board would be appointed by both city and state, and would have to approve new labor agreements before they went to the mayor and city council for ratification.

 

There is a consultative process, but in the end, it will be the state whose opinion decides.

 

I was the national decider but I’m not any more

 

The CFO would be chosen by the mayor from a list of at least three names submitted by the governor. And if, after all this, the city failed to meet the required savings targets, Mr. Snyder could still appoint an emergency manager.

 

Receivers are the last exit before bankruptcy, and if they treat their role as technocratic – making the sums work and leaving politics entirely out of their vocabulary – they have a fighting chance of being if not embraced then at least tolerated and perhaps even tacitly endorsed.

 

My way or the bankruptcy highway?

 

The city council’s response to the consent agreement has ranged from resigned to downright hostile. As The Economist went to press early on April 4th, the nine members had delayed voting on it.  

 

Neither numeracy nor responsibility is a prerequisite to election to office.

 

One even asked, “What is the hurry?” The hurry was the next day’s deadline.

 

Nor was that deadline arbitrary:

 

Under the deal it is planned that some outstanding bonds will be restructured to push $37 million in April 1 and May 1 debt-service payments into future years, and issue $100 million of new bonds to fund its fiscal 2012 and fiscal 2013 self-insurance payments.

 

There’s the real point: failure to approve the consent agreement would leave Detroit in monetary default on its bond obligations, and if that were to have happened, the default conditions would typically cascade (that is, all other bond issues being in default if any of them are in monetary default)

 

Mr. Snyder has said he would rather not use these [receivership] laws in Detroit, and there is reason to believe him. Not only have they never been applied to a city this size, but the takeover of a black city (with an all-black mayor and council) by a white governor has become racially charged.

 

Of course it doesn’t have to be racial, though there is a rich-poor dichotomy that also breaks along the lines of political parties (nearly all the Detroiters are Democrats, the governor and House leader Moss are Republicans).  These disputes can easily take on a racial overtone, especially if the poorer city dwellers are whipped into a confrontational frenzy by demagogues anxious to distract attention from their own corruption and crimes:

 

I’m a mayor! I can’t be convicted of 1½ to 5!

 

Hey, I never went down

 

At one recent public meeting the crowd was unruly. “Before we let you take over our city,” one activist shouted, “we will burn it down!”

 

Well, now, that’s helpful, especially in memory of Detroit’s tragic history of urban rioting:

 

Detroit riot, 1967

 

Detroit riot, 1967

 

Those were some of America’s worst days in my lifetime

 

Detroit riot, 1967

 

Detroit riot, 1967

 

Meanwhile, a coalition of unions has gone on the attack. They argue that the agreement was negotiated behind closed doors, rather than openly as the law requires, and want a federal judge to stop the city and state signing it. The judge said late on April 3rd that he will rule on the matter by April 9th: in other words, after the deadline.

 

Though I am sure unions must do good things now and then, in every story I read about municipal insolvency the unions are not on the side of reason or shared interest.

 

No fistful of dollars here, alas

 

Mr. Snyder has laid out the state’s case on a new website, “Detroit can’t wait”. It includes a personal commitment from him to ensure that, “in the short term…the streetlights are on at night and trash is picked up”, and that “buses run on a reliable schedule so people can get to work”.

 

The governor is right: a city that cannot provide essential services is on its way to anarchy and lawlessness.

 

The mayor of Detroit, Dave Bing, has seemed keen to negotiate a “consent agreement” between the city and the state.

 

A man who didn’t have to take the job, and therefore deserves credit for running for it

 

He got his wish: the agreement was approved (Reuters, April 4, 2012):

 

Detroit, April 4 (Reuters) – Detroit avoided a takeover by the state of Michigan on Wednesday after both a review team and the city council approved a consent agreement that will put the city’s struggling finances under stricter control.

 

The deal, which was passed by the city council in a 5-to-4 vote, “ensures that the future of Detroit is determined by Detroiters and their elected officials,” Detroit’s Deputy Mayor Kirk Lewis said after the late vote.

 

The deputy mayor believes public employee costs must be cut

 

Yet the signing is merely a prelude, a permission to make the hard decisions:

 

Detroit would also have to rework its collective bargaining agreements with unions, some of which have filed a challenge in U.S. District Court claiming the consent agreement would unfairly impair labor deals ratified by their members last month.

 

“We will work on coming up with a restructuring plan with the state. We have to make sure that our 10,000 employees don’t miss a payment,” said Saunteel Jenkins, a member of city council.

 

That’s good, but much more is needed.  Detroit will not stabilize until the city’s finances are in balance, jobs are being created (in part by a low-tax environment with reliable and high-quality city services), and its population stops fleeing.

 

Good thing there’s baseball in Detroit.

 

Currently the best pitcher in baseball