Month in Review: January 2008
[A complete set of 2007 Month In Reviews available here: Dec 07, Nov 07, Oct 07, Sep 07, Aug 07, Jul 07, Jun 07, May 07, Apr 07, Mar 07, Feb 07, Jan 07.]
A New Year is a time of resolution and initiatives, and I began January with Predictions for 2008, among which were these two:
It’s workout time. Even if they can’t make ends meet, affordable housing properties are assets. While a very few need to go somewhere to die, for most, saving them is better than letting them die. Which means that there’s a stakeholder – lender, equity investor, regulatory agency, subsidy provider – who has both a self-interest in protecting the property and the capital to do so if sufficiently motivated. That lucky winner will find itself in workout time.
And remember, kids — you should always have an adult around when you do workouts!
(Full disclosure: my for-profit company recently formed a workout group, precisely to help such folks tackle their problems.)
Just push here
The crunch will accelerate sector consolidation of the survivors. Much of our space is overpopulated, with many too-small and too-thin entities. Some whose fissures are too wide, whose balance sheets are too thin, will cease as active players. They will be bought, or merged, or their assets sold off.
Not many properties will fail. Many properties will change changes, or change financing, or change their controlling party.
As they say on Wall Street, this is gonna break some glass.
It looked so pristine just seconds ago
Or, as my dad used to say, “it’ll get the kids off the street.”
Don’t get run over in the financial traffic
Everyone came out to see the publication launched
I also launched a new monthly electronic publication from my for-profit Recap, Introducing the State of the Market:
November: State of the Market 2
To know or not to know?
We’re not worried about the lack of financial reports
As I speculated in a previous State of the Market, the third quarter reporting has been both grim and upsetting, as one after another, large financial institutions – some of them seemingly removed from the subprime mess – reported major writedowns in their structured-finance assets. In some cases, such as Merrill Lynch, the scale dwarfed any previous estimate, including those made only a few weeks earlier. Can such enormous banks or insurers really lose billions that quickly? Who else might have an undisclosed problem?
As the credit crunch metastasized, spreading into new asset classes, I used a great many big words to describe the fraud problem in House of Games: Part 1, you can’t bluff someone, and House of Games: Part 2, I gave you my trust; and to question the industry’s stout trench-warfare defense of their right not to have to advise customers in Narrowly right, but broadly wrong: Part 1, narrowly right, and Narrowly right, but broadly wrong: Part 2, broadly wrong:
That is the trap of defending the narrowly right but broadly wrong. Even as the industry fought off ill-thought legislation, I suspect it was deaf to the underlying public-policy concern – namely, that brokers will bamboozle clients into taking out financially voracious loans – and indifferent to the lawmakers’ desire to develop something better.
Sorry, I can’t hear you
In the days when I was in a science fiction writers’ workshop, one of our principles was, If you see a flaw, you are duty-bound to offer an improvement. A similar philosophy should apply to public policy. If the legislators’ attempts to solve the problem are ham-handed and unwise, those who are expert have a moral duty, if no other, to help them create better laws. If you don’t embrace the legitimacy of the policy concern, you have no right to complain when they enact something that’s inadvertently damaging to you.
Leave it to the experts, ma’am
Beyond the tactical reason – enlightened self-protection – the strategic trap is simpler. Lenders are experts in finance, customers are amateurs. That information asymmetry should impose on lenders the financial equivalent of the physician’s ‘duty of care’ – an obligation to give the customer enough information so that the customer can make an informed decision.
I’m not advocating that the lender has to stand in for the customer (as is contemplated by the impossible-to-meet “proof of tangible net benefit” standard). Rather, the lender – the expert – should be obligated under what I think of as the good-friend test. “If someone came to me for this product and I were her very good friend, what would I tell her or ask her before I acceded to her request?”
Even a bear of very little brain knows to question a refinancing before signing up
“Personally, I think and have long felt the Fed should have done more early on,” Mr. Andrews says. “But I don’t think anybody realized the level of problems that were going to come out in the last year or two. If you had said to me the industry was going to melt down, I would have said you were absolutely insane.”
Wouldn’t it be nice, Mr. Andrews, if all your clients’ customers had had better disclosure before they took out the loans? Wouldn’t that make their legal position, and their moral/ political position, much more comfortable if they had demonstrated solicitous concern before swapping money and signing papers?
Only one thing matters – get them to sign on the line which is dotted
On the other end, we have the showdown-artist, profiled in Why it’s called a bullet loan: Part 1, the bullet, and Why it’s called a bullet loan: Part 2, the dodge:
On the other hand, nobody has any idea of financial reality right now, giving Mr. Macklowe a bundle of optionality.
Spoon boy: Do not try and bend the spoon. That’s impossible. Instead… only try to realize the truth.
Neo: What truth?
Spoon boy: There is no spoon.
Neo: There is no spoon?
Spoon boy: Then you’ll see, that it is not the spoon that bends, it is only yourself.
Bankers and real estate executives are divided over whether the Macklowes will be forced to sell some properties — maybe even some of the most valuable assets. Some also argue that layoffs in the financial industry this year will almost certainly depress the market and the value of commercial property.
A friend of Mr. Macklowe, who asked not to be identified to preserve a business relationship with him, put it another way. “Somehow he always manages to pull it off,” the friend said. “But he won’t do anything until the bitter end. He will play it out all the way.”
History says Mr. Macklowe will once again dodge the bullet.
I demand loan extensions
I speculated morbidly that we haven’t heard some of the biggest potential writedowns in Who’s next? Part 1, GSEs 2007 buying, and Who’s next? Part 2, GSEs buying strategy shift. Meanwhile, the capital markets were claiming a potential victim in New London, in I’ll hold your breath until YOU turn blue, and the short-term market disruptions were doing nothing to change the long-term demographic trends that are making workforce housing an increasing priority, as I profiled Cape Cod in Demographic shakers: Part 1, abstinence, and Demographic shakers: Part 2, depopulation:
In yesterday’s post, we followed a Boston Globe story about the demographic shakers — Cape Cod’s home owner population, which has voted itself restrictions on growth and in so doing insured that on the one hand, the incumbents will become richer, and on the other, that they will find it ever harder to lure in the service workers on whom their retirement depends.
When the
Why, adopt further growth restrictions that could only act to push them even higher!
Just wrap this around your employment base and twist hard
I covered some essential principles in Apartments are occupied by money not people and the Micawber-esque Look after the rents and the grounds will look after themselves:
Because of the Law of Economic Gravity (uneconomic endeavors cannot survive), a property can afford for its maintenance only as much income as it receives. If it can’t maintain itself, it will deteriorate into an economically rational slum. As Mr. Micawber said it:
“Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”
“I find myself temporarily in funds.”
A property that lacks enough rental income will always fail. A property that has rental income — even if it is in trouble — always has options, from changing general partner and manager on down. As Mr. Micawber put it hopefully, “Something will always turn up.” Further, with adequate income, one can fund a proper replacement reserve, which is absolutely necessary because, as Mr. Micawber knew, “accidents will occur in the best-regulated families.”
“Accidents will occur in the best regulated families.”
After observing the problems of distinguishing fake from real non-profits In sheep’s clothing, I explained that Votes are political equity, and when that essential investment is violated, as in suffering fracturing Kenya, Always the poor suffer first. But that is too depressing to contemplate, and I ended the month more hopefully, looking at Asia’s largest and most fascinating slum, Profile of a slum: Dharavi, Part 1, Profile of a slum: Dharavi, Part 2, and Profile of a slum: Dharavi, Part 3:
Here’s to better tomorrows in Dharavi:
It is 2am, and a violent drumming erupts outside Mr Korde’s house. Booming in a six-beat rhythm, it ends in a crashing roll. This is repeated, again and again, rising as the drummers approach.
The sound is thunderous. A few huge rats rush by the window, fleeing the noise like driven pheasants. And suddenly the drummers appear, parading through the slum, dragging on wheels a huge statue of Durga—a Hindu goddess, a multi-limbed and multi-coloured giantess, astride a tiger.
Flower stall near the
On the drum-roll, the processors pause, and golden flares explode either side of the statue. In every doorway, along the alley, slum-dwellers are watching in silence. It is a thrilling and dream-like sight. This is apparently quite normal in Dharavi.
A living place — that can be made better.
I’m hoping to soak up some serenity from the garden Buddha
Here’s to better tomorrows.
And tomorrow’s houses