Affordable Housing Institute : US

[Previous Months in Review available here: Mar 08 Feb 08 Jan 08]

[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.]

 

Starting the month off right

 

April opened with yet another AHI exclusive, documenting Congress’s enactment sweeping capital markets reform:

 

 

When Congress opened for business this morning, House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid issued a joint statement criticizing the Administration for doubting their expedition. 

 

Just another day serving the people of America

 

As their statement noted:

 

            
           

Which also veered, extremely rarely for me, into political updates:

 

In other news, President Bush stepped down under the 25th Amendment (”Dick says he wantsta drive it a while”),

 

Bring it back by eleven, okay?

 

and Senators Clinton and Obama, appearing at a joint press conference,

 

What about we withdraw in favor of Al and John as a team?

 

announced they were throwing their support to the ‘dream team’ ticket of Al Gore and John Kerry (”proven winners”).

 

There’s still a convention yet to come, guys!

 

Setting aside Panglossian fantasies, I spent some time in reality, first providing Banking on value: the explanation, and then walking through the thrilling Saint Patrick’s Day weekend in Anatomy of a coup: Part 1, Thursday, Part 2, Friday and Saturday, and Part 3, Sunday:

 

I think the invention of global securitization is at best an act of naivete, and at worst an unsupportable negligence. We’ve stayed financially solvent because we’ve built up an equity, and we’ve kept the liquidity and credit markets because we’ve dealt with counterparties who knew we would take that equity.  And now we’re asked to believe that a piece of rating agency paper will take the place of underwriting and site visits, and that a financial community that hasn’t taken on any risk it could shed in the history of its existence will now, for our convenience, do precisely that. I have strong doubts, gentlemen.

– Seven Days in May, General James Mattoon Scott, translated from milspeak into finspeak

 

You have your doubts about CDO’s,  general?

 

Yesterday’s post, one of several detailing the financial coup of the 21st century, covered the hectic days Saint Patrick’s Day weekend.  As reported in the Congressional testimony offered by Timothy F. Geithner, CEO of the Federal Reserve Bank of New York, when the sun set on Thursday, March 13, 2008, it appeared Bear Stearns would have to file bankruptcy the next morning, with incalculable consequences for the intertwined global capital markets.

 

Even though I believe the credit gridlock crisis is behind us, with the Fed’s action and the Bank of England’s followup , we have nowhere near heard the last of these matters, and the rating agencies, whom I’ve previously criticized, will be coming in for more litigation-fueled scrutiny, as we examined in Negotiating your rating: Part 1, the ivory tower:

 

How much opportunity should an issuer have to work with a rating agency to achieve a target result?

 

[For background on the rating agencies, see my five-part post from last August, A Symbiote’s Life is Not a Happy One, Part 1, Part 2, Part 3, Part 4, and Part 5.]

 

I got rated A, totally using my powers of persuasion!

 

Mel: You mean to tell me that you argued your way from a C+ to an A-?
Cher: Totally based on my powers of persuasion, you proud?
Mel: Honey, I couldn’t be happier than if they were based on real grades.

                                                                 – Cher Horowitz (Emma Woodhouse), Clueless, to her father the litigator

 

“Honey, I couldn’t be happier than if they were based on real grades.”

 

That’s the question posed by an interesting and thorough Wall Street Journal article on how the rating agencies evolved toward more responsive symbiosis with those whom they were rating (and who were paying their fees):

 

RATING GAME
As Housing Boomed,
Moody’s Opened Up

 

At issue is whether the rating agency, in pursuit of greater market share and higher fees, consciously or subconsciously lowered its vigilance, like a university luring students with the promise of easy grade-inflated high marks.  Given the massive collapse of previous ratings rounds, where thousands of issues were marked down in one day like contaminated goods, it’s a rebuttable presumption. 

 

We’ll keep typing until we find it

 

Although despite its apparent best efforts the Journal was unable to find a smoking gun, In Part 2, the rough and tumble, and Part 3, the circumstantial evidence I was unsympathetic to the rating agencies:

 

Investors who rely on Moody’s ratings have lost billions in value they probably would not have lost had the ratings been sounder.  Hence Moody’s no longer has the presumption of innocence.  We have, in the classical detective-novel fashion, got all three elements of culpability:

 

Means.  Moody’s certainly had the ability to float ratings upward.

Motive.  Moody’s got rich on the friendly ratings.

Opportunity.  Moody’s had penetrated the entire space (94% of all issues).

 

Does that add up to guilt?  To quote Chief Gillespie from In the Heat of the Night:

 

“I have got the motive which is money and the body which is dead!”

 

“I have got the motive which is money and the body which is dead!”

 

During April I posted the last five parts of my seven-part series on The economics of water: Part 3, pre-urban rules for society, Part 4, Rome invents the municipality, Part 5, Roman municipal finance, Part 6, New York tries private infrastructure finance:

 

Five posts on water in April

 

As we’ve seen so far in this extended series on the economics of water taking off from Duke law professor Jim Salzman’s article Thirst: A Short History of Drinking Water, since housing is what makes cities, infrastructure – at its most basic, water and sanitation – is necessary for cities to scale upward.  Thus the greatest city of antiquity, Rome, was the first to create large-scale municipal infrastructure, and to do it using the Basic Model:

 

 

When Rome fell, no similarly urban and civilized city arose for a millennium and a half, and when it did, it spoke English.  Professor Salzman’s article covers both London and New York, but for our purposes, New York is the more interesting as it is a more complete and clear advance on the Roman model in its use of private capital:

 

The story of New York’s drinking water provides an instructive contrast with Rome.  

 

Though I’m a confirmed Bostonian and birthright citizen of Red Sox Nation, I’ve posted many times about New York, as it is the cradle of apartment living, the birthplace of the co-operative, the last holdout of pernicious and metastasizing rent control, and the inventor of air rights.

 

and Part 7, New York invents municipal finance:

 

Or, as I say it – urbanization required technology and networks, which in turn require government and capital, which in turn requires large-scale public and private finance. 

 

Urbanization is thus, among other things, a phenomenon of money.

 

New York, the epitome of capitalism, demonstrates how rapidly money power can transform environments. 

 

That vertical line is a wall …

 

… which became synonymous with capital markets

 

Between 1650 and 1850, New York went through three or four different phases.

 

We had the pre-urban communal use (”always ask, always give”) model:

 

From its early days, New York’s drinking water came from private wells, public wells, and the Collect. 

 

When that was over-stressed – a consequence of urbanization – water vendors emerged:

 

Faced with declining water quality, water became commodified with the rise of Tea Water. 

 

The limited neighborhood infrastructure was destroyed by a man-made catastrophe (war):

 

Following the failure to provide public infrastructure after the Revolutionary War, the private supply of drinking water reached its logical next step with responsibility for management of New York’s entire drinking water supply system granted to the Manhattan Company. 

 

New York granted a fully private monopoly, but that failed for want of regulation and violation of the Basic Model (that government pays the non-recoverable cost):

 

Only when the company notably failed to provide even the most basic services for drinking water or fire protection did the city step in and occupy the field. 

 

Rome got to the Basic Model through imperialism; New York got there through desperate necessity.  Two diverse environments converged on the Basic Model.  Is the Basic Model the Holy Grail of infrastructure finance?

 

I have seen the Holy Grail of water infrastructure!

 

Closer to AHI’s home, Boston’s politicians seldom disappoint, as revealed by their self-defeating and probably Unconstitutional proposed ordinance in You’d rather we were sleeping together? Part 1, only four, and You’d rather we were sleeping together? Part 2, not five:

 

Boston city council, being dogged by the voters?

 

Dorm living costs about as much as living off campus — and given those facts, many students would prefer to live off campus, especially when off-campus is right in student-friendly bar-dotted Boston, giving credence to the owners’ theory:

 

 Property owners said they believed that colleges supported the plan in order to steer students toward their dormitories.

 

Certainly possible – once you’ve built the dorm, you really want the students to live in it.  Universities that  have built dorms thus have a mercantilist interest in joining forces with NIMBYite neighbors to keep the students down on the farm.

 

 Some students, such as Allison Pyburn, a recent Suffolk graduate who just signed a lease to live with four Simmons undergraduates in the Fenway, said the new law would make it harder for students to make ends meet.

 

Unless they shift their family configuration along with their housing configuration and bunk up together – and we know what more bedrooms mean, don’t we?

 

 “It’s almost impossible to afford to live here already,” she said.

 

I’ll give you a break on the rent

 

I asked readers to suggest topics for future posts in Searching for affordable housing history: call for ideas, and used Leon Trotsky’s writing as the springboard for ruminating on Government architecture:

 

The solution?  Government must come to the rescue:

 

There is no doubt that, in the future – and the farther we go, the more true it will be –

 

To be fair to Trotsky, he believed in permanent revolution, and total revolution, that would eventually sweep the entire world.

 

Trotsky (lower right) with Lenin in the early 1920’s

 

– such monumental tasks as the planning of city gardens, of model houses, of railroads, and of ports, will interest vitally not only engineering architects, participators in competitions, but the large popular masses as well.

 

The imperceptible, ant-like piling up of quarters and streets, brick by brick, from generation to generation, will give way to titanic constructions of city-villages, with map and compass in hand.

 

Not for Trotsky the messy city of Jane Jacobs, with eyes on the street, and flats over shops.  Rather, heroic architects would be build heroically scaled cities to be occupied by heroic steelworkers.

 

Workers of the world unite!  You may get housing yet!

 

In this struggle, architecture will again be filled with the spirit of mass feelings and moods, only on a much higher plane, and mankind will educate itself plastically, it will become accustomed to look at the world as submissive clay for sculpting the most perfect forms of life.

 

There is the statist perspective viewed as a metaphysical philosophy: the world is submissive clay, and by extension the people within it will embrace their new environs. 

 

Komsomolsk, the image and its reality

 

It’s part of a belief system that I described in The Law of the Observant Herd:

 

After a post on the developing niche of Slum tourism, I took a retrospective look at A property reborn: Henry Hudson, Glen Falls, and we examined the challenges of too little homeownership equity in  Houselocked.  I finished up, in the spirit of AHI’s month-opening exclusive, by profiling The ultimate consultant: Part 1, Ghostbusters, and Part 2, Who you gonna call?

 

A.  When dealing with large complex matters that clients might find risky, give your clients a low-cost early-exit option:

 

What’s my political downside here?

 

[Persuading the mayor to let them stop a supernatural upheaval]
Dr. Peter Venkman: If I’m wrong, nothing happens! We go to jail - peacefully, quietly. We’ll enjoy it!

 

Then frame your service’s value not just in terms of the larger policy benefits, but in practical considerations that help your contact executive achieve his personal objectives too:

 

But if I’m right, and we can stop this thing… Lenny, you will have saved the lives of millions of registered voters.

 

That’s one re-election secured!