Month in Review: June 2008
[Previous Months in Review available here: May 08, Apr 08, 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.]
I’m a little worried about my future
During June, the Great Global Risk Repricing of 2008 took better shape, as the retrospective stories (including a fascinating speculation by a columnist pseudonymously named Spengler that I reviewed in Starving for yield?) started to equal the prospective ones, including my three-part review of auditor KPMG’s actions as New Century melted down, in Nothing to see here: Part 1, failure to report …, Part 2, … means reporting failure and Part 3, churning CFOs, with this money quote:
[From the New York Times]: The interpretive waltz between a company and its auditor, of course, can be complicated and open to varying perceptions.
Accrual-basis accounting is more than mere arithmetic. A mortgage or loan transaction has a lifespan measured in years and even decades: I give you money once, today, and you give me money every month for years and years. My ‘loan’ is a piece of paper that describes what you have promised to pay me, and what I can do if you do not. My piece of paper thus has value only if I can actually collect those future payments, and my ability to collect may be impaired from a dozen different causes. Some of these impairments are immaterial; some are temporary. Some are permanent, others are fatal.
When the assets in question are not just individual loans, but whole pools of loans, or securities derived from those loans, then judgment comes into play – judgment informed by data.
Ladies, I need more data before I judge
The auditors do not know as much about their client’s business as their client does, so any professional worth his salt will always look to the source for more evidence. (”Data, more data!” as a CBO friend of mine used to shriek when people questioned her conclusions.)
Where does evidence become argumentation? When does analysis become propaganda?
When I can’t understand it any more?
Similar metaphysical challenges are raised when valuing complex securities being held, as I explored in “It’s worth what I say it’s worth”: Part 1, neither more or less and Part 2, done on paper:
“It’s worth what I say it’s worth.”
The louder I shout it, the truer it must be!
That, more or less, is the defense offer by Bear Stearns as to the value of enormous pools of highly structured complex instruments on their books, a declaration so patently self-serving and self-interested that, with Bear now absorbed into JPMorgan Chase, those who depended financially on Bear are taking the opportunity to look at freeze frames of those crucial decisions:
Are you sure you had no better alternative right then?
For many banks, the solution should be cash, instead of Capital, almost as good as money:
If we use those figures as representative, Fannie Mae has a 10-year backlog of deferred tax assets, and Freddie Mac a 25-year backlog.
When it becomes unlikely that a company will use their deferred tax assets, they often write down a portion of them. Fannie and Freddie have yet to do so.
A Freddie Mac spokesman said, “We feel very comfortable about how we’re operating our business under the current regulatory environment.”
What else could one say? “You’re right, we should write these down, thanks for pointing it out”?
Now you mention it, we shoulda done that a long time ago
These concerned notwithstanding, I called a bottom – of sorts – in a
Rebound is instability too
Although it doesn’t feel that way right now (June), when the history of the Great Risk Repricing of 2008 is written, March 17 – when the Fed and Treasury permanently reshaped the capital markets – will be seen as the day the US residential market bottomed. Even so, rebound is not equilibrium. Some asset clusters bounce sooner, some bounce higher, some never bounce at all. Psychologically, months and years will pass before we all lose that queasy feeling from being buffeted by events.
A falling market only looks like bungee jumping after it’s bottomed, and even during a rebound, you’re flying upside down.
Going up can be as disorienting as going down
– and enthusiastically applauded a visionary move by Florida Governor Charlie Crist, in Buying the farm:
It’s so hard for government to think of buying out private actors that government adopts a mental workaround of developing a fantastic and uneconomic technological protection. (Would that, rather than compromising nature, we had simply bought out all the below-sea-level parts of New
Why didn’t we think of that?
Succumbing to irritation, I mocked the innumerate in Next time, do the math:
You’re innumerate, you are!
And voiced legitimate outrage in Seller-paid down payments: fundamentally flawed:
In my post, I boiled at what appeared to be generosity – a non-profit helping struggling homeownership aspirants by giving them the down payment – down into a circular price-inflating mechanism, to wit:
In a cruder world, what the non-profits are doing might be called ‘procuring.’ In such a procurement, two entities get screwed:
1. The buyers get screwed.
The higher prices contribute to the increase in foreclosures by buyers who have no equity in the homes, the GAO found. Buyers’ settlement costs also rise in some counties with rising housing prices.
2. The Federal government (that’s us taxpayers) gets screwed.
Right in the wallet
Now it’s become clear just how badly the taxpayer has been punished, with a shocking story in the New York Times:
June 10, 2008
FHA Faces $4.6 Billion in Losses
Billion, folks.
That ‘unexpected’ is naive. In case no one has noticed, the subprime mess has claimed many victims, and this program is set up to generate more victims.
In world news, I reported on Affordable housing in Turkey: My talk at GYODER in
It sounds better in English
– and a third of a world away, on my visit to the slums of Sao Paulo and the municipality’s slum improvement programs, in Favelas of Sao Paulo: Part 1, Cingapura, and Part 2, Guarapiranga:
When asked, these boys explained they were building a house on the playground
In self-defense – not to improve the favelas, but rather simply to clean up the water supply, the water company, SABESP, in concert with the city, undertook a massive upgrading of the Guarapiranga reservoir:
The World Bank financed the project and the total amount invested reached US$ 336 million. Sabesp, one of the project executers, invested US$ 94 million to carry out the following actions:
· 390 kilometers of collector, back-bone collector and outfall networks in the municipalities of the basin.
· 26,700 new sewer domicile connections serving 125 thousand residents.
· 8,050 domicile connections in existing networks, supplying a total of 37 thousand people two wastewater treatment facilities in the city of
· 20 sewage pumping stations and automated and centralized control systems of the stations a nutrient removal system in the Guavirutuba Streamlet.
Technological improvement and enhancement in water treatment for supply.
How to urbanize an informal neighborhood: rebuild the streambed, reinforce the hillsides
The slum upgrading was purely incidental – it had to be done to stabilize the hillsides, because it was the people whose effluent was polluting the water, and it was their houses that were risking mudslides.
Reinforcing the hillsides with cement retaining walls protects everybody: the water supply and the residents
This led to another AHI speculation: Urbanizing requires formalization: Part 1, the theory, and Part 2, the consequences:
As AHI blog readers know, AHI is financial advisor to Slum Dwellers International, helping them implement the International Urban Poor Development Fund, a revolving multi-country facility designed to provide cash to lever other resources and be catalyzed back into the fund. We grapple with which initiatives should be funded, what criteria define them, and what outcomes we are seeking. In that, one essential element is changing the local environment – political, policy, intellectual, financial – by using the funds to create pilots that in turn demonstrate a strategy or prove a concept, even if at small scale. (Every pearl starts with a bit of grit as seed.)
“Urbanization requires formality” gives an important clue: we have to use the capital to do a transaction that requires local government to take a step toward formalizing the slum environment. It may be as modest as giving each home a street number and committing to deliver mail to it, or as ambitious as granting the slum-dwellers title to the land on which they currently, illegally, reside.
Address number painted on favela home, Cingapura,
Vende se esta casa: House for Sale, Gurapiranga, Sao Paulo
Anywhere along that continuum may do, but I have come to believe that our action must be accompanied by some response/ recognition by government, however slight that might be. Government must take that first step toward acknowledging the slum dwellers’ existence and the validity of their tenure in the city, else the pilot’s transformative value will be wasted.
The best step, to be sure, is any commitment by government to bring infrastructure, even if minimal or incomplete, to the slum. Once government has acknowledged the slum dwellers as customers of civic services, that is difficult to repudiate, as it requires reversing a political precedent.
At least I think that’s right. We’re going to find out!
The truth is out there
Mourning for
Though a strong economy is usually thought of as benefiting the rich, in fact it’s always the poor who suffer first in a downturn or collapse. As we’ve seen in
When the Constitutional settlement was announced, I posted Let that be your last battlefield. Even if it is,
The tear gas has stopped, but not the damage
From South Africa, I quoted James McClure’s great character, the Bantu detective Mickey Zondi, on developing-world poverty and indulged myself and readers with what proved to be a very popular post, from stars to slums and back again, in Desoto, meet Heinlein: Part 1, selling the future, Part 2, buying the future, and Part 3, colonizing distance:
Yesterday’s interplanetary riff about potentially sell land rights on the Moon, stimulated by a provocative Drake Bennett article in The Boston Globe, suggested that pre-selling future rights would stimulate not only investment but also exploration with a view to investment. Hernando De Soto and numerous others (including me) believe that ownership of private property and land rights is critical to spurring investment in improving that property – and hence, to improving communities. (I’ve already posted at length about Hernando
Now,
Let’s do a thought experiment for a burgeoning city in the global south, like Sao Paulo , where I recently spent nearly a week. Let’s imagine an urban homesteading law:
Variations of urban homesteading were popular in US cities during the late Sixties and mid-Seventies, but died out for reasons I haven’t run to earth. I think they’re worth reviving:
Imagined in 1938, and still vivid today
If you want to make property improve, let someone own it. That was true in Roman times, true on the American frontier. It’ll be true on the Moon, and it’s true in urbanizing slum environments.
Hernando De Soto, meet Robert A. Heinlein
“Pleased to meet you, Hernando.”