Month in Review, August 2008
[Previous Months in Review available here: Jul 08, Jun 08, May 08, Apr 08, Mar 08, Feb 08, Jan 08]
During August, the capital markets woke up to the reality that, banking on value, the Treasury and Fed were now holding all the cards regarding Fannie Mae and Freddie Mac.
Congress dealt Paulson and Bernanke a fistful of cards
We peeked behind the curtain of an investment bank with a review of the Economist’s confessions of a risk manager, in The unequal struggle: Part 1, risk and reward, and Part 2, unlimited downside and limited upside
[T]he job we do has the risk profile of a short option position with unlimited downside and limited upside.
Translated into common English:
Short option position. You can be fired at any time.
Limited upside. Reject a risky, profitable deal and get a pat on the back.
Unlimited downside. Reject a risky, profitable deal that works out and get fired.
Your apprenticeship is over
This is the one position that every good risk manager knows he must avoid at all costs.
Which is why so many shrugged and said yes to questionable deals
What we like to hear from a risk officer?
While everybody ponders the potential next plays, I cheered up America by the time-honored tradition of finding somebody else worse off, in You think it’s bad *here*?
As we watch the US housing and capital markets struggle to find their equilibrium, there’s no question we are experiencing a worldwide phenomenon – and even allowing for the parochial lenses through which Americans receive news of other people’s markets, I think it’s clear that however much disturbance we are facing in the US markets, many other nations are about to fare worse, as illustrated by a recent article from The Economist:
STUDENTS of politics (and more than a few politicians) know only too well the old dictum about lies that are repeated often enough becoming truth. Those foolish enough to believe it should take a look at the sorry tale of Northern Rock, a troubled mortgage lender that failed last September when it ran out of cash.
I’m near a breakthrough!
The
Our housing finance system’s not overgrown at all!
Still, ours isn’t the only overgrown ecosystem, and I spent some time reviewing the UK’s inclusionary zoning law, Section 106, in Sums of a zero sum-game: Part 1, UK section 106 inclusionary zoning, Part 2, reports from the field, and Part 3, what’s it all about, Alfie?
The question raised — homes or money? — is far from trivial.
One on which affordable housing finance detective Sherlock Holmes has yet to post
If Section 106 is simply a cash extract, to be used for whatever the locals want, then the money is the right metric … but if that is so, and homes are irrelevant except as they are a use of money, why bother to tie it to development? In other words, the more local government makes clear that it’s all about the
This is how we keep score in
– the less of a moral or policy justification it has for taking them from only one group of contributors — developers — especially when lack of development both contributes to housing unaffordability throughout Britain, and retards job growth and economic expansion.
The architect said it would work
Back in the realm of practical, we looked at who should be in charge of putting up buildings, Dreamers versus plumbers, and the choices facing college students who’ve suddenly discovered that off—campus living looks expensive, in Pay more, or consume less:
Students off campus – can’t live with ‘em, can’t live without ‘em — at least, that seems to be the prevailing wisdom of the student towns I’ve observed here in greater
“Responsible student, seeks roommates”
Another group of people on the move are recent American immigrants, who have used their accumulated wealth to buy retirement housing back where they came from and who plan to move back there, in The ultimate remittance:
“Earth isn’t a place,” says Mayor John Amalfi, the hero of James Blish’s Blish’s multi-volume space epic Cities in Flight [One of our Ultimate Future Cities – Ed.], at the end of Earthman, Come Home. “It’s an idea.”
Homeownership is an idea, too, one whose powerful lure moves money and people across vast distances. As reported in this inspiring story from The Boston Globe on the ultimate remittance.
[…]
Homeownership isn’t a place, it’s an idea.
“Our dream house,” by a Kibera savings cooperative
The American Dream, exported.
Take one back home
Families on the move means housing demand on the move, and that’s makes cities grow – so why not imagine that whole cities can move? In our continuing Ultimate Future Cities series, we looked at James Blish’s vast imagined world, Cities in Flight: Part 1, the city and its stars, and his Spenglerian view of economics in Part 2, city economics
4. Rogue cities and the shared interests of civilized entities. In every ecosystem there are parasites, free riders, who exploit the brand value of pollinating bees, and Blish’s universe has such rogue cities:
“[Bindlestiffs are] the kind of outfit that gives all Okies a bad name. Most Okies are true hobos; they work for their living wherever they can find work. The bindlestiff lives by robbery – and murder.” 290
As in other situations, both cops and cities have a shared interest in running the bindlestiffs out of business:
We can’t make a living if the bindlestiffs predominate
“The planets are tough on bindlestiffs for the same reason. The bindlestiffs are diseased bees; the taint that they carry gets fastened upon innocent cities, cities that are needed to keep new techniques and other essential information on the move from planet to planet. Obviously, cities and planets alike have to protect themselves from criminal outfits, but there’s the culture as a whole to be considered, as well as the safety of the individual unit; and to maintain that culture, the free passage of legitimate Okies throughout the galaxy has to be maintained.” 399
Over the years, I’ve read Cities in Flight four or five times, previously just for sheer entertainment, but when I hauled it off my shelf to collect the quotes for this post, I found myself hitting paragraphs like that one and thrilling with satisfaction. Cities, in Blish’s universe, are not only the agents of commerce, they are also the custodians of culture.
This has been true throughout history. The Medici were urbanists.
If we have a Renaissance, I can make more money
I continued to puzzle out slums in two lengthy two-part posts: Who wins from a slum? Part 1, the actors, and Part 2, the bystanders:
Slums are robust because they are so interconnected, and also because they have so many hidden winners.
Watch out for hidden snares
This post has taken me hours to write, because it depresses me to discover just how many separate constituencies benefit from slums, and how many of them do so for cynical, selfish reasons. By nature I’m an optimist; that’s why AHI’ is working with Slum Dwellers International. Though difficult, these problems can be solved – but it sure would be easier without all those hidden winners preserving the status quo.
Even the righteous must be on the lookout
Slightly more optimistically, we looked at How a slum dies: Part 1, in the 19th century, and Part 2, in the 21st century:
The Victorians were responsible for many modern inventions, including the bicycle
Over the decades and centuries and continents, demolition/ rebuilding increases the residents’ housing burden, simply because the new homes are better. Some people are so poor that, in the absence of subsidy, they cannot afford the new accommodation. It tends to lead to a turnover in population, with the newcomers less poor than the emigrants. It happened in Boston’s West End; it happens in HOPE VI; it’s happening now in Sao Paulo.
The heroes of Wise’s story are journalists and middle-class do-gooders.
Even in their times, the Victorians’ self-important righteousness made them objects of derision by such exquisite critics as Lytton Strachey (in his surgically slim volume, Eminent Victorians)
Takes one to mock one: Lytton Strachey
and A. N. Wilson (The Victorians), but for all that they present a morally inflated target for the puncturing quill, they were the great altruists who changed how we think of the duties the rich and powerful have to those poor and powerless. So it was with the Victorian slum; it was not allowed to wither away, it was attacked on multiple fronts by multiple crusaders:
Donors – Victorian or 21st century – were the topic of a two-part post that closed July and opened August, Donors as scaffolding: Part 1, need for startup capital, and Part 2, the value of coaching:
Scaffolding is temporary, removed when the structure is completed. Donors, and donor capital, are essential at the beginning of an enterprise, not necessarily essential later. Said in reverse, donors need an exit strategy – a well defined time and status where they stop funding.
Without a defined halting place, the donor’s money can become merely a temporal crutch that substitutes for genuine learning, and leave the donor with no moral exit strategy, instead a continuous obligation to fund a money-losing venture. With a defined stop, the successful MEE can replicate its outputs … and then replicate itself.
Ahmedabad:
I gave credit where it was due in encouraging people to vote for Henry Hudson Townhouses, now completely rebuilt and renamed as Village Green, described in Subsidy portage, proof of concept:
We also found Charlie Allen and Evergreen – easy enough to do, as Charlie was a partner at Recap for a dozen years – and suckered Charlie into persuaded Charlie what a great opportunity it was.
… Here’s what it looked like before
Key to the transformation is the concept – which we conceived and Charlie put into practice – of subsidy portage.
And what it looks like today …
Theory, finance, economics, and the Red Sox came together in my trading-deadline post, When options have negative value: Part 1, Manny being money, Part 2, Money being money, and Part 3, Money being Manny, which concluded with these words of wisdom:
And don’t forget:
Some contracts are too long for their own good.
A contract is no thing of Aristotleian perfection: it is a thrown terra-cotta pot, serving a purpose for a while and then, one day, cracking and outliving its use. When that happens, what’s cracked can seldom be repaired: you have to let go what you thought you bargained for, realistically appraise what you now have, and use the shards to form the new vessel.
You got two World Series and another outfielder out of me, what more do you want?
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