Month in Review, December 2008: Part 1, looking backward
[Previous Months in Review available here: [Nov 08, Oct 08 Sep 08, Aug 08, Jul 08, Jun 08, May 08, Apr 08, Mar 08, Feb 08, Jan 08]
During December, the Rockefeller Foundation released an important book, “Century of the City,” in whose creation I had a small hand:
Cities matter, and they’re going to matter even more in the coming decades. As Rakesh Mohan put it when we were at Bellagio:
If the world is urbanizing, it’s because people think it’s a good idea. Yet our urban planning has a ‘third-class carriage’ mentality: I’m inside, don’t you dare come in, you’re much better off where you are. Most urban planners live in largest cities in the world, yet they complain that cities are too large. This report takes the opposite view.
Rakesh Mohan, Reserve Bank of
Century of the City is a really absorbing, impressive, and important book. I’m glad I was able to play a small part in its creation.
Being tall gets you in the middle of the picture: the Housing, Water and Sanitation team
You should have one in your library, so go order it now. To order a copy:
Email Rockefeller@forbesamg.com and include ‘Century of the City’ in the Subject line of the email form. There is no charge for the books; however, you can order only up to two copies this way.
Oh, God, more AHI blog posts to read
The continuing global de-leveraging again dominated our December posts, first with a detailed investigation of the multi-billion-dollar side bets on others’ financial health known as Unlicensed insurance: Credit Default Swaps (CDS’s): Part 1, the ‘neverpay’ policy –
“I bet I’ll die soon.”
“We bet you’ll live a long time.”
– The essential bargain in life insurance
“I’ll take that bet.”
When you buy life insurance, you’re selling a risk (that you’ll die) and the insurer is buying that risk. You’re paying the insurer to buy it.
I who control my lifespan bet I will die, and you who have no say in it bet I won’t. Talk about agency risk!
What is a credit default swap? From nowandfutures.com.
Thus, if Phyllis Dietrichson thinks her husband might die, she can buy a CDS from Walter Neff, and if Dietrichson dies, she wins big.
– Part 2, no sympathy for the devils?, and Part 3, play at your own risk:
By now we’ve seen, via a useful Economist article, that Credit Default Swaps (CDSs) exploded into the public markets, as large insurers and other financial corporations used them to take large risks that they could then hide from their balance sheets. Now that we’ve woken up, the markets are wondering who else has unmanageable notional exposure, and who will take losses from bets they cannot pay off.
Concern about the damage that the failure of a big swap-seller might yet do has created pressure for the CDS market to be regulated.
Catastrophe is a precondition to fundamnetal financial reform, and it seems inevitable – and long overdue – that CDSs should be regulated with both mandatory disclosure and higher collateral requirements.
New York has charitably offered to oversee “covered” swaps—those where the protection buyer holds the underlying bonds; Mr Dinallo labels uncovered CDS trades as “naked”, likening them to abusive short-selling of shares.
Mr. Dinallo’s right here; bets you can make without having anything to do with the assets can create unlimited exposure, and are an implicit fraud. The Fed’s already banned naked shorts.
Aren’t you glad this is banned now?
We’re so pleased we dressed up
Like many people, I applauded the nomination of Tim Geithner for Treasury Secretary as The right man for the job:
But the likely choice appears to have been driven largely by the financial crisis, and Mr. Geithner’s public record on many of the other matters he will be required to grapple with is limited. Unlike previous picks for Treasury secretary, who hailed from Wall Street, industry or the Senate, Mr. Geithner has been a technocrat most of his career.
Technocrats of the world salute you!
Just what I need, the geek squad endorsement
The incoming secretary will have his hands full with the volume of work required, as his predecessor hank Paulson has already discovered in Brain surgeons wanted! (No experience necessary):
Set a thief to catch a thief, runs the saying, but what do you do when all the thieves are still in business?
Find a brain surgeon?
That’s the challenge facing Treasury, which, as reported in The Wall Street Journal, has discovered that, because complex financial restructuring is no business for amateurs, the processing bottleneck isn’t the money, it’s the workouts:
Workouts were popular in the ’70’s, and they’ll be popular again!
From chilly
That’s the problem with slander and defamation, isn’t it? What if it’s true?
When you take the I out of slander, what have you got?
I’m fine, I’m really just fine
Fortunately, it wasn’t all bad news, as we saw the hesitant emergence of new rent-to-own tenure forms in A toe in the ownership water: Part 1, the would-be buyers, and Part 2, the would-be sellers:
This approach – applying a portion of the rent to the purchase price – is clever in two ways.
That’s me, in two ways
1. It gives the buyers the sense that they are building equity, because each month’s rent lowers their purchase price by a set amount.
Designing discounts-that-aren’t-discounts is one of the many little tricks real estate developers use in soft markets. Even though the real price is $490,000 two years hence, the market will perceive it as $550,000 now – that is, unless a blabbermouth blogger spills the beans.
What beans? Who’s spilling beans? I’m not spilling beans!
2. By tying the reductions to a stated current price, it helps the owner sustain the current pricing and discourages people from thinking about retrades. Psychologically, it anchors the pricing.
Going to set the pricing right about here
Now it’s time to meet another kind of rent-to-own participant:
Can you guess their state of mind?
About the unbelievable multi-decade Ponzi scheme apparently cooked up by Bernie Madoff, I had only a little to say, in Otherguy due diligence:
It’s because we assume that someone who moves effortlessly, even arrogantly, within a rarefied universe must already have been vetted by some one of us.
They met Mr. Madoff through contacts at country clubs in the tri-state area, he said.
“They knew him from golfing in the
Among the most wonderful characters invented by the incomparable Ross Thomas was Otherguy Overby, introduced in Chinaman’s Chance, who never took the rap – because it was always pinned on some other guy.
What ’s all but inconceivable to me is that all these savvy investors would have sat still for an ask-no-questions-tell-no-lies approach to due diligence. What were they thinking?
The essence of business is conducting transactions with people whom one need not inherently trust.
It’s just business
In terms of getting us out of the mess we’re currently in, we might start with what may seem an extraordinarily technical recommendation in Restore the uptick rule:
The longer the period the uptick rule was repealed, the worse the repealed stocks performed:
Who are you going to believe, the SEC or your own eyes?
The passage of the Economic Stabilization Act of 2008 has not stopped bear raids, so the SEC is reviewing its tool kit on short selling. Instead of another blunt tool like a temporary ban, the SEC should promptly bring back the uptick rule.
I’m persuaded. Are you?
Whaddaya think, punk?
In our current predicament, the great danger is that we’ll plump for any old action however short-sighted, as I profiled in Pick a plan, any plan: Part 1, send money, and Part 2, send more money?:
5. Buy cooperation
Yes, they are; it’s called living up to one’s agreements.
“Even if legal issues are eliminated.” How does she propose to do that? To do Ms. Warren credit, she’s probably simply pointing out the need to incentivize loan servicers as well as finding a means to get the loans into a position to be modified.
She proposes the
Interesting, but a nasty agency risk, since it does nothing to assure that the ‘fixed rate mortgages with an affordable payment’ are actually repaid. And if the servicers simply cut the loan balance so heavily to make it certain, who takes those losses?
Because somebody has to …
Secondly, she said owners of second mortgages, who often block modifications because they stand to lose money, should receive a 10% bounty on the face value of the loan for writing it off and getting out of the way.
This is basically buying all second mortgages at a fixed price. You’re either overpaying or underpaying,
In short, it assumes away the real problem, which is getting the loans reset to their payable level. In fact, that’s so important I’ll put it in a box:
I had harsh words for:
Blogger abuse!
[Continued next Monday in Part 2.]
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