Month in Review: July, 2012

September 14, 2012 | Bankruptcy, Economics, Global news, Homeownership, Housing, Innovations, LIBOR, Litigation, Month in review, Municipal bankruptcy, Public choice theory, Rental, Theory, US News

By:David A. Smith

 

[Previous Month in Reviews available here: Jun 12, May 12, Apr 12,Mar 12, Feb 12, Jan 12.]

 

These days, it takes all the running you can do to stay ahead of the scandals

 

These days scandals seem caught in runaway inflation, as it really takes something to top the Chelsea public housing mess or NYCHA’s billion-dollar brain cramp, but July had no trouble measuring up, beginning with actions that, if undertaken by you or me, would land us in jail, as I reported in Political theft in broad daylight: Part 1, daylight robbery, and Part 2, the getaway car:

 

Some in elected office

 

Every now and then, one hits a story whose offhand presentation makes me wonder if the whole world is numb or merely numskulls who cannot see, even when it is thrust into their face, a blatant and disgraceful theft taking place in broad daylight, a theft so appalling that even to report it without denouncing it makes one virtually an accomplice to the theft, as is the New York Times (May 16, 2012):

 

Hundreds of millions of dollars meant to provide a little relief to the nation’s struggling homeowners is being diverted to plug state budget gaps.

 

We know that when a city’s or state’s budget is in crisis, elected officials cannot be trusted to observe their previous principles or statements: needs must.  So they will plunder any source that comes to hand, including sources for which they are not the beneficiary, merely the trustee:

 

Those were as nothing compared with what I immediately called as The biggest scandal of them all:

 

I have no idea where this scandal will end.  Nor, I suspect, does anybody else. But here’s a clue, from the anonymous trader at another bank.

 

Libor had dislocated with itself for a very good reason – to hide the true issues within the bank.

 

There it is.  We were lying to keep the bank alive. 

 

Just this once

 

Somewhere in this mess will be a most culpable bank.  That bank will need to disappear, pour encourager les autres.

 

In fact, the LIBOR scandals have revealed not just a weakness in administration, but fundamental flaws and anachronisms in the instrument itself, which is why I recommended that the capital markets Lose LIBOR: Part 1, why it’s out of date, Part 2, what’s wrong with it, and Part 3, why it’s unfixable:

 

Stop trying to be right, maybe?

 

Would you borrow using a measuring index that (a) is known to be flawed in core structural ways, (b) is certain to be subject to years of global litigation, (c) is now anathema to any counterparty who’s paying attention?

 

LIBOR could be rehabilitated and resuscitated if a sovereign government of sufficient capital and probity stood behind it.  No such exist in Europe.  The US Treasury could, but why would it?  China’s Central bank could, but nobody trusts Chinese figures now, and why would anyone give the Chinese unilateral control of a global rate?

 

LIBOR is backed by nothing other than the confidence bankers had in it.  Now no one should have any confidence in it.

 

Inspires confidence, doesn’t it?

 

So lose LIBOR.  Instead, use an external proxy, assembled from large publicly traded funds (e.g. big money-market funds, say) and drive off that.  Sure, the spreads will need adjusting relative to LIBOR, and there may not be LIBOR for all the maturity intervals the City of London grew to know and love, but in both cases the markets will adapt.  Better a slightly less relevant boundary you can quantify and rely on, than a more relevant fuzzy one you can’t adjudicate consistently.

 

Either it’ll bounce through or it won’t

 

It went through!

 

Among the likely victims of LIBOR legerdemain are cities, though that was by no means the principal reason for their fiscal fiascos – instead they come from the dangerous combination of rosy scenarios and fools with public money, as broken down passionately by Scrantonian (?) Gary Lewis, whose point-by-point evisceration of the city’s facile arguments served as the raw material for my structural extrapolation in Dunderheads: Part 1, 19% structural budget deficit, Part 2, 78% tax increase, and Part 3, sell the Brooklyn Bridge?:

 

Though bankruptcy will probably be in Scranton’s future, this time the union contracts appear not to be the proximate cause.

 

“The teenagers who work at the ice cream stand not far from my house, they make $8.50 an hour — that’s a dollar and a quarter more than I now make,” said John J. Judge IV, a 10-year veteran firefighter who is the president of the Scranton local of the firefighters’ union.

 

The ice cream stand isn’t broke.  Scranton is.  Indeed, that’s the title of a hilarious and spluttering ly erudite blog by Scranton local Gary Lewis, who’s also done all the spadework necessary to document the myriad ways in which Scranton has played a bad position badly.

 

That bad, huh?

 

But Scranton finds itself in a position that is unusual even in this era of widespread budget pain: it has nearly run out of cash and, so far, no one is willing to lend it more.

 

Sub-sovereign entities like cities and states have no inalienable right to tap financing – and for that matter, neither do sovereign entities like Greece. When that happens, the cash has just plain run out.

 

The next model after me … will be back

Those same homeowners being threatened with higher real estate taxes are the ones whose properties have dropped in value, and that combination is so ballasting their finances as to act as The economy’s drag sail:

 

More than 60% of loans are underwater in some high desert locations including Palmdale, above, new data show. (Michael Robinson Chavez)

Nearly 1 in 3 homeowners with a mortgage in L.A. County owes more than the property is worth, new data show. These underwater loans hinder mobility and hurt prices because they tend to stymie the important move-up market.

 

When it comes to housing, we’ve come to expect the best of two worlds: full security of tenure and controllable occupancy cost on the one hand, and on the other instant liquidity via refinancing or sale. 

 

Before the crash, people would trade their starter homes after a few years for bigger ones. Moving up was so common that chains of buyers and sellers would develop, with each deal dependent on another. The breaking of that chain has created a significant drag on the market, economists said.

 

When supply of housing exceeds demand, either we un-build the housing, or we see the marginal value of housing drop perilously close to zero.

 

And in Cleveland, some homes have negative value

 

Combine those two forces – municipal insolvency caused by municipal overspending, and homeowners whose negative equity is acting as their family’s and our economy’s drag sail – and it’s easy to predict, as the columnist Spengler did and I analyzed, that the voters are Not gonna take it anymore?

 

Spengler converts the money flows into people dynamics.

 

There are a lot more people paying property taxes to pay the salaries and benefits of government workers than there are government workers.

 

California is the worst of all: Despite one of the weakest housing markets in the country, property tax collections in California spiked by nearly 50% since 2008.

 

Notice the spike?  The voters took notice.

 

We’ve previously seen how California tied itself in knots over state and local taxation, and how the legislature and state supreme court hacked at the Gordian knot.  And the voters in two cities took serious notice, with San Jose and San Diego rolling back public-employee pensions, as reported in the San Diego Union-Tribune (June 5, 2012):

 

Pension Reform Scores Big with Voters

 

At the US Grant Hotel, San Diego Mayor Jerry Sanders addresses supporters and media to tout the success of Proposition B. Behind him LtoR are City Councilmen Kevin Falconer and TJ Zane who is the President of the Lincoln Club of San Diego.

 

Elsewhere in California are pockets of job growth and aspiration, for whose seekers the sole housing goal is something clean, safe, convenient, and cheap, resulting in the reinvention of unofficial dormitories  in Entrepreneurial barracks: Part 1, the blithe present, and Part 2, the furious future?:

 

Look – over in Silicon Valley.  It’s a hotel!  It’s a rooming house!  It’s an apartment!

 

No, it’s … Superdorm?

 

Whatever this unusual living accommodation is, it’s serving a need and creating a business, as revealed in this gee-whiz article from the New York Times:

 

They’re a nifty idea; pity they almost certainly violate the laws and the zoning.

 

But it’s so fluffy!

 

For benefit of future generations of banking executives, I indulged in a little Monday-morning-quarterbacking by reviewing Bank of America’s business-school-case demonstration of How not to buy a financial institution: Part 1, act in haste, and Part 2, repent at leisure:

 

And the fun’s not finished:


Mr. Moynihan and his team have concluded there is no easy way out of the Countrywide mess.


As I’ve worked through this post, I’ve come to sympathize with Mr. Moynihan, who’s dealing with a problem far beyond his own making, yet where he, as the last grownup standing, has the thankless job of cleaning it up.


“Obviously, there aren’t many days when I get up and think positively about the Countrywide transaction,” he said in August 2011.

 

I’ve seen way too much of Washington these days

 

If only Bank of America, being a supposedly ‘rich and smart’ investor, had the benefit of the zealous public-interest litigation which led to a remarkably flimsy case making its way all the way up to the Supreme Court, where the plaintiffs’ arguments were stomped flat, 9-0, as I reported in It’s not the fee, it’s the split:

 

I thought we held our ground well, didn’t you?

 

The summary could not be more direct, and indeed, it has the tone of a teacher patiently lecturing a stubborn student.

 

Shall I compare thee to a studious fool?

 

(1) Section 2607(b) clearly describes two distinct exchanges.  [1] A “charge” is “made” to or “received” from a consumer by a set­tlement-service provider. [2] That provider then “give[s],” and another person “accept[s],” a “portion, split, or percentage” of the charge. Congress’s use of different sets of verbs, with distinct tenses, to dis­tinguish between the consumer-provider transaction and the fee­-sharing one would be pointless if, as petitioners contend, the two transactions could be collapsed into one.

 

Sorry the Court concluded, with ironclad logic, that RESPA prohibits ‘invisible’ fees as defined by an undisclosed sharing of a fee by the apparent recipient with an offstage partner – in common parlance, a kickback.  And that is all RESPA prohibits.

 

When it comes to poverty alleviation, we know that people have to help themselves, and that begs a critical question not easy to answer: Do we expect the recipient to Change first or be helped first?:

 

When it comes to people whom we wish to help with government or charitable resources so that they can change their lives, should we make them prove it first or should we give it first? 

 

Is this a good idea?

 

That question lies underneath the design choices within many programs.  Our Puritan principles exhort us to make the downtrodden prove it first, demonstrating their moral worth to our satisfaction, lest we reward behaviors we don’t like.  But sometimes, as reported in the Los Angeles Times, it will be better to trust first:

 

Similarly, in the relationship between people and their government, the same law of the observant herd applies, which is why there is more than just addressing letter at stake in What’s in a place name? Part 1, efficiency, and Part 2, urban citizenship:

 

As I’ve previously written, urbanization requires formalization, and that applies to everything connecting the citizen to his or her city:

 

1. Laws and registration of property title.

2. Physical infrastructure, both of utilities and transportation.

3. Information services (like mail).

4. Voting and democratic registration.

 

Vila Nilo, Sao Paulo: the box reads “Block 3, Depositary of Mail”

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