[Previous Months In Review here: Aug 09, Jul 09, Jun 09, May 09, Apl 09, Mar 09, Feb 09, Jan 09]

By: David A. Smith

Continuing our review of September’s posts, technology changes interpersonal dynamics and in so doing reveals aspects of human nature, in particular that what matters in crime prevention is not the phenomenon of seeing but that of knowing one is being seen, in The robocop on the beat: Part 1, seen being seen:

Are you clicking on images you shouldn’t?

Some years back I formulated a more general version of this as the law of the observant herd:

The herd observes how sinners are dealt with.  In this case, sinners are noticed.  Not arrested, mind you; curiously, not even threatened.  Just noticed.

Crime doesn’t like being noticed.  So crime relocates.

Hopefully, with as little swag as possible

The occupants moved out soon thereafter.

The armadillo does what the residents can’t: it observes, it witnesses.  And in a metallic Christian way, it turns the other cheek and it takes punishment.

and Part 2, seen as one seeing:

In yesterday’s post, innovative police chief Steven Settingsgaard parked a retired police car conspicuously in front of a suspected drug dealer’s house.  Overnight it was demolished, but then something striking happened:

The dealer left the neighborhood soon after the incident –

Flush a predator from cover and the animal becomes unsettled and nervous; easier to capture.

– he was later arrested and convicted on a gun charge.

Evidently the emotional disruption played a powerful role in the physical disruption.

Find me worrisome?

With the disoriented giddiness of one who has staggered off the rollercoaster without losing wallet, lunch, or life –

That’s a lovely bridge to jump off, isn’t it?

– I examined, with more sympathy than its authors did, our retrospective on how we got through the financial precipice of last, 2008, in The mad experimenters: Part 1, being still breathing is winning and Part 2, I must have known it all along:

Despite Chairman Bernanke’s brave words a while back – in this selfsame Wall Street Journal – we may talk about exit strategy all we want, but there will be no substantial exit any time soon.

President Barack Obama goes to Wall Street Monday [September 14, 2009 – Ed.], the anniversary of Lehman Brothers’ collapse, to deliver a cautious victory speech. 

With Wall Street executives, as well as government officials, in attendance, the president also will admonish “to avoid a return to the practices on Wall Street that led us to the financial crisis and to recognize their obligation to help produce a wider recovery on behalf of the American people.”

Sounds good, I suppose.

If you don’t like “admonish,” how about “chastise”?

With a modicum of hindsight now available, do governments and central banks deserve credit for preventing catastrophe? The early verdict from most scholars, executives and government insiders is yes.  [What are bloggers, chopped liver? – Ed.]

How about bloggers?  I said yes at each stage:

March 24, 2008, the shotgun marriage of Bear Stearns to JP Morgan Chase: Banking on value.

April 22, 2008, explanation: Banking on value: the explanation.

April 28, 2008, how the Bear Stearns transaction went down: Anatomy of a coup

September 22, 2008, explaining the Paulson Doctrine(s): Part 1, prevent the second great depression

September 29, 2008, explaining TARP: Bailout or bonanza?

October 20, 2008, converting TARP into preferred-stock injections: Paying your rescuer: Part 1, you *will* do it

January 21, 2009: The GSE’s future: Part 1, we need the eggs

March 23, 2009: The AIG Hearings: Part 1, “Now that we’ve killed all the bomb-makers …”

What, you think that counts as evidence?

On the question of which of dozens of extraordinary interventions — rock-bottom interest rates, surging government spending, billions of taxpayer dollars injected into banks, sweeping government guarantees — made the biggest difference, there’s less agreement.

Sometimes the answer is, All of them.

An impromptu discussion at AHI led me to write down Three key questions to give your ecosystem a physical: Part 1, follow the critters, Part 2, follow the ownership, and Part 3, follow the money:

In the same way, when we consider a housing finance ecosystem, the blood plasma is money, and its tracing is a time-honored investigative technique.

“Follow the money”

When it comes to housing, the money moves in three dimensions: homes, people, and money:

1. Homes.  Providers and consumers finding each other.

2. People.  Sellers and buyers exchanging money for consumption and use rights.

3. Money.  Capital providers and capital consumers financing a home purchase.

Understand these three dimensions and you go a great ways toward placing an ecosystem in its space.

Thus, if you come new to a housing finance ecosystem, either because you’re visiting a country and want to buy or rent a home, or as a student, researcher, or consultant tasked with designing a new program intervention, you can learn a lot about the ecosystem if you follow the money through each of its three dimensions.

These questions are valuable for two reasons:

They are worth inspecting

1. They are discoverable.  Since everyone who might be an investigator can imagine the sequence of finding an apartment, buying a house, or finding a loan, they create a natural and surprisingly comprehensive line of inquiry for investigators.  More particularly, the questions are non-judgmental – they just ask about what is, rather than what should be or what might be or isn’t.

Question 1: Owner-consumer value chain

If you have housing (to rent or sell) and I need housing (to occupy or buy), how do we find each other and what kind of tenure relationships could we establish?

You’re new in town, and you need a place to live.  Think of all the sub-questions you’ll have.

1.       Can I find plenty of places, or are they scarce?

2.       How much space can I afford?

3.       Can I buy or do I have to rent?

4.       If I want to buy, how far out of downtown do I have to be?

5.       Is there enough good-quality rental?

6.       Is the government in the business of providing housing?

7.       Is the government in the business of subsidizing the supply side (helping create more homes)?

Now I’m going to ask you a simple question – do you feel … lucky?

2. They are measurable.  The results can be quantified – search costs, occupancy costs, closing costs.  Those costs make comparisons possible across ecosystems, and also make possible measuring the ecosystem’s evolution over time.

Question 3: Financing a home purchase

If I need to get a lot of money to buy a home, where do I get the money, and what does it cost (up front and over time)?

In every society, owning urban housing costs many multiples of a normal persona’s disposable housing income; indeed, among my rules of thumb for gauging a housing ecosystem (yes, that’s a blog post to come) is the better the housing ecosystem, the longer the period of time over which a buyer must obligate himself or herself to acquire property ownership. 

How long do I have to keep paying for this house?

Seldom is a month complete without some tale from the cradle of US apartment living, and our second-most-formal city, New York, which despite its reputation puts up with a shocking degree of informal settlements in Temporary permanence?:

You elected me temporarily, but maybe I could be permanent?

In New York City, formalization of sheds is literally just around the corner:

But others have higher ambitions: They want an all-new sidewalk shed — airy and elegant. The talk among architects, in fact, is that the city is about to launch a competition to design one.

Given time, New York’s sheds may become formal arcades – if not rivaling Bologna’s, then maybe New Orleans‘ French Quarter.

Formalizing the pedestrian shed: New Orleans arcades

In this post, I came bury sheds, not to praise them – but when you think about it, making sheds permanent by arcading them solves everyone’s problem.  It claims more city space for pedestrians, and more air space for additional structures.  The city becomes more dense, yet more livable.  The informal leads the formal, and in that lead, it changes the city.

The future of New York City’s sheds?  Torino’s arcades

If you leave them there for fifty years, they’ll be historic and then you can’t tear them down.

They claimed this was historic and had to be preserved

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By: David A. Smith

During September, I published a two-part post so depressing and sober it had taken me a year to take it out of inventory, about Winston Smith’s nightmare: The ultimate future city: 1984, Part 1, the poverty of slums and Part 2, the slums of poverty:

Perhaps the most famous year in fiction begins in the most tactile not-present:

It was a bright cold day in April, and the clocks were striking thirteen.  Winston Smith, his chin nuzzled into his breast in an effort to escape the vile wind, slipped quickly through the glass doors of Victory Mansions, though not quickly enough to prevent a swirl of gritty dust from entering along with him.

In previous posts, I’ve profiled visions of ultimate future cities.  Some of these visions are nightmares – and yet, nightmares that can see around us if we know where to look, in the slums inside.

Victory mansions? Soviet flats

The hallway smelt of boiled cabbage and old rag mats.  At one end of it a colored poster, too large for indoor display, had been tacked to the wall.  It depicted simply an enormous face, more than a meter wide: the face of a man of about forty-five, with a heavy black mustache and ruggedly handsome features. 

Big Brother is checking your mouse clicks

Only slightly more cheerful, albeit substantially closer at hand, was this grim multi-part story of Los Angeles public housing, in Distrust me just this once? Part 1, the need for trust, Part 2, the enemies of trust, and Part 3, how to build trust:

Slums persist in part because they have defenders.  Among those defenders are many slum residents themselves, for whom a lifetime’s experience has taught them, Trust no one, especially any well-dressed or well-spoken newcomer who claims, “I’m from the government and I’m here to help you.”  That makes any slum upgrading program a hard sell, as illustrated by this Los Angeles Times article about the obsolescent and miserable public housing property Jordan Downs:

Fred Smith, left, 37, has lived in the Jordan Downs public housing project in Watts most of his life.

Ronald Perkins and his neighbors were nearly outnumbered by the consultants and architects who showed up at the Jordan Downs community center.

Planning session for Jordan Downs

Resident participation is a cornerstone of HOPE VI, as slumdweller control is a cornerstone of Slum Dwellers International’s Urban Poor Fund.  But as Yogi Berra said, if people don’t wanna come to the ballpark, nobody’s gonna stop ‘em.

“Which is worse, apathy or ignorance?”

“I don’t know and I don’t care.”

– High school joke

The public housing system is structured around dependency.  Just as public housing’s financial schema makes housing authorities dependent on an autocratic HUD and behind that a fickle Congress, its residency policies – in particular, totally mean-tested rents and an allergy to evicting miscreants – promote resident dependency.  It is poverty trap and also an initiative trap, and it engenders passivity:

As mental palate-cleaners after such tough pieces were two bits of fluff.  I had a little fun with a Massachusetts state senator who assured us that in no way was he being at all hypocritical by buying his liquor in no-state New Hampshire rather than in new-tax Massachusetts, even though he had by purest coincidence traveled across the entire state, in Borderline behavior:

The absurdity of this is brought home when those who make the laws they expect others to observe flout their own handiwork, as did unlucky Massachusetts state representative Michael J. Rodrigues, who discovered the damning evidentiary power of a cell phone camera, and didn’t like it.  As gleefully reported by the populist Boston Herald:

State Rep. Michael Rodrigues, inset, a Westport pol, was spotted over the [September 1, 2009 – Ed.] weekend piling booze into his car – emblazoned with his ‘House 29’ Mass. license plate – at a tax-free N.H. liquor store.

A Westport lawmaker who voted to hike the state sales and alcohol taxes was spotted brazenly piling booze in his car – adorned with his State House license plate – in the parking lot of a tax-free New Hampshire liquor store, the Herald has learned.

This is not Michael Rodrigues’ car, and any inference to the contrary is unjustified

Savor the scene: a guardian of the public trust smuggling booze into his home state, caught red-handed violating a law he personally helped make more onerous:

Rodrigues, who was loading booze into his car, snapped “mind your own business,” the witness said.

“Rich, you’re giving smugglers like me a bad name.”

The witness’ account was also posted yesterday on Citizens for Limited Taxation’s Web site.

And it’s a doozy:

As my family and I were driving back from York Beach my wife asked me to pull off at the NH liquor store on 95 south at the Mass border. When I pulled around to get a parking space you can imagine my surprise to see what I could only assume to be a Mass state rep’s car. He also had a Deval Patrick/Tim Murray sticker on his back window – so I assume he’s a Democrat who voted in favor of the recent sales tax hike.

Our citizen journalist is right on both counts.  Mr. Rodrigues is a Democrat, and he voted yes on the tax hike.

The increase pushed the sales tax to 6.25% and slapped that same levy on booze – the first time alcohol has been subject to retail sales tax.

So the guy comes out with a couple of cases of booze in his carriage and loads them into his car. I asked him if this was “official” business or personal. He was surprised by my questioning and asked what business is it of mine as to what he’s doing. I told him I was a Mass citizen. He said it was personal – I pointed out the state car with official plates and he said it was “his”.

“That car is mine, not the state’s”

A far cry from Harry Truman, who smacked a stamp onto any personal correspondence he wrote when he was President.

I didn’t ask him why he was in NH purchasing alcohol instead of supporting Mass businesses and the 6.25% tax they just levied on us common folk…

Observe that Mr. Rodrigues’s district is about as far from New Hampshire as it’s possible to be in Massachusetts.

Place-based taxation is predicated on the assumption that consumers cannot flee the law’s grasping hand.

“Thank you, Thing!”

Later I floated some unmoored speculations in All at sea: waterworlds of the future:

We all live in a yellow submarine
Yellow submarine, yellow submarine

– Richard Starkey

Every one of us has all we need?

Perhaps it’s because, as city dwellers, we seek green space and crave privacy, but few destinations capture our imagination more than the idyllic deserted island.

Societal conventions optional

Yet we’re rational enough to realize that a tiny island will lack creature comforts – unless, that is, we build them, which seems the premise behind The Seasteading Institute, whose press release explains that a few months back:

The Seasteading Instiitute crowned the winners in its first Seasteading Architectural Design Contest to design the floating city of their dreams.

‘Floating city’ inevitably reminds me of Gulliver’s Island of Laputa, which Swift envisioned so he could satirize royal and aristocratic disengagement.

Wobbling along the cost of Balnibarbi

Seasteads are permanent, stationary structures specifically designed for long-term ocean living.

Which sounds good, until you realize that very few if any of these structures exist.

Maximizing our use of space!

Still, they make interesting speculations, so let’s take a look:

Serious sums can swing on metaphysical questions only a lawyer can love, as uncovered in You can check out any time you like:

At one end of the money-store continuum is physical property, which as I’ve often observed, is immovable, and as earth, it abides.  At another is financial property, which is just as ethereal.  Money is paper (or worse, just electronic bits) which have value only if we all believe it does.  Because we cannot physically relocate property, we are forced to use intellectual forms – title deeds, mortgages, loans, P&S’s – to convey ownership, which is a pure intangible.  Beyond the immutable of physical property and the intangible of ownership, we further slice ownership by adding new dimensions:

Two dimensions = land and real property.

Three dimensions (add verticality) = condominium, co-operative

Four dimensions (add time) = rental, time share

Each added dimension slices the occupancy/ use rights into a more discrete bundle, which on the one hand tends to add value (because you buy only as much as you need) and on the other complicates the contractual and financial relationships.  Indeed, by multiply slicing the ownership, an unscrupulous developer could tunnel through zoning regulations via a portable hole:

Nobody can pull a comb over my eyes!

In more serious news, we explored whether the third government housing pipeline, the FHA, will need substantial taxpayer equity like its two siblings, Fannie Mae and Freddie Mac, in Liberally prudent or imprudently liberal? Part 1, how we got here, and Part 2, how we’ll get out of it:

Will these folks …

… follow these folks?

An additional 2.4% delinquency on a $627 billion portfolio represents $15 billion more in delinquencies. 

The [FHA capital] ratio last year was around 3%, down from 6.4% in 2007.

An additional 2.4% delinquency is not the same as losses.  Loss = Default Rates x Principal-Writedown Given Default.

Let’s do some simple arithmetic.  How much of a writedown can FHA afford on those delinquencies?  40% losses on 2.4% delinquency represents 0.96% lost portfolio value.  In short, FHA had better recover 60 cents on the dollar.  Or else what?

If its reserves fall short, the agency is obliged to notify Congress, which could spark a commotion over the extent to which the government is funding losses in the housing market.

The Journal is mightily pumping its bellows; ’spark commotion’ is a far cry from ‘go bankrupt.’ 

Keep reading, we’re sure you’ll get fired up

A senior official at HUD, which oversees the FHA, said there is “no risk” that the FHA would require money from Congress if the ratio falls below 2%.

The Journal knows full well that FHA is the Treasury – it will keep going indefinitely, losses be damned, as long as Congress keeps giving its authority.

[Continued tomorrow in Part 2.]

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Yesterday we had brave words and sound logic from Kenneth Feinberg, Treasury’s ’special master for compensation,’ who as quoted in the Wall Street Journal (quotes in blue Times Roman), hopes his new standards “will be voluntarily picked up” throughout corporate America.

You’ll pick it up if you know what’s good for you

He might’ve tried starting with Freddie Mac:

The government-controlled mortgage finance company is giving CFO Ross Kari compensation worth as much as $5.5 million. That includes an almost $2 million cash signing bonus and a generous salary that could top $2.3 million.

It cannot be a coincidence that there are no publicly available pictures of Ross Kari

Would you want your face splashed across the front pages?

There can be no doubt Freddie Mac needs a highly capable CFO, and soon:

The McLean, Va.-based Freddie Mac has been without a permanent CFO for more than a year, when its two top executives stepped down as part of the government takeover in early September 2008. Acting CFO David Kellermann committed suicide in April.

Hideous though the circumstances are, the need to get the best is an argument to pay the necessary price.

Freddie Mac is not just another company.  It’s alive today, and nearly 80% owned by the government, only because almost $51 billion in taxpayer funds were pumped into it over the last year. More bailout money also may be needed in the quarters ahead as losses from its troubled mortgages mount.

An excellent argument to get the best bomb-defusers we can.  Wonder what Mr. Feinberg thinks of it?

You should do it for what I say it’s worth

Perhaps Mr. Feinberg was seeking to give more optics, and less substance?

Some bankers and outside experts said Mr. Feinberg was overstating the extent of the cuts. Many bankers will continue to enjoy seven-figure pay packages, including one who will receive $9.9 million.

Stock isn’t cash, but stock has value, especially in a liquid and public traded company.  Even if the stock is restricted, or the options do not vest for a period of time, they are money and value.

Of the 136 employees whose pay Mr. Feinberg reviewed, 29 are on track to collect total 2009 pay of at least $5 million, according to documents released by Mr. Feinberg.

So are Mr. Feinberg’s rules a big cut, or aren’t they?

And his calculations of 50% cuts in total pay for the top 25 at each firm from a year before depend partly on departures of certain highly paid employees.

Clever, that: It’s 50% less than the overpaid people who are now gone.

While some highly paid executives are exiting, at least one other is entering:

Leave banking and go into burgers?

[Mr. Kari's] cash signing bonus totals $1.95 million and will be paid out in semi-monthly installments over the year.

What makes Mr. Kari worth a signing bonus, the sort of inducement normally associated with star athletes?

You paid a lot for this hat

Market reality, that’s what:

That money is supposed to cover what he forfeited in stock options and grants when he left Fifth Third Bancorp, where he served as CFO since last November.

Mr. Feinberg and the regulators can no more stop the market than they can deny economic gravity.  If the top-quality financial CFOs are worth $1.5 million a year, then anyone who takes a vow of financial chastity has made the decision not to be a top-quality organization.  Particularly when asking someone to leave his home and walk away from previously-agreed deferred compensation.

“You expect me to solve everything?“

Freddie Mac also said it would immediately allow him to sell his home to the company, waiving a 60-day offer period that is required for other executives. It did not, however, specify which of his homes would be covered; Kari has residences in Ohio, Oregon and Washington State, according to the filing.

Hence a trap of aligning incentives via extended deferred compensation. 

A better approach for Kari’s compensation would have been to require him to wait at least three years to receive a bulk of his compensation, instead of allowing him to get as much as 80% of it in cash over one year.

Someone can always come along and buy it out – and, if Freddie Mac and FHFA are an indication, someone will.

No doubt that Kari is an able executive and has a hard task at hand. Before his 10-month stint at Fifth Third, he worked in the executive ranks at the insurance company Safeco and Wells Fargo.

Freddie Mac’s regulator, the FHFA, highlighted his qualifications in a statement it made after the pay package was disclosed. The agency said the approval of Kari’s pay was done after consulting with the Treasury Department.

Treasury, it should be noted, is where Mr. Feinberg works.  

“I have absolutely no idea who that man speaking is.”

When formulating his new draconian policies, he had to have known that Freddie Mac was ready to violate them even before they were announced.

The FHFA declined further comment, and the Treasury Department didn’t return a request for comment.

In its statement, FHFA also said that Kari’s hire came at a “critical time for our nation’s economy and for the company.”

That argument is no help at all.  Companies always face critical times.

Had he stayed at Fifth Third, [Mr. Kari] would not have been able to cash out of his equity compensation until the bank repaid the $3.4 billion in TARP funds it received. But Carol Bowie, head of the Governance Institute at RiskMetrics Group, a financial risk management firm, notes that his cash signing bonus at Freddie Mac effectively allows him to accelerate his receipt of equity he forfeited when he left Fifth Third.

Thus we have it that Mr. Kari was already tied up in regulation, but his new employer wanted him so badly that it paid his ‘exit fee.’ 

Bowie acknowledges that attracting top talent is critically important to a troubled company like Freddie Mac, and supports the idea of executives being paid for their skills.

Which brings us back to my initial question: are the Feinberg caps designed to realign incentives, or to punish the putative transgressors? 

Some small-town bankers are resentful of the coming scrutiny by the Fed, blaming many of the foolish loans and reckless trades that led to the financial crisis on larger institutions. “We’re all having to pay for the sins” of the big banks, said Rusty Cloutier, CEO of MidSouth Bancorp Inc., Lafayette, La.

At the current rate by which we are absolving ourselves and others, eventually we will decide that the entire crisis is the single-handed responsibility of one man, whom we can tar and feather and count ourselves righteous.

With my “securitization”

In the end, the problem is insoluble.  Neither Treasury nor FHFA nor any other regulator can nullify the market’s perception of value.  The best they can do is standardize regulation, insist on transparency, and try to align the incentives.

To make sure firms follow the new rules, Mr. Feinberg imposed reporting requirements on top executives and directors.

Are you trying to sneak money through security?

Regulatory reform is a process, not an event.  Mr. Feinberg’s moves are a blunt instrument.  I hope that, after delivering their thundering shock, they will gradually fade away.

“It’s simple – chop pay”

He said he hopes the standards “will be voluntarily picked up” throughout corporate America.

Fat chance.

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The huge banking institution is giving their new CFO compensation worth as much as $5.5 million. That includes an almost $2 million cash signing bonus and a generous salary that could top $2.3 million.

Catastrophe being a precondition to fundamental financial reform, in the aftermath of the banking crisis and the massive multi-billion-dollar Federal intervention, government is pursuing both the continuing crusade to choose culprits and then excoriate them, and also to put in place a new more expansive post-Paulson regulatory structure  that will reduce systemic risk in the US and global banking systems. 

A spokeswoman justified the pay because it was comparable to what others in the financial services industry make.

“A foolish consistency of the hobgoblin of small minds.”

Both objectives are ostensibly served by Washington’s new announcements of dramatically intrusive rules governing executive pay, as reported in the October 23 Wall Street Journal (quotes in blue Times Roman):

In a one-two punch at the pay culture of banks and Wall Street firms blamed for the financial crisis –

Take that, Gotham City banking malefactors

So now it’s the pay culture?  One single villain?

You mean there’s another?

To be sure, compensation structures shape and reflect corporate culture and played a contributing role in this epic mess, but to demonize a handful of executives is to exculpate everyone else – and we were all greedy, all starving for yield, and all short-sighted.  The entire world got drunk on risk, and we all have the mother of all hangovers.

And we’re not happy about it, are we?

– the U.S. government announced plans to aggressively regulate compensation at thousands of lenders and impose steep pay cuts at seven companies that received billions in federal aid.

Retribution and correction often intermingle.  From the parent who shouts this hurts me more than it’ll hurt you to our schizophrenic attitude toward incarceration – is it supposed to be punishment, or penitence? – human beings who have been hurt want those who hurt them to feel a measure of pain.

While the moves had been anticipated for weeks, Thursday’s separate announcements by the Federal Reserve and Treasury Department represent unprecedented federal intervention in pay decisions traditionally left to boards and shareholders.

In our post-crunch regulatory structure, are we trying:

1. To align incentives?

2. To cut executive pay?

These are not the same thing, and to do the latter in the guise of the former will only lead to tears.

The central bank moved to incorporate reviews of compensation into its routine regulatory process, a step that will affect large and small financial firms across the U.S. as well as American subsidiaries of non-U.S. financial companies.

That’s a good idea; transparency and periodic scorekeeping are helpful. 

The crackdown –

Notice the inflammatory language of vengeance.

– is likely to influence how financial firms pay top executives, traders, loan officers and others whose actions could threaten the soundness of the institutions.

Another implicit confusion.  Government has no business preventing companies from taking risks, but it does have a legitimate business in preventing companies from taking risks that threaten the financial system.  Americans are rightly angry that, in protecting the American economy, the regulators have rescued banks from themselves.

As expected, Treasury official Kenneth Feinberg said cash salaries paid to the highest-earning executives at seven companies getting exceptional federal aid will be capped at $500,000, while the group’s total pay level, annualized, will be 50% lower than a year before.

Mr. Feinberg, I note, has no background whatsoever in finance; he’s a lawyer, a prosecutor, and a mediator.  All these are very odd credentials for his current role.

Judging by his pictures, Mr. Feinberg is fond of shaking his finger

If these are such good ideas, why aren’t the shareholders doing it themselves?  Why rely on Uncle Sugar to do it? 

The rulings cover the highest-paid 25 employees at each of the seven heavily aided companies: Citigroup Inc., Bank of America Corp., American International Group Inc., General Motors Co., GMAC Inc., Chrysler Group LLC and Chrysler Financial.

Are the regulators pandering to the populist mob, or are they doing something that cannot be done except by an external and disinterested agency?

Standards are meaningful only when applied to all.  Individual entities competing with one another – whether companies for market share, or companies for executives, or even individual executives – cannot be expected to renounce potential comparative advantage. 

“I think it will make an important difference” because many banks have been reluctant to change their pay practices unilaterally out of competitive worries, said New York’s banking superintendent, Richard Neiman.

How big a difference?  This big

Mr. Neiman’s got it exactly right. It does no good to take a stand on principle for lower athlete pay if others are profligate.

We bleed Yankee blue … or Steinbrenner green

Indeed, the inevitability effect practically guarantees people will try to steal a march on their competitors, once they know new rulemaking is certain.

Compensation experts said it would be hard for companies to escape the new oversight, though individuals could do so by jumping to hedge funds, private-equity funds and other financial firms beyond the reach of the new curbs.

Exactly.  If compensation is regulated at a defined group of institutions, the most highly compensated will simply jump to new unregulated institutions.

You have to pay me to try this

Many years ago, I was negotiating guarantees from a developer whose integrity I doubted.  (One does this now and then in business.)  To assure that I didn’t have the company’s net worth lost in the shell game, I insisted on having the parent company on the guarantees, not a single-purpose subsidiary.  I thought myself clever – except that shortly thereafter, the developer formed a new parent company, of which the one signing our guarantees then became a subsidiary.  Over the ensuing years, the sponsor ran al the income through the new parent, thus gradually atrophying my guarantor.

Out of that, I learned a lesson – if you want to squelch a behavior, you have to squelch every possible outlet.  In regulatory terms, if you want to cap pay across the board, then you must regulate it everywhere:

Some state regulators said they plan to issue similar requirements for state-regulated banks not covered by the Fed plan.

The rulings will be effective for just November and December; employees won’t have to repay salaries already received.

That’s a sound principle – aside from the impracticality and legal liability associated with attempting to claw back payments legally made under binding contracts.

But the rulings will become the starting point for next year’s salary figures and until the companies repay their government aid.

It sounds like you’re capping 25, but you’re capping everybody.

These moves are the brainchild of Kenneth Feinberg, the Treasury Department’s special master for compensation.

“Stop pointing out that I point my finger a lot.”

Mr. Feinberg is taking seriously his moniker of czar; he is willing to command with laserlike precision:

Don’t come to my attention

Mr. Feinberg said he will have to approve pay for the next chief executive at Bank of America. He already pushed outgoing CEO Kenneth Lewis into giving back $1 million he received so far this year and forgoing the rest of his $1.5 million salary for 2009.

While I have no sympathy whatsoever for Mr. Lewis, that certainly sounds like schoolyard bullying of no conceivable economic or public-policy benefit.  It’s retribution, pure and simple.

And I did so well for B of A, too

Some critics said that Mr. Feinberg was too soft on the banks and that his main accomplishment – forcing firms to use more stock and less cash when paying employees –  didn’t go far enough to rein in compensation.

He’s using a blunt instrument to get their attention.  Being blunt, it won’t necessarily work well.

You dare say this doesn’t work?

While the Fed didn’t propose pay caps, it said it will review compensation policies at “28 large, complex banking organizations,” which it didn’t identify. It will be a “horizontal review” that in effect compares them to one another.

Making this so funny is that scarcely weeks earlier, the government itself violated every single Feinbergian principle when it hired a new CFO for an entity entirely under its control.  As reported Business Week (quotes in red Arial):

When [the new CFO] joins Freddie Mac on Oct. 12, he will receive a base salary of $675,000 and is entitled to an additional $1.66 million in cash for the year. The company said he will be paid in installments, but did not specify the timing of those payments in a Sept. 24 securities filing. The company declined to comment beyond the filing.

He will also receive performance-based pay at the board’s discretion. The target amount for that cash compensation is $1.16 million, but what is actually given to Kari could be higher or lower.

His cash signing bonus totals $1.95 million and will be paid out in semi-monthly installments over the year.

Feinberg says cap cash pay at $500,000, his fellow agency approves paying $1,950,000 as a signing bonus.

The Federal Housing Finance Agency, which oversees Freddie Mac, approved the pay package.

Can we reconcile this seeming contradiction?

“Don’t try to contradict me”

[Continued tomorrow in Part 2.]

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Who ordered the large?

That’s the sinking feeling probably being experienced by the government public-private team trying to recruit developers into their Herculean effort to redevelop Mumbai’s Dharavi slum, as the global credit crunch thins the ranks of potential development consortia.  As reported on Live Mint:

Six consortia opt out of Dharavi project bidding

Bangalore: Six of the 14 teams in the fray to bid for a Rs15,000 crore [$3.2 billion – Ed.] Dharavi makeover project have opted out, jeopardizing the scheme.

Five consortia have to be chosen to develop one sector each of the 535-acre shanty town in Mumbai, to make it a part of the growing residential and commercial development within Mumbai.

It always looks so easy on the maquettes

With only eight candidates in the bidding, it will be hard to create the sense of government leverage necessary to extract a favorable deal for each parcel.

“I am going to raise this issue with the committee of government secretaries that the number of participants does not give scope for adequate competition,” said Gautam Chatterjee, chief executive of the authority. “The committee will take a final call on what should be done with the bidding process.”

When it negotiates with the private sector on a macro project, government is usually out-traded: for several reasons: the talent updraft, government’s slow OODA loop, their information/ analytical disadvantage, and the necessity for government to have a consensus outcome.  [And that's even omitting entirely the possibility of corruption and bribery in the award process – Ed.] 

Will Dharavi disappear in favor of high-rises?

It’s been a particular challenge at Dharavi, which, as I’ve posted, has been politically contentious from the beginning. 

On Friday, the Dharavi Development Authority asked the 14 short-listed groups to submit to it the memoranda of understanding among the team members.

A very good idea – it flushes from cover who is actually a team and who is simply a mob hoping to win the beauty contest and then plunder the opportunity.

We had fourteen, but six of us were shams

This was asked after rumours that many of the international and local companies wanted to opt out of the project in the wake of the global economic downturn.

The DDA asked a question, and got an answer it didn’t like to hear, but needed to hear:

Lanco’s flame has gone out

Some lead members of teams that are not a part of the project any more are Unitech Ltd, K Raheja Universal Pvt. Ltd, Lanco Infrastructure Ltd, RNA-Videocon, Runwal group and Kalpataru group.

Videocon tuned out

Runwal ran away

Kalpataru got lost

Normally when you’re negotiating, you assume that any offer the other side makes will be on the table indefinitely.  Public-sector and pro-poor groups conducting such negotiations, who are at an information and analytical disadvantage, tend to play their cards by instinct, judging what they can squeeze more by how the other side behaves than by their own internal analysis.  Most of the time that works, especially when there are multiple private bidders competing for the same business. 

When the number of bidders shrinks, the public sector’s disadvantage gets worse.

Among the remaining teams are Lodha Developers Pvt. Ltd and DB Realty Pvt. Ltd. The two firms recently filed their draft red herring prospectuses to raise money through initial public offerings.

Financing their Dharavi development through an IPO??  You’re kidding, right?

That’s a joke, right?

Lodha has tied up with a Malaysian construction firm, LBS Bina Group Berhad, as its technical partner, and DB Realty has teamed up with its subsidiary, Conwood Agencies Pvt. Ltd.

Slum redevelopment is challenging, because it is so much more than simply large-scale construction.  Further, the public-private negotiations are extensive, time-consuming, and fraught with uncertainty.  The private sector converts uncertainty into cost, and cost reduces profit/ equity potential. 

Less profit to work with

The value of urban land depends on the net residual profit to be derived from developing it; as a result, land price is the most volatile line item in the total uses of funds.  To that uncertainty, add the uncertainty inherent in dealing with government.

Looks yummy but perishable

Then put another scoop of uncertainty for the slumdwellers themselves, who have an effective voice and are not shy about using it.

“Developing slums in Mumbai needs expertise because such projects have serious socio-political complications,” said an analyst with an international property consultancy, who didn’t want to be identified.

At some point it becomes unstable

With slums being hard to redevelop, the surprise is less than some opted out, but that that so many have stayed in so long:

In March, following a harrowing six months of liquidity crunch and slow property sales, five out of 19 teams had opted out, leaving only 14 in the fray. Some the prominent firms that exited were Housing Development and Infrastructure Ltd (HDIL), and Reliance Engineering Associates Pvt. Ltd and Urban Infrastructure Venture Capital Ltd.

Big bids always have big consortia – and if one or two team members get cold feet, the team can disintegrate.

HDIL, one of the country’s biggest slum redevelopers, was forced to opt out after its US-based partner Lehman Brothers Holdings Inc. went bankrupt in September 2008.

Sorry, Lehman

“We had been getting a little jittery about the project and don’t want to be a part of the project anymore,” Sandeep Runwal, director of Mumbai-based Runwal group, had said in September.

Don’t throw me out with the bath water, okay?

Property consultants who have tracked the Dharavi project closely said the biggest problem with the participants now is that none of them really has experience in redeveloping slums.

Said an analyst with an international property consultancy, who didn’t want to be identified, “besides DB Realty, no other team is equipped for that.”

Dharavi is still the fixable slum.  Still, government may have played its cards too slowly, and there may be much less financial ice cream.  If I were advising government, my advice would be move quickly and designate some developers.  The ice cream cone is melting fast, and you may be contending over nothing.

The way to think about development opportunities

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