By: David A. Smith

[A full year's Month in Review available here: Dec 09, Nov 09, Oct 09, Sep 09, Aug 09, Jul 09, Jun 09, May  09, April 09, Mar 09, Feb 09, Jan 09.]

In January, aside from one little post about the invisible delights of apartment living (It’s what you don’t see), everything I wrote covered capital markets and macro policy, proving just how deeply intertwined are home asset values and fiscal economy.  The first 2010 tree I ran into was a contradictory set of housing price indicators out of which one could assemble any narrative one wanted, as I observed in Pick a direction. 

At least we don’t have to go far for help

That being unsatisfactory, I sought to provide some fearless 2010 predictions – worth every bit as much as a California promise – starting with Part 1, global macroeconomic factors:

1. Ben Bernanke will be easily reconfirmed as Federal Reserve chairman

2. After a ‘decent interval,’ the Fed will start raising interest rates

3. The recession will linger like a bad cold

4. The dollar will defy financial gravity … for the year, anyway

5. ‘Sovereign bankruptcy’ will enter the lexicon

6. Global finance will be whipsawed by sovereign-bankruptcy worries

We ended 2009 with the US economy still losing total employment.  That may not be the economists’ definition of a recession, but it’s the public’s practical definition, and the one with most relevance to housing, for when jobs and people’s earning power are shrinking, so too is their consumption of housing.

That economic weakness will be worldwide, for a 10-20% global de-leveraging simply does not happen overnight, uniformly, or predictably.  Sucking that much cash out of the financial ecosystem has external consequences – a premium on liquidity, lower asset values, and a steeper risk curve.  Nor are we done with the financial aftershocks – the multiple governmental shadow bankruptcies yet to come, for example – that will knock the props out from under people (like pensioners and public employees) who up to now have thought themselves immune.

Who, me?  Nothing wrong with me!

Of these, Bernanke’s reconfirmation [1] happened, although some may question ‘easily’ (although really, what did all the noise amount to?), and [5] has arisen (at least in the Eurozone, with Greece, although not yet here at home).  The others have to ripen, but as a portfolio of predictions, I like it.

Part 2 covered US capital markets:

7. All the big TARP banks will recover

8. In 2010, many regional banks will fail

9. TALF will be revived

10. The GSEs will be frozen in time

11. The risk curve will widen and stay wide

12. Financial and real estate service-sector consolidation will continue

Right now, global capital is scared.  Scared of lingering recession.  Scared of monetary policy.  Scared of sovereign insolvency.  Scared of the unknown future. 

I’ve got reason for being scared

When capital is scared, it ventures only a short ways from safety, which means safe nations, safe security types, safe asset classes, safe maturities – and always with a line of retreat, meaning a liquidity option.  Flight to higher-credit assets requires collateral, not counterparties, in view of the market’s loss of faith in ratings agencies and guarantors.  Every asset class will stratify, and for real estate assets, the stratification will occur by location, property quality, debt service coverage, sponsor.  Safer will be overly rewarded and riskier will be overly punished.  The gap between creditworthy haves and creditless have-nots will become more palpable and more painful.

The result is a steep yield curve and a steep risk curve.  You want to borrow money for a long period, secured by a repositioning asset, and with anything less than sterling credit?  Be prepared to pay up for it.

Is that loan proposal a joke?

It will be Ben Bernanke’s job to keep the yield curve smooth and relatively flat. 

While one shouldn’t judge solely on the froth of journalism, that the big TARP banks are now targets of populist anger suggests they have recovered (Prediction 7). 

This isn’t good for the brand

About the others, we’ll see. 

The remaining predictions are much more sector-specific.  In Part 3, housing and affordable housing, I covered the macro supply factors, and concluded that we have too many entities and not enough business for them all to do.  Major consolidation is in order:

13.  Total US households will be level, not increasing

14.  Average national home prices will rise, but weakly

15.  Rent increases will be held back by the shadow rental market

16.  2010 net housing production will be nearly at a standstill

17.  LIHTC pricing will stabilize at 75¢ or so

18.  LIHTC will lose market share to newer tax credits

19. Consolidation will squeeze out 15-20% of sponsors

Though it pains me to tell my friends this, the shakeout is long overdue.  We have too many too-small sponsors; we need more scalable Production MEEs.  We also need comprehensively to rethink the distribution of Production MEEs around the country, and how we can use legislative motivation and resource incentives to drive portfolio rationalization: capable Production MEEs spaced continuously across the national landscape, each one successfully owning a geographically logical and localized portfolio of properties.

Cover the landscape, and make best use of the resources

Whew!  Compared with all that heavy going, the month’s remaining posts are meringue indeed.   Start with a remarkable anti-defamation lawsuit brought on behalf of Rumpelstiltskin (aka the U S Government), whose case is pressed in Rumpelstiltskin’s fee: Part 1, the libels, and Part 2, the motives:

If it please the court –

Comes now my client, your honor, the United States government, affectionately known as Rumpelstiltskin – who having rendered a valuable, nay an essential, service to the fair maiden investment banks and her father the banking industry, is now being both cheated of the compensation which he demanded and to which the parties agreed, and libeled for doing so.

Lot of straw, little lady, and not a lot of gold here, is there?

The essential facts are not in dispute. 

Parties at interest in this litigation

“Prince” Charles Miller (bank)

“Dolly” Miller [not her real name], the investment banker

Cassius King (representing the retail customers)

Rumpelstiltskin (Treasury)

The defendant and alleged victim was an investment banker.  Under our financial privacy shield laws, her name must be withheld so we will refer to as Dolly Miller.  Dolly claimed that via securitization, she could spin straw (unrated mortgage instruments) into gold (ratable securities), which her father the miller (major public banks) sold to Cassius King and his extended family, at vast profits.

[I note for the record that we will be joining other parties, such as the rating agencies, in derivative actions.]

Add a bit of outrageous flattery suggesting that Great laws from little blog posts grow:

If virtue is its own reward, can an AHI post change a law? 

One blog post = one wing flap?

Though I would never claim such a thing, Dr. Zhong Yi Tong, principal analyst of the Washington DC homeownership tax credit, traces a direct link between a July, 2003 AHI report and the newly-extended national first-time homebuyer credit.  I was utterly unaware of this until December 29, when he wrote me an out-of-the-blue email connecting the dots. 

So modest he insists on a small photo

Zhong Yi’s email, from which I quote with permission, is in dark red:

Several years ago you wrote a blog post [Tax credits boost regeneration markets – Ed.] on my dissertation study on the impact of targeted homeownership tax credit program – evidence from DC.  You also used some of its information for your UK experiment.  Now it seems to me that my study on this matter might have somewhat contributed to the housing recovery for the US. 

Argh, pity me

Then pity the poor pirate who, having looted the high seas, now discovers he needs to reintegrate with civilization to enjoy the proceeds of his plunder, by Burying treasure:

Pirates have a real estate problem and a capital problem. 

We’ve got the capital, now we need the real estate!

Like highwaymen (land pirates) and kidnappers (wilderness pirates), for their business they need a work environment of vast uncharted spaces and complete lawlessness – for which the high seas often serve admirably. 

We’re ordinary fisherman … until we attack you

The pirates’ real estate problem is that, conducting their business in a place of no law – and hence no monetary or economic resources – they must nevertheless equip and base themselves in a place of monetary and economic resources – and hence of some law.

Readers who have stopped following this blog for having activated their estates will be pleased to learn that for them, Death is a bonanza:

Have you died so far in 2010?  If you have, you’re in luck!

I’m from eternity and I’m here to help you solve your tax problem

If you’re still alive in 2010, but wonder how much longer you’ll make it, then you have a decision to make.

“Now, you have a decision to make: do I feel lucky?”

Rich Cling to Life to Beat Tax Man

You mean you’re not glad to see me?

[Article published in the The Wall Street Journal on December 31, 2009.]

Nothing’s certain except death and taxes – but a temporary lapse in the estate tax is causing a few wealthy Americans to try to bend those rules.

[Snip]

As my earlier exposition suggested, there is a logical linkage between estate tax and capital gains tax.  Capital gains are payable when an asset is sold from Owner A to Owner B.  In an estate, the assets pass from Owner A to Owner B without benefit of an economic sale, but certainly within benefit of a sale for legal and tax purposes (the old owner is legally dissolved, a new one created with full protection of the law).

The idea is that you shouldn’t be able to put assets into a vehicle and pass them, generation after generation, without tax.  Legal vehicles have their force because government protects property, and the capital gains and estate taxes can be seen as a user fee for protecting wealth when it passes from the hands of a capable person to potentially less capable beneficiaries.

Finally, the month ended with another multi-part post – hey, it’s complex stuff, and all soundbites are misleading without context – on the puzzle of pay.  In January, I posted Part 1, what should happen, executive level, and Part 2, what should happen, company level:

With the economy in the tank and banks (including the Federal Reserve) making record profits, populist ire has settled on the bankers themselves. 

Were you paid a great deal of money?

Yes, we … uh …

Guilty!  Until proven innocent!

Deservedly so?  That question is implicit in a lengthy Steven Brill piece in the New York Times, a largely sympathetic profile of TARP paymaster Kenneth Feinberg.  Brill makes much of Feinberg’s flagellating bankers, as others are lining up to take their turn.  The bankers are facing a financial crisis tribunal and being bashed by the President:

“Those who oppose this fee [The proposed $90 billion tax on all banks – Ed.]  have also had the audacity to suggest that it is somehow unfair,” President Obama continued, “that because these firms have already returned what they borrowed directly, their obligation is fulfilled.”

(How naively audacious I am, to think that repaying a debt ends the obligation.)

Next you’ll be telling me I can get it from a tap

Some of the shots are truly deserved, as when Goldman CEO Lloyd Blankfein walked into a verbal door:

You mean you open it first?

Testifying to the Financial Crisis Inquiry Commission, the body established by Congress to determine the causes of the Wall Street debacle, Lloyd C. Blankfein, the chairman and chief executive of Goldman Sachs, drew most of the fire.

Mr. Blankfein parried repeated questions over his bank’s extraordinary profits and salaries. At one point, when he likened aspects of the financial crisis to a “hurricane” and similar acts of God, the commission’s chairman, Phil Angelides, a Democrat and former California state treasurer, cut in to say, “Acts of God, we’ll exempt. These were acts of men and women.”

Score one for Chairman Angelides!

How do you like me now?

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[A full year's Month in Review available here: Dec 09, Nov 09, Oct 09, Sep 09, Aug 09, Jul 09, Jun 09, May  09, April 09, Mar 09, Feb 09, Jan 09.]

A blog is pointillist – sparkly bits of insight (we hope) collected by the roving eye of an intellectual crow.  Yet step back from the dots and you may see a pattern, and patterns are what make ecosystems out of the rhythms of life. 

Fascinating … and logical

That’s what calendar increments like decades are for – to let us take stock.

I opened the new decade by looking back at the old one, with the longest and most substantive post I’ve ever written, seven parts on the decade’s biggest invisible stories:

All of them are important, and if there is only one post of mine you read in its entirety, it should be that one, but as I despair of receiving the undivided attention of our ADD/ Twitter generation, I will succumb to market forces and provide sound bites, starting with Part 1, the perpetual-motion credo:

By no stretch of the imagination was Mr. Raines unusual in the Aughties – nearly every financial wizard, on or off Wall Street, was similarly enraptured with the wealth machine that was the decade’s global capital markets.  It was all driven by the belief that risk could be quantitatively controlled by hedging strategies – a deeply seductive belief.

Tell me again how default risks are not correlated

For that, one needed an unwitting wizard.  Cometh the willful disbelief, cometh the formula.  As I wrote [Posted March, 2009]:

The E = mc² of financial engineering

Guaranteed perpetual motion!

Suppose I offered you a free lunch?  Would you take it?

Between Li’s formula and Raines’s willingness to believe it and massively bet on it with the country’s money for his stockholders’ and his own profits, we were ready an asset boom.  That was amplified by two other forces documented in Part 2, yield starvation and dematerialization of global capital:

When I was a kid, financial capital was represented tangible: gold, silver, currency.  Bonds were bearer bonds, stock certificates.  Actual pieces of paper (that’s not an oxymoron) with embossing, stamping, engraving, or certification of authenticity.  Possession of the scrip was critical to proving no-questions asked credit.

Money, though an intangible concept, through 1999 had a tangible expression.

During the Nineties, many indicia of status dematerialized.  Airplane tickets went electronic (when was the last time you saw a paper one?); so did driver’s licenses.

My identity is an illusion, as is everything else here

Most significant in this dematerialization was that of capital.  From having once had a tangible existence, by the time the Aughties opened, capital was evidenced by matching sets of numbers contained in bank and financial institution computers, making a mockery of the old how-to-steal-a-million caper movie that was a screen staple when we were growing up.

From this vision of money …

… to this, art replacing cash

Now there was plenty of financial-asset demand globally, and the potential for an expanded supply domestically.  To that tinder we needed wizards to strike matches, with they did, as documented in Part 3, tangles in the financial web, with FIN 46 (shielding companies from the dreaded ‘consolidation’) and allowing the explosion in Credit Default Swaps:

Along with thousands of others, I can testify how much accounting brainpower was consumed defining the maximum perimeter of entities in which the Parent had a big economic stake without the dreaded FIN 46 consolidation.  This still goes on today, consolidation being the Thing To Avoid At All Costs.

Simple, isn’t it?  Vinot Kothari’s FIN 46 flow chart

As you can imagine, this led to contortions by which entities sought to avoid having to consolidate.

A total of 470 participants from the US and Europe participated in the survey. Most also felt that the market will adapt itself with new structures which simply cosmetically re-engineer SPEs to fall out of the definitions of the Interpretation.

That was the invisible story.  FIN 46, which sought to make things more transparent, in fact made them more opaque.  While investors basked in the illusion of transparent consolidation, in reality they were absorbing ever more risk.

Our structures have a firm foundation

By mid-decade the economy was humming merrily away, and it seemed the party would never end, but as covered in Part 4, the 2006 crest, two things should have tipped us off: FAS 157 was issued, and Angelo Mozilo began cashing out:

During 2006 Angelo Mozilo, Countrywide’s founder, CEO, and largest stockholder, began selling his positions; in fact, Mr. Mozilo “modified the executive sales plan in late 2006 to accelerate his stock sales. Critics say he sped up them up because he was aware of problems at Countrywide.”

Problems?  What problems?

By mid-2007, Mr. Mozilo was coming under fire, although at the time the smoldering appeared merely fumes and not a conflagration.

[Snip]

Regarding his stock sales, I thought Mr. Mozilo’s explanation credible, said so at the time.  Later I came to feel a complete chump for having done so.  But here’s the invisible story – as far as I know, despite the stock price sliding, there was no more detailed investigation into Countrywide’s business model and finances, if only to rebut the presumption that Mr. Mozilo was cashing out while the cashing was good:

[In 2009] the SEC released emails in which Mozilo referred to certain mortgage products as “poison” and “toxic” at the same time Countrywide was making riskier and riskier moves with its lending operations.

Don’t paste this label on the product, okay?

At the time, Mr. Mozilo’s actions were scrutinized; FAS 157 was overlooked.  That opened the window for the last mover (Fannie Mae) before the world inverted.  As covered in Part 5, the wrong zags, the capping folly was that, as Angelo Mozilo was beetling out of subprime, Fannie Mae (under Daniel Mudd, Raines’s Mister-Clean successor)  was gobbling it up:

Moreover, shifting to riskier securities – moving up the risk curve – meant that the companies could increase their profits by increasing the risk to us taxpayers.  That’s what they did – just at the moment that many (like Angelo Mozilo) were dramatically reducing their exposure to subprime lending, the GSEs increased theirs. 

Where Angelos fear to tread …

[Snip]

Mr. Mozilo, who was closest to the action, was cashing out of Countrywide and cashing Countrywide out of these loans.  Fannie Mae and Freddie Mac, who were further from the risks and from the touch on assets necessary to evaluate and manage those risks, were aggressively buying them from aggressively selling Mr. Mozilo.

Somebody had to be wrong.

They couldn’t all have been right at the same time: Johnson, Raines, and Mozilo

By 2007, we were looking unhappily at a risk curve hit by a seismic shock, with sudden paper writedowns of virtually every financial situation in the world.  That led to the first of many responses.  As described in Part 6, rule changes with the game in progress, to the volatile mix we added new uncertainty:

2007: Repeal of the uptick rule

During the summer of 2007, as the credit crunch deepened and the decline in asset values started to accelerate, the SEC inexplicably did the equivalent of severing the runaway automobile’s brakes [Posted December, 2008]:

Who repealed the uptick rule?!?!?

[Snip]

Aftermath.  Realizable values of structured assets collapsed to fire-sale prices.  Those discounts became the bludgeons of FAS-157-driven writedowns.  One by one Wall Street’s financial pillars – Bear Stearns, Lehman Brothers, AIG, and Fannie Mae – suffered bear raids.  Billions of capital disappeared even as some capital migrated to the raiders.  Finally, in April, 2009, the SEC restored the uptick rule.

Finally, in Part 7, effects not yet visible, I listed the two big invisible stories of 2009 whose importance wouldn’t surface until this year.  One of them (Chairman Bernanke’s reappointment) proved a bit more contentious than I expected – although really, they never laid a glove on him – and the other, although small at the time, is like that first corn kernel to pop in the pan:

2009: California’s shameless IOU issuance

In July, the state of California did an extraordinary thing: it repudiated its debts.

Why pay debts when you can print money?  A California IOU

Instead of paying its bills with cash, the state printed paper, backed by nothing, and ordered people to accept it.

If you or I did that, we would be summarily hauled into court and our property potentially seized. 

Oh, wait – it was the court itself that was welshing.

To be sure, the state dressed up this reneging on its debts with flowery language:

[Snip]

We are living in interesting times.  The decade upcoming promises to be no less interesting.

Does this mean danger/ opportunity?  

With the Chinese holding $800 billion of our paper, we’re about to find out.

With that as the forest, let’s plunge into the trees:

Enlightenment’s in there

[Continued tomorrow in Part 2.]

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

The more I write about housing, the more entangled it becomes with the fabric of cities, formally and informally.  Housing is what makes places into cities, because cities are where people live in close proximity, and when the people move to the city faster than the city is willing to cope with them, the result is an explosion of informality and slums. 

A global phenomenon

In the formal city, the government defends my property – police, firefighters – and services my property – roads, utilities.  In the informal city, the government at best ignores my property – Kibera, Africa’s largest slum, is on no city map.  Because of this, political nature abhorring a vacuum, when government is absent, other power structures occupy the space, which as we saw creates more enemies of slum upgrading within the slum itself, as profiled in Slums, the enemy within: Part 3, Illicit landlords, and Part 4, fifth columnists:

In yesterday’s post, we discovered that despite its many palpable benefits, and the visible reality of its construction, many Kibera residents are greeting Kibera’s first slum upgrading with fear.

Kibera in 2005: Whom can you trust?

Background: A while ago [Early September – Ed.], Kenya’s newspaper The East African Standard published a great and extensive series on the proposed upgrading of Kibera: Africa’s largest slum, which I visited in 2005.

Kibera in 2005: photo taken during my visit

The articles covered community resistance in the Standard, Kenya, the indignity of having no toilets, slumlord exploitation, slumdweller fears, an idealist’s critique, the power of savings, the potential to reform building codes, and an editorial endorsing affordable housing (which the Standard mistakenly but understandably calls ‘rent control’).  Woven throughout the series were the main themes that show why slums, though hard to eradicate, are also hard to upgrade. 

Although the program will provide the lucky relocates with much improved housing at only a small increase in rent from what they are paying structure owners, these residents – some of whom have known little else their entire lives – have a seemingly inexhaustible supply of fears.  Where do these fears come from?  From those who win from a slum, such as landlords – or, as they prefer to be called, structure owners.

Kibera in 2005: Most of what you see is owned, according to somebody

You might expect such slumlords to be embarrassed, or to voice their objections through useful mouthpieces like the residents.  Instead they’re visible and belligerent:

As we saw in November, sometimes the best thing that can happen to a slum is for it to suffer a physical catastrophe, like a fire, that strips away the utterly inadequate housing and reveals thousands of people who suddenly have an urgent need, as we profiled in a four-part post on the conflagration that destroyed the Joe Slovo slum in Cape Town, in The urban palimpsest: Part 1, wiping the slate:

The man for whom the settlement is named: Joe Slovo, South Africa’s first democratic housing minister

The best thing to happen to the informal settlers of Cape Town’s Joe Slovo township began with a spark:

March 9, 2009

On 9th March 2009, a fire razed 500 shacks to the ground, and left 1,500 homeless. 

(Unless otherwise captioned, all photos are from iKhayalami and cover the March 9-11 rebuilding days.)

What evolved was a partnership between the community and iKhayalami, where an entire section of Joe Slovo was planned, cleared and rebuilt using materials and expertise supplied by the NGO, and the labour and community access supplied by the leadership – all done at just 10% of the cost of more formal housing developments.

The story that follows (a large set of pictures is here, from which this post’s images are drawn) is remarkable for what happened but even more for what it demonstrates about why slums are both resilient and change-resistant, how they become political and economic stalemates, and what becomes possible when tragedy cracks options open.  It also flashes insights into the role of Mission entrepreneurial entities (MEEs) and the responsive power of networks.

Part 2, gridding the vision, Part 3, building the grid, and Part 4, writing the lessons:

The story has a happy ending:

In conclusion

While these shelters are not perfect, and certainly dissimilar to more formal housing projects, iKhayalami was able to re-shelter a significant number of people:

Joe Slovo, March 2009

1. In conditions far above what they had before

2. In situ

3. In a way which prepared the site for future introduction of basic services. 

All these are enduring achievements.   Because slums are places where private investment has outrun public infrastructure, the rationalization of informal private settlements should lead public investment – in fact, it should induce public investment.  The city has granted the Joe Slovo residents tacit citizenship by handing them disaster packages and working with them in their deployment; it will be hard for them to retract it when the infrastructure can now be laid down logically.

Joe Slovo, March 2009

This was all done at a cost of less than 10% of what more formal structures cost and in just a few weeks.

Self-built means self-labored, which means cheap.

Remarkably given the circumstances, it was the community that came to the table in this instance and not government. 

Not remarkable at all: networks and markets always move faster than government.

Joe Slovo, March 2009

In South Africa, decent housing is a fundamental right enshrined in the ANC Charter, but that doesn’t mean everyone is well housed.

Estimates suggest a government house may only be delivered 30 years after being on the waiting list. 

Or until there’s a cleansing fire, which creates the urban palimpsest.

Joe Slovo, March 2009

An alternative approach to tragedy is the one being adopted by Manila in its efforts to bring the city to the people:

In a similar way, the typhoon-battered city of Manila is now proposing to grow by relocation, moving those who lived on its squalid and polluted river banks out to a new city a-building.  As reported in Bulatlat:

16 Oct 2009: Relocation Solution Poses a Dilemma to Slum Dwellers Made Homeless by Ondoy

Days after Ondoy struck, the government declared that it would no longer allow these poor Filipinos to return to their shattered homes.

Manila waterway slums before the typhoons

What is the ‘home’ to go back to?  Disaster can create an urban palimpsest, wiping away everything but the land itself.  So, as in Joe Slovo in Cape Town, we have the tension – an urgent need to do something very quickly, and a unique opportunity to do something very profound.

MANILA – In the aftermath of typhoon Ondoy, many were quick to blame the urban poor living along the creeks, waterways and riverbanks of Metro Manila. Their shanties and their garbage block these sewage systems, hence worsening the impact of the typhoon, so goes the familiar criticism.

Nonsense.  While I have not toured the now-destroyed riverbank slums, the pictures I saw at the Asia-Pacific Housing Forum, coupled with the scale of flooding, make this claim just about impossible. 

Days after the disaster, the government declared that it would no longer allow these poor Filipinos to return to their shattered homes.  Vice President Noli de Castro, who also chairs the Housing Urban Development Coordinating Council, confirmed in a news report that the families who were living along waterways and riverbanks would no longer be allowed to rebuild their homes in those areas.

Mr. de Castro’s long been interested in housing and slums

Anti-poor, or another reason?

Once the city embraces our exurbs, it makes an economic trade – the city will provide services, and the property owner will pay taxes, the arithmetic of which can be made transparent, as provided by my own city of Cambridge in our fair city’s fair taxes:

If only municipal government came with one of these certifications

In Our Fair City of Cambridge, as Click and Clack like to call it, nothing is as fair as our taxes are fair – and that’s fair enough, isn’t it?

Not just a law firm, a motto: the Harvard Square offices of Click and Clack

Roughly a month ago, there was mailed to our house a handy and glossy pamphlet, Understanding Your Taxes (link in .pdf, and highly recommended) that lays out, in English so plain it might as well be soporific, the basic facts about Cambridge’s city budget, and the role that local real estate taxes play in it.  As we’ve seen before, the basic budget algebra of real estate taxes requires the municipality to raise as much in annual revenue as it spends on city services. 

As Understanding Your Taxes puts it:

Basic facts about the real estate tax levy

Three major factors are responsible for calculating a tax bill:

1. The City Budget

2. Commercial-Residential Property Tax Classification

3. Property Values (Assessment)

That order is not happenstance: the city’s budget is built up uses first:

In city budgeting, you eat the pie before you pay for it

At the other end of the spectrum, when a neighborhood ceases to generate meaningful tax revenue because its property values are in decline, the city government can be dazzled by the prospect of using eminent domain to sweep away the hodgepodge of declining uses in favor of a master-planned upscale revitalization, only to miss its economic launch window, as shown in Collective failure: Part 1, the city loses, and Part 2, the company loses:

Who won in New London?  As far as I can tell, nobody.  New London lost: the jobs crossed the river to Groton.  Pfizer lost: it spent $294 million on a property that is now vacant and on which it will lose $75 million or more.  Ms. Kelo lost:

“In all honesty, I’m not happy about what happened to me,” Ms. Kelo said. 

Financially, she would have been better off selling when NLDC came calling.

But, she added, “With 43 states changing their laws, in that sense I feel we did some good for people across the country.”

Everybody lost.

The little house that became a symbol: relocated and refurbished

Naturally, when the real estate markets seize up, government tries to lubricate them, occasionally without success, as explored in mutual stalemate:

If to a hammer everything looks like a nail, to a government everything should be solved by lawyers, guns, or money.  So when the government factory wants to achieve particular public-policy results, it manufactures either or both of its products – laws and money – to motivate private participants, principally Mission Entrepreneurial Entities (MEEs), as essential actors in affordable housing delivery to do its work for it. 

I’ve given you every chance to move, Black

As revealed in a recent Guardian (UK) article, if the private participants don’t move, the government can find itself stalemated.

Why aren’t you moving?

It was a £1.5bn cash injection that was supposed to make a dent in England’s 5m-strong housing waiting list.

Five million waiting list?  In a country of 60 million total? 

The NHF, which represents housing associations, estimates that households on the waiting list in some areas would have to wait 280 years for a home.

Time to wake up, Rip; your home is ready

As the city’s economy grows, housing affordability shrinks, and the city’s finances improve, which combination gives elected officials a chance to bestow largesse, or even better, to promise to bestow largesse, as did Boston mayor Tom Menino in Praiseworthy intentions:

Is there harm in trumpeting something one has not done?

The city has not yet negotiated a price with Bank of America, but the money to buy the five buildings will come from $8.2 million in federal funds set aside to buy and renovate foreclosed homes.

Here we have an advanced form of political vaporware: a pledge to do something in the future, in exchange for your votes – your political equity – today.  That’s outstanding political calculus, of a type I’ve encountered before, most memorably in Egypt, when as a subcontractor to a USAID prime contractor, I designed and built financial projections for a 500,000-home affordable housing production program that President Hosni Mubarak announced one Pharaonic day on the campaign trail, seeking to keep his winning plurality above 90%.  I designed the program; I wrote the financial model; I highlighted the key decision variables; I sent the proposal forward.  President Mubarak got elected overwhelmingly, and I never heard further if the program ever advanced beyond that initial conception.

“What did his models say it would cost?”

The properties will then be resold to homeowners, nonprofit groups, or private developers.

Otherwise known as “people we haven’t located yet.”

City officials said they have also applied for [A deflective version of 'maybe we will get' – Ed.] another $39 million under the federal Neighborhood Stabilization Program.

Otherwise known as “money we haven’t got yet.”

Can we apply for money too?

City officials aren’t the only ones playing fast and loose with consistency – our Federal government showed remarkably flexible situational ethics, insisting on executive compensation caps for all banks – except the one we really, really need bailed out – as revealed in Do as I say, not as I did: Part 1, what I say, and Part 2, what I did:

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.

We also featured the return of Sherlock Holmes in What makes a good consultant? Part 3a, attributes of character:

[Continued from the previous Part 2b and Part 2a, which dealt with services and activities.]

[A previous trio, Part 1a, Part 1b, and Part 1c, covered the rules of engagement with clients.]

Now we come to the most interesting part of my narrative.  Not all those who are clever are cut out to be consultants.  One may learn the skills, but one does not spend thirty-three plus years in affordable housing finance, as the Compleat housing finance consultant, without being temperamentally suited to the role.  That my friend was, sometimes to my exasperation:

But with me there is a limit, and when I find a man who keeps his cigars in the coal-scuttle, his tobacco in the toe end of a Persian slipper, and his unanswered correspondence transfixed by a jack-knife into the very centre of his wooden mantelpiece, then I begin to give myself virtuous airs. I have always held, too, that pistol practice should be distinctly an open-air pastime; and when Holmes, in one of his queer humours, would sit in an armchair with his hair-trigger and a hundred Boxer cartridges and proceed to adorn the opposite wall with a patriotic V. R. done in bullet-pocks, I felt strongly that neither the atmosphere nor the appearance of our room was improved by it.

The Musgrave Ritual

He never threw anything out …

And the much more practical problem of water intrusion Only when it rains: Part 1, leaky roofs, and Part 2, pricy torts:

The queen of torts was out of sorts

Evidently building code does not require a property to be leak-free – if it did, probably no property anywhere would meet code.

When it becomes clear that a building has problems that go beyond punch-list items — a kitchen drawer, say, that won’t stay shut or a closet door that sticks — the first thing owners should do is hire an engineer.

Or a capital needs assessor.

“You have to get a top-to-bottom assessment of the building — the interior, the exterior, all the systems,” Mr. Sladkus said. “That creates a record and tells the board where things stand.”

The sooner this is done, the better, he added, because it takes away a sponsor’s potential claim that problems were caused by the apartment owners. Depending on the size of the building, an engineering report could cost $10,000 to $50,000.

It’s not cheap – and you get what you pay for.

“Why are you complaining?  All your limbs are reattached!”

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

By: David A. Smith

October featured extensive consequences of the capital shakeout: human consequences, political consequences, and bank recapitalization consequences.  These interesting times (as the Chinese curse would describe them) gave us mounds of fodder for speculation, theorizing, and advancing the state of knowledge.

For truth, for knowledge, four eyes!

4. AHI’s thinking.  Originally I had thought that with the United States‘ scale, diversity of housing ecosystem, and seventy years of experience, we would be exporting lessons – good and bad – around the world, but I’ve discovered that we are importing ideas too.

Which way does knowledge flow?

To that end, as part of the World Habitat Day activities, we released our new year-long report spotlighting a newly discovered species, in Essential actors in affordable housing delivery:

Last week in Washington, as part of the World Habitat Day activities, AHI – in partnership with the National Housing Conference as host and the Housing Partnership Network as a co-sponsor – issued and discussed the Extract of our report, Mission Entrepreneurial Entities: Essential Actors in Affordable Housing Delivery.

It’s all about MEE – Mission Entrepreneurial Entity, that is!

This is a major report that changes the way people will think about and interact with MEEs (rhymes with ease).  Download the Study’s Extract here, and for the full report, see the end of this post.

We held the event (click here for more background) at the National Housing Conference, which over its distinguished 75 years of existence, dating back to 1934, has been the best-respected convener of thought leadership, research, and bipartisan advocacy on affordable housing. 

NHC: dubbed a Creative and Effective Institution by the MacArthur Foundation

We think people cannot perceive the importance of MEEs until they are properly identified: they’re the most effective affordable housing change agent no one has ever heard of.  MEE experience in the US and UK is reflected in emerging MEEs throughout the global South, notably our customer Slum Dwellers International (SDI).

Self-managed revolving facility: AHI as financial advisor

MEEs also play a critical role in emerging affordable finance, particularly for America’s under-banked and unbanked, as we explored in Microfinance, American style: Part 1, the bad, and Part 2, the good:

The CFSA’s members’ business model is built around on-the-spot credit decision-making, high interest rates (to cover for default and costs of collection), minimal regulation and minimal paperwork.  Even if we grant them the noblest of motives, to overlay government disclosure and government regulation will drive up their unit costs of originating and servicing a loan.  That will disrupt their business model, and it’s certainly possible that the post-regulation, post-reform “better” loans might be more expensive and less available than the lend-first-collect-later model that the payday lenders now use.

The Financial Service Centers of America, which represents check cashers, said that it supports increasing transparency to customers but that additional federal regulation “is unnecessary and duplicative and will only increase the cost of financial services to consumers without any corresponding benefit.”

The FSCA could well be right.  Check cashing is also a form of credit decision, and if the check is bad, the cashier is out the money with no hope of recovery.  So there are transaction costs, and they can rapidly mount up as a percentage of a $20 or $50 check.  One could so burden the hummingbird that it could never fly.

The trade group for payday lenders said it began requiring members to display their fees on posters in their stores last year.

Good!  Why do I have the feeling the members are doing this only because they are running scared?

Industry advocates argue that innovation – not legislation – is the key to reform.

Why not both?

You may need both

Might the innovative response to payday lending be the emergence of 21st century American microfinance?

I’ll have more to say about both American microfinance and housing microfinance (another obscuring misnomer) in future posts.

5. Slums are AHI’s asset class, so during October I looked at four cases: one long dead (Manchester, England), one seriously wounded (Cairo’s Garbage City), one resisting treatment (Nairobi’s Kibera),  a nd one that may be missing its launch window (Mumbai’s Dharavi), starting with Manchester in Recovering the lost urban poor:

We choose to remember our highlights and lowlights, our moments of intensity – and we choose to forget anything that is drab, commonplace, routine, or redolent of the profane.  So, for instance, even though we spend an average of fifteen minutes a day communing with our inner selves – roughly 1% of our lives, day in and day out – and via these moments of Zen delivering roughly two pounds of dump per day, one will find nary a mention thereof in our fiction, our journalism.  We all know it, but we all overlook it, and our future selves will have no knowledge of it. 

“The whole of this built-up area is commonly called Manchester, and contains about 400,000 people. This is probably an underestimate rather than an exaggeration. Owing to the curious lay-out of the town it is quite possible for someone to live for years in Manchester and to travel daily to and from his work without ever seeing a working-class quarter or coming into contact with an artisan. He who visits Manchester simply on business or for pleasure need never see the slums, mainly because the working-class districts and the middle-class districts are quite distinct.”

– Friedrich Engels, Condition of the Working-Class in England, 1844

The nuclear family

Indeed, if an alien species were to reconstruct our lives based solely on what we report, rather than what we experience, their view would be skewed indeed.

 And its nucleus?

We examined a modern slum, and the unintended consequence of slum clearance, via a story of Cairo’s Copts in The slum you need:

They’re called zabaleen, after an Arabic phrase meaning ‘garbage people’, and you wouldn’t want to be one:

Most of the inhabitants of Garbage City are Coptic Christians.

An estimated 60,000 – 70,000 Zabaleen live in an area known locally as Garbage City, and are mostly descendants of poor farmers from Upper Egypt who settled in the city in the 1950s. By virtue of their being Coptic Christians and of their occupation, the zabaleen are discriminated against, and face compounded hardships brought about by the pervasive corruption and kleptocracy of Egypt’s governance. Since they’re not Muslims, social services provided by Islamic organizations are not extended to them as well.

But their lives, which until four months ago were merely difficult, have now become even harder, for as the Boston Globe reported last June, the Egyptian government decided their mode of living represented a health hazard – a result which has had remarkable unintended consequences that tell us something profound about slums.

Zabaleen pigs, before they were slaughtered

A lengthy Kenyan East Afcrican Standard report on Kibera served as an illustration of why slums are so hard to improve, in Slums, the enemy within: Part 1, Why it’s hard to begin with:

A while ago [Early September – Ed.], Kenya’s newspaper The East African Standard published a great and extensive series on the proposed upgrading of Kibera: Africa’s largest slum, which I visited in 2005.

The mud structures (in the foreground) will be replaced by the new housing units (in the background) in Kibera under the Kenya Slum Upgrading Project (Kensup).  [PHOTO: BONIFACE OKENDO/STANDARD]

The articles covered community resistance in the Standard, Kenya, the indignity of having no toilets, slumlord exploitation, slumdweller fears, an idealist’s critique, the power of savings, the potential to reform building codes, and an editorial endorsing affordable housing (which the Standard mistakenly but understandably calls ‘rent control’). 

Kibera in 2005: Soweto East, with middle-class homes in the distance

All Kibera 2005 photos taken during my visit

Slums have enemies within: people who for reasons noble or ignoble will fiercely oppose any major upgrading program.  And every slum upgrading program faces one huge obstacle: the cost.  Affordable housing always costs money, costs that are non-recoverable over any normal private-investment horizon, and that money must come from government:

The Government estimates a staggering Sh880 billion will be needed to eradicate slums and informal settlements.

Four years ago, after the Bellagio housing conference, I visited Nairobi at the Kenya government’s invitation, to take further into implementation design the Kibera slum upgrading financing strategy several of us – including Angelo Mozilo, then-CEO of Countrywide, Stewart Paperin of the Open Society Institute, Nic Retsinas of Harvard’s Joint Center for Housing Studies, and various Kenyan government representatives – had brainstormed and recommended. 

Building on work that Kensup and UN Habitat’s Slum Upgrading Facility SUF) had begun, I spent an intensive week, hard numerous interviews, took copious notes, then returned to Boston and ‘built out’ the program, both its narrative and the financial model.  It was solid work; I was and am proud of it.

That continued in Part 2, Skeptics and cynics:

Of the residents’ reasons, fear is uppermost, and fear need not be rational:

Some claim their children would contract waterborne diseases once they move to clean houses.

Such a fear maybe nonsense, but it comes from somewhere, and as we’ll see in tomorrow’s posts, there are plenty of people willing to encourage others’ fears.

Others say they are [so] accustomed to squalor life in Kibera that they would not know how to live differently.

Poverty creates a curious kind of dependency – that of the familiar.  Be it ever so humble, there’s no place like home sounds to us a homily, yet it conceals within our belief that we do not ‘deserve’ a better condition, that there must be some trick or hidden test, and we will fail it.  We saw entrenched distrust in American HOPE VI public housing redevelopments; we see it here in Kibera.

Kibera in 2005: eco9nomic empowerment, co-op office

They also fear they might not find affordable schools for their children since most of those in Kibera are sponsored.

Fear of the unknown.  Distrust of anyone in apparent authority who provides reassurance.

Most posts in this series are coming.  Check them out.

Meanwhile, we checked in with the crumbling prospects for massive slum clearance/ rebuilding in Dharavi: While the ice cream cone melts:

Slum redevelopment is challenging because it is so much more than just large-scale construction.  The additional dimensions of public-private partnership, political visibility, and multi-party stakeholder negotiations render it more complex and therefore risky.  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.  With slums being hard to redevelop, the surprise is less that some opted out, and more 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

As I’ve posted over the years, the Dharavi redevelopment story has some eerie parallels with the ill-fated attempt to redevelop New London’s waterfront, using eminent domain for economic development.

The house the Supreme Court ruled could be taken and moved:

Suzette Kelo’s home in New London, Connecticut

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By: David A. Smith

In our US housing world, July and August are the sleepy months when Congress flees the scene, September is the month of recovery, and in October all conventioneering and symposiating break loose.

Vote for AHI!

And so it proved this year, particularly as Mother Nature started the month with a typhoon:

1. Human consequences of events.  Early in October, tragedy struck Manila in the form of Typhoon Ketsana, leading to my appeal, Help the Philippines:

Manila, yesterday

Sonia Fadraigo, Federation leader and Board member of AHI’s client Slum Dwellers International wrote this morning:

Federation not OK.  Badly hit.  Biggest disaster ever.  Don’t know where to start.  Still gathering info as to how many died.  Thousands of Fed members lost their houses – washed out by the floods.  We need help.  Thank you for the concern.  Please pray for us.  Another typhoon coming.

Three weeks ago I was in Manila, at the Second Asia-Pacific Housing Forum, speaking about slum redevelopment as an urban poverty solution.  It rained the entire time, but the locals said, this isn’t rain.

I flew home.

SDI Secretariat awaits further news. National Federations on standby to go to Manila if possible and if needed.

Remember Hurricane Katrina? 

Disasters are – well, disastrous – yet in our globally networked world, they offer unusual opportunities for housing and urban redevelopment.  In post-disaster recovery, the rules are temporarily suspended even as the money can flow in torrents, as we saw in micro with the Cape Town Joe Slovo reblocking.

Joe Slovo informal settlement, Cape Town, March 9, 2009

The rules become equally malleable during financial distress and the threat of insolvency, and in that open space we may have rebuilding but we may also have remarkable developer chutzpah, as we discovered in The rules say I can change the rules, including this rule:

[Waves to Harvey and smiles]

“No, no, not yet. Not until me and Harvey get the rules straightened out.”
“Rules!?!? In a knife fight!?!? No rules.”

Butch Cassidy and Harvey Logan

Abject desperation yields a creativity verging on the laughable, as illustrated by this recent Wall Street Journal about residents whose developer has what can only be described as a Hole-in-the-Wall defense to liability.

Devastation can also be financial, as seen in the human cost of job losses at Lehman Brothers in Banking’sWild Geese: Part 1, the casualties and Part 2, the recovering:

Need a bank assaulted?

O the Wild Geese are flying, O the Wild Geese are flying.

We’ve built your canals and railroads, our buildings reach the sky

– “The Wild Geese,” by Mike Harding

In 1691, after the Williamite Army crushed the Irish Jacobite army in the Battle of the Boyne, their army was allowed to disperse.  They took to the continent, serving initially in the French Army.

[New York Times, September 13, 2009]  Tom Ollquist remembers Sept. 9, 2008 — the day Lehman Brothers laid him off — as if it were yesterday. “You’re not going to believe it,” he told his wife. “I was shot.”

“Tom Ollquist sold packages of mortgages and other financial products for Lehman Brothers.”

Six days later, so was Lehman Brothers. Federal regulators let the foundering firm slip into bankruptcy, a collapse that touched off the most perilous week of the financial debacle, after years of freewheeling lending, trading and regulation produced outsize losses that devastated the banking system and brought the economy to its knees.

So began a military Diaspora that continued for more than two centuries, the Flight of the Wild Geese.

Searching for shelter and employment

When housing demand shrinks, the result is a glut by any other name:

Here’s a hint: dark red is bad

If apartment vacancies are high in such normal-America cities as Raleigh and Tacoma, the cause is not a glut of supply, but a withering of demand:

– as rising unemployment continued to chip away at demand during the traditionally strong summer rental months.

People tend to forget that housing demand is elastic.

The muscles in my mighty arms

Are as strong as rubber bands

When housing is cheap, people consume more – they move out of the house, lose the roommates, buy a larger home with a media room, a home office, or a game room.  Going the other way, when housing becomes expensive: the total number of households shrinks.

Driving the change is the troubled employment market, which is closely tied to rentals. With unemployment at 9.8% –  a 26-year high – 

“Hey, aren’t you as big as you think?”

A lesser consequence in both human and property terms are the reluctantly over-consuming households of people who followed the economy to a new job, leaving  behind a house they have to rent, in The reluctant landlord:

Nobody ever went broke paying taxes on found money.  But there is a bigger tax danger:

Renting for an extended period can eliminate or diminish the value of capital-gains tax exclusions. Federal tax law requires you to live in the house at least two years of the previous five in order to qualify for the full capital-gains tax exclusion upon sale of $250,000 for a single person or $500,000 for a couple, with some exceptions.

So, prospective landlords, don’t rent your home longer than three years.

Time to sell

Gluts in housing correlate with gluts in labor, meaning high unemployment, and when there are unemployed architects and underemployed workstations, the result can be flights of fancy and of folly, as we saw in In praise of folly: Part 1, the fantasies, and Part 2, the financials:

“So this unemployed architect walks into a bar and says, ‘our erections can last for years’.” 

If folly persists longer than four centuries, see your architect

Okay, maybe not precisely that cheesily, but something similarly whimsical had to have been in the minds of Boston Globe editors when they sent out an offer to under-employed architects, What would you do to beautify under-developed property? 

We asked designers to suggest ways to spruce up stalled building projects around the city.

Given this, what’s a CAD-CAM designer to do but crank up the fantasies?  As the Globe’s introduction said:

The ideas are not restrained by considerations of practicality or cost, and they are not meant to be.

Some are reality-based, some float in the Empyrean realms unfettered by the necessity for practicality, like these two:

Filene’s design #1: Design firms: Howeler + Yoon Architecture and Squared Design. The team proposes to build a vertical algae-powered bioreactor on the Filene’s site.  The structure would be composed of prefabricated modules, or “eco-pods,” containing materials to manufacture biofuels. The eco-pods would allow scientists to test algae species and methods of fuel extraction. The fuel produced by the algae would power robotic arms that could reconfigure the pods to enhance growing conditions.

Reason staggers at the impracticalities of this one. 

Why put eco-pods, whatever they are, in stacks that are on the one hand physically inaccessible – so that anything good derived has to be lifted out by antiseptic arachnid arms – and on the other hand in a high-people-traffic area, so that anything bad can infect the maximum number of zombies right away?

Rule Number 2: Double Tap

2. Policy and political consequences continue at the forefront of our news, in particular the potential for favoritism suggested by the Friends of Angelo programs as Countrywide, warranting a call to Open the books Countrywide:

“I would prefer not to, sir.”

Two years ago, two years after I’d called the market top and just as the subprime mess was beginning to break, in the form of New Century’s bankruptcy and problems alleged at Countrywide, I stuck up for Angelo Mozilo – or more precisely, I questioned the New York Times’s putative expose of Countrywide’s marketing and sales practices, of which the Times breathed a hot aura of indignation. 

Now I feel like a chump.

“Ah’m your worst nightmare”

[Snip]

It’s entirely possible that the VIP program could be legal, yet violate Congressional rules, which are much more strict.  For that matter, since when is ‘not-illegal’ the end of the matter? 

You’re so gullible, you’ll re-elect me

It added that of 28,000 VIP program borrowers, “the vast majority” were private citizens and not government officials.

That too is irrelevant.  Countrywide could well have been trying to influence private citizens – legitimately or illegitimately would not matter – and that by itself would be no necessary subject for Congress.  But if, among the VIP borrowers, we found that every single member of Congress received preferential treatment, and the amounts were substantial, how would the citizens react?

Aux armes, citoyens!

There’s a simple way to find out.

Open the books Countrywide.

Shortly thereafter – AHI gets results! – Congress did issue the subpoenas and start what is sure to be a protracted, tawdry, and political process.

An example of the power of Congress

3. Bank recapitalization featured in several posts, starting with my lighthearted look at debt repackaging in Remixing REMICS, or shake your booty:

If no one wants your pile of booty, perhaps you should try shaking things up  At first blush, that appears to be the strategy behind the proposed remixing of Real Estate Mortgage Investment Conduits (REMICs), as presented in a recent Wall Street Journal article:

I’m gonna shake it up

Once upon a time, Wall Street invented a nifty means of centrifuging, separating, refining off, then packaging and selling the resulting slices.  It was called ‘securitization‘ and everyone everywhere lived happily ever after again.

I’ve invested all our money with Bernie Madoff, honey

Or something like that ….

Debacle, period

We got a bit more serious at the ill-conceived proposal to have banks provide liquidity back to the FDIC, in The wrong move for all the wrong reasons:

The premise, therefore, is that this is real debt – just an advance.  But here comes the stinger:

What stinger?

– and ultimately would be paid by the rest of the industry.

“Paid by the rest of the industry” = “tax on their profits.”

Translated into money-speak, which bankers understand, I regulate you, so lend me some money that I’ll pay back by taxing you.

Or even simpler, gimme some money.

Pound notes, bad checks, loose change, anything!

Contrasted the World Bank and the Federal Housing Administration in Big, bad banks: Part 1, too big to fail? and Part 2, too bad to fund?:

In the space of a week, that question’s surfaced about two governmental banks – FHA in the US and the World Bank – in stories in the New York Times (which I’ll excerpt in plain text) and UK Telegraph (in indigo palatino), but as we’ll see, the source of the evidence, and hence the threat credibility, vary extraordinarily.  Let’s start with the World Bank:

The World Bank is close to ‘running out of money’, its president, Robert Zoellick, has disclosed.

World Bank president Robert Zoellick has launched a major campaign secure more funding from rich nations

“By the middle of next year we will face serious constraints,” said its president Robert Zoellick, as he launched a major campaign to persuade rich nations to pour more money into the Washington-based institution.

Formerly open for business

The bank gets its capital from developed nations, and then makes loans to developing nations.  If those nations do not repay as timely as expected, the bank may have capital (loans receivable) without cash.  Should those loans go bad – as commercial and residential loans do, as we have discovered – then the World Bank could become insolvent, but since its creditors are sovereign nations who as a general rule are not seeking repayments to pro up their own liquidity, a more practical outcome is an inability to lend further.

Lack of liquidity or total insolvency?

That’s less serious than the problem being alleged about FHA:

A year after Fannie Mae and Freddie Mac teetered, industry executives and Washington policy makers are worrying that another government mortgage giant could be the next housing domino.

Problems at the Federal Housing Administration, which guarantees mortgages with low down payments, are becoming so acute that some experts warn the agency might need a federal bailout.

As we’ll see, this appears to mean ‘one expert.’

Some expert reports are like a box of chocolates

 [Continued tomorrow in Part 2.]

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