By: David A. Smith

In yesterday’s post featuring a well-titled New York Times story, we focused mainly on the upside of premarital homebuying – how it tends to precipitate the decision to marry. 

Honey … I guess we’ve got to get married

Since it does, policy makers like to incentive the buying of first homes:

Pete Flint, the chief executive of Trulia, a real estate search engine, points out that people who have never bought a home make up a demographic tending toward the young and unmarried.

Enabling people to marry sooner ties to population growth, which ties to desirable national demographics.

And then there’s the federal tax credit for first-time home buyers [spotted as a worthwhile initiative by AHI in 2003 – Ed.], to expire on April 30, 2010, which will provide several thousand dollars in income tax relief.

With this tax credit, we multi-ethnic models were able to pretend we’re a family!

[Unless the recession turns around quickly, expect to see Congress extend the tax credit yet again – Ed.]

It offers federal income tax relief equal to 10% of the purchase price of a home — capped at $8,000 — for couples earning less than $150,000 and individuals earning less than $75,000.

As we saw in Great laws from little blog posts grow, the first-time home buyer credit really works – and now is an excellent time to be providing a stimulus to encourage young couples to move into home buying.

That deadline is lighting a fire under some couples in the serious, or almost-serious, stages of a relationship.

As we saw yesterday, the relationships’ degree of seriousness corresponds directly to whether the parties are willing to co-invest in a long-lived, illiquid asset of much more value to them jointly than individually.  Come to think of it, isn’t that a fair economic definition of marriage itself?  A long-lived asset.  Illiquid (hard to get out of).  Of minimal value separately. 

They worry that if they don’t act now, they may squander the best property-buying opportunity they will have for a while.

Or your mother won’t fund your down payment.

I’ve posted before on the many reasons why single-family homes are resistant to massive price drops; one reason is buyer anxiety about the availability of long-term secure tenure with investment potential.

There are also signs (or at least a feeling in the air) that the housing market could be picking up (including word that this [2009 – Ed.] may be a good year for Wall Street bonuses).

As we know, it was.

Mr. Flint said that trulia.com had received numerous e-mail messages from unmarried couples asking about the logistics — and wisdom — of buying a home together.

Many of the queries are about the first-time home buyer tax credit and how or whether it can be divided between people whose marital status doesn’t allow them to jointly file a tax return.

(The answer from the Internal Revenue Service: only one of the two people can claim the tax break if they are unmarried at the time of the sale. It cannot be divided, even if the couple marry later in the year.)

Things get dicey when you try to undo it

Marriage creates a legal institution – the marital couple.  It is an economic joining. 

Trulia posts such questions on a message board called Trulia Voices, and real estate professionals often chime in with answers. One of the notes on the board contained the following cautionary tale from a couple who split up, rather than marry, six months after buying a new house.

That’s why you should cohabit before you coinvest – you can dissolve the relationship a whole lot more easily than you can dissolve the economic partnership of co-owning a house.

One person in the pair had provided a 10% cash down payment on the home; the other borrowed 10%; and they both signed a mortgage for the remaining 80%. Once they decided to break up, their only recourse seemed to be to try and sell the house.

“Yet,” the e-mail post says, “only being six months into the house it would be difficult to break even (right?). He is in no financial position to take on the home himself and I would be strapped if I did.”

Ergo, don’t buy unless you’re sure.  In my case, I closed on a condo, got married days later, and then went on honeymoon.  We lived together only after we got married.

Real estate lawyers say that there are more complications for unmarried property owners who part ways than there are for married property owners who divorce — and a less clear process for resolving them.

Marriage’s economic fusion can be replicated with domestic partnerships; what cannot as yet be replicated are the favorable tax and health-care treatments accorded the legally married.

Is that a rhetorical question, or what?

“By default, our laws are suited for married couples acquiring assets,” says Luigi Rosabianca, a real estate lawyer in Manhattan.

Because if you’re not married, you’re unlikely to be sharing assets, and the assets you’ll be sharing are chattel – portable – hence subject to a ready division.

Under New York State law, he explains, a husband and wife are considered “tenants by the entirety” when they buy property.  

State laws vary, but in general, they are construed for the benefit of surviving spouses – an important default benefit not generally extended to civic domestic partnerships.

That ensures, among other things, that the property will automatically transfer to the surviving spouse if one person dies.

Marriage, in short, is a bond accorded a higher status than a simple partnership.  That principle is believable and logical (and a refutation of the claim that civic domestic partnerships can give all the same benefits).

“If you are not married, you have to fill in the blanks,” Mr. Rosabianca said. Toward that end, he recommends that unmarried couples consider signing what amounts to a pre-prenuptial — legal agreements specifying the unknowns, including “who contributes what percentage of the expenses, mortgage, taxes, common charges, utilities.”   He added, “You also have to account for capital gains — what percentage goes to whom.”

All of these are simply negotiating contingencies against the exit.  If, when being married, you pledge and mean the ’til death do us part, then none of them matter.  But if you’re buying property and are not married, then the question is – Well, why not?  You must be contemplating the possibility of sepaqrating.

And there can be other issues. “Say this house is close to your mother,” Mr. Rosabianca said. It may be wise to sign an agreement saying, “If we break up, you have to buy me out, because I don’t want to live near your mother.”

Uh … even if we don’t break up? 

This would be less of a problem if I had no one in common with you

Couldn’t that be a problem for a married couple going through a divorce as well?

“With a married couple that would probably be handled with the divorce,” he said. With an unmarried couple “it’s almost more prudent to be proactive in addressing these concerns.”

No, I get the villa, you take the mansion

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So good is the New York Times’s headline for this story – adapted from Christopher Marlowe – that I cannot improve upon it:

Come live with me and be my Love

And we will all the pleasures prove

– Christopher Marlowe

Shakespeare’s contemporary and competitor

So intertwined with our notions of family are our feelings about housing that we use tenure terms as shorthand for relationship status – we speak of living together, moving in together, or setting up house.  The shorthand works for reasons both superficial – living together implies sleeping together, and we know what that means – and economically profound, because finances are as messy to commingle as fluids, and just as hard to separate.

Thought-provoking but counterfactual

Chuck Haberstroh and Jacque Horelik went to high school together in Westport, Conn., but they did not know each other then. They met by chance during college, when she visited a mutual friend at Lehigh University, where he was a student. A few years later they crossed paths back home in Westport and went on a date to a cool pub and restaurant. Things were a bit on and off for a while, but then they began to get serious.

Because housing cost is size-dependent, and housing demand is elastic, the appeal of moving in with someone for whom one feels intimate is partly the ability to move out on those where toothbrush-mingling is less acceptable.

He lived in a house in nearby Norwalk with a bunch of male buddies; she moved to the place next door with her sister and a couple of friends.

Cohabitation changes the relationship because what once was an event – we are getting together – becomes the absence of an event.  Making coexistence less eventful has an up-or-out effect: it deepens some relationships and destroys the magic of others.

She started spending all of her time at his place, so she ditched her room and moved in with him.

Cohabitation has relationship significance.

Whose is whose?

Commingling capital has more relationship significance.

A few months later, they signed a lease on a small apartment of their own.

As we all know, among the great advantages of rental is its ease of entry and exit.   Establishment costs are low – sign a lease and pay a security deposit – and capital at risk is likewise low. 

Commingling your future has the most significance of all.

He was in his late 20s, she was two years younger. They had been together for two years. They made each other laugh, they liked each other’s friends, they loved each other’s company. And so they knew — as everyone seemed to be telling them — that it was time.

To buy real estate.

Chuck Haberstroh, 30, and Jacque Horelik, 28, haven’t set the date, but they have bought a home. “We may never see such a buyer-friendly environment again,” Ms. Horelik said.

We all know that making the decision to marry is fraught with symbolism and emotional complexity, to the point where the parties themselves may doubt their intentions and commitment.  Buying the house, while seemingly simpler, is actually clarifying – if you can imagine jointly investing your independence into an illiquid financial asset, whose payoff will be only many years in the future, then maybe your wallet is telling you something your brain is reluctant to acknowledge.

And for Mr. Haberstroh and Ms. Horelik, both the real estate and the relationship have now fallen into place, to the delight of Ms. Horelik’s family, who are of the wedding-before-house school.

The first night they slept in their new home, they got engaged.

I suspect similar real-estate-clarifies moments occur frequently in relationship development – it certainly did in my case.  I’d been living in a big dusty rent-controlled apartment – let me be clear, I was not in favor of rent control, but in the People’s Republic of Cambridge it was illegal to pay more than the Rent Control Board approved rent – and Nancy thought it time I should be investing into an owned home or condo.  Since I didn’t care, she undertook to look for places, and as she toured them, she realized after a while that she was rejecting candidates not because they’d be bad for me, but because they were unacceptable to her.  “Once I realized that,” she told me, “it meant I couldn’t envision a future without you.”

Two distinct forms of desire — the carnal type and the kind that involves granite countertops — have been known to intermingle, but perhaps never more so than now.

How buffed are your countertops?

Aside from the financial consequences, there are also procreative ones.  Move out of your parents’ house, move in with your girlfriend or boyfriend, and more bedrooms mean more babies.

New York and its environs have always been places where real estate can drive relationships, for better or for worse (think of the marriages that have lingered for far too long because neither spouse can afford to move out of the Classic 6).

I previously explored that in staying together for the sake of the bills:

Because housing demand is elastic, there’s a direct correlation between housing consumption and family size.  It works going upward (more bedrooms means more babies) and the same dynamic works unhappily in reverse – people who no longer wish to live together nevertheless cannot afford to live apart:

Lisa Decker, a certified divorce financial analyst in Atlanta, said she was seeing couples who were determined to stay together even after divorce because they could not sell their home, a phenomenon rarely seen before outside Manhattan.

If you are what you live in, what you live in can become what you are. 

Marriage is always an economic decision, especially with most people seeing it as the gateway to parenthood:

But the peculiarities of the housing market today are leading more couples to ponder the question, “Should we buy?” before they settle the question, “Should we commit?”

They’re intertwined.

Whom mortgage obligations has joined together, let no one put asunder

Mr. Haberstroh, now 30 and a vice president of CastleKeep Investment Advisors in Westport, said the market dictated which question he and Ms. Horelik tackled first.

“When the market started to turn in the buyer’s favor,” he said, “we decided we had to take advantage of that.”

“My whole thing was with this market, get the house — the one you want and love — first,” Mr. Haberstroh said.

He may not like it, but I’ve got him by the bulge

Buying a house is as precipitating an event as pregnancy – it’s an instant where a continuously rising level of affection and desire is converted into a discontinuous and hard-to-reverse change in status:

That wasn’t entirely her whole thing. “I was itching to get engaged before we bought the house,” said Ms. Horelik, 28, a teacher who works with special education students. “Chuck definitely felt the pressure from me and both of our families.”

I’m surprised the would-be in-laws weren’t hinting about down-payment assistance. 

“There are just so many things you can lose out on” if you wait, said Elaine Matthews, 27, an actress and dancer who is in contract to buy a condominium in Greenpoint, Brooklyn, with her boyfriend of 16 months, Sean MacLaughlin. They hope to close on the property — a brand-new 1,200-square-foot ground-floor duplex with a backyard, a deck and a white picket fence — at the end of February or the beginning of March.

Elaine Matthews, 28, and Sean MacLaughlin, 31, plan to get engaged; meanwhile they are under contract to buy a condominium in Greenpoint, Brooklyn.

Ms. Matthews and Mr. MacLaughlin, a 31-year-old actor, met while performing with the touring company of “The Phantom of the Opera,” and have spent most of their relationship on the road, living in hotels.

“New York rents are very high and you never see that money again,” Ms. Matthews said. She went on to list the benefits of buying: “We got a great mortgage rate, 4.75,” she said. In addition, owners of units in new developments in New York City can take advantage of a program that phases in property taxes over a period of 10 years.

One of the many ways governments incentivize homeownership.

Mr. MacLaughlin said: “We were talking about getting married and I said, ‘Wait a minute, if we just put off the ring, we’ll get the apartment first.’ ”

A good illustration of the difference between symbolic and practical expenditures. 

At $522,000, the apartment costs a good deal more than most rings, but Ms. Matthews said the price was about $60,000 less than what a similar unit in a complex by the same developer went for two years ago.

But then, love is supposed to be about being impractical, isn’t it?  Practicality comes when the relationship ends …

Or half of the equity in a property?

[Continued tomorrow in Part 2.]

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[Continued from yesterday's Part 1.]

Yesterday, riffing off a thought-provoking Harvard Business Review op-ed by Lawrence Candell from MIT’s Lincoln Laboratories, we envisioned the composition of a Financial Invention Review Board (FIRB), and bestowed upon it hypothetical powers.

“That’s a lot of powers!”

Creating a new entity and bestowing upon it such far-reaching powers will be difficult enough (imagine the howls of outrage from Wall Street, especially when the politicians succumb to the well-nigh-irresistible temptation to tax all banks to pay for it), so both policy prudence and political practically positively prescribe pruning potential problems pre-presentation.

This FIRB, being a US government entity, would have no jurisdiction beyond America, so that if its review standards were too strict, new FP’s would be introduced globally before they were used in America.  This situation is akin to the FDA, which routinely is more rigorous in its evaluation of drugs that some global jurisdictions, and to the SEC, whose jurisdiction likewise stops at the limits of our shores.  Global competition would then arise among various financial-product regulatory environments, and that might well be acceptable.  Just as you had to travel to Finland for Rogaine (when it was known as the Helsinki formula) or to Mexico for Laetril (sorry, Steve McQueen), you might choose to expatriate some capital and invest it in a whizzo new French security. 

A French security certified by Nicholas Sarkozy himself

Though Mr. Candell proposes to allow the FIRB to design, to me that exceeds its appropriate function.  Analyze, prototype, and troubleshoot is plenty of scope and authority.  How do we constitute this paragon of inventiveness?

That would mean hiring top talent from a wide range of disciplines in both academia and industry in order to provide a high-level systems perspective on problems.

While some become expert purely from the sidelines, most top talent gets to be top talent by working in business.  For the system to work, therefore, we need to capture solons – people who’ve built their pile in industry and now want to give back not their dollars but their wisdom, or those in mid-career or early career who will leave some money on the table in exchange for the satisfaction of national service and being in the intellectual forefront. 

(Yes, Virginia, there are such people.)

The FIRB thus has to have roughly these requirements and limitations:

Financial Invention Review Board: requirements and limitations

1. No conflicts of interest by any executive, director, or shareholder.  (Might mean requiring all investments to be placed in a blind trust.)

2. No revolving door: if you work for the FIRB, you cannot work for, consult for, or invest in any FIRB-issuing entity for at least [three] years thereafter, and cannot derive compensation from any FIRB entity during your term plus three years.

3. Strong confidentiality requirements, especially of withdrawn (non-issued) products.

4. Free review of any proposed Financial Product.  (Although it’s been done sometimes, it’s hard to charge for a mandatory review, particularly as we want to preclude all possible excuses for not submitting.)

5. Federal funding of operations regardless of its decisions.  Immune to political pressure and independent of other regulatory bodies (e.g. SEC, Fed).

6. Pay well enough to attract top talent (including post-private-sector), even after considering the conflict of interest and revolving-door requirements.

Funding is critical:

It would mean having the resources to build rapid prototypes and surrogate test beds—not anywhere near industrial production capacity but sufficient to inform a full-scale approach.

Whoops – here Mr. Candell’s orientation in the physical sciences leads him astray.  One can built a prototype of the B-2 bomber, and even test it under field conditions, without necessarily breaching its secrecy.  That doesn’t work with financial products – once you introduce an idea to investors, people can replicate it, reverse-engineer it, or simulate it.

“Well, sir, we definitely grab the boat”

It also raises a boundary or definitional issue of no small difficulty.  What constitutes a “financial innovation”?  What is the difference between a small tweak of a previously approved product – assuming the FIRB exists, that is – and this little wrinkle?  What if two financial products are perfectly safe used in isolation, but fissionable when combined?

“Now you may ask, ‘Joker, where can I get these fine products?’  Well, you may already have!”

Lincoln Labs and its like work because DoD is a monopsony – the sole consumer of certain products.  If Boeing’s design for a new weapon is rejected, it cannot sell that weapon to any other national defense industry – and we know that the design cost of military hardware is a huge barrier to entry, so in all practical fact, if DoD doesn’t buy your new prototype, it will not get made.

That doesn’t work in financial products, which can be replicated overseas in a New York (or London!) minute.

A better analog is the FDA, which recognizes that its review stodginess means some products become available in Europe long before they are in the States.  Here too we encounter a bit of a problem, since drugs, even if tiny, are physical objects that must be shipped from place to place, whereas money, being dematerialized, can be anywhere at any time.  Even more troubling, we can create domestic instruments to mirror the performance of international ones – ADRs do just this with stocks.  That means an investor buying a US ADR that maps onto a European security is buying, in the United States, the economic equivalent of an instrument that cannot be sold in the United States.  We tolerate that for listed instruments – should we consider prohibiting ADR’s of non-public FIRB-unapproved financial products?

It would mean transferring lessons learned to the industrial base, in part by establishing requirements for novel financial instruments and providing guidance to financial regulators.

What would be the penalty for non-compliance with FIRB requirements?  How about criminal liability for selling an unreviewed product later found to have required a FIRB review? 

Mind your head, sir, the press may attack

That would put a potent weapon in the tort lawyers’ hands, since the originators of a security would be exposed for many years.  Required disclosure could be imposed on the entities’ chief executives (”I’m Lloyd Blankfein and I approve this financial instrument”), making the FIRB-certifier a position as dicey as that of a public-company CFO.  (Come to think of it, the CFO should also be a FIRB-certifier, in addition to the product’s principal architect.)

The sheer complexity of the financial system may lead some to believe that such a center could never attain what our national-security-focused labs strive for: a deep understanding of the threats we face, and the know-how to design systems that respond to them.

I doubt the market’s fear is lack of understanding.  My guess is it’s fear of FIRB cost, fear of FIRB delay, fear of FIRB incomprehension/ ignorance/ stupidity, or fear that the FIRB could be subverted.

The only thing we have to fear is the FIRB itselfr

Unlike defense procurement, this problem area may have too many degrees of freedom and too few immutable laws and principles to guide us to some useful solutions.

Certainly, it has much less to control the experiment – by the time you find out (say) CDS’s in combination with securitizations were a dangerous mixture and you under-escrowed for them, you’ve nuked a million 401(k)’s. 

The center would have the greatest possible impact if its efforts were focused at the right level. They should complement rather than duplicate what researchers in academia are already doing, and should therefore target large-scale problems and aim to provide insights that would shape national policy.

Easy to say, hard to do.  Like the Supreme Court, the FIRB could not create a fact pattern just for the pleasure of ruling on it.  Instead the FIRB would have to review applications that came to it, and potentially be drowned in submissions.  (Some investment banks might employ the nefarious strategy of submitting dozens upon dozens of new financial products, with a view to overloading the system and then complaining about its slow response.  If you think investment banks wouldn’t be that cynical, I envy you your happy, trusting life.)

The Promise.

There is little risk in trying.

I wouldn’t go that far – there’s cost (to create it and fund it from the government, and the temptation to tax banks to pay for it would be well-night irresistible), and there’s risk in the possibility of squelching needed innovation and making America uncompetitive in global capital markets.  We also know the howls of agony that would reverberate through Wall Street’s canyons if anyone so much as hinted this might occur – it would need to be imposed by swift fiat or not at all.

That’s a mighty swift Fiat!

To sum up, it looks like this:

Could this work?  I don’t know … but it’s worth thinking hard about.

I’ll take it under consideration

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By: David A. Smith

Before we unleash a new financial drug on the world, might it require some clinical field trials?   That question lies behind a fascinating Harvard Business Review op-ed by of all people and places, Lawrence Candell from MIT’s Lincoln Laboratories:

What can you do in a democracy when you rely on the private sector for solutions in an area of critical national importance?

The few … the proud … the highly paid

The abstract answer is, contract purely technical functions, reserve essentially governmental functions for publicly accountable bodies.  But that answer begs the next question: what functions are sufficiently technical?

One inherently governmental function is the setting of compulsory standards (of disclosure, capitalization, or trading).  With a few exceptions, that business of compulsory standard-setting cannot be left to private entities, for they invariably either form cartels or structure the rules to maximize their upside and minimize their downside.  Enter the government:

In the case of US national defense, the government funds nonprofit research centers like the one I work for—MIT Lincoln Laboratory, in Lexington, Massachusetts.

Massachusetts is a hotbed of ideas

Can this approach be applied to financial products? 

Right now, we have seen the emergence of standard-setting or standard-scoring bodies of greater or lesser independence, sophistication, standard-imposing power, and effectiveness: FASB, the Basel II accords, SEC, and the rating agencies.  None of them is really akin to Lincoln Labs, or its fellow travelers of Greater Cambridge – in this context, both Lexington and Boston may be considered satraps of Greater Cambridge – which is a veritable hotbed of such entities, with MITRE and DARPA. 

And Lincoln Labs, where they build things

These centers are stocked with technology experts and innovation capabilities [A] as good as those to be found in industry, but [B] they answer only to the public, [C] not to profit-seeking shareholders.

Mr. Candell’s summary contains three suppositions: equality of capability, public accountability, and non-profit status.  The third of these, [C] non-profit status, is in my view not essential, since non-profits can in some cases be just as venal as for-profit entities.  A better formulation for [C] is that Testing Centers be [C] free from potential conflicts of interest, a condition which can be achieved in several different ways (to which we’ll return below).

[D] Seated across the table from large defense contractors, [E] federally funded R&D centers function as independent honest brokers:

Now Mr. Candell’s summary adds two postulates to give the Testing Centers clout: [D] mandatory pre-usage engagement between the proponent and the Testing Center, and [E] government funding of the Testing Center.

They allow innovative defense contractors to thrive, as the system needs them to do, but they also check the contractors’ occasional temptation to do what is most profitable rather than what is really needed.

Mmm … profits

I’m no expert on defense-contractor review, and Mr. Candell is, so let’s take as fact his assertion of the Testing Centers’ effectiveness both in checking the taking of unnecessary financial risk (by the government) and in not inhibiting the free.  Can this be made to work in finance?

These centers clearly perform a valuable function, and the cost of funding their expertise is less than 1% of the Defense Department’s budget.

Well, 1% of DoD’s $650 billion is still a gargantuan number – but if the Testing Centers really perform the function, that would be money well spent.  And that much money would buy you a lot of smart reviewers.

As the financial crisis erupted in late 2008, some of my colleagues and I couldn’t help wondering why there was no similar setup in the financial industry.

There was supposed to be such a setup.  They were called ‘rating agencies’ and they abdicated their responsibilities, preferring to become symbiotes of those they were rating.

Here was another area of extreme national importance. Why didn’t the wizards who were devising new financial instruments in the private sector have a mirror image operating in behalf of the public?

Here’s a key point.  Rating agencies were never set up to be mirrors, nor to be windows.  They are oracular, and held themselves out as reliable even if inscrutable.  Unfortunately, we learned that behind that inscrutability was unreliability.

I have all the answers right here

Of course, there are many public-spirited experts developing and studying next-generation financial solutions at our universities—just as there are many professors working on military technology. But that academic contingent can’t be expected to protect the public interest.

Of course not, for many reasons.  (1) They are not chartered with protecting the public interest, so they have no standing to intervene, making independent protest so much noise.  (2) They have other things to do – you know, like teach – and can choose to research in their spare time.  (3) In pursuit of intellectual freedom, they resist being slaved to tasks imposed by others.  (4) In terms of resources brought to bear on individual DoD-related problems, they’re massively outgunned.

I’m only interested in knowledge

To decide how best to invest its resources, the Department of Defense needs understanding and guidance at the systems level. The same would seem to be true for a financial industry that annually moves trillions of dollars.

The Breakthrough Idea

Let’s federally fund an R&D center that, borrowing the best practices of defense research centers, could design, analyze, prototype, and troubleshoot financial innovations, making sure they promoted our economic security and prosperity.

Let’s think out-of-the-egg, shall we?

At this point in the article, I said to myself, Hmm … how could this be made to work?

To start with, why hasn’t it been tried up to now?  Several reasons:

1. We didn’t know we needed it.  The industry was unregulated and new innovations are generally unregulated.

2. The difficulty of specifying which innovations are material enough to warrant scrutiny.

3. The last fifteen years saw a net deregulation, as financial products evolved much faster than regulatory thinking about them.  As the new instruments gained market share, the percentage of financial instruments subject to this kind of scrutiny shrank.

4. The talent updraft.  Private-sector employers can and do generally pay much better than their public-sector counterparts.

In any outgunned situation, you need to change the rules, to balance the tension, by providing the government side with something that compensates for its lack of gunnery.  Mr. Candell implicitly addresses these with his last two points (D and E) – standing granted by making the review mandatory, and Federal funding adequate to pay for very smart people.

You vant to sell your decadent innovative securities, tovarisch, you pass our checkpoint.

To create these conditions in our imagined Financial Invention Review Board (FIRB), the nation would need (a) a pre-review of every new type of financial product [Or else what? See below. – Ed.], and (b) delegation of review authority – including signoff authority – to the newly created and fully independent FIRB.

The FIRB would then have the following powers:

Financial Invention Review Board: powers

1. To prohibit sale in the United States of a particular financial product (FP), even to sophisticated investors.  [Or else what? See below. – Ed.]

2. To mandate disclosure requirements for said FP.  These would go beyond the ‘omit no material fact’ standard representation in offering circulars; it would be much more like an SEC S-1 review, with the FIRB able to demand additional information and to compel its disclosure before approving a sale.

3. To require the issuer or banker of said FP to post liquid collateral, with a secure and independent escrow agent, equal to some ratio established by the FIRB.  The FIRB could change the required ratios from time to time, presumably by lowering them based on greater experience.

Want to have power over all finance?  Read on!

[Continued tomorrow in Part 2.]

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Smoking isn’t illegal, yet so demonized has it become in America’s urban cores that creeping illegalization seems close at hand by its gradual eviction from any inhabited space.  Consider this little morality play from New York Times:

The movement to ban smoking in New York City has grown so quickly that no place seems immune — certainly not restaurants or bars, and public beaches and parks may not be far behind. Now the efforts are rapidly expanding into the living room.

More landlords are moving to prohibit smoking in their apartment buildings, telling prospective tenants they can be evicted if they light up in them.

Coming soon to an apartment near you?

People who do not smoke (full disclosure: I’m one of them) can find the smell of stale tobacco smoke not merely unpleasant but nauseating – so there’s a market segment which strongly prefers non-smoking environments.  Conversely, people who smoke want to be able to do so during the day and evening – so there’s a market segment for smoking environments as well.  And although it’s illegal in America to discriminate on the basis of race, creed, or place or national origin, it’s legal to discriminate on everything else – so one can imagine a company reaching the conclusion that offering a non-smoking-only option is sound marketing.

This month, the Related Companies will ban smoking at some of its downtown apartment buildings –

A marketing decision?  Or something more sinister?

– because of health concerns about secondhand smoke, according to company officials.

Will we succumb to the tyranny of the tort lawyers? 

Smokers who already live in any of these buildings will not be affected, according to Jeff Brodsky, a president of Related, which is a national developer with 17 buildings in Manhattan.

But any new renters must promise not to smoke at home, even if they continue to elsewhere.

That’s just prohibition in slow-motion.

That’ll be a stop to it

Kenbar Management, a local developer, is going a step further. When its new project, 1510 Lexington Avenue, opens in December, smoking will be banned in all 298 units, in addition to private and shared terraces.

Aside from questions of marketing and customer preference, fundamental issues of rights come into conflict here.  If a man’s home is his castle, then I should be able to do within its walls anything I want that does endanger or materially inconvenience my neighbors.  When I share property with others – as in a high-rise apartment – then the pervasiveness of odors raises new challenges, because my right of quiet enjoyment rubs up against yours.  Apartment owners – or co-op boards, or condo associations, who stand in the same relation – have to balance competing rights and preferences.  Further, they have to comply with laws which in the name of public health (or otherwise) have marginalized, ostracized, or quasi-banned activity that is legal but frowned upon.

And the typical smoker’s refuge — directly outside the building — is also off limits; tenants must agree not to smoke on any of the sidewalks that wrap around the building, which takes up most of a block in East Harlem, according to Kinne Yon, a Kenbar principal.

We already have public-nuisance statutes banning smokers from congregating near office-building doors.

Only outside, and a certain distance away

The trend has predictably divided smokers and nonsmokers in New York.

“I think it’s absolutely absurd,” said Bryan Marx, 53, a cabinetmaker who has lived at Tribeca Park, a Related building on Chambers Street, since 1999. He smokes hand-rolled cigarettes in his apartment, but said that he cut back on a cigar habit a few years ago to appease a neighbor.

“How about a little tolerance?” Mr. Marx added. “Smokers have become the whipping boys for everything that’s unhealthy about living in New York City.”

BRYAN MARX–Bryan Marx, 53, a smoker who lives at Tribeca Park in Manhattan, said a ban in apartments would be “absolutely absurd.”

One has to love the Times’s visual editorializing: could Mr. Marx have possibly been photographed from a more surreptitious angle?

Across the country, the movement to ban smoking in residential buildings is gaining traction. The Department of Housing and Urban Development has strongly encouraged public housing agencies to ban smoking in some or all of their units.

Just as it makes eminent sense to have some apartments handicapped-accessible, it makes eminent sense to have some buildings smoke-free. 

So far, about 50 public housing agencies have now forbidden smoking, according to Betsy Feigin Befus, a lawyer with the National Multi Housing Council, a landlord trade group that has tracked the efforts.

That’s not just blowing smoke

I cannot see how a public agency could ban a legal activity in all of its buildings.  Surely there will be a test case litigated on this point.

New York City has been at the forefront of efforts to ban smoking in bars and restaurants, and the city’s health commissioner, Dr. Thomas A. Farley, said in September that he supported a ban on smoking at city beaches and parks. But the city, he said, has no plan to push for a smoking ban in public housing developments.

Litigation is likely to ensue on this as well:

Other cities, through legislation or by initiatives of developers, have taken similar steps. In California, for example, all apartments and condos in Richmond, near San Francisco, must outlaw cigarette smoking, according to an ordinance passed in July. Across the bay in Belmont, a ban on smoking in apartments took effect in January after a 14-month grace period, with $100 fines possible for offenders.

Presumably the anti-smoking ordinances are on health grounds – namely that secondhand smoke is sufficiently noxious as to constitute a public health hazard.  If that is so, why is smoking legal? 

(By the way, if cigarette smoking is banned but marijuana smoking is permitted for ‘medicinal purposes,’ whose health wins: mine or my high neighbor’s?)

Well, I might get glaucoma some day!

While there is no question about the dangers of secondhand smoke [at what levels of exposure? --- Ed.], there is debate about whether the amount of smoke that may be transmitted from one apartment to another is harmful. A recent study by New York City’s health department found that about 57% of nonsmokers had been exposed to substantial levels of cigarette smoke, raising suspicions among experts that apartment dwellers might be susceptible to secondhand smoke from their neighbors.

Who defines ’substantial’?

Pan Am Equities, a real estate management company, may have been one of the first in New York to introduce a smoking ban to an apartment building. About 18 months ago, the company asked new renters to promise not to smoke; the ban did not affect existing tenants, according to David Iwanier, a company vice president.

There’s a difference between asking and banning.  There’s a difference between having some no-smoking buildings and having all of them no-smoking.  There’s a difference between a private landlord, who is competing in the marketplace, and a public housing authority, which has a mission to house everybody.

There’s also a difference between taxing and prohibiting

Co-ops and condominiums have been somewhat slower to embrace such bans, according to real estate lawyers.

They fear loss of resale value.

A poll commissioned by the NYC Coalition for a Smoke Free City suggested that a residential smoking ban might not hurt rentals or sales. The survey of 1,000 New Yorkers, which was administered by Zogby International in July, found that 58% would pay more to live in smoke-free housing; 68% might not live in a smoking building in the first place.

Setting aside the announced bias of the poll’s commissioners, the poll doesn’t show anything of the sort.  That some people might pay a little more (how much is unstated) wouldn’t counterbalance the effect of eliminating 20% of the population, and perhaps 25-30% of the households, from your resident pool.

You’d be in a health twilight if that were tobacco, you know

That 950,000 New Yorkers — or 16% of the population — call themselves smokers, according to the city’s health department, is not insignificant, said Daniel Baum, chief executive at the Developers Group/The Real Estate Group of New York, a brokerage that focuses on rentals.

“I think in general it’s probably not an ideal time to try to limit potential tenants,” Mr. Baum said. “Every occupied apartment counts.”

And Audrey Silk, the founder of Citizens Lobbying Against Smoker Harassment, a nine-year-old advocacy group, said the trend was troubling from a civil liberties perspective.

At least we know where they’re coming from.

“If we’re talking about annoying odors, where do you draw the line?” she said. “What about cooking odors, from fish or curry?”

In A Wild and Crazy Guy (1978), Steve Martin explained how, when asked by a fellow passenger on an airplane, “Mind if I smoke?” he would answer, “No, mind if I fart?”

“It’s one of my habits!”

“Yeah, they got a special section on airplanes for me now.”

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