[Continued from yesterday's Part 3 ,and the previous Part 2and Part 1.]

In yesterday’s post continuing our series on the enemies within of slum upgrading, we encountered the vociferous and conveniently righteous landlords, who stand to lose their questionable livelihoods when they face new, better competition.  Next up are those who, for one reason or another, like the slum as it is now.

Kibera in 2005: phone service for sale

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.

0213_kib

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. 

1.  Rabblerousers and demagogues

Where there are slums, there are votes to be captured, by making promises of brave deeds to be accomplished if only, or whenever.  Brave promises that are never broken because those promising somehow never have the right power at the right time.  Consider this example, from Slum upgrading initiatives in Kenya by South Africa’s Marie Huchzermeyer:

However, tenants in parts of Kibera (e.g. Gatwekera Village) under encouragement from their Councillor, have already stopped paying rent.  In short-sighted political self-interest, the Councillor has promised these tenants slum upgrading with free housing. 

Doesn’t sound short-sighted at all; the councilor makes a promise that secures votes.  If the government does not come through, the councilor tells people, you have to support me more strongly the next time.  Unfulfilled promises are the political vaporware that keeps on giving.

The tenants justify non-payment on the basis that structure owners have benefited in the past and that it is now the tenants’ turn to benefit from the slum upgrading.

Particularly in Kenya, whose land-use and housing history is redolent of broken promises:

Josephat Mukuna, 37, says the new housing programme is reminiscent of the Highrise National Housing Corporation project, in which he contributed money, only for outsiders to take all the houses upon completion.

04: Mr Josephat Mukuna says he cannot pay the Sh 1,000 rent for new houses.

The Highrise National Housing Corporation is a visible national disgrace.  Worse is that its towers stand right at Soweto East’s edges, where Kiberans daily will pass by them twice, once outbound to work, once homeward.

Kibera in 2005: HNHC towers at the entrance to Soweto East

“I am not prepared to leave for now. I know this project is based on falsehood and the

Government wants to just get us out of Kibera, demolish our houses, chase us from the new buildings and leave us as IDPs.”

What can one say to Mr. Mukuna – you’re crazy?  He has seen this happen before.  Why should this time be different?

“I am not ready for that,” says Mukuna, a father of four who has been a tenant in Kibera for the past 18 years.

Kenya’s government must prove Mr. Mukuna wrong.   Will it? 

2.  Criminals living in or off of the slum

Crime flourishes in slums.  Further, crime uses slums, and slums create external crime.  If everyone is illegal, then land and property ownership depend on who you know, or who you’ve paid off.

Professor Marie Huchzermeyer, a professor at the School of Architecture at the University of the Witwatersrand in Johannesburg, says … due to the existence of a deeply corrupt system of land allocation and profit extraction over the decades, 80% of Kibera residents are tenants of illegal structure owners.

She says residents fear the slum redevelopment will lead to displacement due to non-affordability and corruption.

Strangely enough, very few chronic bribe recipients will raise their hands and claim entitlement to being bribed.  Far better to find a useful spokesperson – preferably a Kiberan herself – and fill her full of irrational fears whose consequences coincide with stopping the slum redevelopment and thereby reducing the bribes as a source of income.

Kibera in 2005: Friendly Hair Salon

“Among residents and decision-makers slum upgrading is understood to mean demolition and construction of housing. Therefore considerable awareness raising will be necessary before upgrading can be implemented,” she says.

Awareness-raising?  Or bribe reduction?

3. People who want the lowest-cost housing regardless of quality

Some people live in a slum because they care little about their housing quality, and much about its cost. 

Tenants opposed to the move say they cannot afford Sh 1,000 monthly rent for the new housing units –– besides many other reasons.

Beatrice Omondi, 37, has already packed her belongings and is now awaiting the day the ministry officials will go with the National Youth Service trucks to move them.

Kibera in 2005: pub upstairs

“I have packed them in boxes and I can’t unpack. I am so elated,” she says.

The mother of four has lived in the shanties since 1987 and never thought even in her wildest dreams one day she would have the opportunity to live in a stone house, let alone own one.

From my visit four years ago, I remember doing the arithmetic.  When the total costs of occupancy are factored in – including water and sanitation – those living in Kibera now should be able to afford a single room in a three-room flat

“It’s a new life we are being given,” she says. At the moment, she lives in a rented three mud houses at the heart of the slum with her husband and four children.

She pays Sh3,000 in rent but her monthly bill go up to Sh4,000 because each member of the family pays Sh3 every time they go to the toilet, Sh5 for bathrooms and Sh300 for electricity.

That’s why they can afford it.

Omondi operates a small food cafe and also imports clothes and shoes from Uganda.

Business flourishes in slums.

Kibera in 2005: Baked goods cooling

Some women fear they may not be allowed to use firewood in the new houses.

They may not be.  Those building the new houses need to think through such issues.

Jane Ngolyo, 76, who sells groceries, told us that her future looks bleak if she is to move to the new houses.

“I know the city council will not allow me to operate my small business there so I will be left without any income to pay their rent and feed myself. They will eventually evict me and throw in the streets without anything to eat,” she says.

She has lived in Soweto for 30 years. She says she can only afford to pay the Sh300 that she has been paying at her current house. This is because she earns between Sh50 and Sh100 from her business.

There will be displacement of some worthy households.  I hope there is a relocation/ adjustment plan.

Kibera in 2005: The undeveloped decanting site

Lastly – and the most difficult enemies to address, because they would be offended to be called enemies of progress – are those idealists for whom any compromise is a taint, whose belief in the ideal trumps any concession to practicality.  People who suggest solutions like this:

As a first step for Nairobi’s slums, with immediate effect and at very little cost, the patronage by provincial officials (referred to as ‘chiefs’) in corruptly allocating land and extracting fees for improvements made by structure owners could be stopped.  The chiefs’ interests are illegitimate and unlawful and they would need no compensation for loss of livelihood.  This intervention would not require resources, but instead the level of political will that was present in various anti-corruption initiatives by the new Kenyan government in the past three years.

Why didn’t I think of that?

Maybe because it’s impractical, D

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[Continued from Thursday, October 29^th Part 2 and the previous Part 1.]

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:

The landlords are bitter because they are about to lose property that has been their source of livelihood for decades. They therefore want compensation.

Do the landlords have legal title to their property?

Most of the about 500 landlords in Soweto-East village have been earning their daily bread from the shanties they own in the slum, some for up to 30 years.

They own the shacks by right of incumbency, and by right of force.

The proposed demolition of the structures once the tenants are relocated has caused fury among the owners, who insist they must be compensated since they will lose land and other property.

I’ve been told – unverified – that a structure owner recoups his capital investment (in the structure, that is) in a handful of months.  I doubt this – the payoffs to the enforcement-protection structure likely consume a major slice of his Net Operating Income.

Kibera in 2005: Bakery in the slum

In any case, the slumlords are vocal:

One of the landlords is Cyrus Kimemia who earns Sh18,000 from 24 structures.

That’s Sh 750 per month, as compared with Sh 1,000 per month in rent for a solid, one-room embryo house.  No wonder Mr. Kimemia feels threatened.

The father of five has lived in Kibera for 24 years and says the then-DO gave him the land in 1984.

‘Gave’ him the land?  Who was this person, and was the land his to give?  Did such a person even exist?   When there is no title system, no claim can be refuted.  Property rights inure solely based on current power, and that implies current bribery.

Upon retiring as a clerk with the Postal Corporation of Kenya, he says he used part of his Sh240,000 retirement payout to buy more land on which he built more structures.

He says.  Still, I was told that more than half of all structure owners are civil servants.

How can the government expect to enforce anti-slumlord laws when half of those doing the enforcing are slumlords by night?

Coined in the Spanish Civil War

“That is why I feel so much pain as I cannot just sit back and watch as my retirement benefits disappear. I want to be given title deeds for my plots or relocated,” he says.

Irresolution is the enemy of reinvestment.

Also to be affected is Millicent Anyango, a mother of six, who is a widow. The 32-year-old landlady owns seven houses. “I stay in two of them with my family and earn a livelihood from renting out the other five at a cost of Sh600 per month. I can say without fear that I am not ready to leave Soweto at whatever cost,” she said.

Where residents are fearful, structure owners are not.  Perhaps they pay friends in higher places?

Kibera in 2005: furniture factory

She wondered how she would cater for her family’s basic needs if the structures were demolished. Millicent, who has lived in Soweto East village for 20 years, says she is expecting nothing short of title deeds for her plots.

She’s never had them before.  Why be granted them now?

She says she can use the title deeds as security for a bank loan to start another venture for a livelihood. “If I leave with nothing, how does the Government expect me to even pay rent for the new house?” she asks.

Ms. Anyango, in other words, wants to be paid eminent domain compensation to relocate; she who has no property rights wants to be compensated as if she did.

Josephat Odhiambo, 49, also a landlord says he built 25 units in 1984 using savings he accrued from small-scale businesses. He says the then-DO gave him the land.

The structure owners’ claims also have the same ring, don’t they?  As if they had rehearsed their story into a polished tale that is irrefutable because all the evidence is verbal, and all of it is old.

Kibera in 2005: illegal jerry-rigged wiring to steal power

Besides the houses where he collects between Sh 600 and Sh 1,000 a month, the father of eight also sells water.

In slums, water-selling is big business.

When the project started in 2003, Odhiambo says, the impression the Government gave them was that it was to benefit everyone.

He says.  And what would you have done differently, Mr. Odhiambo, had you known?

“They made us believe that it was like giving Sh20 to somebody who had Sh5,” he says.

But he says they later learnt the structures were to be demolished, stone houses erected and then sold to former tenants.

He is among those who had moved to court to seek an injunction over the impending demolition.

Kibera in 2005: wide road through Soweto East

About 84 landlords went to court last week and obtained an injunction to stop the demolition of their structures for a week.

For a week.

The landlords found themselves an ally of convenience: newer residents.

Walter Hongo, a member of Soweto SEC, says residents who do not want to move from the slums were not part of the initial plan that started in 2003. He says the dwellers have teamed up with landlords who have been making huge profits from houses constructed on Government land.

Almost certainly correct.

“We divided Soweto East into four zones: A, B, C and D and gave each tenant a number and an identification card.”

As SDI has shown, enumeration is critical, else everyone claims the benefit, not just those who actually lived in the slum.

Dharavi household enumeration card

“Those in Zone A are the first to move. There are many people who moved in after the cards had been issued and these are the ones saying they won’t go because they do not have units at the site,” Hongo says.

Many a slum upgrading program, from Dharavi to HOPE VI, has grappled with angry disputes over who’s-in versus who’s-out.

Kibera in 2005: shoes for sale

[Continued tomorrow in Part 4.]

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

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

He might’ve tried starting with Freddie Mac:

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

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

Would you want your face splashed across the front pages?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Leave banking and go into burgers?

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

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

You paid a lot for this hat

Market reality, that’s what:

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

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

“You expect me to solve everything?“

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

Hence a trap of aligning incentives via extended deferred compensation. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

With my “securitization”

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

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

Are you trying to sneak money through security?

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

“It’s simple – chop pay”

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

Fat chance.

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

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

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

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

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

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

Take that, Gotham City banking malefactors

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

You mean there’s another?

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

And we’re not happy about it, are we?

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

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

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

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

1. To align incentives?

2. To cut executive pay?

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

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

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

The crackdown –

Notice the inflammatory language of vengeance.

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

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

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

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

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

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

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

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

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

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

How big a difference?  This big

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

We bleed Yankee blue … or Steinbrenner green

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

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

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

You have to pay me to try this

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

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

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

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

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

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

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

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

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

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

Don’t come to my attention

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

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

And I did so well for B of A, too

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

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

You dare say this doesn’t work?

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

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

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

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

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

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

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

Can we reconcile this seeming contradiction?

“Don’t try to contradict me”

[Continued tomorrow in Part 2.]

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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.

I’ve got a good chance to be next up

Chief executive David Orr says: “What was already a significant problem [of demand for affordable housing] is getting worse on a day-by-day basis.”

Doesn’t that signal there is something powerfully wrong with the UK’s housing production system?

“In the short term, we have got to do as much as we can [to build], given the circumstances.”

So when housing minister John Healey announced the government’s new affordable housing drive this summer, first reactions were positive.

Want a billion pounds?

“The cash was a bit of a surprise and very welcome,” says Richard Capie, policy director at the Chartered Institute of Housing (CIH). “When was the last time you saw money coming from education, health and transport into housing?”

Capie can’t remember seeing money flowing from education into housing

But now the excitement has subsided, questions are being asked about the government’s new plans and its attempt to spend its way out of the house-building slump. Can the money really do anything to ease waiting lists?

Depends on how many homes the money builds, and at what affordability level.

And how can we provide enough affordable homes for the future once the funding runs out?  Such issues will be at the heart of the National Housing Federation (NHF) annual conference starting in Birmingham today [23 Sep 09 – Ed.].

Certainly, plenty of cash is going into addressing the development downturn: the new £1.5bn comes on top of £1bn in the Budget, including a special fund to restart stalled development projects. Housing associations are building, despite:

[1] Tougher access to finance

[2] Tightening land supply

[3] The collapse in demand for ownership that makes it impossible to cross-subsidise schemes with homes for sale.

You’re out of the building business

Tell again why they’re building?

Keith Exford, chief executive of one of the biggest developing housing associations, Affinity Sutton, says his association “is whole-heartedly open for business.”

Of course they are.  Sharks gotta swim, and bats gotta fly.  Developers gotta chase the next deal ’til they die.

But he warns that the recession is straining the system. “If you are going to do social housing without the benefit of cross-subsidy, then you need more grants and you build fewer houses out of available resources,” he says.

Cross-subsidy, which I liken to the unicorn – much pursued and seldom captured – is predicated on selling market-quality homes at market prices without having to spend  market costs (usually for land) to develop them.  Then the ‘excess’ profits resulting are plowed back in to greater affordability on the other apartments.

“We need to start thinking about the current development model as I can’t see how it can survive.”

That development model is precarious.  More than precarious.

Must answer me, these questions three

Ere the other side he see

In the US, we’ve seen that the LIHTC delivery system has been disrupted, and although it is slowly repairing, it has some ways to go.  The British system is under different but no less profound stress.

The NHF also argues the government is undermining social housing growth by insisting that housing association rents be cut by 2% because of falling inflation.

First case of mutual stalemate.  It’s tempting to scale back resident rent increases, but every dollar so saved is a dollar less of free cash flow to the Housing Associations – which, as non-profit MEEs, deploy their excess capital into building new homes.  By easing the stress on current residents, they prevent other people from becoming residents in the new homes Housing Associations would otherwise develop.

Orr estimates the cut would cost associations £260m a year, slashing development by up to 4,000 homes a year.

To save the many 2% a year, we leave 4,000 out in the cold.

If it were up to me, I’d charge them 2% more

And this is self-defeating; in the long run, lack of supply will push up rents.

“When we are expecting to see public capital investment reduce, reducing associations’ revenue capacity just makes development more and more difficult.”

What would make a real difference, associations say, is a readier supply of mortgages for those wanting shared ownership.

Certainly – but if the overall interest rates go lower, that will also push up prices.  Stalemate again?

They also urge more flexibility from councils on planning to make it easier for developers to build. Councils, associations believe, should not expect as much from planning gain – where developers incorporate affordable housing in return for planning permission – as they once did.

As I’ve previously posted, the UK’s form of inclusionary zoning, Section 106, is a zero-sum game.  Whatever the locality wins, the sponsor loses.  Every dollar of affordability grasped by the locality is a dollar less profit, land value, or risk cushion.

Councils themselves have now been put centre stage in developing new social housing. Earlier this month, the government confirmed 47 councils will share £127m to build more than 2,000 homes, with more money up for grabs in the autumn.

That’s £63,500 per home of permanent sunk (non-recoverable) cash equity out.

One per new affordable home?

There are also planned reforms to the way council housing is funded, allowing councils to keep money from rents. The Local Government Association (LGA) is urging the reforms to be pushed through quickly. LGA chair Margaret Eaton says: “Councils could build up to 300,000 new homes and improve conditions for millions of tenants if there is root-and-branch reform of the housing finance system and the government takes away the barriers to building.”

Like the love affair with greenfield preservation.

But some authorities are unhappy about the house-building drive, since it means the funding they need to improve their existing stock is on hold.

Another stalemate?  Spend more to build new and you have less to rehab existing? 

That’s the consequence of the public housing dependency trap.

The authorities affected – around a dozen that have set up arm’s-length management organisations (ALMOs) –

In addition to housing associations, UK public housing is operated by local authorities.  Under the Labour government, strong coercion was applied to compel those authorities to set up professional management operations (Arm’s Length Management Organizations, or ALMOs).

I’m tickled to be an ALMO

Having relied on the government for funding, the ALMOs find themselves in the position of Flounder in Animal House: “You effed up.  You trusted us.”

– now stand to lose hundreds of millions in decent homes programme funding. Gwyneth Taylor, policy director of the National Federation of ALMOs, says the government should not renege on its promises to existing tenants.

Taylor doesn’t believe in reneging

“They are throwing all their eggs into one basket, when there’s no guarantee all the £1.5bn will be spent,” she says.

Catch the subsidy!

Block that metaphor!

For the Conservatives the answer lies in scrapping current house-building targets, which, according to shadow housing minister Grant Shapps, are just imaginary numbers. “In many ways it’s not through lack of money that we are not building enough homes… [the government] has got the wrong approach, with: 

[1] Too much targeting

[2] Inefficient ways to spend money

[3] Lots of schemes that add little, and

[4] Cumbersome administration.”

(”Other than that,” he added, “they’re swell fellows.”)

For Exford, recently appointed to the Joseph Rowntree Foundation’s new housing taskforce, which aims to develop policy options, the solution could lie in more homes for intermediate and market rent.

Basic principle: if you add supply anywhere on the income/ cost continuum, you will ease stress throughout the system.  That would be a move to loosen the stalemate.

More flexible options could bridge the gap between those who can afford ownership and those who qualify for scarce social housing. “We need a more sustainable, mixed-income, mixed tenure product range,” he says.

The CIH’s Richard Capie argues that, in the wake of a government pledge to make the allocation of social homes fairer – councils are being urged to inform communities better about who gets housing, for example – there should be a range of “price points” for affordable housing.

“Someone in a social home on £65,000 and someone next door on housing benefit both pay exactly same rent. It’s not about them being in the properties – that’s a good thing – but should we be looking at rent geared to income? That would give you more rental income and that’s how you build more homes.”

Means-testing is another form of poverty trap.  Another possible mutual stalemate.

The time is ripe, many feel, for change, and this is acknowledged by Sir Bob Kerslake, chief executive of the Homes and Communities Agency: “It is critical that the sector actively joins the debate and is open to new models. Who knows what the process will bring, but we are more likely to succeed through collaborative thinking across the housing and regeneration world.”

To make a move, you’ve got to break the mutual stalemate.

At least it’s not stalemate

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