Affordable Housing Institute : US

[Continued from yesterday's Part 1.]

 

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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By: David A. Smith

 

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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By: David A. Smith

 

Would you rather spend $138 and get 360 brand-new objects, or spend $130 and get 269 used objects?

 

What is this, asks the reader, a trick question? 

 

Not to the New York City Housing Authority, but perhaps to those whose willingness to believe and trust has been incinerated by many years of unfulfilled hopes.  As reported in the New York Times [February 6, 2010 – Ed.]:

 

Philadelphia tore down 21. Chicago leveled 79. Baltimore took down 21 as well, and when 6 of them came down in one day in 1995, it threw a parade.

 

IMPLOSION–The implosion of a large housing project in Newark in 1996. Many cities have moved toward smaller-scale housing that does not carry the stigma of despair and poverty.

 

Since the 1990s, public housing high-rise buildings have come tumbling down by the dozens across the country as cities replace them with smaller suburban-style homes that do not carry the stigma of looming urban despair and poverty.

 

Not just in America.  London has torn down some of its council high-rises.  Paris should tear down its.  Even as increasing density means cities must go vertical, going vertical is the prerogative of the wealthy.  The poorer you are, the more important it is for you to live on or near the ground floor – despite theoretical architects like Le Corbusier, the only people who can live happily in a high-rise are middle-income or rich.  Very low income high-rises become the slums inside.

 

New York City has long been the great exception, and red-brick towers still dominate the skyline from the Lower East Side to East Harlem, from Mott Haven, in the Bronx, to Bushwick, Brooklyn.

 

Dents in the sign notwithstanding, a wonderful community?

 

New York is exceptional for many reasons:

 

• It has long had the nation’s most capable large public housing authority
• As the cradle of apartment and high-rise living, it’s got a granite backbone uniquely suited to high-rises.
• NYCHA has been searching the sofa cushions (to scrape up extra operating money) and selling the family silver (disposing of non-core assets) to stave off the evil day.

 

Yet, as we saw only a few weeks ago, rehab deferred is rehab denied, and New York City, under the capable direction of Michael Kelly, has finally reached the inevitable conclusion for this property:

 

But now, for the first time in its 75-year history, the New York City Housing Authority wants to knock down an entire high-rise complex, Prospect Plaza in Brooklyn — a move that has surprised and angered a number of former tenants and advocates for low-income housing.

 

 

In the past decade, the authority has chosen to renovate rather than tear down its aging housing stock, often at great expense. Its decision to demolish Prospect Plaza was not the result of a sweeping policy shift, but of the failure of a renovation project that became bogged down in years of administrative, financial and legal problems.

 

The failure of Prospect Park’s HOPE VI renovation – a failure over a decade in the making – is a classic story.  Visions of sugar plums brought to the party far too  many cooks, all angling for their own piece of the pie.  As profiled in a story I discovered from City Limits, July 1, 2001, the inevitability effect doomed the Prospect Plaza HOPE VI transaction:

 

 

Here are a few snippets from the tragedy:

 

A consortium of community groups and churches, which joined with project tenants to jointly administer the funds, are now [July 1, 2001 – Ed.] duking it out for control of the money.

 

While they fought over the financial ice cream cone, it melted away.  Here’s a representative snapshot from a story so dreary I cannot bear to quote it:

 

Early on, when Abdur-Rahman Farrakhan became chairman of the PPDC, the group quickly descended into a nasty war of words. Farrakhan accuses other nonprofits–in particular the Brooklyn Interborough Community Network (BICNet)–of manipulating Prospect Plaza’s tenants in the hopes of getting large contracts for job training and technical assistance. “Everybody is looking to position themselves as best they can to be able to take advantage of this,” he says. Farrakhan says that Shelton Jefferson, who heads BICNet, “wanted a guaranteed contract and went to the tenants to stir shit up.”

 

Jefferson says he’s astonished by Farrakhan’s charge. “I doubt if Mr. Farrakhan would say something like that,” he says. “I have become involved in this project only because I was asked. I was asked by NYCHA to be an adviser to the tenants.”

 

For several years, NYCHA and its preferred developer, a very capable organization khown as Michaels Development, pursued HOPE VI, but that too collapsed.  Meanwhile – rehab deferred is rehab denied – the buildings became progressively more empty, more decrepit, and more expensive to renovate.

 

Prospect Plaza today: derelict and fenced off

Don’t let the windows fool you – the ground floors are boarded up

 

Prospect Plaza — three 12- to 15-story towers in Brownsville — is plagued by neither despair nor poverty: It has been vacant since 2003, when the last tenants were moved out with the promise they could return to refurbished apartments.

 

So why are we keeping an outmoded shell?  Nostalgia?  Or political expectation?  Or something simpler – like distrust of the alternative?

 

Agency officials say they want to tear down the 35-year-old buildings and erect new apartments in their place. Officials initially planned to leave the towers standing and reconfigure the apartments, by eliminating some units to create bigger living rooms and bathrooms, but those plans were scrapped by the authority’s new leadership because demolition made better financial sense.

 

It often does.  Buildings become obsolete, the more so when they fail to receive periodic upgrading and repositioning.

 

Ilene Popkin, the agency’s assistant deputy general manager for development, said the three buildings had deteriorated from vandalism and exposure to the elements, and were out of context with the neighborhood.

 

She said it would cost $481,000 to renovate each of the 269 apartments. Demolishing the structures and building 361 new units would cost $381,700 per unit.

 

If you do that arithmetic, renovation will cost $130 million and deliver 269 existing apartments; new-build will cost $138 million and deliver 361 – 92 more apartments for only $8 million more.

 

Mo’ money, mo’ housing

 

Moreover, because they’re new-build, with no resident relocation challenges, the construction will go faster, with far fewer unknowns or temporal risk factors.

 

The new apartments — including public and private housing, not only for the poor but also for low- and moderate-income families — are likely to be built in low-rise buildings.

 

Prospect Plaza originally included four towers housing 1,200 people.  [Not units – Ed.]

 

One was torn down in 2005; the plan was to use that space for a new community center, shops and additional housing. But today, the building’s old footprint is just a fenced-off lot.

 

Many public housing properties suffer from excessive density, particularly if the apartments are designed for families.  Babies have the annoying habit of growing up into toddlers, then into children, then into adolescents, and all these increasingly animate and rambunctious small people

 

That building was the first high-rise the authority demolished. In 2007, the agency also knocked down a number of two-story buildings as part of the redevelopment of the Markham Gardens complex on Staten Island.

 

The authority has completed the first two phases of its Prospect Plaza redevelopment plan, involving not the actual housing project itself but 37 two-family houses and 150 rental units in four-story town-house-style buildings that were constructed on nearby lots formerly owned by the city.

 

It’s a start – improving the neighborhood surrounding the public housing property.

 

The new Prospect Plaza: not a project but a neighborhood

 

The ribbon-cutting – always a happy moment

 

Several former residents of Prospect Plaza and groups that represent public housing tenants said they did not support the demolition, in part, because it was unclear to them that the authority intended to replace the old units with the same number of new public housing units.

 

While I understand about residents’ fear of losing apartments, there is a vast difference between losing a judicial unit – an apartment that is contractually or legally obligated to be affordable, irrespective of whether it is inhabitable – versus losing an actual unit. 

 

Do we count the unit as here or lost?

 

Even as the three towers sit vacant on Prospect Place near Saratoga Avenue, they continue to be a costly expense for the cash-strapped authority, which has paid a security firm $25,000 a month since 2005 to keep watch over the buildings.

 

At $25,000 a month for five years, that’s $1.5 million – which could have meant five more brand-new apartments after the rebuilding.  A large fraction of our public housing stock has decayed beyond salvageability, and – as we saw in Atlanta – it takes an executive with some courage to say so.

 

Agency officials have not decided how many of the new apartments will be public housing, but they said that former residents and community leaders would help make that determination.

 

“We are committed to being shoulder to shoulder with you,” the agency’s new general manager, Michael Kelly, told former tenants and others at a community meeting last week [Late January – Ed.] a few blocks from the vacant buildings.

 

Michael Kelly, general manager of the New York City Housing Authority, tried to reassure former tenants at a public meeting.

 

As I’ve previously posted, Mike Kelly is one of the good guys.  I trust him.

 

The cost of demolishing the towers and building the new apartments is estimated at $138 million. Part of the financing will come from a $21.4 million federal grant the authority was awarded in 1999 to revitalize Prospect Plaza, of which about $17 million remains.

 

The other $4 million got spent in the ill-fated Michaels HOPE VI effort.

 

At the meeting, Mr. Kelly said it was too early to say where the rest of the financing would come from. Agency documents describe the project as “mixed finance,” meaning it will be paid for with public and private dollars, with some of the money coming from the sale of federal low-income housing tax credits.

 

Doctoral candidate Laura Tach likes income mixing

 

Meaning income mixing, meaning LIHTC residents and so on.

 

The demolition, which must be approved by the federal Department of Housing and Urban Development, is planned for this fall, with construction scheduled to start in 2012.

 

If one cannot finance the renovation, one has no choice but a teardown and rebuild.

 

Preference for the new public housing units will go to former residents, many of whom were relocated to other public housing in Brooklyn.

 

Milton Bolton, 50, a former resident and the president of the still-intact Prospect Plaza Tenants Association, held up a thick draft of a 1998 application for the federal grant and said, “It’s hard to have trust.”

 

Milton Bolton, the tenant association president of Prospect Plaza, at the vacant buildings where he used to live.

There comes a time when buildings have to go somewhere to die; when that happens, it is a kindness to get rid of them.

 

Ms. Popkin and Mr. Kelly acknowledged “bumps along the road” for the project in the past, but they stressed their desire to rebuild the neighborhood. “I understand that folks here are frustrated,” Ms. Popkin said. “There is a new management at Nycha. We have a commitment to these towers. This is a top priority to move forward.”

 

Initially I was skeptical of Mr. Bolton’s distrust, until I found these paragraphs from nine years ago:

 

Even residents who say they’d welcome higher-income neighbors are running out of patience. Milton Bolton, the president of the Prospect Plaza Tenant Association and once a big booster of the plan, is now [July, 2001 – Ed.] ambivalent. He’s distressed that the social service programs are not established yet–particularly the homeowner training workshops, since he someday hopes to buy a house. Bolton, a soft-spoken bear of a man, sits in a straight-backed chair and bounces his 2-year-old son [The boy is now 11 – Ed.] on his lap as his seven other children scoot in and out of the room. “We welcome the changes,” he says. “We welcome the impact if it’s done right. But no matter what we do, it still feels like we’re fighting a losing battle.”

 

Bolton, who has put in countless hours on the Prospect Plaza deal, believes that he will not be allowed to return to the project once the renovations are complete. He has been unemployed for a while and admits that there have been many times that he has fallen behind in his rent. He’s even been put on probation for the problem. “What they’re telling me is once I leave, I’m not coming back,” he says. “We just have to hope they bring at least some of the people back.”

 

I sometimes forget that those residents who have the most time to devote to public housing advocacy may be those who have the fewest economic resources.  I respect and admire Mr. Bolton’s patience and commitment in the face of uncertainty and disappointment.

 

Bolton keeps hoping

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By: David A. Smith

 

Proving that America has no monopoly on good ideas, the impending collapse of Greek finances is revealing, strand by strand, that whatever shenanigans and subterfuges might have been pioneered by the Enrons of this world, the sovereign nations of Europe will have perfected and taken to scale.  As reported in the Wall Street Journal (Arial):

 

Proving the capital markets know more than governments do: Greece has big default spreads

 

Concerns that Greece and other struggling European nations may not be able to repay their debts are focusing investor attention on another big worry: Economies across the Continent have used complex financial transactions—sometimes in secret—to hide the true size of their debts and deficits.

 

Actually, nearly always in secret, as we shall see.

 

Investors long turned a blind eye to European governments’ aggressive bookkeeping, aimed at meeting the euro zone’s fiscal ceilings. Countries using the euro currency have a rich history of exotic maneuvers aimed at meeting rules requiring members to cap debt levels at 60% of their gross domestic product and their annual budget deficits to no more than 3%.

 

‘Meeting’ is a euphemism for ‘avoiding while giving lip service to.’

 

Blow in my phone and I’ll borrow you anywhere

 

Despite criticism, European leaders deemed many of these moves acceptable as they sought the long-planned currency union.

 

While efforts will now be made to blame Wall Street or City of London bankers for taking these bets, you can’t cheat an honest man:

 

As my dear old grandfather Litvak said (just before they swung the trap), he said:

 

You can’t cheat an honest man.

Never give a sucker an even break

Or smarten up a chump.

 

By Larsen E. Whipsnade

 

Nobody made Greece do these trades, the Greeks were trying to get away with skullduggery.  Whose fault is it that the money was lost – the bookie who took the bet, or the punter who wanted to put it down?

 

To try to meet the targets, which were aimed at building trust in the stability of the euro, governments over the years have:

 

Translation: To build trust, we had to bamboozle you.  Doing what we promised would have been too hard.

 

Sold state assets

Bundled expected future payments into securities to hawk

Even, in the case of Greece, insisted to the Eurostat statistics authority that large portions of its military spending were “confidential” and thus excluded from deficit calculations.

 

I can’t see you, therefore I’m invisible!

 

I’m invisible – see?

 

In 2000, Greece reported that it spent €828 million ($1.13 billion) on the military—about a fourth of the €3.17 billion it later said it spent.

 

“I lied.”

 

Greece admitted to underreporting military spending by €8.7 billion between 1997 and 2003.

 

A billion here, a billion there, soon you’re talking about real money.

 

A man who spent so many billions they’ve named a Senate office building for him: Dirksen

 

Portugal classified subsidies to the Lisbon subway and other state enterprises as equity purchases.

 

Hey, if I spend it on myself, isn’t an investment, isn’t it?

 

After learning that, Eurostat made Portugal redo its accounting in 2002.

 

If I have this right, Eurostat is a toothless CBO.  They can observe the truth – if people tell it to them – but they have no ability to compel anyone to accept the truth.

 

I’m from Eurostat and I’m here to enforce against you

 

The country revised its 2001 deficit from €2.76 billion, or 2.2% of GDP, to €5.09 billion, or 4.1%—well over the limit.

 

Ever go out to dinner with more than eight people?  Everybody orders dessert – because everybody realizes that for the incremental dessert they eat, their friends will pay seven-eighths.

 

The Euro was a club and all the kids wanted to join; so they all sucked in their belts, wriggled into their trusses, and here they are. 

 

I’ve dropped two deficit sizes already!

 

It’s a classic tragedy of the commons-currency, and the British must be thankful they are not in it.

 

France arranged a deal with the soon-to-be privatized France Telecom in 1997 under which the company paid the government a lump sum of more than €5 billion. In return, France agreed to assume pension liabilities for France Telecom workers. The billions from France Telecom helped narrow France’s budget gap to around €40 billion in 1997; it reported a deficit for that year of 3% of GDP—right on the target, and helping it to join the euro.

 

Totally cockamamie, of course – but in the context, I’d have looked the other way. 

 

Just bring the truck back undamaged, okay? – and I don’t know anything about any bananas.

 

One-offs are acceptable; structural gorging is not.

 

Adding to the difficulties, EU regulators have few tools for forcing euro-zone countries to adhere to fiscal requirements.

 

Few?  Try ‘none,’ particularly as the EU has never enforced any of its rules against any of its larger members, and rules you don’t enforce are worse than useless.

 

Last week, such worries exacerbated market jitters over Europe’s debt woes and could complicate Greece’s plan this week to sell more debt, bankers and investors say.

 

Gee, do you think the revelation of widespread cooking of the books will make it harder to sell more IOUs?

 

In recent weeks, countries’ use of currency swaps has drawn attention. In such transactions, often benign –

 

Translation: Not always corrupt and malignant.

 

– countries might borrow in a currency not their own, for example, and use a derivative to offset the risk of currency fluctuations.

 

Okay, Vice President of Common Sense – why would a nation borrow money in a currency not its own, and then hedge back to its own currency?  Why not just float bonds in your own currency?  Sounds awfully fishy to me.

 

It’s a trap!

 

Investors paid little attention to the often-opaque derivative deals until concern of a Greek default began to rattle markets.

 

Why should they?  After all, they had a sovereign guarantee.

 

Oh, wait …

 

The closer scrutiny also comes against the backdrop of exploding budget deficits in many European countries and fears about the stability of the euro.

 

The evidence is overwhelming – the Euro is teetering on the edge of kaput, because the European countries have been living beyond their means ever since the single currency was introduced.

 

About those pension liabilities …

 

Had America continued to produce above-inflationary returns, Europe’s yield starvation would have been assuaged.  We did not, and as our yields come back to reality, Europe’s pension liabilities crash.

 

Governments across Europe pumped hundreds of billions of euros into their economies to combat the financial crisis, sending national debt levels soaring.

 

There should be little consolation in the knowledge that however bad the American economy may be, Europe’s is worse.

 

The Portuguese finance ministry declined to comment on whether Portugal has used currency swaps such as those used by Greece, but said Portugal only uses financial instruments that comply with EU rules.

 

Mo-om, we only did what the Greeks did!

 

I warned you, young lady, no complex derivative trades until you’re at least eleven

 

And if the Greeks flung themselves into the seas, would you do it too?

 

European officials said last week that EU regulators didn’t know about a particularly controversial “off-market” currency swap structured in 2001 by Goldman Sachs for Greece. Officials say they believe the problem isn’t widespread –  

 

How would they collectively know, since it’s evident they individually went to considerable lengths to hide what they were severally doing?

 

– but a number of prominent European politicians, including German Chancellor Angela Merkel, have called on authorities to have a closer look at the transactions and whether banks helped governments distort their books.

 

A 2008 Eurostat report, however, says questions about how to account for off-market swaps like the one used in Greece were raised as early as 2007. The report said it provided detailed guidance about how to handle some forms of them. Eurostat didn’t respond to a request for comment.

 

You just stay small and inconspicuous, okay?

 

At the moment, Eurostat’s in an impossible position – having provided the clearest advice, having seen it ignored, with having the consequences now surfacing.

 

We warned the Greeks, and what did it get us?

 

Eurostat tried for years to change the rules on use of swaps.

 

As we saw in 3% altruistic, if governments inadvertently create a program liable to extreme misuse, not only will it expand rapidly, it will also be fiercely defended and hence prove enormously hard to kill.

 

“Feed me!  Feed me!”

 

European finance ministries in 2000 overruled Eurostat, arguing that they needed as much flexibility as possible to manage debt loads.

 

Should one blame the pharmacist if the junkies broke into the dispensary?

 

In 2001, Goldman and Greece came up with a now-controversial solution: a new off-market swap. It agreed in the future to convert yen and dollars into euros at an artificially favorable rate.

 

In other words, the parties agreed to a future transaction with a built-in bargain for Greece: a “pay me later” that offered many years of vaporware – the ability to book a transaction on a false basis:

 

Greece could use that [Artificially favorable – Ed.] rate when it recorded its debt in the European accounts—pushing down the country’s reported debt load by more than €2 billion, according to people familiar with the matter.

 

Everything’s exactly as it seems

 

In exchange for the good deal on rates, Greece had to pay Goldman. The amount wasn’t revealed.

 

A payment would count against Greece’s deficit, so Goldman and Greece came up with another twist. Goldman effectively loaned Greece the money for the payment, and Greece repaid that loan over time.

 

But the two sides structured the loan as another kind of swap. Treated as a swap, the deal didn’t add to Greece’s debt under EU rules.

 

So they created an artificial trade, then hid the fee, then hid the loan that hid the fee, then hid the swap that hid the loan that hid the fee.

 

 

Gikas Hardevoulis, a former advisor to the then-prime minister of Greece, said the trade should not have been done. “It was done to dress up the debt figures by some smart idiot in the finance ministry” he said.

 

Lenin called them “useful idiots.”

 

He also expected capitalists to sell Communists the guns to overthrow them …

… and look what it got him!

 

It wasn’t until 2008—a decade after the deals became popular—that Eurostat was able to revise its rules to push countries to include swaps in their debt and deficit calculations.

 

Transparency is always the first step to reform.

 

Greece’s remaining exposure to the complicated arrangement remains unclear.

 

The more the veils unravel, the worse will be what we see.

 

Europe is headed for a very ugly landing.

 

Financial drugs make you financially ugly

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By: David A. Smith

 

Shouldn’t have let us have anything valuable

 

Otter : Flounder, you can’t spend your whole life worrying about your mistakes! You effed up – you trusted us! Hey, make the best of it! Maybe we can help.
Flounder : [crying] That’s easy for you to say!

 

Last week, at his company’s annual meeting, JPMorgan Chase CEO Jamie Dimon let loose with a scalding critique of the Federal government.  As reported in American Banker:

 

I believed I would be fairly treated by my government

 

JPMorgan Chase & Co. chief executive Jamie Dimon said during his company’s annual investor day Thursday that he has been turned off by the “capricious, arbitrary and punitive behavior” of regulators since his company accepted $25 billion in aid as part of the bailout of the financial industry in 2008.

 

Ever since the global capital crunch, we have seen periodic outbreaks of irrational populism.  It’s understandable, of course – finance is abstruse, bankers make money and therefore are easy targets, and elected or appointed officials sometimes find it convenient to flog a helpless whipping boy, such as the absurd spectacle of Congress seeking to overturn AIG executive bonuses payable to the people who would be disarming the latent financial bombs left over from the crunch.  Meanwhile, in a classic case of “do as I say, not as I did”, the government was promulgating executive pay rules that it proposed to apply to anyone whom it did not need, and to exempt from anyone it did. 

 

“We think to this of this, gentlemen, as a line-up“

 

Even the President has occasionally lapsed into illogical populist language, justifying a proposed new tax with the specious sound bite ‘we want our money back’ … at a time when the government had already been repaid.  Indeed, the government has generally reaped net profits from the TARP repayments, via not only the dividends but also the buyback of the mandatory share options.

 

Even more bothersome to Mr. Dimon was the implied libel on his bank for having taken TARP in the first place:

 

While the company has since returned that aid with interest, JPMorgan Chase has been lumped in with all of the troubled institutions that may have acted irresponsibly in the run-up to the financial crisis, Dimon said. It is also facing a slew of new accounting rules, federal fees and other regulatory changes that could sap its bottom line.

 

As I’ve posted before, government and capital have asymmetric doomsday devices. 

 

Ze are zo many zings a goffernment can do

 

Government has the sovereign power, which inherently cannot be bound, so that government can if it chooses abrogate contracts with relative impunity, or repudiate its debts via sovereign bankruptcy, or more subtly, it can devalue its currency through inflation, the young’s revenge on the old for their previous profligacy.

 

Capital can flee, faster than government can grab it.

 

This is how much we’ll put at risk on your integrity

 

Economies work – and therefore nations work – when capital and government each see the other as a reliable counterparty operating according to consistent rules of long standing and with a shared interest in maximizing the common wealth.  It’s quite clear Mr. Dimon doubts the government’s integrity:

 

If he could do things again, Dimon said: “I don’t know if I would” accept aid. “But then again, when you are in that situation, and your country calls, it’s hard to say no.”

 

It wouldn’t be hard for him to say No now; in fact, his stockholders would probably demand it as a matte of his fiduciary duty.

 

At the least, he said, he would have tried to find some way to avoid the “vilification” that came from accepting federal aid. 

 

Good luck, Mr. Dimon; the sovereign cannot be bound.

 

So I discovered

 

When Dimon speaks, though, the Administration ought to listen:

 

Dimon has assumed the role of the country’s most credible banker and outspoken banker since JPMorgan Chase has emerged from the recession as perhaps the healthiest and most powerful commercial bank in the U.S.

 

“I didn’t have to be here, you know”

 

For that matter, the world ought to listen, as Mr. Dimon’s additional remarks echoed AHI’s concerns:

 

“We want to see employment go up consistently for several months,” Dimon said. “If we’re lucky, it will happen some time this year.”

 

Unfortunately, the global recession will linger like a bad cold.  The stimulus legislation hasn’t stimulated; if anything, it’s impeded economic recovery.

 

The company doesn’t expect to lose a lot of money should interest rates rise, as it has been focusing on reducing its rate exposure. 

 

In other words, Mr. Dimon is taking out insurance against Ben Bernanke raising rates – which of course he must and he will – and against inflation coming back.

 

A 100 basis point increase would translate into a $500 million loss, which he described as “mostly noise in our company.” 

 

He’s also hedged JPMorgan’s sovereign exposure elsewhere:

 

JPMorgan Chase also doesn’t have a lot of exposure to the debt woes plaguing Europe. “Greece itself wouldn’t be an issue for this company. Neither would any other country, in my opinion,” Dimon said. 

 

If anything, Greece’s troubles – and those right behind it of Spain and Italy, much larger economies – will sink the Euro, not the dollar.  Which is why the Euro’s suddenly in free fall.

 

No worries, Europe

 

He said JPMorgan Chase is actually more concerned about California’s deficit troubles, which could actually pose a higher default risk than the sovereigns in Europe.

 

Of course – because not only is JPMorgan all over California, California’s part of America, so that if California collapses – a bleak prospect looking more likely with each passing day of inaction – then the American economy will have another infection to fight off.

 

Mr. Dimon, therefore, is keeping huge capital reserves:

 

Dimon said the company also has no timeline for winding down its $40 billion in loan-loss reserves, which some industry watchers say could deliver a jolt to earnings in coming years.

 

I like being protected from a very rainy decade

 

In other words, the analysts believe that JPMorgan has over-reserved against loan losses, meaning that at some future point, JPMorgan could boost its earnings by deciding that it had previously been too conservative.  Such moves verge on ‘earnings management,’ if they are used to manipulate results and game bonus formulas rather than as exercises in disinterested judgment.

 

He said the bank’s reserves should be considered some $10 billion to $20 billion of excess capital that it will have at its disposal when things improve. “We’re going to keep them as high as we can keep them,” he said. “We think it protects the company.”

 

There’s another way to view those reserves – as a cushion against government unreliability.  That’s a lot of capital to sit on the sidelines because government has proven itself unreliable.

 

And let there be no mistake: having once been burned – as the bank sees it – by trusting government, it is fully ready not to trust again:

 

Regulatory pressure is another issue, [Investment banking division head Jes Staley] said, although the company is confident it can thrive in the face of any regulatory changes as long as they impact the industry equally.

 

Staley will play on any field that’s level

 

Hear the fear?  With the government not just regulating markets but owning large chunks of industries, it is easy to see government self-interested motivation behind its actions.

 

JPMorgan will also pass onto customers higher funding costs that may result as tighter regulation.  “We’re going to reset the price of credit globally, and in a dramatic way, if the regulators go beyond the bounds that they should,” Staley said.

 

That, my friends, is an unmistakable threat – and should be heard as such. 

 

You really want to take us on?

 

Altogether this is a totally damning report card on the state of governmental integrity:

 

Flounder : Will that work?
Otter : Hey, it’s gotta work better than the truth.
Bluto : [thrusting six-pack into Flounder's hands] My advice to you is to start drinking heavily.
Otter : Better listen to him, Flounder, he’s in pre-med.
D-Day : [firing up blow-torch] There you go now, just leave everything to me.

 

Why am I not confident?

 

They’ve lied and used me every time … maybe this will be different!

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