Counterpunch: The battle for the soul of Florida

July 31, 2007

The Florida Chamber of Commerce has announced plans to raise as much as $65 million to fight a constitutional amendment sought by citizens supporting Florida Hometown Democracy.

The FHD measure would require that changes to local zoning plans—required by Florida law of each and every municipality and county—to first run the gauntlet of local voters before being voted on by local legislatures.

This moment in Florida history is framed by the biggest housing bust since the 1920’s.

The soul of Florida is at stake in the battle by Florida Hometown Democracy against the Chamber of Commerce and the building and development lobby.

Florida’s developed landscape did not become such a point of contention, by coincidence.

But for a mortgage industry that proliferated through the use of obscure financial derivatives, multiplied from the lowly consumer or commercial mortgage, there would be no incipient rebellion by citizens.

What is visible on the ground are for-sale signs, rising taxes, tightening credit, struggling production home builders and condo developers.

What is less visible, is how the last stage of the building boom, now in cinders, used financial engineering to sell distant investors on high returns pegged to pools of underlying packages of mortgages.

The trick, now being revealed in crashing financial markets–and not just homebuilders–was in mis-marking risk by laying off low quality development against higher credit quality debt.

What Wall Street persuaded investors of financial derivatives, (too complex for all but the most sophisticated analysts to understand), goes something like this. Imagine a mutual fund (remember, this is an imaginary example) comprised of many different mortgages. Now in this fund, there are a few dogs — strip malls in bad neighborhoods, cheap, platted subdivisions two hours from any source of work– but on balance, the risk of having some dogs is minimized by returns the fund will generate on better quality malls and higher priced subdivisions.

Now, more than a trillion dollars of real estate investment–across the United States–is based on this premise: that the value of the fund will not be affected by the risk of default, if the dogs fail.

Put another way: Florida’s growth is shaped by financial engineering based on the performance, not of better quality community design, but by the lowest common denominator.

On the ground you see strip malls and platted subdivisions by the thousands. What you don’t see is how the entire financial system that depends on diversifying risk, fails to account for what people want and what people need in terms of quality of life, the environment, and principles of “sustainability”.

Builders complain about their critics: “we are only building what the market wants.” It’s a fallacy. Builders build what bankers can finance.

And bankers, in this case Wall Street, will finance whatever generates the most commissions and bonuses for top shareholders, absent regulation.

What Florida Hometown Democracy and its amendment says, in fact, is that Floridians no longer trust either government or business to lead the way in the design and plan for growth.

And with good reason: what has government or the growth machine done to earn anything but the anger and enmity of a majority of Floridians?

In the 1920’s, Florida was a sleepy and relatively empty state. When real estate markets cratered, for the most part Florida itself was intact.

80 years later, Florida is a much different place. On the issue of water alone, Florida’s growth has manifestly failed to protect both public health and the environment.

It is the pressure for more growth, for instance, that is the root cause of government agencies allowing benzene to contaminate the drinking water supply for Miami-Dade.

The pressure for growth is also what caused recommendations in the most comprehensive watershed study undertaken anywhere, anytime, to be shelved by Miami-Dade county commissioners who found the whole idea of restricting growth to serve people to be distasteful in the extreme.

These stories–how the unallocated costs of growth continue to pile up in multi-billion dollar increments, even to the point of putting people in the way of cancer–could be repeated anywhere in Florida: Tampa, Jacksonville, Orlando, Pasco County, Collier or the Florida Keys.

This time, as ‘for sale’ signs sprout like weedy species across the state, it is manifestly clear that business interests, led by the growth machine and building lobby, have no plan, no idea, and no interest in taming the costs of growth imposed on citizens and ordinary people.

There is little question that the Florida Hometown Democracy measure will pass the test of state voters, if enough signatures and be gathered and enough money raised to communicate with Floridians.

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Counterpunch: Winners and losers in housing market collapse

July 21, 2007

In a quarterly conference call yesterday reported by The New York Times, JP Morgan CEO Jamie Dimon referred to the current business climate as “a relatively benign point in the credit cycle.”

The market judged the company differently, sending share prices 3 percent lower by the end of the trading day.

Market jitters and JP Morgan’s comments are relative to the subprime mortgage meltdown.

In recent weeks, Wall Street’s biggest players have all stuck to the same pitch: that the subprime mortgage mess is “contained”.

It is about as contained as inflation. You remember inflation? That’s the index frequently cited as “core inflation” that omits food and energy prices because American consumers don’t drive cars or eat.

Who would omit the price of food or energy from a core index? Clearly, someone or ones who want Americans to believe the cost of living is nothing compared to the benefits of democracy.

That’s how the meaningful is turned to meaning-less.

Along the same lines, today Federal Reserve Chair Ben Bernanke told Congress in his mid-year economic report that he thought “the demand for housing would stabilize “soon”.

Understand, though, that the charade that passes for current thinking on the economy in Senate or House subcommittee hearings is stage-managed by well-educated and well-compensated types who know perfectly well how poorly the broad stock market indexes have performed in relation to inflation.

And they read the papers and the blogs: consumer confidence is down, homebuilders confidence is plummeting, and public corporations, like Pulte Homes in yesterday’s announcement, are hemorraging value.

Behind closed doors, including the doors of the Federal Reserve, one must infer that the dialogue is of a substantially different character. These knife-blade conversations do not show up in print.

Still, it is no secret: billions of dollars in Wall Street bonuses, over the past decade, and expectations for future wealth are tied to the creation of debt tied to mortgages, both commercial and residential. For every $1200/square foot apartment sold in Manhattan, there is at least one optimistic Wall Street banker in waiting.

That debt goes by as many different names as there are flowers in a garden. It is known, ubiquitously, as financial derivatives.

Leaving Manhattan aside, until housing markets in the nation’s fast growing regions started to collapse, under the weight of the same liar loans, mortgage fraud, and adjustable rate, interest only mortgages (better known as toxic financial waste), holders of financial derivatives really didn’t have to worry much about informing their own investors about the value of the debt.

As long as real estate prices were rising, no one asked.

No one asked in Congress, which allowed government sponsored entities like Fannie Mae and Freddie Mac to engage in massive fiscal irregularities. No one asked in pension fund management, which assumed that the blue chip folks at places like JP Morgan would hold their interests at the highest level of fiduciary responsibility.

But now that dozens of subprime mortgage lenders have shut their doors and left paperwork in shambles in hastily closed offices, now that Bear Stearns’ funds have gone belly-up like crappie in a red tide, suddenly the rating agencies responsible for providing accurate values for financial derivatives as well as other credit have started to do what they should have done in the first place.

“Moody’s Investors Service says it is paying a high price for its tough stance on lax lending standards for commercial mortgage-backed securities”, reported the Wall Street Journal yesterday.

“On a recent CMBS (commercial mortgage back security) offering issued by Morgan Stanley, which included 225 fixed-rate loands on 268 multifamily, commercial, and manufactured housing community properties” Moody’s rivals got the ratings business.

“We used to rate 75% of the deals, but since our announcement (tightening credit quality standards for CMBS pools), we were not asked to rate 75% of them,” says Tad Philipp, a managing director for Moody’s. ‘Our market share has done a complete flip.’”

From one point of view, Moody’s is costing the big banks money, in rating the issuance of debt (and bonuses, of course) and so big banks are penalizing Moody’s.

The sharper point of view is that the big banks are suppressing facts about the vast excesses they have created in financial derivatives and the additions they make to the net worth of the nation’s top financial executives.

And so, when one reads in the NY Times, JP Morgan CFO Michael J. Cavanaugh saying that “the bank’s decision to increase its credit loss provisions did not reflect a spillover of subprime lending problems into prime lending”, it is natural that the world financial markets begin to wonder, what the hell is going on?

In another Wall Street Journal article yesterday, concerning uncertainty in credit markets—not just subprime—Charles Gradante, co-founder of hedge-fund consultant Hennessee Group, said, “Right now things are starting to become unglued.”

What exactly does that mean?

For one, the ABX index which tracks the price of insuring losses in subprime bonds has fallen precipitously. According to the Journal, “the portion of the triple-A subprime debt issued last year has fallen about 5% in the past week. The portion of the index which tracks low-rated triple-B bonds is down more than 50% this year.”

Beyond falling indexes, beyond the matter of hedge funds, like the two disappeared from Bear Stearns’, is the question: how many dollars and how many hedge funds have to re-price their assets to reality?

That’s the essence of what Joshua Rosen, a managing director of Graham & Fisher, an investment firm, told the New York Times in a related story, “Bear Stearns says battered hedge funds are worth little.” Asks Rosen, “…’do the prime brokers and others who have extended lines of credit to the hedge funds really have a good handle’ on how those borrowings have been invested?”

The answer is, no.

The response of banking regulators is “to increase scrutiny”. (AP, July 17) Now Federal Reserve Chairman Ben Bernanke is offering lawmakers “fresh assurances that regulators are taking steps to better protect would-be homeowners from abusive mortgage practices.”

And this crew is going to protect America from inflation?

Putting the right price to inflation is as much anathema to the Federal Reserve, to Congress and the White House, as re-pricing synthetic financial derivatives to banks and hedge funds they loan and invest, sometimes on opposite sides of the same financial instrument: both are as substantial as smoke from a crack pipe.

And yet, reality has a way of forcing the air from whatever pipe dreams materialized from “the ownership society”: one of the biggest speculative financial booms in US economic history, next to the dot.com bust it was meant to absorb, and did for a while.

It may be Jamie Dimon’s point of view that this is a “relatively benign point in the credit cycle.” Try telling that to an American who has lost his or her home, or, to one of the 176,000 Americans who got foreclosure notices in May.

According to California based RealtyTrac, it is “the highest figure they have ever recorded in their monthly report and is 90 percent higher than the numbers from a year ago.”