Tag: Real Estate

I am Fine, I am Dry, and This Was Not A Natural Disaster

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Area in yellow has been paved over, creating a flood making machine

Notwithstanding the flooding which got wide coverage in Ellicott City, it was not a big deal where I live, Owings Mills, about 20 miles away.

It was a fairly intense storm, but beyond a few flooded basements, it should not have been a disaster.

The flooding was caused by reckless and uninformed real estate development:

ELLICOTT CITY FLOOD: STOP CALLING IT A NATURAL DISASTER

For 200+ years the flooding in Ellicott City came from the rising of the Patapsco River and was mostly limited to lower Main Street. During major rain storms the water was absorbed into the ground in the surrounding woods north and west of town and the Tiber River, which runs east along Fredrick Road, was wide enough to handle the overflow that ran through town. (rivers have the uncanny ability to be just as wide and deep as they need to be)

In the past 20+ years developers and Howard County zoning board have banded together to pave over all of those woods with medium and high density housing. The yellow area is mostly new construction built in the last two decades. When you pave over the natural terrain and add sewers and roads that lead directly to Main Street (red area) you get a high speed rollercoaster for the water to ride right through town. This “top down” flooding has nothing to do with Mother Nature. This is a man-made disaster caused by greedy and/or uninformed people who decided that building homes above this wonderful city was worth the risk of destroying it.

………

The county executive may be right that this is a “once in a thousand year storm” but anyone who has ever been on Main Street in a rain storm knows that flooding is a common occurrence since the construction above town became so out of control. Now, in perfect irony, The state and county will spend more money than they earn on tax from new construction to fix the damage it created. This is a horrible disaster but nature had nothing to do with it.

This problem was foreseeable, and there have been plenty of indications of a problem even before the last flood 2 years ago.

I am not sure what can be done to fix this now, though requiring the replacement of driveways and parking lots with porous surfaces could not hurt.

You Remember the Story of the Boy Who Cried Wolf?

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After about a year and a half of a noun, a verb, and Vladimir Putin, we now have some pretty good evidence that Donald Trump and his relatives have been selling foreign policy.

We’re talking an explicit quid pro quo, but you’ll hear very little about this because it all fades into the miasma that is Trump’s ethical lapses.

In the process of pursuing Vladimir Putin as if he were Ernst Stavro Blofeld, people have ignored the fact that Trump is deeply and profoundly corrupt, and always has been:

Today marks the 16-month anniversary of Donald Trump becoming the 45th president of the United States, and nowhere has our unlikeliest commander-in-chief placed a greater stamp on America’s place in the world than his dramatic — and sometimes arbitrary and capricious, or so it seems — shifts in foreign policy. None of these seismic changes seemed more baffling than last spring’s abrupt sellout of the Persian Gulf state of Qatar — a longtime ally where the U.S. Air Force Central Command and its 10,000 American troops are now based.

………

Trump stunned his own foreign policy team — including then-Secretary of State Rex Tillerson and Defense Secretary James Mattis — when he tweeted that Qatar is a sponsor of terrorism and seemingly endorsed an economic and political blockage of the tiny, oil-rich nation organized and led by two powerful neighbors, Saudi Arabia and the United Arab Emirates, or UAE.

………

How to make sense of a 180-degree shift in policy that seemed so counter to U.S. interests in the region? A few months later, people who suspect the worst about Trump and his minions learned a possible motive that was almost too cynical to comprehend. Not long before Team Trump switched gears on Qatar, key officials from the emirate had met with Charles Kushner — father of Trump’s son-in-law and senior adviser, Jared, who’s in charge of Trump’s Middle East portfolio — to discuss a massive Qatar-funded bailout of 666 Fifth Ave., the debt-laden Manhattan skyscraper that was threatening to sink the Kushner family real estate empire. But the Qataris rejected the deal — just weeks before the policy about-face. Whatever actually happened, the appearance was simply awful. 

No, the reality is simply awful.

It also seems not to have been the full story. This weekend, the New York Times published a stunning report about a plan floated by a longtime emissary for the Saudis and the UAE in early August 2016, when Trump had just grabbed the GOP nomination but faced an uphill campaign against Hillary Clinton. Donald Trump Jr., aide Stephen Miller and Erik Prince, founder of the notorious mercenary outfit once know as Blackwater, listened intently as the emissary offered Team Trump millions of dollars in assistance, including a covert social-media campaign, to help Trump win that would be run by a former Israeli spy who specializes in psychological warfare, or psywar.

“The emissary, George Nader, told Donald Trump Jr. that the princes who led Saudi Arabia and the United Arab Emirates were eager to help his father win election as president,” the Times reported. Some key elements — exactly who was behind the plan, and what parts, if any, were carried out — remain murky.

I should mention here that Nader is a convicted felon, having served multiple sentences for child porn and sexual child abuse.  (As Anna Russell would say, “I’m not making this up, you know.”)

And the corruption is pretty explicit:

As long as Trump and Jared Kushner continue to hold onto their business holdings while leading U.S. foreign policy, this cloud will remain. Did Trump voice support last week for ending American sanctions on the Chinese telecom company ZTE Corp. because it would benefit their U.S. subcontractors, or because a Chinese fund is investing $500 million in an Indonesia theme park that should dramatically boost the value of a related Trump Organization development? Then there’s the matter of Qatar, because in recent months it has become clear that the Gulf state is again in the Trump administration’s good graces, and the strategic alliance has been renewed as if last spring’s blowup never happened. Is that because it’s a more sensible policy — or is it because a firm called Brookfield Asset Management that is backed heavily by Qatari funds is near a deal to bail out Kushner’s 666 Fifth Ave? Is it any wonder that so many longtime key allies of the United States wonder if they can trust Trump’s America?

I note that Trump was thoroughly corrupt, and deeply mobbed up last year, but, instead of looking at the stuff that blatantly obvious, we have discussions of pee tapes.

Good Proposal

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One of the features land reform historically has been expropriation, and these days, that frequently is made very difficult by modern trade deals, and extra-territorial court decisions, where you see people seizing assets once they are out of countries.
There is another way, rigorously enforced property taxes at a significant , with a reasonable homestead exemption, something on the order of 20 hectares for agricultural use, and 2 hectares for other uses:

………Most of the land, and all the best land, is owned or controlled by absentee natives or by outside organizations—foreign corporations, banks or governments. Local government is corrupt, incompetent, and obligated to outsiders if not actually controlled by them. There’s a two-fold net effect. On the one hand, there’s a continuing drain of working capital and labor to the outside, as rents, interest, profits flow out and young adults emigrate. On the other hand, the extraction process cripples the economy, by cutting off working capital and killing labor incentives. The local government, cannot or will not provide adequate services, due to corruption and lack of tax money. Metaphorically, these colonies are being bled dry.

Suppose a reform government were to come to power in these places and suppose it could stave off foreign threats. How could it stop the bleeding?

………

The same strategy can work for modern colonies. A reform government can heavily tax the value of real estate, possibly with exemptions for small resident property owners. Better yet, and much easier to implement, tax only the land component of real estate. Such a tax would force absentee owners to send euros or dollars back to the colonies. The government could then begin to provide services and repair infrastructure. But why tax real estate? Why not tax income or imports? Because absentees and foreign based corporations can easily avoid income taxes by funny accounting. Taxes on most imports are regressive and a drain on the economy. The real money is in real estate.

All but the most primitive governments keep some sort of registry of property, crude and out of date in Greece, Haiti, and Puerto Rico. A reform government can easily create new cadastral maps—that’s what George Washington did as he surveyed Native American land. In the age of GPS it’s even easier. The government can then place the existing claims on the map. The recorded “owner” may be a shell corporation based in the Bahamas, but no matter. Just tax it. Where claims overlap, they can be taxed twice—forcing owners to resolve the boundaries. The government can claim any blank spots—forcing hidden informal owners to declare themselves or lose the property.

If you juxtapose this with a stated goal of land reform through eminent domain, where the owners are paid a fair market value for their properties, you can create a simple assessment of the property:

Another strategy for getting initial property values is to ask owners to declare the values themselves, with the government having the right to purchase the properties at the declared value. The government right to purchase, if enforced, takes away owners’ incentive to understate the value.

As an aside here, if you require this declaration for a reduced tax rate, say 20% if the owner does not make a declaration versus 2% if they do, and you require the land to be tied to an actual person for a homestead exemption, which means that obscure ownership arrangements become economically unsustainable.

The downside, of course, is the urge of politicians to cut tax deals with large corporations for the immediate political benefit, even though any sane analysis shows that this ends up costing more than it generates in revenue.  (Amazon’s grotesque competition for its second headquarters is simply the most egregious example ……… so far.)

Feet of Clay

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It appears that Warren Buffett’s mortgage companies aggressively redline, steering affordable mortgages away from black borrowers:

Trident Mortgage Co. helps more families buy homes in Philadelphia and neighboring Camden, New Jersey, than any other company, but it primarily serves one demographic: white people.

That is no coincidence: Trident employs a nearly all-white team of mortgage consultants, and all of Trident’s offices are in white neighborhoods, where it makes the overwhelming majority of its loans to white homebuyers.

It’s a division of Berkshire Hathaway Inc., the giant holding company led by Warren Buffett, which has dramatically expanded its mortgage brokerage portfolio in recent years, reporting nearly 28,000 loans worth $7.3 billion last year.

“I originally paid little attention to HomeServices,” Buffett wrote in his most recent shareholder letter, referring to Berkshire Hathaway’s real estate brokerage operation, HomeServices of America Inc., which controls Trident and two other mortgage companies. Then, he said, its “growth exploded.”

………

But as they’ve become major players in cities across America, Berkshire Hathaway’s affiliated mortgage companies have followed a consistent pattern. Government lending data reviewed by Reveal from The Center for Investigative Reporting shows the companies direct their lending toward white borrowers and white neighborhoods, even in population centers such as Philadelphia where a majority of residents are people of color.

The analysis is part of Reveal’s ongoing coverage of modern-day redlining in America, which found 61 metro areas, from Jacksonville, Florida, to Tacoma, Washington, where people of color were significantly more likely to be denied a conventional home loan than their white counterparts. This was true even when people of color earned the same amount of money as white loan applicants, wanted to take on the same size loan or buy in the same neighborhood.

Reveal’s analysis found people of color were far more likely to be turned down for a loan in many of Berkshire Hathaway’s largest markets, including Philadelphia, Atlanta and Washington, D.C. It makes loans through three firms, Trident Mortgage, HomeServices Lending LLC and Prosperity Home Mortgage LLC. Here’s a breakdown:

  • In Philadelphia, Trident Mortgage made 1,721 conventional home purchase loans in 2015 and 2016, 47 of them to African Americans and 42 to Latinos.
  • In Atlanta, HomeServices Lending made 1,358 conventional home purchase loans, 63 to African Americans and 46 to Latinos.
  • In Washington, Prosperity Home Mortgage made 2,650 conventional home purchase loans, including 167 to African Americans and 144 to Latinos.


Legal experts said Berkshire Hathaway’s mortgage companies were carrying out the very practices outlawed by the Fair Housing Act, a 50-year-old law that banned racial discrimination in lending, by locating their branches in white neighborhoods, employing mortgage consultants who – from their websites – appear to be overwhelmingly white and lending mostly to white borrowers.

“It sounds to me like they are intentionally avoiding doing business with people of color,” said Allison Bethel, director of the fair housing clinic at the John Marshall Law School in Chicago.

………

The analysis compared the racial breakdown of mortgage lending for every lender in every city in America. It showed Berkshire Hathaway’s mortgage companies took in a far greater proportion of their conventional loan applications from white homebuyers than their competitors in its largest markets in 2015 and 2016.

The figures were especially stark for Trident, which placed all of its 55 loan centers across Delaware, New Jersey and Pennsylvania in majority-white neighborhoods, Reveal’s analysis found. The analysis also showed 92 percent of the company’s conventional home loan applications came from borrowers in majority-white neighborhoods. When Trident did lend in neighborhoods where the majority of residents were people of color, most of the loans still went to whites.

Berkshire Hathaway’s mortgage business has the hallmarks of one that could be prosecuted for “failure to serve” under the Fair Housing Act, according to Eric Halperin, a former federal prosecutor who oversaw fair lending cases during President Barack Obama’s first term.

………

The government lending data analyzed by Reveal also showed Trident served a much smaller and whiter section of the Philadelphia area than the region’s No. 2 lender, Wells Fargo, which overall took in a slightly smaller number of conventional home purchase applications. Trident made 26 times as many conventional loans to white homebuyers as black homebuyers in Philadelphia in 2015 and 2016, the data shows. For Wells Fargo, that ratio was 7 to 1.

It seems to me that Oracle of Omaha might have a blond blind spot when it comes to issues of people of color.

How the Sharing Economy Makes Our Lives Better

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A study by the New York City Comptroller has shown that Airbnb led to significant rent increases in New York City:

Airbnb’s growing influence caused rents to increase significantly in tourist areas and gentrifying neighborhoods in Manhattan and Brooklyn, where the majority of the company’s rentals are concentrated, according to a report released on Thursday by the city comptroller’s office.

In Manhattan’s Hell’s Kitchen and Chelsea neighborhoods and the Midtown Business District, which accounted for about 11 percent of all Airbnb listings in New York City in 2016, average monthly rents increased by $398 between 2009 and 2016, of which $86, or 21.6 percent, was a result of Airbnb’s presence, the report said. In Greenpoint and Williamsburg in Brooklyn, the study said, rents went up 18.6 percent in those years because of Airbnb listings.

Airbnb makes it easy to rent apartments to tourists, taking units off the market for full-time residents, the report said.

“For years, New Yorkers have felt the burden of rents that go nowhere but up, and Airbnb is one reason why,” the city comptroller, Scott M. Stringer, said in an interview. “It’s just simply supply and demand. Fewer apartments to rent means higher prices, and that’s the Airbnb effect.”

The report said that Airbnb’s influence cost New Yorkers $616 million in additional rent in 2016 as a result of price pressures.

The term for this is negative externality, the imposition of a cost on a third party not directly involved in the transaction.

It’s the same as the trucker polluting your air, or the dry cleaner who dumps his chemicals down the drain.

In this case, Airbnb and its “Hosts” make money, and everyone else pays for it, to the tune of about $1000.00 a year in added rent. 

I’ve Heard This Story Before

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Luxury homes in Manhattan are selling at the biggest discounts on record as owners grow tired of waiting for buyers to match their price.

Homes priced at $4 million or more that went into contract in the first 12 weeks of the year had their asking prices cut by an average of 10 percent, the most in data going back to 2012, according to Olshan Realty Inc. Final sale prices, which won’t be known until the deals close, will probably reflect even greater reductions, said Donna Olshan, president of the brokerage that compiled the report.

“Most things at $4 million and above are selling 15 to 20 percent below the original ask,” Olshan said. “It’s a data point that screams: The market is overpriced!”

Owners who prevail in selling their homes are conceding that Manhattan’s luxury market is brimming with choices, and that even well-heeled buyers are sensitive to price. Shoppers with cash are no longer bidding up properties to record levels, and sellers who recognize the new reality are the likeliest to succeed, Olshan said.

If things are bad now, what happens when there is crack-down on money laundering?

Also, what happens when banks start getting burnt by this?

Two words, “Lehman Brothers, 2008.”

OK, that’s two words and one number.

The Further Adventures of Everyone’s Favorite Slum Lord

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I am referring, of course, to Jared Kushner, who is being sued for an exceptional level of slum lord sliminess.

They have been trying to move the suit to Federal court, where the jury would be less sympathetic.

Unfortunately for him, being in Federal court would require his company to reveal all the investors, and a judge has ruled that this information would not be kept under seal, so going to stay in Maryland state court:

Jared Kushner’s family real estate company has backtracked on its effort to have a lawsuit filed against it by tenants of its Baltimore-area apartment complexes moved to federal court, after a judge ruled that this transfer would require it to reveal the identities of its investment partners.

The tenants’ class-action lawsuit was filed in the Circuit Court for Baltimore City in September, four months after a ProPublica article co-published with the New York Times Magazine described the highly aggressive tactics used by Kushner Companies to pursue tenants and former tenants over allegedly unpaid rent or broken leases. The lawsuit alleged that Kushner Companies, which owns 15 large apartment complexes in the Baltimore area, was improperly piling late fees and court fees onto tenants’ bills, often in excess of state limits, and using the threat of immediate eviction to force payment.

In early November, the various Kushner affiliates named in the lawsuit filed a request to have the case moved from the state court, where it would be heard by a Baltimore City jury, to the federal courts, where it would be heard by a jury drawn from a broader geographic swath of Maryland. To get approval for this request, Kushner Companies had to show that none of the investors it has brought in as partners on the complexes are based in Maryland.

The Kushner affiliates also filed a motion in federal court seeking to have the list of the investment partners shielded from public view, citing the high degree of media interest in Jared Kushner, who as Kushner Companies CEO presided over the purchase of the complexes before moving into the White House to serve as senior advisor to President Donald Trump, his father-in-law. “Given the tenor of the media’s reporting of this case, including politically-motivated innuendo no doubt intended to disparage the First Family, there is foreseeable risk of prejudice to the privacy rights and reputations of innocent private investors,” the Kushner lawyers wrote.

So, who do you think that his investors are?

For real estate in general, and the Kushners in particular, helping people launder money with real estate is a core operating principle.

My guess is that it would be mobsters, drug lords, with Saudis, Chinese, and Russian oligarchs thrown in as a garnish.

Cue Jimmy McMillian

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Retail has been vanishing in New York City, it ain’t because of online retail, it’s because the rent is too damn high because commercial real estate in the city has become infested with hedge fund investors who have been jacking up the the rent.

It’s not like they have a choice. The way that this sort of investment works is that they have short term (around 5 years) interest only mortgages, and if they cut rents, then they cannot refinance at the end of the term, because the valuation is directly related to the rents that they charge:

Walk down almost any major New York street – say Fifth Avenue near Trump Tower, or Madison Avenue from midtown to the Upper East Side. Perhaps venture down Canal Street, or into the West Village around Bleecker, and some of the most expensive retail areas in the world are blitzed with vacant storefronts.

The famed Lincoln Plaza Cinemas on the Upper West Side announced earlier this week that it is closing next month. A blow to the city’s cinephiles, certainly, but also a sign of the effects that rapid gentrification, coupled with technological innovation, are having on the city.

Over the past several years, thousands of small retailers have closed, replaced by national chains. When they, too, fail, the stores lie vacant, and landlords, often institutional investors, are unwilling to drop rents.

They are actually unable to drop rents, because, as I have noted a above, they sustain losses on a property better than they can a drop in rents.

A recent survey by New York councilmember Helen Rosenthal found 12% of stores on one stretch of the Upper West Side is unoccupied and ‘for lease’. The picture is repeated nationally. In October, the US surpassed the previous record for store closings, set after the 2008 financial crisis.

The common refrain is that the devastation is the product of a profound shift in consumption to online, with Amazon frequently identified as the leading culprit. But this is maybe an over-simplification.

“It’s not Amazon, it’s rent,” says Jeremiah Moss, author of the website and book Vanishing New York. “Over the decades, small businesses weathered the New York of the 70s with it near-bankruptcy and high crime. Businesses could survive the internet, but they need a reasonable rent to do that.”

Part of the problem is the changing make-up of New York landlords. Many are no longer mom-and-pop operations, but institutional investors and hedge funds that are unwilling to drop rents to match retail conditions. “They are running small businesses out of the city and replacing them with chain stores and temporary luxury businesses,” says Moss.

In addition, he says, banks will devalue a property if it’s occupied by a small business, and increase it for a chain store. “There’s benefit to waiting for chain stores. If you are a hedge fund manager running a portfolio you leave it empty and take a write-off.”

Seriously, there is nothing in this world that financialization cannot destroy.

It takes a lot of work to destroy retail in New York City, but the hedge funds seem to have found a way.

Lame Ass Tweet of the Day

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Care of my first cousin, once removed:

The Republican tax bill caps the mortgage interest deduction at $750,000 for new mortgages. In California, seven counties have average home prices that are more than $750,000: Alameda, Marin, Orange, San Francisco, San Mateo, Santa Clara and Santa Cruz counties. #GOPTaxScam

— Sen Dianne Feinstein (@SenFeinstein) December 17, 2017

You know, there are any number of cogent reasons to oppose the Republican tax bill.

It’s bad policy.

It’s worse economics.

It is completely bereft of morality.

But arguing that because housing is over priced in California, largely as a result of Proposition 13*, that the tax bill is bad is the single most unconvincing argument that one can POSSIBLY come up with.

*Prop 13 requires that property taxes go up at a fraction of the rate of inflation, and as a result, people don’t downsize on paid off homes, because their taxes would double or triple. This reduces supply, and drives up the price, of housing.

Where I Feel a Grudging Admiration of an Atrocity Committed by Mao Zedong

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I am referring, of course, to Mao’s mass executions of landlords.

I am aware that the later leader of the PRC has a life that is drenched in blood, but when I read about Houston landlords demanding rent for flooded homes, I have an insight into why the peasants might be inclined to support such a policy:

Rocio Fuentes weighed up the cost of getting some new sofas for her new apartment in Pasadena, Texas, and decided the family budget could just about stretch to it. Just one month after moving in, Hurricane Harvey swept through and the Fuenteses were left not only with the ruined furniture but also an ongoing rental demand for a dwelling they had to flee.

 ………

 But while everything has changed for this family, they are still expected to pay for their abandoned home.

 “Our landlords say we have to pay rent and late fees and every day it is going up,” Fuentes said. “We are paying rent for somewhere we can’t live in. They said ‘you aren’t the only ones in this situation’, but what are we supposed to do? We don’t have any money. We don’t have anything.”

 An acute housing crisis is starting to grip thousands of other families in south-east Texas as the floodwaters ebb away, with a death toll put at 60 on Monday. More than 180,000 houses in the Houston area have been badly damaged, with only a fraction of occupants owning any flood insurance. And under Texas law, rent must still be paid on damaged dwellings, unless they are deemed completely uninhabitable.

 ………

 Under the Texas property code, if a rental premises is “totally unusable” due to an external disaster then either the landlord or tenant can terminate the lease through written notice. But if the property is “partially unusable” because of a disaster, a tenant may only get a reduction in rent determined by a county or district court.

We need to send Jimmy “The Rent is Too Damn High” McMillan down there to kick some landlord butt.

Asshole Loser of the Day: Vinod Khosla

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A California court has ordered a Silicon Valley billionaire to restore access to a beloved beach that he closed off for his private use, a major victory for public lands advocates who have been fighting the venture capitalist for years.

An appeals court ruled on Thursday that Vinod Khosla, who runs the venture capital firm Khosla Ventures and co-founded the tech company Sun Microsystems, must unlock the gates to Martins Beach in northern California by his property.

The decision is a major blow to Khosla and other wealthy landowners who have increasingly tried to buy up the internationally celebrated beaches along the California coast and turn public lands into private property.

The beach was a popular destination for fishing, surfing and other recreational activities for nearly a century, and the previous owners provided a general store and public restroom. But Khosla eventually bought the property and in 2010 closed public access, putting up signs warning against trespassing.

Khosla, who has a net worth of $1.55bn and does not live on the property, has faced multiple lawsuits and legislative efforts to get him to open up the gate to the beach near Half Moon Bay, about 30 miles south of San Francisco. The law in California states that all beaches should be open to the public up to the “mean high tide line”.

The decision this week, affirming a lower court ruling, stems from a lawsuit filed by the Surfrider Foundation, a not-for-profit group that says the case could have broader implications for beach access across the US.

“Vinod Khosla, with his billions of dollars, bought this piece of property and said, ‘No, no, the public isn’t going to use this anymore. End of story,’” the Surfrider attorney Joe Cotchett said by phone on Thursday. “He got away with it for many years … This is probably one of the most important public right-of-access cases in the country.”

You know, maybe if we actually enforced the rules against the rich, we would have a better society.

Something Seriously Weird

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The indespensible Matt Tiabbi has looked into the Government takeover of the government-sponsored entities (GSEs), Fannie Mae and Freddie Mac, and found it odd.

Not only is it odd, but it runs completely counter to the normal way that the Treasury Department handled rescues during the financial crisis.

For the bailouts of both the auto companies and AIG, the Secretary of the Treasury Timothy “Eddie Haskell” Geithner could not get the government out of those businesses, but with Fannie and Freddie, they retained a permanent ongoing interest:

In August 2012, a few months before Barack Obama told Mitt Romney the Eighties had called and wanted their foreign policy back, the U.S. government made a momentous and little-discussed decision. It unilaterally changed the terms of the bailout of Fannie Mae and Freddie Mac, seizing all of the companies’ profits.

 The government originally insisted on a 10 percent annual dividend in exchange for what ultimately became a $187 billion rescue. In 2012, the government quietly changed that 10 percent deal to one in which the state simply seized all profits. Government regulators euphemistically described this as “fully capturing financial benefits.” The press paid almost no attention to this event.

 ………

 They had gone bust during the crash years for a variety of reasons, mostly due to incompetent and corrupt management. But by the summer of 2012, with the real estate market in recovery, the companies weren’t bust anymore. On the contrary, they were about to start making money again – enormous piles of it, in fact.

 The government has always insisted it didn’t know this. Not just in the summer of 2012 but numerous times since, officials have insisted that they needed 100 percent of Fannie and Freddie’s profits because they wanted to protect taxpayers from likely future losses, and because Fannie and Freddie would otherwise be unable to pay back what they owed.

 Mario Ugoletti, a special adviser to the director of the federal housing agency, said in 2013 of the companies’ debts that it was “unlikely that [Fannie and Freddie] would be able to meet that amount consistently without drawing additional funds from Treasury.”

 But documents just released in a court case show that the government privately believed just the opposite before it made its historic decision to “sweep” the GSE revenues.

 One key document is a memo from Mary Miller, assistant Treasury secretary for the financial markets, to then-Treasury Secretary Tim Geithner. Dated December 11th, 2011, Miller writes to Geithner that “Freddie is expected to be net income positive by the end of 2012, and Fannie by the end of 2013.”

 ………

 The only reason this story is hitting the headlines at all this week is because the government’s 2012 decision triggered an all-out pitched battle between two investor groups. Those who bet on Fannie and Freddie’s revival were wiped out by the government’s 2012 decision, while those who shorted the firms have made fortunes.

 The documents that came out this week were released in a lawsuit brought by Fannie and Freddie shareholders who believe that the government stole billions of dollars in profits from them.

Well, that last bit explains cui bono, doesn’t it.

I’m wondering if the firm Warburg Pincus, where Geithner secured a job as president, had short positions on Fannie and Freddie, but I am a cynical SOB.

Then I decided to put on my cynical hat, and thought perhaps the Obama administration was attempting to move the GSE’s function, and their government backing, to Wall Street, so as to privatize the profits and socialize the risks, to benefit the finance industry at the expense of ordinary Americans.

This did seem to be the modus operandi of the Obama and his Evil Minions™, and that the easiest way to take down the GSE’s would be to eliminate the major constituency for the supporting them, their investors.

It appears to have worked:

Lurking underneath the scandal derisively termed “Fanniegate” is a monstrous struggle for future profits. The fight here is not just about the profits generated by the GSEs, but what to do about them generally. Finance lobbyists have successfully forged a bipartisan consensus that the companies need to be privatized. Essentially, Wall Street wants to step into the shoes of Fannie and Freddie.

 In most versions of GSE reform currently winding their way through Congress, the same too-big-to-fail banks that blew up the mortgage markets in 2008 would assume most of the responsibilities of Fannie and Freddie. Crucially, securitized mortgages would continue to enjoy government backing under many of these proposals.

 Privatized profits, socialized losses. Who doesn’t love that formula?

 It would be the ultimate triumph for Wall Street, and the ultimate shocker ending to the crash era. After nearly blowing up the planet with a mortgage bubble and getting bailed out by taxpayers, banks would now be handed control of the real estate markets and granted permission to reap massive profits trading government-backed mortgages until the end of time.

I kind of hope that it’s petty corruption by Geithner, who, after all, is a rather petty fellow, because the other alternative is that the policies of the Obama administration with regard to the finance industry were at their core ineluctably evil.

The counter argument to this theory is the massive program of prosecuting the Wall Street banksters for their crimes, but even George W. Bush prosecuted more aggressively than the Obama administration did.

The Real Trump-Russia Connection

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Like pretty much every major player in the real estate market in New York City, Trump aggressively aided the Russian mob in laundering their proceeds through property purchases:

In 1984, a Russian émigré named David Bogatin went shopping for apartments in New York City. The 38-year-old had arrived in America seven years before, with just $3 in his pocket. But for a former pilot in the Soviet Army—his specialty had been shooting down Americans over North Vietnam—he had clearly done quite well for himself. Bogatin wasn’t hunting for a place in Brighton Beach, the Brooklyn enclave known as “Little Odessa” for its large population of immigrants from the Soviet Union. Instead, he was fixated on the glitziest apartment building on Fifth Avenue, a gaudy, 58-story edifice with gold-plated fixtures and a pink-marble atrium: Trump Tower.

A monument to celebrity and conspicuous consumption, the tower was home to the likes of Johnny Carson, Steven Spielberg, and Sophia Loren. Its brash, 38-year-old developer was something of a tabloid celebrity himself. Donald Trump was just coming into his own as a serious player in Manhattan real estate, and Trump Tower was the crown jewel of his growing empire. From the day it opened, the building was a hit—all but a few dozen of its 263 units had sold in the first few months. But Bogatin wasn’t deterred by the limited availability or the sky-high prices. The Russian plunked down $6 million to buy not one or two, but five luxury condos. The big check apparently caught the attention of the owner. According to Wayne Barrett, who investigated the deal for the Village Voice, Trump personally attended the closing, along with Bogatin.

If the transaction seemed suspicious—multiple apartments for a single buyer who appeared to have no legitimate way to put his hands on that much money—there may have been a reason. At the time, Russian mobsters were beginning to invest in high-end real estate, which offered an ideal vehicle to launder money from their criminal enterprises. “During the ’80s and ’90s, we in the U.S. government repeatedly saw a pattern by which criminals would use condos and high-rises to launder money,” says Jonathan Winer, a deputy assistant secretary of state for international law enforcement in the Clinton administration. “It didn’t matter that you paid too much, because the real estate values would rise, and it was a way of turning dirty money into clean money. It was done very systematically, and it explained why there are so many high-rises where the units were sold but no one is living in them.” When Trump Tower was built, as David Cay Johnston reports in The Making of Donald Trump, it was only the second high-rise in New York that accepted anonymous buyers.

In 1987, just three years after he attended the closing with Trump, Bogatin pleaded guilty to taking part in a massive gasoline-bootlegging scheme with Russian mobsters. After he fled the country, the government seized his five condos at Trump Tower, saying that he had purchased them to “launder money, to shelter and hide assets.” A Senate investigation into organized crime later revealed that Bogatin was a leading figure in the Russian mob in New York. His family ties, in fact, led straight to the top: His brother ran a $150 million stock scam with none other than Semion Mogilevich, whom the FBI considers the “boss of bosses” of the Russian mafia. At the time, Mogilevich—feared even by his fellow gangsters as “the most powerful mobster in the world”—was expanding his multibillion-dollar international criminal syndicate into America.

………

 The very nature of Trump’s businesses—all of which are privately held, with few reporting requirements—makes it difficult to root out the truth about his financial deals. And the world of Russian oligarchs and organized crime, by design, is shadowy and labyrinthine. For the past three decades, state and federal investigators, as well as some of America’s best investigative journalists, have sifted through mountains of real estate records, tax filings, civil lawsuits, criminal cases, and FBI and Interpol reports, unearthing ties between Trump and Russian mobsters like Mogilevich. To date, no one has documented that Trump was even aware of any suspicious entanglements in his far-flung businesses, let alone that he was directly compromised by the Russian mafia or the corrupt oligarchs who are closely allied with the Kremlin. So far, when it comes to Trump’s ties to Russia, there is no smoking gun. 

 But even without an investigation by Congress or a special prosecutor, there is much we already know about the president’s debt to Russia. A review of the public record reveals a clear and disturbing pattern: Trump owes much of his business success, and by extension his presidency, to a flow of highly suspicious money from Russia. Over the past three decades, at least 13 people with known or alleged links to Russian mobsters or oligarchs have owned, lived in, and even run criminal activities out of Trump Tower and other Trump properties. Many used his apartments and casinos to launder untold millions in dirty money. Some ran a worldwide high-stakes gambling ring out of Trump Tower—in a unit directly below one owned by Trump. Others provided Trump with lucrative branding deals that required no investment on his part. Taken together, the flow of money from Russia provided Trump with a crucial infusion of financing that helped rescue his empire from ruin, burnish his image, and launch his career in television and politics. “They saved his bacon,” says Kenneth McCallion, a former assistant U.S. attorney in the Reagan administration who investigated ties between organized crime and Trump’s developments in the 1980s.

(emphasis mine)
Some observations:

  • You cannot be a major real estate developer in New York City and not have made some sort of  accommodation to the mob.
  • Much of the appreciation of real estate in NYC (and London and Miami) has occurred only because of money laundering operations.
  • Trump has deliberately structured his real estate operations (“anonymous buyers”) to benefit as much as possible from dirty money.
  • There is a f%$# load of dirty money in Russia looking for a safe home.

This is something that an enterprising reporter could have covered during the election, but they were all to busy covering Trump’s latest tweets.

Seriously, This ain’t rocket science,* this is just decent shoe leather reporting.

I get that everyone goes to J-School imagines themselves meeting with Mark Felt (Deep Throat) in a parking garage, but most good reporting is an artifact of hard work, connecting the dots, and understanding the institutions that you are investigating.

*Full Disclosure, in 1999-2000 and 1996-1998, I worked as a mechanical engineer for what is now Lockheed Martin Missiles and Fire Control, and I have some claim to actually having been a rocket scientist.

This is What Happens When Government Plays Footsie with Real Estate Developers

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The plans for a new FBI headquarters have been scrapped.

As much as I hope that a new headquarters would remove the name of J. Edgar Hoover, this was rather complex deal, which involves various “incentives” from competing state and local governments and a byzantine property swap for services to lower cost, and as such, it seemed to be a recipe for a fiasco:

The federal government is canceling the search for a new FBI headquarters, according to officials familiar with the decision, putting a more than decade-long effort by the bureau to move out of the crumbling J. Edgar Hoover Building back at square one.

The decision follows years of failed attempts by federal officials to persuade Congress to fully back a plan for a campus in the Washington suburbs paid for by trading away the Hoover Building to a real estate developer and putting up nearly $2 billion in taxpayer funds to cover the remaining cost.

Officials from the General Services Administration, which manages federal real estate, said they plan to announce the cancellation in a phone call with bidders and in meetings on Capitol Hill on Tuesday morning. They spoke on the condition of anonymity because they were not authorized to disclose the decision before it was announced.

For years, FBI officials have raised alarms that the decrepit conditions at Hoover constitute serious security concerns. But the plan to replace the building grew mired in a pit of government dysfunction and escalating costs with no end in sight.

………

The GSA’s unconventional strategy of trying to offset the development cost by trading the Hoover Building downtown to the winning bidder was aimed at saving the government money but became a laborious and expensive complication.

As the search dragged on, both the federal government and developers bidding on the project began to bear inordinate costs.

Real estate companies pursuing the deal spent years and millions of dollars attempting to make their case for the project. The GSA, meanwhile, is housing many of the bureau’s 9,500 headquarters employees using expensive short-term leases at about a dozen locations throughout the Washington region because the staff long ago outgrew the Hoover Building.

………

President Barack Obama had sought $1.4 billion toward construction of the project, but in May, Congress left it underfunded by more than a half-billion dollars. Congressional leaders had pulled together $523 million toward the project and possibly $315 million more through transfers of existing funds previously meant for other uses.

That was on top of $390 million that had been previously appropriated for the project.

Then in June, House appropriators rescinded $200 million from the project, drawing exasperation from local officials who have been pushing for the government to decide among three final locations: Greenbelt, Md., Land­over, Md., or Springfield, Va.

At the time the House took back the $200 million, Minority Whip Steny H. Hoyer (D-Md.) and Rep. Anthony G. Brown (D-Md.) called the decision “reprehensible.”

………

Acting GSA administrator Timothy Horne is scheduled to testify before a House subcommittee Wednesday at a hearing about “Maximizing Taxpayer Returns and Reducing Waste in Real Estate.”

Hopefully, he will be aggressively questioned, because a cost more than $1½ billion for the building AFTER giving away some of the most attractive real estate in indicates that, “Maximizing Taxpayer Returns and Reducing Waste in Real Estate,” is not a governing principle here.

While We Are on the Subject of, Treason, Bribery, or Other High Crimes and Misdemeanors ………

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It does appear that Donald Trump (père, not fils) may have been using his position as President in an attempt to secure a bailout for a disastrous real estate deal made by Jared Kushner.

Specifically, Trump’s immediately taking the side of the House of Saud in their dispute with Qatar on Twitter may very well have been retaliation for their turning down a deal with his son-in-law:

Not long before a major crisis ripped through the Middle East, pitting the United States and a bloc of Gulf countries against Qatar, Jared Kushner’s real estate company had unsuccessfully sought a critical half-billion-dollar investment from one of the richest and most influential men in the tiny nation, according to three well-placed sources with knowledge of the near transaction.

Kushner is a senior adviser to President Trump, and also his son-in-law, and also the scion of a New York real estate empire that faces an extreme risk from an investment made by Kushner in the building at 666 Fifth Avenue, where the family is now severely underwater.

Qatar is facing an ongoing blockade led by Saudi Arabia and the United Arab Emirates and joined by Egypt and Bahrain, which President Trump has taken credit for sparking. Kushner, meanwhile, has reportedly played a key behind-the-scenes role in hardening the U.S. posture toward the embattled nation.

That hard line comes in the wake of the previously unreported half-billion-dollar deal that was never consummated. Throughout 2015 and 2016, Jared Kushner and his father, Charles, negotiated directly with a major investor in Qatar, Sheikh Hamad bin Jassim al-Thani, known as HBJ for short, in an effort to refinance the property on Fifth Avenue, the sources said.

Trump himself has unsuccessfully sought financing in recent years from the Qataris, but it is difficult to overstate just how important the investment at 666 Fifth Avenue is for Kushner, his company, and his family’s legacy in real estate. Without some outside intervention or unforeseen turnaround in the market, the investment could become an embarrassing half-billion-dollar loss. It’s unclear precisely how much peril such a loss would put Jared’s or his family’s finances in, given the opacity of their private holdings.

HBJ, a former prime minister of Qatar who ran the country’s $250 billion sovereign wealth fund, is a billionaire and one of the world’s richest men. He owns a yacht worth $300 million called Al Mirqab, the same name he gave to the private investment firm that Kushner pitched. The former emir of Qatar summed up HBJ’s power with a quip: “I may run this country, but he owns it.”

HBJ ultimately agreed to invest at least $500 million through Al Mirqab, on the condition that Kushner Companies could raise the rest of a multibillion refinancing elsewhere. The negotiations continued long after the election, carried out as recently as this spring by Charles Kushner. “HBJ basically told them, we’re good for 500, subject to a lot of things, but mainly subject to you being able to raise the rest,” said one source in the region with knowledge of the deal. The talks were confirmed by two additional sources with knowledge of the talks. One of those sources claimed that the potential deal was not contingent on the rest of the money being raised and that the HBJ investment was on hold as the overall structure of the financing was reconsidered. None of the sources would agree to talk on the record about a private financial transaction that has until now remained a secret.

………

The revelation of the half-billion-dollar deal raises thorny and unprecedented ethical questions. If the deal is not entirely dead, that means Jared Kushner is on the one hand pushing to use the power of American diplomacy to pummel a small nation, while on the other his firm is hoping to extract an extraordinary amount of capital from there for a failing investment. If, however, the deal is entirely dead, the pummeling may be seen as intimidating to other investors on the end of a Kushner Companies pitch.

………

On June 6, President Trump took sides, taking credit for the moves by the Gulf nations.

…extremism, and all reference was pointing to Qatar. Perhaps this will be the beginning of the end to the horror of terrorism!

— Donald J. Trump (@realDonaldTrump) June 6, 2017


So good to see the Saudi Arabia visit with the King and 50 countries already paying off. They said they would take a hard line on funding…

— Donald J. Trump (@realDonaldTrump) June 6, 2017


During my recent trip to the Middle East I stated that there can no longer be funding of Radical Ideology. Leaders pointed to Qatar – look!

— Donald J. Trump (@realDonaldTrump) June 6, 2017


On June 9, after Saudi Arabia and the UAE had begun to blockade Qatar, Secretary of State Rex Tillerson sought to calm nerves, calling for mediation and an immediate end to the blockade.

Within hours, Trump, at a White House ceremony, contradicted Tillerson, slamming Qatar again and claiming it had “historically been a funder of terrorism at a very high level.”

Trump’s White House remarks, Tillerson came to believe, had been written by UAE Ambassador Yousef Al-Otaiba and delivered to Trump by Jared Kushner.

(emphasis mine)

This is Teapot Dome level crap.

It’s easy to understand, and the violation of the law is clear.

What’s more from a power politics perspective, if this becomes a major political issue, it would scare off any potential investors for 666 5th Avenue, which would likely cripple the Kushner Company empire when the balloon payment comes due.

Quoting Billy Ray Valentine from the movie Trading Places, “The best way you hurt rich people is by turning them into poor people.”

If Only Classic Economic Theory Could Provide a Solution

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There seems to be much hand wringing over the fact that not enough people want to work construction these days:

About two-thirds of the contractors who are struggling with the labor shortages gripping the construction industry say it has become a challenge to finish jobs on time, according to a new survey.

More than one-third of contractors said they are being forced to turn work down and 58% said they are putting in higher bids, said the survey sponsored by USG Corp. and the U.S. Chamber of Commerce. Three-quarters of those who said they are having difficulty finding skilled labor said they are simply asking their employees to work harder.

“Basically they’re just making people work harder as a way to cope,” said Steve Jones, senior director of Dodge Data & Analytics, which was the research partner of USG and the Chamber on the project.

If you have a shortage of workers, increase wage and non-wage remuneration to a level where you have enough workers.

This is literally Econ 101.

Trolling Becomes Reality

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A week ago, I wrote admiringly of Jeremy Corbyn’s proposal to house people displaced by the fire at the Grenfell in empty luxury flats in the area.

Though I did not describe it as such, I felt that this proposal was a world class, and well deserved, troll, but that this would never happen.

I was wrong. The troll has become reality:

Sixty-eight flats in a luxury apartment complex where prices start at £1.6m are being made available to families displaced by the Grenfell Tower fire.

Families who escaped the tower blaze will be able to take up permanent occupation in July and August in the apartments in the Kensington Row scheme about 1.5 miles south of Grenfell, where last Wednesday’s blaze left 79 people dead and missing and presumed dead.

The homes are within the Royal Borough of Kensington and Chelsea but in the more affluent south end of the borough. They have been purchased by the Corporation of London and will become part of its social housing stock.
Grenfell Tower fire: death toll raised to 79 as minute’s silence held
Read more

The most luxurious four-bedroom apartments are currently on sale in the development for £8.5m but the homes being released to Grenfell residents are part of the affordable quota being built and feature a more “straightforward” internal specification, but have the same build quality.

The complex includes a 24-hour concierge, swimming pool, sauna and spa and private cinema.

It is not yet clear if the Grenfell residents will have access to the facilities, which are normally not included for those in affordable housing.

“We’ve got to start by finding each of them a home,” said Tony Pidgley, chairman of the Berkeley Group, which built the homes. “Somewhere safe and supportive, close to their friends and the places they know, so they can start to rebuild their lives. We will work night and day to get these homes ready.”

The move follows calls by Jeremy Corbyn for luxury homes in the borough to be requisitioned.

Last week he said: “Kensington is a tale of two cities. The south part of Kensington is incredibly wealthy, it’s the wealthiest part of the whole country. The ward where this fire took place is, I think, the poorest ward in the whole country and properties must be found – requisitioned if necessary – to make sure those residents do get rehoused locally.”

My theory is that Coebyn’s proposal scared the hell out of the real estate community,  for whom empty buildings purchased by mobsters, despots, and other money launderers that is their bread and butter.

Had even one of these empty flats been requisitioned, the damage to the very high end London real estate market would have lasted for decades.

Wells Fargo Again

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In addition to creating phony accounts for customers, it appears that Wells Fargo modified mortgages of people who had filed for bankruptcy, which is illegal in at least two levels:

Even as Wells Fargo was reeling from a major scandal in its consumer bank last year, officials in the company’s mortgage business were putting through unauthorized changes to home loans held by customers in bankruptcy, a new class action and other lawsuits contend.

The changes, which surprised the customers, typically lowered their monthly loan payments, which would seem to benefit borrowers, particularly those in bankruptcy. But deep in the details was this fact: Wells Fargo’s changes would extend the terms of borrowers’ loans by decades, meaning they would have monthly payments for far longer and would ultimately owe the bank much more.

Any change to a payment plan for a person in bankruptcy is subject to approval by the court and the other parties involved. But Wells Fargo put through big changes to the home loans without such approval, according to the lawsuits.

The changes are part of a trial loan modification process from Wells Fargo. But they put borrowers in bankruptcy at risk of defaulting on the commitments they have made to the courts, and could make them vulnerable to foreclosure in the future.

Seriously, what does a bankster need to do to get arrested in the USA?

One Wingnut Wipe Dream Bites the Duat

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You know the tale, a reactionary Congressman from the mountain west proposes selling off the national parks and national forests for a couple of magic beans, and then in the face of a freakout from hunters, sport fishermen, and outdoors enthusiasts, backs down.

It ain’t just the green crowd that gets a benefit from public lands:

Rep. Jason Chaffetz (R-Utah) withdrew legislation Thursday that would have transferred 3 million acres of land from federal to state ownership, citing objections from constituents who complained that the move would limit access to public hunting and fishing grounds.

The Disposal of Excess Federal Lands Act, which would have shifted federal holdings to state governments in Utah, Arizona, Colorado, Idaho, Montana, Nebraska, Nevada, New Mexico, Oregon and Wyoming, prompted an outcry among hunters and anglers’ groups. Introduced three weeks after House Republicans enacted a rule change to make it easier to sell off federal land, the measure prompted two separate rallies in Santa Fe, N.M., and Helena, Mont., this week that drew hundreds of people opposed to the measure.

“I am sensitive to the perceptions this bill creates in the current environment,” Chaffetz wrote in his letter to House Natural Resources Committee Chairman Rob Bishop (R-Utah). “As a proud gun owner, hunter and public lands enthusiast, I want to be responsive to my constituents who enjoy these lands. I look forward to continuing to work with stakeholders in the broader public lands discussion in a collaborative manner.”

BTW, what that last statment means is that he’ll try again during a lame duck after he announces his retirement.

They will be back to steal our land.