Friday, August 31, 2007

Market Crisis of 2007 - NY Times - Primer on CDOs and Credit Derivatives

Published in the New York Times, Friday, August 31, 2007

News Analysis
Why a U.S. Subprime Mortgage Crisis Is Felt Around the World


The evening entertainment for roughly 500 financial executives at the Deutsche Bank global derivatives conference last month in Barcelona did not come cheap — the Rolling Stones reportedly were paid more than $5 million.

“The best part is, it’s coming out of your bonuses,” Mick Jagger joked to the crowd.

The hosts of the conference could well afford it. After all, the business of creating new finance vehicles like derivatives and structured products has exploded in recent years. And at the time of the conference, there remained a mostly rosy view of such instruments, because of their ability to help businesses and investors spread out risk.

But the global financial turmoil — set off by problems with subprime mortgages — has prompted a backlash in some quarters against such financial engineering.

More broadly, it has led to a better understanding of the downside of spreading risk so well — it can be felt in all corners of the world, unsettling hedge funds, banks and stock markets as far away as Australia, Thailand and Germany. In effect, reducing risk on a global scale appears to have increased it for some players.

“The market appears to be finding it harder to truly understand the inherent and underlying risks involved,” said Chris Rexworthy, who was a regulator with the Financial Services Authority in Britain for 10 years before moving recently to the private sector.

The backlash is particularly sharp abroad, in countries that were surprised to find that problems with United States homeowners could be felt so keenly in their home markets. Foreign politicians and regulators are seeking a role in the oversight of American markets, banks and rating agencies. The head of the Council of Economic Analysis in France has called for complex securities to be scrutinized before banks are authorized to buy them.

In the United States, regulators appear to think that the new and often unregulated investment vehicles — which have shrunk the world and speeded up business in much the same way as the Internet — are not all inherently flawed.

This opinion is captured in an analogy offered by Peter Douglas, the founder of GFIA, a hedge fund research firm in Singapore. He likens using derivatives to power tools. If you know how to use them, he said, they are exponentially better and faster for building a house, compared with using hammers, screwdrivers and handsaws.

If you don’t, “you could drill a hole in your head," he said.

Funds and banks around the world have taken hits because they purchased bonds, or risk related to bonds, backed by bad home loans, often bundled into financial instruments called collateralized debt obligations, or C.D.O.’s.

The losses have often surprised the investors, and in some cases the funds and the executives of the banks, who were unaware of the extent of their risks.

The crisis extended as far as the $2.2 trillion money market that finances the day-to-day operations of businesses, as investors wondered whether the underlying assets were sound. “It’s amazing how much ignorance and fear are out there,” said Kevin Davis, a professor of finance at the University of Melbourne.

The confusion about these products lies in part in their complexity. Structured products are pooled assets that have been sliced and diced into ever more smaller, more specialized pieces.

They offered investors higher returns at a time when traditional fixed income, or debt-related products, were producing low returns.

As low interest rates fueled a lending boom to borrowers with weak credit, banks looked for new ways to package those loans, so they could sell more. A central building block to offset the risk was asset-backed securities, which are bonds backed by pools of mortgages or other income-producing assets, like student loans, auto loans, and credit card receivables.

Banks and other financial institutions pooled those asset-backed securities into new units, dividing them up again and issuing securities against them, creating collateralized debt obligations.

The idea took off, with new combinations that were further removed from the original asset. New creations included C.D.O.’s of C.D.O.’s, called C.D.O.-squared. There is even a C.D.O.-cubed.

According to JPMorgan, there are about $1.5 trillion in global collateralized debt obligations, and about $500 billion to $600 billion in structured-finance C.D.O.’s, referring to those made up of bonds backed by subprime mortgages, slightly safer mortgages and commercial mortgage backed securities.

Many of the products have proved to be highly problematic as the underlying assets — the subprime mortgages — have gone bust, revealing dangerous amounts of leverage in the securities that few people could value. As a result, they have become like a potent computer virus, leaving many people fearful that they too will be affected.

“A lot of risk in the subprime asset-backed market is embedded in, and amplified by, C.D.O.’s,” said Rod Dubitsky, head of asset-backed research at Credit Suisse.

Weaknesses in the system were laid bare, including ratings that did not accurately reflect risk and faulty assumptions on how diversified pools with multiple layers of leverage would react.

That in turn spooked investors in other markets, who started selling anything they thought might be risky, from stocks to loans, and in some cases putting their money into cash.

The combination of a subprime shock, “untested financial innovation and leverage has led to a confidence crisis,” said Pierre Cailleteau, Moody’s Investors Service chief economist in London.

The advent of radically more complex structured products coincided with another trend in finance: the explosion of credit derivatives, financial tools that enabled institutions like banks and hedge funds to try to hedge exposure to the huge credit market, like loans to corporations.

“Credit derivatives are the fastest-growing part of any bank,” says Derek Smith, head of flow credit trading at Deutsche Bank. He cited 80 percent growth in 2007 for his firm and average annual growth of about 40 percent for the industry.

Blythe Masters, a veteran of the credit derivatives revolution and the head of global derivatives at JPMorgan Chase, added, “There has been a wall of money coming at the credit markets in the past five years.”

Credit default swaps (what are widely known as a credit derivatives) allow two parties to exchange the credit risk of an issuer, such as a company. For example, if an investor buys a credit default swap on General Motors, called buying protection, he or she makes money when the credit weakens and makes a lot of money if G.M. goes bankrupt.

In the meantime, the seller of protection makes a fee from the buyer and profits if the company’s credit improves.

Credit derivatives radically shifted the financial landscape for two reasons: they allowed banks to hedge some of their exposure to the huge loans they give corporations, and they have allowed investors to bet against, or short credit, as a hedge and to speculate.

For banks, shedding exposure to the credit risk of companies, or governments, or individuals, means not having to reserve as much capital for potential losses. That frees up capital to make even more loans — to homeowners, institutional investors, corporations or hedge funds.

The banks found a perfect partner in hedge funds, lightly regulated pools of capital with high fees that were looking for better returns. Insurance companies and pension funds also sought the higher returns, called yield, as interest rates hit historically low rates.

“Fundamentally, having 100 or 1,000 people with a slice of the risk is better than a bank holding 100 percent of the risk,” said Robert G. Pickel, chief executive of the International Swaps and Derivatives Association.

As the market for C.D.O.’s backed by structured products choked in recent weeks, the overall credit derivatives market has performed well, say some industry participants.

“Credit derivatives have done a good job at doing exactly what they should do: they have accurately and immediately reflected the markets’ pricing of risk throughout this crisis,” Ms. Masters said. But there has been a lot of pain. Investors purchasing derivatives are making a bet that the underlying stock or bond or loan is going to rise or fall, but they do not own it. Because buying a derivative requires much less capital than buying the loan or bond it is derived from, banks and traders can buy more of them than they could loans or bonds. That can translate into huge gains — or, in times of stress, outsize losses.

Some institutions are not parsing what products are riskier than others, but rather they are rushing for the door. First State Investments in Singapore has slashed its holdings in all Asian financial firms in recent weeks.

At this point “it doesn’t really matter what their exposure is” to subprime products through derivatives, said Alistair Thompson, the deputy head of Asia-Pacific equities at First State. “What concerns us is the sentiment” in the market, he said.

The surprises are certainly not over: there were whispers among investors in Australia this week that some local funds were still turning up unexpected subprime exposure because of credit derivatives, weeks after the problems first surfaced.

While that happens, markets are sure to remain skittish.

“Liquidity can just be turned off, and essentially it is a confidence game,” Mr. Thompson said.

Link to online story here. Archived here.

(In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. Plainfield Today, Plainfield Stuff and Clippings have no affiliation whatsoever with the originator of these articles nor are Plainfield Today, Plainfield Stuff or Clippings endorsed or sponsored by the originator.)

Pay-to-Play - Bergen Record - Ferreiro attacks regulation

Published in the Bergen Record, Thursday, August 30, 2007

Ferriero support of pay-to-play stuns Democrats


Joe Ferriero has never disguised his disgust for New Jersey's pay-to-play bans on campaign contributions.

Bergen County's top Democratic power broker would love nothing better than to watch a judge cut those restrictions to ribbons -- much like the way he swiftly diced a pair of poached eggs at a Hackensack diner on Wednesday.

"I have made it known to party leaders of my intention to challenge the constitutionality of pay-to-play [restrictions]," he said, referring to his plans to file a lawsuit in federal court, possibly in two weeks. "No one in any way has tried to dissuade me from doing this."

That's probably going to change. And quickly.

Nervous Democratic Party officials are furious, puzzled and privately ambivalent about Ferriero's attack on pay-to- play limitations, the crown jewel of the Democratic Party's ethics reform platform.

Ferriero's legal jihad defies every fundamental law of campaign politics, they say. Why would the wily political strategist and his legal counsel, Dennis Oury, openly talk about such an idea -- let alone draft a lawsuit -- just as the scandal-battered Democrats hit the campaign trail to try to maintain their tenuous control of the Legislature?

Sure, he has a point, some say. Many remain furious at Jim McGreevey for imposing an executive order on pay-to-play one month before the ethics-challenged governor left office in disgrace. McGreevey's last-ditch attempt to restore his name deprived his party of thousands of dollars

in contributions from professionals -- from lawyers to engineers to architects -- who do business with state and local governments.

Some even believe it's time to have a full debate over whether those contractors' First Amendment rights are being violated by pay-to-play bans.

But now?

Democrats know they are about to be painted as comrades of a corrupt party machine that produced Sens. Sharpe James of Newark and Wayne Bryant of Camden, both indicted on federal corruption charges. They are also the party of Ferriero protege Joe Coniglio of Paramus, who is in the crosshairs of a federal probe. And that's just for starters -- expect some opponents to roll out a McGreevey-era roster of rogue fund-raisers and friends.

So about the last thing Democrats want or need is to have Ferriero and the Bergen County Democratic Organization, which derived its power from an aggressive pursuit of contractor cash, trying to dismantle the new laws.

Tom Wilson, the Republican State Committee chairman, is already hatching a strategy: If Ferriero sues, he says, the GOP will challenge every Democratic candidate to take a position on the lawsuit. If they oppose it, he will call on them to return all BCDO contributions. (And the organization has been very generous in the past.)

Then there are the headlines such a lawsuit would generate. Think of how easily GOP strategists can cut and paste those screamers into campaign ads.

"All of us know that those statutes have turned good people from government,'' said Joe Cryan, chairman of the Democratic State Committee, striking a diplomatic tone. "However, our party is best served by our record of accomplishment, including ethics reform and the culture-changing Clean Elections campaign."

News of the suit, first reported in this column Tuesday, also reopened the public rift between Ferriero and his Bergen County nemesis, Sen. Loretta Weinberg of Teaneck, who has beaten back two challenges by his handpicked candidates. She and her running mates fired off a letter to Ferriero and the BCDO, criticizing him for pursuing the suit without input from county committee members. In other words, this was yet another example of Ferriero The Boss, a label he vehemently rejects.

Weinberg, who sponsored a key pay-to-play law in 2005, called opposition to it "bad government, bad politics and bad timing just before an election."

Governor Corzine is also less than enamored with the prospect of a fight.

"The governor is not going to support the lawsuit,'' said Lilo Stainton, his spokeswoman, adding: "He's more concerned with the potential corrosive effect of campaign cash than the possibility of debate within the Democratic Party."

Apparently stung by Weinberg's criticism, Ferriero said Wednesday that he will survey BCDO leaders, either through an executive committee meeting or by phone, before deciding whether to move ahead. But he remained unapologetic about his disdain for the laws, which he described as "unconstitutional and totally unnecessary."

He rejects suggestions that the bans are needed to halt the practice of rewarding donors with lucrative government spoils. Reformers argue that the practice inflates the cost of government, drives up property taxes and drains public confidence in government.

"It's an absolute absurd assertion to say that because people contribute to an election that it increases the costs,'' Ferriero said. "And I would defy anyone to prove that."

He added, "Contracts are not awarded in a vacuum. They are awarded in a public meeting subject to the scrutiny of the public and the press ... to determine whether the professional is qualified -- and what those rates are."

Ironically, Ferriero might find a sympathetic federal judiciary. The U.S. Supreme Court struck down a strict Vermont campaign finance law last year, and justices recently expressed disdain for the McCain-Feingold reforms on campaign advertising during oral arguments in a Wisconsin case.

Maybe that buoys confidence for Ferriero's prospects in a courtroom. It provides little comfort for Democrats defending themselves on the campaign trail.


Link to online story here. Archived here.

(In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. Plainfield Today, Plainfield Stuff and Clippings have no affiliation whatsoever with the originator of these articles nor are Plainfield Today, Plainfield Stuff or Clippings endorsed or sponsored by the originator.)

Thursday, August 30, 2007

Market Crisis of 2007 - Economist - Policy: What would Bagehot do?

Published in The Economist, Thursday, August 16, 2007

Economics focus
What would Bagehot do?
Should central banks act as buyers of last resort?

Aug 16th 2007
From The Economist print edition

HOWEVER much marble they lay in their foyers, banks have typically been brittle institutions. They borrow short (collecting deposits or short-term loans that might have to be repaid quickly) and lend long (making loans that cannot easily be converted into cash at anything close to their value to the bank).

A bank is solvent if its assets are worth more than the money it owes to its depositors and creditors. As long as its depositors believe that their money is safe, their faith is rewarded. But even a solvent bank can be broken by a bank run. If depositors fear that others will withdraw their money, making claims on the bank's reserves of cash, nobody will want to be last in line. Since a bank cannot redeem more than a fraction of its deposits at any one time, the depositors' rush to escape with their money paradoxically ensures that some of them will lose it.

The damage may not stop there. A run on one bank can shake faith in another, if only because depositors have no reliable way to distinguish between sound and unsound institutions. As the banking system comes under threat, the supply of credit to businesses and households will be interrupted. And since cheques and other payments are often drawn on bank accounts, the payments system can come under strain.

In “Lombard Street”, his 1873 account of the money markets, Walter Bagehot urged the Bank of England to stave off such panics by lending “quickly, freely and readily”, at a penalty rate of interest, to any bank that can offer “good securities” as collateral. When this newspaper laid out these principles in September 1866, they were described by a director of the Bank of England as “the most mischievous doctrine ever broached in the monetary or banking world in this country”.

But as Bagehot pointed out, by lending liberally, central banks make it less likely that their money will be needed. By demanding good collateral, the central bank can try to distinguish insolvent banks from illiquid ones; and by charging a penalty rate of interest, it ensures that it is truly the lender of last resort.

Bagehot's mischievous doctrine is now conventional wisdom among central banks, as last week's events dramatically demonstrated. First the European Central Bank and then the Federal Reserve intervened liberally, lending against good collateral. They departed from Bagehot only in not charging a penalty rate.

Bank architecture has moved on since Bagehot's day: neo-classical columns giving way to glass atriums. Their position in the financial architecture has also changed. Companies that would once have turned to a bank for an overdraft or a loan now sell paper or bonds to the market. Home mortgages are now bundled into securities and sold on.

But as the past few weeks have shown, the financial system remains brittle. Hedge funds, for example, have ventured into thinly traded securities, such as collateralised-debt obligations (CDOs), that nowadays are easy to dispose of only in the mathematical models they use to value them. On the other side of the balance sheet, the funds have short-term financing from multiple sources. If a fund starts to show losses, its backers may lose faith in its trades. But even if they believe it will eventually make money, they might grow nervous about the fund's other backers. Just like a nervous depositor eyeing the queues in front of a bank, one hedge-fund creditor may demand its collateral before everyone else grabs theirs. If, to muster collateral, a fund is forced to sell assets into a falling market, a profitable trade can quickly become unprofitable. In this way, seasons of alarm “beget the calamities they dread,” as Bagehot put it.

Should anyone else care? Some of the buyers of CDOs are big enough that their failure can hit the banks that sponsor or finance them. It could also cause the credit markets to seize up, interrupting the provision of finance to the economy. What would Bagehot do in such circumstances? Making it cheaper for banks to lend to each other is a rather indirect method of intervention. The Fed's rate cuts in the autumn of 1998, as Long-Term Capital Management, a big hedge fund, neared collapse, allowed banks to pick up the pieces as the capital markets came unstuck. But such tactics might not always do the trick.
The new mischief-makers

Willem Buiter of the London School of Economics and Anne Sibert of Birkbeck College, London, have advocated their own mischievous doctrine*. They think central banks should become “market-makers of last resort”, setting a price for securities that can no longer be sold on “orderly” markets because distress sales are pushing prices far below their fundamental value.

The central bank could make a market in CDOs, say, either by accepting them as collateral or by buying them outright. In either case, it would have to make up its mind about the underlying risk of such instruments and an appropriate penalty price. If it gets its calculations wrong, the central bank may lose money and face. But, the two authors say, preserving financial stability is more important than “covering the central bank's posterior”.

The bigger danger is that the central bank might make the next crisis more likely if it goes too far to protect investors' posteriors in this one. After all, they should anticipate that a security might not be easy to trade. But they won't deal with this “liquidity risk” if they can rely on the central bank to create a liquid market in whatever security has got them into trouble.

Banks, in return for the protection offered by a lender of last resort and by deposit insurance, accept restrictions on how far they can extend themselves. Mr Buiter thinks that hedge funds should not enjoy the protection of a central bank until they too are willing to accept analogous restrictions. In the meantime, perhaps they should lay more marble in their foyers.


Link to online story here. Archived here.

(Note: Online stories may be taken down by their publisher after a period of time or made available for a fee. Links posted here is from the original online publication of this piece.)

(In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. Plainfield Today, Plainfield Stuff and Clippings have no affiliation whatsoever with the originator of these articles nor are Plainfield Today, Plainfield Stuff or Clippings endorsed or sponsored by the originator.)

Market Crisis of 2007 - Economist - Risk: Surviving the markets

Published in The Economist, Thursday, August 16, 2007

Risk and the new financial order
Surviving the markets
The new financial order is undergoing its harshest test.
It will not be pretty, but it is necessary

Aug 16th 2007
From The Economist print edition

THE lifeguards had been scanning the horizon for an oil-price shock, a bankrupt buy-out or a terrorist attack. But when the big wave struck last week it surprised them by coming from inside the financial system and threatening to swamp an unlikely shore, the money markets where banks lend to each other to help cover their daily operations. Investors have been asking for years if the frantic innovation in finance, especially the securitisation of just about every form of debt into a tradable asset, was a way to spread risk efficiently, or whether this left the financial system prone to rare—but cataclysmic—failures. It looks as if investors are about to find out.

Over the past week central banks have lent tens of billions of dollars to restore confidence to the markets (see article). But it is already clear that this mess is about more than a bit of rash mortgage lending to Americans who were in the habit of falling behind with their monthly payments. Hedge funds and private-equity firms, kings of the boom, are nursing big losses. Debt markets that once handed out cash to all comers are tight or closed altogether. In almost every asset market, investors are scurrying to reprice risk—which mostly means to reduce it.

The gravest and most immediate threat is to the banking system. For the time being, banks no longer trust other banks enough to lend them money except on onerous terms; equally worryingly, they lack confidence that other banks will trust them if they want to borrow. It is alarming when the very outfits that exist to supply the economy with credit start to hoard it from each other. At best this tightens monetary policy; at worst, a shortage of cash will cripple the payments system and cause runs on otherwise solvent banks and businesses that cannot rapidly raise funds.

Underneath all the new technology and the fancy derivatives with strange acronyms is a dilemma as old as banking itself. Anyone who thinks that lending has been too loose—and many bankers do—should welcome a purge: better now than later when the imbalances would be bigger and the economy probably weaker. But if good banks fail and money for good companies dries up, the purge will wreak huge and wasteful damage on healthy parts of the economy. How likely is that?
Fear of the deep

Financial crises are always about the way people do business, and not just the deals they have struck. Yet this one goes deeper than most. The spreading panic has shown up weaknesses in some of the foundations of modern finance. The past 20 years have created untold wealth. As securities and markets have steadily taken the place of old-style bank managers, the number of potential investors has grown and the cost of capital has fallen. Much good has come of that.

But there is a price that is only now becoming apparent. Because lenders expected to be able to sell on the risk of default to someone else, they lent too easily. After all, they would not have to pick up the pieces. In theory, that risk should have been borne by the people best able to carry it. But with everybody having sold on the risk to everyone else—and the risk often being carved up, repackaged and sold again—nobody is sure where the losses are. The fear is that some risks ended up with those who least understood what they were getting into, and fear is a potent force in this disintermediated world. In the interbank market, every counterparty was potentially vulnerable. Even small amounts of bad credit can drive out good.

In theory, ratings agencies and mathematical models help investors price the risk they are taking on, even if the securities they are buying are scarcely traded. Yet when some supposedly good-quality assets proved to be worth little, people lost faith in the models and the ratings. Across the board, investors had failed to take account of how fast and how far asset prices fall when everyone wants to sell at the same time. Hard-to-sell long-term securities had been bought with short-lived debt, which left borrowers vulnerable to a change in sentiment every time the debt fell due. It does nothing to restore confidence when the biggest model-driven hedge funds had to get in new money. The people at Goldman Sachs lost a packet when something happened that their computers told them should occur only once every 100 millennia.
Reassess, reprice and then rebound

The retreat to a new level of risk was never going to be orderly or free of casualties. Neither should it be. Bankers and investors need to suffer precisely because the methods of modern finance have been found wanting. It sounds Darwinian, but the brutal demonstration that you pay for your sins is what leads the system to evolve. Markets learn from their mistakes. Only fear will spur investors to price risks better and get them to put more effort into monitoring their counterparties.

If these lessons are to sink in, central bankers must stand back—as, by and large, they have done. Every intervention now will be taken as a sign of what the regulators will do next time. If they bail out banks that have mispriced risk, the mispricing will continue. And when the central banks do step in, it should not be to save the financiers. The cost of intervention is warranted only to save the rest of the economy from the financiers' folly. By that test, central banks were right to lend money to the banks in recent days, because it ensured that a liquidity crisis did not become a solvency crisis. They may yet have to take over a failed bank, though only if that is needed to stop a run. It is still far too soon to cut interest rates.

Because this crisis taps so deeply into the newly devised structures of finance, anyone who says the worst is definitely over is either a fool or someone with a position to protect. As risk has become bewilderingly dispersed, so too has information. Nobody yet knows who will bear what losses from mortgages—because nobody can be sure what those loans are really worth. Nobody knows if tighter lending standards will oblige borrowers to raise more capital, triggering more sales in stockmarkets and more pain. Nobody knows how messy the inevitable bankruptcies will turn out to be. What markets need now is time to piece that information back together. Time before the next wave strikes.

Link to online story here. Archived here.

(Note: Online stories may be taken down by their publisher after a period of time or made available for a fee. Links posted here is from the original online publication of this piece.)

(In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. Plainfield Today, Plainfield Stuff and Clippings have no affiliation whatsoever with the originator of these articles nor are Plainfield Today, Plainfield Stuff or Clippings endorsed or sponsored by the originator.)

Market Crisis of 2007 - NY Times - OpEd: Fed's Subprime Solution

Published in the New York Times, Sunday, August 26, 2007

Op-Ed Contributor
The Fed’s Subprime Solution


THE subprime mortgage crisis of 2007 is, in fact, a credit crisis — a worldwide disruption in lending and borrowing. It is only the latest in a long succession of such disturbances. Who’s to blame? The human race, first and foremost. Well-intended public policy, second. And Wall Street, third — if only for taking what generations of policy makers have so unwisely handed it.

Possibly, one lender and one borrower could do business together without harm to themselves or to the economy around them. But masses of lenders and borrowers invariably seem to come to grief, as they have today — not only in mortgages but also in a variety of other debt instruments. First, they overdo it until the signs of excess become too obvious to ignore. Then, with contrite and fearful hearts, they proceed to underdo it. Such is the “credit cycle,” the eternal migration of lenders and borrowers between the extreme points of accommodation and stringency.

Significantly, such cycles have occurred in every institutional, monetary and regulatory setting. No need for a central bank, or for newfangled mortgage securities, or for the proliferation of hedge funds to foment a panic — there have been plenty of dislocations without any of the modern-day improvements.

Late in the 1880s, long before the institution of the Federal Reserve, Eastern savers and Western borrowers teamed up to inflate the value of cropland in the Great Plains. Gimmicky mortgages — pay interest and only interest for the first two years! — and loose talk of a new era in rainfall beguiled the borrowers. High yields on Western mortgages enticed the lenders. But the climate of Kansas and Nebraska reverted to parched, and the drought-stricken debtors trudged back East or to the West Coast in wagons emblazoned, “In God we trusted, in Kansas we busted.” To the creditors went the farms.

Every crackup is the same, yet every one is different. Today’s troubles are unusual not because the losses have been felt so far from the corner of Broad and Wall, or because our lenders are unprecedentedly reckless. The panics of the second half of the 19th century were trans-Atlantic affairs, while the debt abuses of the 1920s anticipated the most dubious lending practices of 2006. Our crisis will go down in history for different reasons.

One is the sheer size of the debt in which people have belatedly lost faith. The issuance of one kind of mortgage-backed structure — collateralized debt obligations — alone runs to $1 trillion. The shocking fragility of recently issued debt is another singular feature of the 2007 downturn — alarming numbers of defaults despite high employment and reasonably strong economic growth. Hundreds of billions of dollars of mortgage-backed securities would, by now, have had to be recalled if Wall Street did business as Detroit does.

Benjamin Graham and David L. Dodd, in the 1940 edition of their seminal volume “Security Analysis,” held that the acid test of a bond or a mortgage issuer is its ability to discharge its financial obligations “under conditions of depression rather than prosperity.” Today’s mortgage market can’t seem to weather prosperity.

A third remarkable aspect of the summer’s troubles is the speed with which the world’s central banks have felt it necessary to intervene. Bear in mind that when the Federal Reserve cut its discount rate on Aug. 17 — a move intended to restore confidence and restart the machinery of lending and borrowing — the Dow Jones industrial average had fallen just 8.25 percent from its record high. The Fed has so far refused to reduce the federal funds rate, the main interest rate it fixes, but it has all but begged the banks to avail themselves of the dollars they need through the slightly unconventional means of borrowing at the discount window — that is, from the Fed itself.

What could account for the weakness of our credit markets? Why does the Fed feel the need to intervene at the drop of a market? The reasons have to do with an idea set firmly in place in the 1930s and expanded at every crisis up to the present. This is the notion that, while the risks inherent in the business of lending and borrowing should be finally borne by the public, the profits of that line of work should mainly accrue to the lenders and borrowers.

It has not been lost on our Wall Street titans that the government is the reliable first responder to scenes of financial distress, or that there will always be enough paper dollars to go around to assist the very largest financial institutions. In the aftermath of the failure of Long-Term Capital Management, the genius-directed hedge fund that came a cropper in 1998, the Fed — under Alan Greenspan — delivered three quick reductions in the federal funds rate. Thus fortified, lenders and borrowers, speculators and investors, resumed their manic buying of technology stocks. That bubble burst in March 2000.

Understandably, it’s only the selling kind of panic to which the government dispatches its rescue apparatus. Few object to riots on the upside. But bull markets, too, go to extremes. People get carried away, prices go too high and economic resources go where they shouldn’t. Bear markets are nature’s way of returning to the rule of reason.

But the regulatory history of the past decade is the story of governmental encroachment on the bears’ habitat. Under Mr. Greenspan, the Fed set its face against falling prices everywhere. As it intervened to save the financial markets in 1998, so it printed money in 2002 and 2003 to rescue the economy. From what? From the peril of everyday lower prices — “deflation,” the economists styled it. In this mission, at least, the Fed succeeded. Prices, especially housing prices, soared. Knowing that the Fed would do its best to engineer rising prices, people responded rationally. They borrowed lots of money at the Fed’s ultralow interest rates.

Now comes the bill for that binge and, with it, cries for even greater federal oversight and protection. Ben S. Bernanke, Mr. Greenspan’s successor at the Fed (and his loyal supporter during the antideflation hysteria), is said to be resisting the demand for broadly lower interest rates. Maybe he is seeing the light that capitalism without financial failure is not capitalism at all, but a kind of socialism for the rich.

In any case, to all of us, rich and poor alike, the Fed owes a pledge that it will do what it can and not do what it can’t. High on the list of things that no human agency can, or should, attempt is manipulating prices to achieve a more stable and prosperous economy. Jiggling its interest rate, the Fed can impose the appearance of stability today, but only at the cost of instability tomorrow. By the looks of things, tomorrow is upon us already.

A century ago, on the eve of the Panic of 1907, the president of the National City Bank of New York, James Stillman, prepared for the troubles he saw coming. “If by able and judicious management,” he briefed his staff, “we have money to help our dealers when trust companies have [failed], we will have all the business we want for many years.” The panic came and his bank, today called Citigroup, emerged more profitable than ever.

Last month, Stillman’s corporate descendant, Chuck Prince, chief executive of Citigroup, dismissed fears about an early end to the postmillennial debt frolics. “When the music stops,” he told The Financial Times, “in terms of liquidity, things will get complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

What a difference a century makes.

James Grant, the editor of Grant’s Interest Rate Observer, is the author of “Money of the Mind.”

Permalink to online story here. Archived here.

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(In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. Plainfield Today, Plainfield Stuff and Clippings have no affiliation whatsoever with the originator of these articles nor are Plainfield Today, Plainfield Stuff or Clippings endorsed or sponsored by the originator.)

Tuesday, August 28, 2007

Police - Courier - Summary of DCA recommendations, 2004

Published in the Courier News, August 11,2004

Plainfield Police Division:
Summary of recommendations

It is essential that ordinances be reviewed periodically as to consistency with current operations and consistency with current statutory law. The Division of Local Government Services therefore makes the following recommendations:

- Review ordinance that establishes the staffing levels of the police department.

- Review, enact/amend an ordinance that codifies and/or establishes the basic rules and regulations of the police department.

- Review and adjust the work shift schedule so that each patrol officer is not working with a 27-hour annual deficit.

- Civilianize some of the administrative positions currently performed by police officers and move the officers back to patrol.

- Continue ongoing reviews of traffic signage and ordinances within the city. Replace, remove or correct where necessary. This will lead to better and more consistent traffic enforcement. Conduct an assessment of both officer and community education. Assess state education programs and their applicability to the education of Plainfield's modern police force. Enhance existing community education programs with an emphasis toward current issues within the community.

- Replace the lieutenant's supervisory position in the traffic bureau with a sergeant.

- Revise outside employment guidelines to charge an appropriate administrative rate.

- Complete a feasibility study regarding an upgrade of the police department facilities. It is acknowledged that any renovation/expansion/building will be a capital expense. Therefore, any feasibility study must be accompanied with a short-term and long-term fiscal plan. Explore the possibility of installing a video security system in the police facilities.

- Continue to meet with and expand neighborhood watch programs and continue neighborhood education programs. Explore the feasibility of re-establishing the neighborhood watches in areas where they have been reduced or have become non-functional.

- Implement a Professional Standards Unit for staff inspection and containing the Internal Affairs Unit.

- Explore feasibility of revenue enhancement in several areas including towing, secondary employment and alarms.

- Staffing adjustments through attrition:
a. Recommend the reduction of the police captains ranks from seven to four.

b. Recommend the reduction of police lieutenants ranks from 10 to nine.

c. Recommend the reduction of police sergeants ranks from 25 to 23.
- Create a temporary task force for "Problem Oriented Policing." This task force will target certain specific areas for a cohesive concentrated effort of policing. Create a Burglary/Robbery Task Force. As current crimefighting needs of the community are identified by the administration, focus the Problem Oriented Task Force toward these identified needs.

Source: State report of Plainfield police operations by the state Department of Community Affairs' Division of Local Government Services

(In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. Plainfield Today, Plainfield Stuff and Clippings have no affiliation whatsoever with the originator of these articles nor are Plainfield Today, Plainfield Stuff or Clippings endorsed or sponsored by the originator.)

Monday, August 27, 2007

Taxes - Ledger - Editorial: Enable local options

Published in the Star-Ledger, Friday, Jul 20, 2007

Open up local tax options

New Jersey legislators have always been paternalistic in their dealings with mayors and town council members. To do just about anything, local leaders need the say-so of lawmakers, who often adopt a we-know- best attitude. When talk turns to curbing property taxes by raising revenue through some other local tax, the response from Trenton is almost always: Don't even think about it.

It's time for legislators to reconsider.

Only once have lawmakers offered a limited number of municipalities an option to impose a broad-based tax. The results justify doing it again.

Four years ago, legislators imposed a 5 percent tax on hotel-motel rooms and gave towns and cities the opportunity to tack on 3 percent and keep the money. So far, 146 towns have taken advantage of this opportunity, easing the property tax burden in those communities.

On average, towns collecting the new tax saw the municipal portion of the property tax rise 7.4 percent compared with 9 percent in places without the room tax. There's nothing good about a 7.4 percent tax increase -- except that it is not 9 percent.

In some towns, the relief was significant. Cape May, chockab lock with Victorian inns, saved homeowners an average $224 on their property tax bills. Morris Plains residents saved $139, Fairfield homeowners $92 and those in Clinton $87. The room tax offered a painless way -- at least as far as local residents were concerned -- for mayors and councils to keep a check on ever-rising property taxes.

But as of now, the Legislature isn't likely to expand on that successful formula. Senate President Richard Codey remains opposed to letting towns have options. His reasoning and that of other lawmakers is simple: Having enacted a "reform" that de creased property taxes by an average of 20 percent this year, they're not about to let the locals impose new taxes. To them, that simply doesn't make sense.

Their reasoning is flawed. There has been no property tax "reform," just larger re bate checks, and there is only enough money to cover those checks for this year.

What doesn't make sense is slamming the door on any discussion of other municipal tax options. No town would be forced to impose a tax. But towns should be allowed to do so as a means of reducing reli ance on the property tax as the sole way to pay for municipal and school costs.

A local wage tax or a little extra sales tax or even a tax on new developments are possibilities. Others would arise from a serious debate of the proposal.

And in each case, town residents would have to weigh the impact. Would a higher sales tax cause shoppers to go elsewhere, eventually hurting the local economy? Would a wage tax drive businesses to neighboring towns?

Of course, the Legislature could establish restrictions. One ought to be that none of the revenue could be treated as newfound money to be spent on new programs or services. Rather, it would have to be used to supplement property taxes and cover existing expenses.

The League of Municipalities likes the idea of taxing options, and Gov. Jon Corzine has talked up the plan at times but not done much to push the Legislature on it.

It's time for state legislators to treat their counterparts in town halls as equals, fully capable of making taxing decisions. And facing the consequences.

Online story here. Archived here.

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(In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. Plainfield Today, Plainfield Stuff and Clippings have no affiliation whatsoever with the originator of these articles nor are Plainfield Today, Plainfield Stuff or Clippings endorsed or sponsored by the originator.)

Taxes - Ledger - Realtors oppose local transfer tax

Published in the Star-Ledger, Friday, August 3, 2007

Realtors oppose plan for local tax on transfers

Star-Ledger Staff

The powerful New Jersey Association of Realtors announced a major lobbying push this fall to try to kill legislation that would let municipalities impose a separate local tax on realty transfers.

"What we're afraid of happening is that this is going to be one of those issues that's going to pop up in 'lame duck,' and they are going to rush it through," said Jarrod Grasso, the group's vice president of governmental affairs. "This isn't going to be an issue we're going to sit back on."

Grasso said the Realtors were concerned by recent comments by Gov. Jon Corzine in a Star-Ledger story in which he said he still thinks municipalities should be given more tax-raising options, possibly including local realty transfer taxes.

The New Jersey State League of Municipalities is pushing hard for such an expansion. Five bills have been introduced in the Legislature during the last year to allow cities and towns to charge a local tax of 50 cents per $500 of a home's sales price. Two of the bills would apply statewide, while three would apply only to Newark and Jersey City.

Assemblywoman Joan Quigley (D-Hudson), a co-sponsor of both versions, said she believes the local fees "make sense." She said she was hoping one of the bills would win approval during the lame duck session after the election, but acknowledged many of her colleagues already have been swayed by the Realtors, which typically ranks among the top 10 special interest donors each election.

"If we're going to get it through, the mayors are going to have to talk to their legislators," she said.

William Dressel, executive direc tor of the League of Municipalities, said one reason property taxes are so high in New Jersey is municipalities have few alternatives to balance their revenues. Mayors at least should be given the option of raising other taxes to offset property taxes, he said.

"I think it's a decision that has to be made locally," Dressel said.

A Star-Ledger analysis recently found one of the few local tax op tions that does exist -- the hotel- motel tax -- generated about $37 million for towns last year. Homeowners in a dozen towns would have paid at least $100 more each year in property taxes without the tax.

Jersey City Mayor Jerramiah Healy said he believes the new local fee could be a boon to real estate by curbing property taxes. He esti mates it would raise $30 million an nually in Jersey City alone.

"This is a perfect way to provide property tax relief," adding the local fees would be small compared to real estate brokers' sales commissions, which usually run around 6 percent of home sales.

A calculator available on, a special Web site created by the Realtors to stir up opposition to the tax, lets people compute the potential im pact on their wallets. It shows, for instance, the owner of a $356,700 house, the statewide median price, would pay $357 if the new local tax becomes law. That payment would be made on top of the $2,799 realty transfer tax already imposed by the state.

Grasso said state officials not only should reject the local tax, but they also should consider lowering the state realty transfer tax, since it has shot up 80 percent during the past four years.

"Gov. Corzine has come out talking about no new taxes, no new fees. We want that mantra to continue," Grasso said.

Online story here. Archived here.

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(In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. Plainfield Today, Plainfield Stuff and Clippings have no affiliation whatsoever with the originator of these articles nor are Plainfield Today, Plainfield Stuff or Clippings endorsed or sponsored by the originator.)

Tuesday, August 21, 2007

Schools - Courier - QSAC Report 2007

Published in the Courier News, Tuesday, August 21, 2007

Failing marks for Plainfield school system; NJ aid required
Low scores in report trigger state assistance


PLAINFIELD -- A new state monitoring report released Monday shows that the school district scored below 50 percent in four of five key areas, meaning the Department of Education must directly assist in improving the school district's performance.

Plainfield met 61 percent of the indicators for operations management, 38 percent for personnel, 8 percent for instruction and program, 11 percent for governance and 32 percent for fiscal management. Percentages greater than 80 indicate a district is high-performing, while those from 50 to 80 mean a district must file a corrective plan for the deficient area. Indicators below 50 percent trigger state help.

Officials know that there are problems in the district, which serves about 7,000 students in 10 elementary schools, two middle schools and one high school. And they also say they want to address the issues.

"I'm certainly appalled at these findings of the state about the educational health of the Plainfield public schools," Interim Superintendent Peter Carter said Monday. "However, being here nine weeks, I pledged to the community and, more importantly, to the kids that we're going to fix it."

Districts may appeal the findings to the state Board of Education if they are not happy with them, state Commissioner of Education Lucille Davy said Monday.

Board of Education members are to meet tonight for a regular meeting, but it likely will be weeks before they have time to review the voluminous, three-part report and start developing a plan to address its findings.

The report was the latest in a series of evaluations that show problems in the district, which has been decertified since 1988 under another state monitoring plan.

The Plainfield district also fell short on federal Adequate Yearly Progress standards in a report published last week. Plainfield High School and Maxson and Hubbard middle schools are several years into noncompliance. In addition, three of the district's 10 elementary schools did not improve as required by the federal No Child Left Behind legislation.

The report's findings also come as district and board officials continue to deal with the aftermath of a series of major changes in key administrators that occurred after the state monitoring team visited Plainfield this year.

Victor Demming, school board secretary/business administrator, resigned as of June 1, and schools Superintendent Paula Howard resigned effective June 6. Carter was hired June 8 and was on the job June 11. He ended up having to do the exit interview with the examiners June 27.

In his first letter to the community July 2, Carter flatly said that the anticipated report would show the district had deficiencies in all five monitoring categories.

The district since has seen the removal or resignations of some of Howard's top administrators because of a lack of proper certification. Last week, the school board hired an Illinois firm to conduct the search for a new superintendent.

Davy said Monday that she was well aware of Plainfield's special situation. With a "hole in top leadership," she said, "it would not be surprising to see there are issues around student achievement."

"We know what's going on in Plainfield," Deputy Commissioner Willa Spicer said, noting "a particular set of difficulties."

Carter will serve through the end of the 2007-08 school year. He said he soon will conduct a "superintendent's forum" on the report for "anyone who wants to come," and the report will be discussed at a September school board meeting. The district also is advertising to find new directors for curriculum and instruction, and for testing and evaluation.

Davy said the district will need to "identify strong leadership and a strong team" for improvement. The DOE also has the right under the new monitoring system to name three additional members to the nine-member elected school board. Davy said Monday that such appointees could be city residents or others with the needed strengths to serve.

The DOE will review districts' progress in six months, she said.

Reports on three state-operated districts -- Asbury Park, Camden and Trenton -- along with Irvington, Salem City, Jersey City and Newark were released July 24. Paterson was added later. On Monday, reports for Atlantic City, Camden County Vocational-Technical Schools, Elizabeth, Essex County Vocational School, Lakewood, New Brunswick and Plainfield were issued.

But even as these reports are made public, an audit of the DOE raised questions of the department's ability to help districts in need.

The audit, released Thursday, was performed by KPMG at a cost of $628,000. It was required under a joint resolution of the state Senate and Assembly to assess the DOE's oversight capabilities. On Monday, Davy said resources might have to be deployed differently at some point, but she said, "We are not doing the work ourselves, it's about leading the districts."

Assemblyman Jerry Green said the monitoring report should be a wake-up call to residents, most of whom typically don't attend school board elections.

"Obviously, this report is very critical of the governing of this district," he said.

The state could appoint three new board members or, he suggested, Plainfield could revert to an appointed school board.


Read the report online at


Why should other towns have to put up with another towns problem kids? Enforce home rule, bring in dress codes (no under garments showing etc, it doesn't have to be overboard), problem kids, put in the county slammer if warranted, try giving a damn about your own community, not giving up!

Posted: Tue Aug 21, 2007 4:48 pm


I wonder, if the whole school board were turned out, would that solve the problem? Obviously, there are students in the Plainfield School District who both can and do achieve (you are an empirical example). We are not "locals" (my wife and I actually fled California because of the generally abysmal schools out there), so I don't know the history of Plainfied. But certainly in California, it's a vicious circle. Schools deteriorate, those with the financial means leave a district, the tax base erodes, the schools get worse, and the process accelerates. I assume a similar pattern in Plainfield, but could be wrong.

When we moved here, Plainfield had a quite nice housing stock, but the realtors discouraged us even looking there because of the schools, and we landed in Montgomery Township because of the school quality. This pattern re-enforces itself, don't you think?

Posted: Tue Aug 21, 2007 4:22 pm

If the citizens of Plainfield elected competent members to the School Board then vouchers wouldn't be necessary. Instead, we could consider the money we "pour down the drain" a well-worth investment in thriving school system. I have been working for the Board of Elections since I turned 18 and each year delivers the same low turnout. We need more faith and participation in our city's public school system. Without it, how can we ever have faith in own community/city?

The potential of Plainfield students must be realized. As both a teacher and product of 4 different Public Schools Plainfield I have witnessed this first hand. Even now as I'm conducting Graduate studies in Education at USC 3000 miles away(to perhaps help aid in cleaning this mess), the Plaintalker is keeping me informed on the traditions continuing. Carter sounds serious...I just pray he is. Lord knows his pay is.

People of Plainfield pay attention to what's going on!

Posted: Tue Aug 21, 2007 3:46 pm


obviously, the problems in school districts like Plainfield did not arise overnight, and this any solutions are going to be, in your words, complicated.

But equally obvious - the remedies that have been tried since 1988 have not worked. It's a cliche to say that the definition of insanity is to continue doing the same thing and expect different results.

I suggest that SOMETHING needs to be tried in Plainfield. At least for those parents/children who actually give a hoot about education, vouchers may offer a lifeline.

Posted: Tue Aug 21, 2007 2:58 pm


What private schools do you think are going to accept all of Plainfield's students?

School choice sounds great in theory, but the reality of it is a little more complicated.

Posted: Tue Aug 21, 2007 12:30 pm

Online story here. Archived here.

(Note: Online stories may be taken down by their publisher after a period of time or made available for a fee. Links posted here is from the original online publication of this piece.)

(In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. Plainfield Today, Plainfield Stuff and Clippings have no affiliation whatsoever with the originator of these articles nor are Plainfield Today, Plainfield Stuff or Clippings endorsed or sponsored by the originator.)

Sunday, August 19, 2007

Abbott Manor Case - NY Times - Win for historic district in expansion case

Published in the New York Times, Sunday, August 19, 2007 - Real Estate Section.

In the Region | New Jersey
Altercation Over an Addition



ONCE a piece of history is gone, it will never come back,” said Dottie Gutenkauf, a resident of one of 10 designated historic districts in this town.

“That is why we had to persist,” she added, describing a battle to prevent construction of a large addition to a nursing home in her Victorian-era neighborhood. “The character of the building the nursing home was in, and that of the streets around it, was going to be obliterated,” she said.

A house was to be surrounded on two sides by the L-shaped expansion of Abbott Manor Nursing Home, which had operated in the neighborhood for 20 years; also, the three-story addition would loom close to a Tudor that serves as an Episcopal rectory.

So in 2000, when the nursing home’s owners first applied for a zoning variance to permit the construction, Ms. Gutenkauf and others in the Van Wyck Brooks Historic District organized to oppose it.

They researched zoning ordinances, gathered documents, testified at hearings and declared success when the application was denied in 2002, as Ms. Gutenkauf duly reported in her blog, called the Plaintalker, at the time.

The nursing home owners, a company called CPR Holdings Inc., moved residents from the nursing home in 2005, settling them in a similar facility it owns in Scotch Plains. But despite that, Ms. Gutenkauf’s declaration of victory proved premature.

In 2005 the zoning board abruptly reversed itself, granting the variance after CPR sued the town. Its argument was that without the modern addition, handicapped residents were being denied their right to fair and adequate housing.

It was at this point that Ms. Gutenkauf and her neighbors filed a suit of their own — one that took until late last month to resolve. “And our legal bill is very, very large,” said Gerry Heydt, a plaintiff who is also president of the district residents’ association.

Superior Court Judge Walter R. Barisonek rejected the nursing home owners’ argument that federal fair housing law protected handicapped residents’ right to live in that particular spot.

Steven C. Rother, the Roseland lawyer who argued for CPR, said in a recent telephone interview that the company declined to comment because it might appeal.

But William Michelson, the lawyer for the neighborhood residents, said he viewed an appeal as unlikely. “Judge Barisonek’s careful and detailed analysis will surely give them pause,” he said.

That analysis, according to Mr. Michelson, contained an element that could be significant to preservationists in future cases: The judge rebuffed CPR’s contention that the existing legal recognition of nursing homes as of “beneficial use” to a community automatically supersedes preservationist concerns.

“The ruling was the first time a New Jersey court has declared the validity and importance of historic districts, and described what their effect should be on land-use applications,” said Mr. Michelson, a resident of Plainfield who once served on its planning board and helped write its master plan.

Along with the four neighborhood residents named in the lawsuit — Ms. Gutenkauf; Ms. Heydt and her husband, Arne Aakre; and Kenneth Philogene — Mr. Michelson has taken the position that the vitality of Plainfield as a whole is at stake in the fight over historic-district standards

Twenty-five years ago, he said in a recent interview, the town was in a state of serious decline and headed toward “even worse.” Local officials decided at the time that the one likely path to salvation was to protect the community’s chief asset: its ample stock of wondrous old structures.

Mr. Michelson and his partner, Victor Quinn, had been among a first wave of gays drawn to Plainfield by the opportunity to buy Victorian diamonds in the rough and restore them as showplaces; they restored one, and then another, both in historic districts.

Ms. Gutenkauf and her husband, Joe, who also moved to Plainfield in the early 1980s, bought a converted barn dating to 1889. Although she claims it still has the faint smell of hay about it, it is now in pristine condition, listed on the National Historic Register with others in the Van Wyck Brooks district.

The man who gave the district its name, a critic and literary historian and Plainfield native son, was born not far from Ms. Gutenkauf’s house, around the time it was built, she said.

Plainfield today is an urban sort of suburb, ethnically and culturally diverse, with its own symphony orchestra, a lively arts scene and delis, bodegas and soul food restaurants. African-Americans once made up a majority of the population, though they have now been surpassed in number by Hispanic residents.

A gay presence is large and well established, and there is an annual tour of historic homes owned by gays and lesbians. Former Gov. James E. McGreevey and his partner, Mark O’Donnell, live in a Plainfield home with gardens retaining their original historic design by the firm of the Central Park architect Frederick Law Olmsted.

“The historic districts make this a rather unique place to live,” Mr. Michelson said. “Not just the exceptional architecture, but people are given a way to buy into a community that feels like a real community, where you have something in common with everyone around you.”

Mr. Michelson and Ms. Gutenkauf each remarked on the depth of various neighbors’ involvement in the Abbott Manor issue. Mr. Aakre, a trained architect, probably provided the coup de grĂ¢ce, they said, with his scale models of the nursing home before and after expansion.

“The judge gasped when he saw them,” Ms. Gutenkauf said. “He picked them up, held them side by side, and I think it really made a splash.”

The ornate yellow-brick nursing-home building, which has a columned wood portico and was originally a private home, is now looking distinctly forlorn, seemingly not kept up since the residents vacated. None of the neighbors know what will become of it.

“What we hope, of course,” Ms. Heydt said, “is that it will be restored, and rejoin the other beautiful buildings in the district.”

Online story here. Archived here.

(Note: Online stories may be taken down by their publisher after a period of time or made available for a fee. Links posted here is from the original online publication of this piece.)

(In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. Plainfield Today, Plainfield Stuff and Clippings have no affiliation whatsoever with the originator of these articles nor are Plainfield Today, Plainfield Stuff or Clippings endorsed or sponsored by the originator.)

Thursday, August 16, 2007

Mortgage Fraud - Financial Times - Payback Time

Published in the Financial Times [London], Thursday, August 9, 2007

[Mortgage Fraud]
Payback time

By Brooke Masters and Saskia Scholtes

At the height of the US subprime lending boom, taking out a mortgage could not have been easier. Low credit score and history of bankruptcy? No problem. Income too low to qualify for a mortgage? Inflate what you earn on a "stated income" loan. Nervous that your lender might check up on your "stated income"? Visit

For a $55 fee, the operators of this small California company will help you get a loan by employing you as an "independent contractor". They provide payslips as "proof" of income and, for an additional $25, they also man the telephones to give you a glowing reference should your lender need it.

But perhaps the most absurd aspect of the US subprime mortgage market in recent years is that lenders became so generous with credit provision for out-of-pocket borrowers that very few checks were ever made.

That left the system extraordinarily vulnerable to widespread fraud, a possibility that federal and state prosecutors across the US have begun to look into. With the subprime crisis expected to cost investors between $50bn (£24bn, €36bn) and $100bn, according to the US Federal Reserve, these investigations could transform it from a market correction to a full-blown national scandal.

At the root of the subprime problem was easy credit: lenders and their brokers were often rewarded for generating new mortgages on the basis of volume, without being directly exposed to the consequences of borrowers defaulting. During several years of strong capital markets and strong investor appetite for high-yielding securities, lenders became accustomed to easily selling the risky home loans they made to Wall Street banks. The banks in turn packaged them into securities and sold them to investors around the globe.

Such ease of mortgage funding allowed thousands of borrowers to get away with fraudulently mis-stating their incomes, often with the encouragement of their brokers. More ambitious fraudsters appear to have taken out multiple mortgages and walked away with the cash.

Karen Gelernt, a partner at law firm Cadwalader, Wickersham & Taft, says: "The difficulty is getting a handle on the size of the problem, because there is no real mechanism for reporting fraud for most originators in this market. In fact, they had every incentive not to report."

Fraud has been detected up and down the financing chain: just as borrowers have lied to get better rates and larger loans, mortgage brokers and loan officers have lied to borrowers about the terms of their loans and may also have lied to the banks about the qualifications of the borrowers. Appraisers, likewise, have lied about the value of the properties involved.

"The recent rapid expansion of the subprime market was clearly accompanied by deterioration in underwriting standards and, in some cases, by abusive lending practices and outright fraud," Ben Bernanke, Fed chairman, recently told lawmakers. With mortgage rates rising and house prices falling, subprime borrowers have been defaulting at record rates.

The fallout is working its way up from the retail level - forcing people out of their homes and lenders into bankruptcy. Investment banks have lost revenue as investors back away from mortgage securities and a handful of high-profile hedge funds have collapsed - most notably two highly leveraged funds managed by Bear Stearns. The crisis has contributed to turmoil in financial markets in recent weeks and could threaten the health of the US economy as lenders tighten access to credit, putting a drag on consumer spending.

For some, this rapid and dramatic unravelling of the subprime lending industry has echoes of the costly savings and loans crisis of the early 1980s - a meltdown that also had its origins in financial market innovation and inadequate oversight, and which many cite as a contributing factor in the 1990-91 economic recession. That crisis ended with a federal bail-out of $150bn and a handful of high-profile convictions for fraud.

This time around, the major losers have been hedge funds, which in theory are limited to wealthy investors. But some analysts believe the pain could spread - many pension funds and college endowments have turned to hedge funds to heat up their returns and some, including Harvard University, are starting to get their fingers burned. Harvard is estimated to have lost $350m of the $550m it invested in a hedge fund run by Jeffrey Larson, a former Harvard money manager, that collapsed recently as a result of positions related to the subprime market.

If the losses trickle down and end up hurting small investors, pressure may grow for a public bail-out. Rumours swept the market earlier this week that Fannie Mae and Freddie Mac, the government-backed mortgage agencies, might get the authority to make sweeping purchases of underpriced mortgage securities.

"The US mortgage landscape has become a top-of-mind political talking point, and we would not be surprised to see the usual 'flow like mud' legislative process fast-tracked with respect to items offering relief to the -troubled mortgage market," says Louise Purtle, strategist at -CreditSights, a research firm.

Most fraud in subprime lending appears to have been so-called "fraud for purchase" - lying about income so as to win a mortgage approval. In reviewing a sample of "no doc" loans that relied on borrowers' statements, the Mortgage Asset Research Institute recently found that almost all would-be home owners had exaggerated their income, with almost 60 per cent inflating it by more than 50 per cent.

These fraudulent borrowers are often difficult to uncover, says Ms Gelernt, because they often stretch to meet their minimum payments for some time before they eventually default. The time lag between initial fraud and default also makes a conviction hard to obtain, she adds, while mortgage investors also have little chance of recovering their losses from individual borrowers in these circumstances.

Many of the originators to blame for poor quality control standards may not be held to account either - with several such lenders already in bankruptcy. "There's a real problem in finding fraud after the fact because the money is already out the door and you won't get the recovery," says Ms Gelernt.

Loose lending standards also facilitated fraud for profit. US prosecutors around the country have broken up at least a dozen mortgage fraud rings and more cases are expected.

In one New York case, the FBI charged 26 people who used stolen identities, invented purchasers and inflated appraisals to obtain subprime loans on more than $200m of property. In an Ohio case, 49 per cent of the mortgages processed by a -single broker never made even a first payment.

The fate of a series of North Carolina neighbourhoods built by Beazer Homes may offer a foretaste of the looming problem. Low income home-buyers around Charlotte have sued the builder alleging that its lending arm steered them into mortgages they could not afford, leading to widespread foreclosures.

The homeowners allege that sales agents misrepresented their personal data, including assets and income, to help them qualify for government-insured mortgages starting in 2002. By the beginning of this year, 10 Beazer subdivisions in Charlotte had foreclosure rates of 20 per cent or higher, compared with 3 per cent state-wide, according to a local newspaper analysis.

The FBI is probing Beazer for possible fraud and the US Housing and Urban Development is examining whether its sales practices violated government-insured mortgage rules. Beazer has defended its sales practices and says it has a "commitment to managing and conducting business in an honest, ethical and lawful manner". In June it announced that it had fired its chief accounting officer for allegedly attempting to destroy documents. The company's shares have lost 75 per cent of their value since the probes began.

Several state attorneys-general are also on the trail. Andrew Cuomo of New York state made headlines this spring with a series of subpoenas to property appraisal companies and has said publicly that he is probing the entire industry. Sources familiar with the office's work say the investigation is still at a relatively early stage.

Marc Dann, the Ohio attorney- general, is looking further up the funding chain. He has been outspoken in his criticism of the role the financial services industry may have played in the large numbers of foreclosures in his state. "There's a whole series of people that knew or should have known that there was fraud in the acquisition of these mortgages," Mr Dann told the Financial Times. "We're looking at ways to hold everybody who aided and abetted that fraud."

Mr Dann's office is looking at brokers, appraisers, rating agencies and securitisers and plans to use several legal methods to hold bad actors accountable. The Ohio attorney-general not only has criminal enforcement powers, but also represents the third-largest set of public pensions in the country and can thus file civil lawsuits on behalf of investors.

"But for the mechanism of packaging these loans, the fraud never would have existed," Mr Dann says. "We're following this trail from homeowner to bondholder." He says his investigation could take six months to a year to bear fruit.

The Securities and Exchange Commission, for its part, is investigating whether Bear Stearns and other hedge fund managers were forthright about disclosing the rapidly declining value of their holdings.

Many of the mortgage-related securities bought by the hedge funds are rarely traded and difficult to value accurately. They are often valued in portfolios according to complex mathematical models because real market prices are not available, making it possible to disguise underperformance if models are not updated.

The SEC has not brought a case in the area so far, but current and former regulators note that it has previously won settlements from several mutual funds and banks that failed to revise the prices of illiquid assets during a falling market.

Private securities lawyers are also starting to file securities fraud lawsuits on behalf of investors who have lost out because of the subprime meltdown.

Jake Zamansky, a lawyer who negotiated an early settlement from Merrill Lynch in the scandal over skewed investment bank research, has filed an arbitration claim against Bear Stearns alleging the firm misled investors about its exposure to the mortgage-backed securities market.

The class action law firm of Bernstein Litowitz is also preparing a claim against Bear Stearns, alleging the firm made material mis-statements in the offering documents for its now defunct hedge funds.

"This was simply about a hedge fund strategy that failed," said a Bear Stearns spokesman. "We plan on defending ourselves vigorously against the allegations in these complaints."

Other hedge funds may also come under political or legal pressure over their role in the loan crisis.

Richard Carnell, a professor at Fordham law school, says it may be possible to hold the investment banks that securitised the mortgages at least partially responsible in the case of a major collapse of the market. "There are two things you can object to in the securitisers' conduct: failing to disclose material facts about the credit quality of the mortgages; and you can also criticise them for acting as an enabler for someone they know is a bad actor," he says.

But putting together a case will not be easy because the hedge funds and other investors who bought such securities are presumed to be sophisticated about financial matters. This means it will be harder for them to prove they were not properly warned about the risks involved.

In the case of the Bear Stearns funds, investors may face new hurdles to recovering any money through US lawsuits. Though the funds operated mostly in New York, they were incorporated in the Cayman Islands and that is where they have filed for bankruptcy. In what could be a test case for international bankruptcy laws, the liquidators have applied to the US courts asking them to block US lawsuits during the liquidation process.

Bear Stearns said in a statement: "Because the two funds are incorporated in the Cayman Islands, the funds' boards filed for liquidation there . . . The return to creditors and investors will be based on the underlying assets and liabilities of the funds not on the location of the filing."

Even if the US lawsuits do go forward, a case pending before the Supreme Court could also prove crucial to investors who hope to make a case that hedge funds and rating agencies enabled widespread fraud.

In Stoneridge Investment Partners v Scientific Atlanta, the court is considering whether investors can recover from firms - including accountants, lawyers and bankers - that help a public company commit fraud by participating in a "scheme to defraud". If the high court rules against "scheme liability", investors who lost money in the subprime market will have very few places to turn to try to get some of it back.

William Poole of the Federal Reserve Bank of St. Louis thinks that this may be what investors who lose money on subprime-linked securities deserve for not looking at them closely enough.

Criticising Wall Street underwriting standards recently, he said: "The punishment has been meted out to those who have done misdeeds and made bad judgments. We are getting good evidence that the companies and hedge funds that are being hit are the ones who deserve it.''

Online story here. Archived here.

(Note: Online stories may be taken down by their publisher after a period of time or made available for a fee. Links posted here is from the original online publication of this piece.)

(In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. Plainfield Today, Plainfield Stuff and Clippings have no affiliation whatsoever with the originator of these articles nor are Plainfield Today, Plainfield Stuff or Clippings endorsed or sponsored by the originator.)

Wednesday, August 15, 2007

Pay-to-Play - APP - Editorial: Limited at last

Published in the Asbury Park Press, Saturday, August 11, 2007

Pay-to-play limited at last

Monmouth County's Board of Freeholders on Thursday effectively said to the state Legislature: OK, your turn. The freeholders unanimously passed pay-to-play restrictions and a curb on wheeling, outdoing the state's weaker reforms.

The freeholders did the right thing in backing the proposals from a committee that toiled for months to come up with measures that block the ability of contractors and other professionals to win lucrative public jobs by wooing politicians with hefty campaign donations.

Kate Mellina, a county chairwoman for the good-government group Citizens' Campaign, said the rules approved Thursday "set a standard for the state." We're glad to see Monmouth County join the many municipalities and one other county that are showing up the Legislature by passing stricter, more comprehensive, campaign finance reform measures. Political contributions from anyone seeking county work will now be capped at $300. To limit wheeling, candidates can't accept a contribution from another county's political party in excess of $2,600 per election.

The Democratic-controlled Legislature has failed to take the lead on pay-to-play, often saying they want to see what the counties and towns do first. That's a flimsy excuse. But one by one, towns and now counties are taking them up on it. We hope Monmouth County's actions will help shame Trenton's Democratic legislative leaders into doing the right thing, moving the strictest of the pay-to-play bills through the Statehouse and onto Gov. Corzine's desk.

Monmouth County's effort wasn't smooth — and should have been finished long ago. Some political shenanigans put a few forks in the road, including an effort in June to scuttle the work of the bipartisan committee in favor of weaker measures promoted by Republican leaders. But as one resident told the board Thursday, "at the end, you did the right thing. You showed some outstanding leadership."

Pay-to-play is a form of legal bribery where donations result in government contract prices that are inflated to cover the cost of those donations. That political game ultimately costs the taxpayers — a lot. Wheeling plays games with disclosure efforts as political contributions are made to out-of-county campaign funds, then wheeled back in to hide the identity of the original donor.

Monmouth County has tossed the ball back to Trenton. We'd like to see Ocean County get in the game, too, as well as the remaining municipalities that are still waiting for Trenton to act. There's no reason why that has to be an exercise in futility.

Link to online story. Archived here.

(In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. Plainfield Today, Plainfield Stuff and Clippings have no affiliation whatsoever with the originator of these articles nor are Plainfield Today, Plainfield Stuff or Clippings endorsed or sponsored by the originator.)

Pay-to-Play - APP - Monmouth County OKs restrictions

Published in the Asbury Park Press, Friday, August 10, 2007

County OKs pay-to-play restrictions
Sweeping reform hailed as a model for state


FREEHOLD — Sweeping pay-to-play and campaign-fund wheeling reforms were enacted by the Monmouth County Board of Freeholders on Thursday night, drawing bipartisan praise and the endorsement of the Citizens' Campaign good government group.

The group's members had attended county meetings for months and pushed for the changes, which will take effect Sept. 1. Other residents — about 50 people attended the board meeting at the Hall of Records — also said they welcomed the resolution, which was unanimously passed by the freeholders.

Howell resident John Lebrio told the board he has "been a staunch advocate for these types of changes in Howell, to no avail" and also noted that in recent years requests to county officials to take action "fell on deaf ears."

"I'm glad to see we've done a complete turnaround," Lebrio said.

Ocean Township resident Kate Mellina, who has addressed the topic at various board meetings during the last 22 months, told the freeholders that they've "set a standard for the state. I hope the municipalities follow."

The rules cover pay-to-play restrictions for professional service contracts and "extraordinary unspecifiable" service contracts, capping political contributions for those seeking such work at $300.

Also, wheeling money into Monmouth County elections is curbed: No candidate for county office shall accept a contribution from another county's political party in excess of $2,600 per election, according to the resolution.

Other highlights of the measure: contributions to a political party committee or municipal party committee count against the limit; there are restrictions against business entities seeking government contracts; and public disclosure
statements must be filed at least 10 days before the awarding of a contract or an agreement to procure services.

Not an easy journey

Republican Robert D. Clifton, Democrat Barbara J. McMorrow, county administrators and representatives of Citizens' Campaign — for which Mellina serves as a volunteer county co-chairwoman — had worked on different drafts of the
legislation since an action committee was formed at the start of the year.

McMorrow took office in January, becoming the first Democrat to serve on the board since 1989. Mellina said, "I do believe the rivalry thing, having the kid from the other side, helped this."

McMorrow said: "The journey has not been an easy one. There have been detours and bumps. But we got there. The pay-to-play portion of this resolution is tried and tested."

McMorrow said new rules on who the county purchases services and items from are so strong that Citizens' Campaign "is considering adding them to their model ordinance."

Clifton said Mercer County was the first county to pass a pay-to-play resolution and Atlantic County introduced a measure last week.

Clifton said, "We believe ours will go far beyond what the state has. We hope all the counties follow suit."

State law bans contracts over $17,500 from being given to a business that made a donation to the elected officials awarding the contract, or their political party committee, unless they are awarded through a "fair and open process."

Freeholder Lillian G. Burry said, "We are making history with the passing of this pay-to-play legislation. It would never occur without the tenacity and concern of the citizens."

Ball in state's court

William C. Barham, the freeholder director, said state legislators "should take notice."

"I call on all the legislators to stop the nonsense and stop wheeling all the money around, because we all know what's going on," he said.

Another Howell resident, John Costigan, agreed pressure should be put on the state government to move to tougher reforms.

"We should all go to Trenton. We should start at the top. I'm glad to see we're doing a great job in Monmouth County," Costigan said.

Jeannette Mistretta, a Freehold Township resident, said there had been much political interference while the legislation was being drafted. On one occasion, the work committee's draft scheduled for introduction on June 28 was scuttled and replaced by a version favored by GOP leaders.

"There were lots of shenanigans that went on at the last minute," Mistretta said. "But at the end you did the right thing. You showed some outstanding leadership. I want to thank you."

The resolution states that "substantial political contributions from those seeking to or performing business with the county of Monmouth raise reasonable concerns on the part of taxpayers and residents as to their trust in government contracts." The document goes on to note that "counties are authorized to adopt by resolution measures limiting the awarding of public contracts to business entities that have made political contributions."

Bob Jordan: (732) 308-7755 or

Link to online story. Archived here.

(In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. Plainfield Today, Plainfield Stuff and Clippings have no affiliation whatsoever with the originator of these articles nor are Plainfield Today, Plainfield Stuff or Clippings endorsed or sponsored by the originator.)

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About Me

Plainfield resident since 1983. Retired as the city's Public Information Officer in 2006; prior to that Community Programs Coordinator for the Plainfield Public Library. Founding member and past president of: Faith, Bricks & Mortar; Residents Supporting Victorian Plainfield; and PCO (the outreach nonprofit of Grace Episcopal Church). Supporter of the Library, Symphony and Historic Society as well as other community groups, and active in Democratic politics.