NewGeography.com blogs

If someone is just finding out last week that Wall Street is profiting from the crisis it created, then I have only one question for them – "what rock have you been living under for the last two years?"

I’ve been shining a bright light on this since I first joined NewGeography.com to cover finance. From one of my first articles in November 2008, where I explained the nuances of financial innovations – “Who stands to gain? … Citigroup, Goldman Sachs, JP Morgan and Morgan Stanley …. You can do the math from there.” – to recent blogs on the impact of stimulus and bailout spending – “Goldman Sachs … even got transaction fees for managing the Treasury programs that funded the bailouts.” – I hope that it has been more obvious than painful that you have to take personal responsibility for your finances because you can’t rely on Wall Street to do it for you.

Last week, the SEC charged Goldman Sachs with civil fraud. On Friday, a group of investors filed a lawsuit against Goldman’s executives for behaving in an “unlawful” manner and for “breaches of fiduciary duties” – meaning they were reckless with other people’s money. Goldman is also being sued by the Public Employee’s Retirement System of Mississippi for lying about the real value of $2.6 billion in mortgage-backed securities (MBS). I remind you that there’s a good chance that Goldman (and other Wall Street banks) were and are selling MBS that don’t have mortgages behind them – as I like to put it, there’s no “M” in their “BS”.

In a nauseating twist to the story, AIG (according to sources for the Business Week article) insures Goldman’s board again investor lawsuits – so AIG may be paying the costs of defending Goldman’s executives in addition to any fines or settlements on the cases. AIG is still on bailout life support from US taxpayers. In December 2009, the Federal Reserve Bank of New York took $25 billion worth of AIG preferred stock as partial payback for the $182.3 billion bailout.

Even less shocking to readers of NewGeography.com should be the story that the SEC lawyers were busy surfing the internet for pornography when they should have been preventing this stuff from happening in the first place. I wrote an article last February about bailed-out Wall Street bankers spending taxpayer money on prostitutes. Those SEC staffers will need to be up to date on all things unholy when they head for the door that leads them to more lucrative jobs on Wall Street.

Like the arsonist who gets the insurance payoff after burning down his own house, the Wall Street bankers profited from transaction fees in creating the crisis, profited from the bailout payoffs funded by the U.S. taxpayers and they continue to profit from their credit derivatives as the whatever was left standing begins to collapse around us. Like most Americans, I think I’d get some sense of satisfaction from seeing someone in handcuffs over what has been done to the value of our savings and the global reputation of our capitalist system.

With President Obama’s approval ratings headed downward, there’s a growing interest in the powerful Cook County politicians that pushed Obama. James Peterson has written a three part series on Chicago Machine boss, Alderman Ed Burke. The series was written for Andrew Breitbart’s Big Government website.

The first installment of the series deals with Alderman Burke’s association with the Chicago Mob. Burke’s unapologetic relationship with Alderman Fred Roti, who was described by the FBI (in 1999) as one of only 47 made members of the Chicago Mob. Peterson quotes this resolution Burke entered into Chicago’s City Council glorifying Roti:

Fred B. Roti, a committed public servant, a cherished friend of many and good neighbor to all, will be greatly missed and fondly remembered by his many family members, friends and associates.

Peterson’s second article deals with top FBI informer Robert Cooley’s accusation that Alderman Burke attempted to fix a murder trial for the Chicago Mob. Even though Cooley repeated this accusation, Burke failed to sue him or the publisher of the book. Peterson also deals with the sensitive subject of Alderman Burke’s relationship with Chicago’s media. Peterson quotes a 2003 Chicago Sun-Times story:

The curious public feud between City Council’s most powerful alderman and one of Chicago’s highest profile television reporters was turned up a notch Wednesday. Unable to persuade WLS-TV Channel 7 to pull reporter Andy Shaw off the City Hall beat because of the bed and breakfast Shaw and his wife run out of their Lincoln Park home, Finance Committee Chairman, Edward M. Burke (14th) did what he considers to be the next best thing. He introduced a legislative “order” directing six city departments—Fire, Revenue, Buildings, Streets and Sanitation, Zoning and Public Health—to enforce “any and all provisions” of the municipal code at only one address:607 West Deming. That happens to be the address of the Windy City Urban Inn, where the Shaws have continued to rent seven rooms at their three-story mansion…

Part three deals with Alderman Burke and the legitimate world. Peterson delves into the relationship Burke has had with the law firm Jenner and Block. Peterson quotes an a 1997 Chicago Sun-Times story:

Ald. Edward M. Burke (14th), whose decisions on hiring lawyers in the City Council ward remap case have funneled $7.5 million in city fees to the prominent Jenner and Block law firm, holds co-counsel status with that firm in two recent lawsuits, court records show. Burke’s links with the firm do not appear to violate any laws or regulations…

Managing partner Jerold Solovy – who is the lead attorney in the remap case – was treasurer of the unopposed 1996 campaign for Illinois Appellate Court justice of Anne Burke, the alderman’s wife. And prominent [Jenner and Block] partner John Simon served as her campaign chairman. The firm provided $14,414.15 in services and money to the campaign.

The firm hired Burke’s daughter Jennifer A. Burke in June, 1995, shortly after she graduated 173rd in a class of 385 from Chicago Kent College of Law. In making new hires, the firm usually draws top students from the nation’s leading law schools. Two weeks ago, Burke, whose name has been linked to the federal investigation of ghost payrolling at City Hall, hired Jenner and Block partner and former U.S. Attorney Anton Valukas to represent him in that inquiry.

Anyone interested in the place President Obama came from should read all three articles in detail. Alderman Burke is one key people who fast tracked Obama’s career. You’ll also want to read about the Chicago Democrats and the Chicago Mob. When Rod Blagojevich’s trial starts on June 3, the names of Tony Rezko, Jesse Jackson Jr., Valerie Jarret, Rahm Emanuel, and David Axelrod, and Barack Obama are guaranteed to be mentioned. They are part of the Chicago Democratic Machine, a Machine with Alderman Burke at the top.

For the past six years, Hugh Pavletich of Performance Urban Planning (Christchurch, New Zealand) and I have authored the Demographia International Housing Affordability Survey. The Survey assesses structural housing affordability by the use of the Median Multiple (median house price divided by the median household income). This measure is in wide use and has been recommended by the United Nations and the World Bank.

Six nations are routinely covered, including the United States, the United Kingdom, Canada, Australia, Ireland and New Zealand. In each of these nations, the Median Multiple has been astonishingly similar, at least until recent years, with all six nations having had a Median Multiple of 3.0 or less until the last decade, or at the worst, the late 1980s. Of course, as Demographia and a world-class collection of economists have shown, house prices have risen substantially relative to incomes as a result of growth management (also called smart growth, urban consolidation) that ration land for development.

For the first four years of the Survey, California markets were the most unaffordable, with Los Angeles exceeding 11 at one point, while San Francisco, Honolulu and San Diego exceeded 10. That all changed with the US housing bust, which was the most severe in California. As a result, Vancouver has become the most unaffordable major metropolitan area in the six nations, with a Median Multiple of 9.3 in the 2010 Survey. Sydney was a close second at 9.3.

The South China Morning Post, Hong Kong's leading English language newspaper, approached Demographia to estimate a Median Multiple for Hong Kong. This we were pleased to comply, given our interest in expanding the scope of the Survey to more than the six nations.

It took a considerable amount of "digging" to develop the data, and a number of emails back and forth with The South China Morning Post. The result was an estimated Median Multiple for Hong Kong (the entire Special Economic Region) of 10.4. This makes Hong Kong the least affordable metropolitan area of the 273 Demographia has reported upon. The South China Morning Post illustrated this in an attractive graphic.

At least temporarily, however, home purchasers in Hong Kong have been able to arrange financing packages that mute these high costs. Currently, mortgage interest rates are from 0.8% to 2.1%, which is far below the lowest levels reached in the six nations. As a result, such homeowners find their housing more affordable that some metropolitan areas with higher Median Multiples (such as Vancouver and Sydney).

However, things could soon change. Professor Chau Kwong-wing of the University of Hong Kong calls the present situation: "... just a short-term illusion," adding that "People think they can afford an expensive flat with a reasonably cheap mortgage. Their dreams will burst and the flat will become unaffordable when the interest rate rises." The professor has a point. Variations in interest rates can mask or magnify structural affordability, which is measured by the Median Multiple. This is because interest rates are subject to fluctuation, while buyers and sellers do not renegotiate sales prices after the deal is concluded.

Professor Chau echoed the land regulation views of the economists, indicating that the need for "increasing land supply for sales."

We look forward to routinely reporting on Hong Kong in future editions of the Demographia International Housing Affordability Survey.

Hong Kong has grown fast in recent decades, not only in population but also in income. International Monetary Fund placed Hong Kong's 2009 gross domestic product per capita (adjusted for purchasing power) only 10% below that of the United States, and 15% above its former colonial administrator, the United Kingdom. Hong Kong was even further ahead of other major European Union nations and Japan.

Forbes Magazine just released its "Best Places for Business and Careers" list and it's no surprise to me that Des Moines, Iowa just landed in the top spot. Nearly 5 years ago, I'd have said the same thing you may have just muttered. "Des Moines...that's fly over country...who'd want to live and work THERE?" I fully appreciate your logic with our cold winters, humid summers, and ag-centric heritage. But weather and corn fields aside, the Des Moines metro, a circle consisting of about half a million people, has captured my heart and I've become its most passionate evangelist.

After a lifetime of Southern California bustle, my wife wasn't exactly thrilled about my desire to abandon our friends and family infrastructure. But ultimately she wanted me to have more than a view from the windshield of a Honda Civic and to be a stay-at-home mom for our kids. We began to see clearly that reaching goals for entrepreneurship, more family time, and more civic engagement were unattainable in our current location. We were ready to reclaim our time, live with less hassle, and stretch a bit.

So in 2005, we executed geographic arbitrage landing in Clive, Iowa, a beautiful community on the West side of the Des Moines metro. Soon the memory of my 2.5 hour daily plunge into freeway hell was fading. Views of the beaches and mountains from the window of the 6:20AM flight to DFW became real life experiences on urban bike trails and fishing at the lake blocks from my house. A 20-minute drive from end-to-end, the Des Moines metro area defines easy living and 70 miles equals 60 minutes. (I'm still chronically early to my appointments.)

During those first months here a local business blogger who'd been reading my copious posts on "Why Des Moines?" reached out to me. After coffee and a few introductions, my personal and business network began to flourish. It was hard to comprehend how quickly anyone who's willing could reach top level contacts in business, associations, and in government. Before long I was shopping a business plan to investors and prominent business owners in town. I was even introduced to State House representatives who cared about my thoughts on what's happening in their districts. (I went 33 years never meeting a Congressman in CA.) I realized that within a few phone calls I could reach top decision makers, corporate leaders, and legislators and they were willing to listen to me. My business createWOWmedia is growing rapidly now and I'm reaping the benefits of 2.5 years of head down execution and statewide relationship building. I had the time, the energy, and the start up capital through my CA home sale to stop dreaming and start doing. The Des Moines metro gave me that opportunity and I'm thankful for it.

I've figured out that if you're willing to endure a couple months spent largely indoors or bundled up that the trade-offs are magical and worth their weight in gold. I wouldn't trade what I've found here for anything. The Des Moines metro and the state of Iowa as a whole offer so much…and ask so little in return. Des Moines is easy living defined.

Am I worried about a massive influx of new Iowans pouring in from Western states based on this piece and Forbes's recommendations? No chance. But if you do decide to take the plunge and reclaim your life from the concrete jungle, shoot me an email and I'd be happy to guide you. That's what good neighbors and Iowans do.

Doug Mitchell is a Southern California refugee who moved his family to Des Moines, Iowa to build a better life. Doug can be reached at doug@createWOWmedia.com or on twitter @doug_mitchell

The big news in finance this week is that Goldman Sachs got busted – finally – for fraud related to those mortgage-backed bonds. At the heart of the Securities and Exchange Commission charges is the accusation that Goldman Sachs failed to disclose conflicts of interest it had on some mortgage investments. One of the charges that Michael Milken plead guilty to in the 1980s was the failure to disclose. “This type of non-disclosure has [not since] been the subject of a criminal prosecution,” according to his website. The charges against Goldman are for civil fraud. The difference between civil and criminal cases is that civil cases are usually disagreements between private parties; criminal cases are considered to be harmful to society as a whole. The judge in the Milken case found that his failure to disclose resulted in $318,082 of financial damage. The SEC is charging that Goldman’s failure to disclose resulted in a $1 billion loss to investors. The former resulted in criminal charges, the later in civil. One has to wonder, given Milken’s 10-year sentence for a relatively small dollar-valued infraction, what would be appropriate in this case.

The only criminal case related to the financial crisis that has been brought against any Wall Street executive so far was against two Bear Stearns hedge fund managers. They were found not guilty in November of “falsely inflating the value of their portfolios.” Theirs was a crime of commission not omission – they were charged with actively lying to investors and not with failing to disclose information. The closest situation that might result in criminal fraud charges for failure to disclose will be if the Justice Department pursues charges against Joseph Cassano, the AIG accountant who failed to disclose information about the magnitude of the losses AIG had insured. Federal prosecutors have been investigating this since at least April 2009 – information about investigations is not made public, including if the investigation has been dropped, so we don’t know for sure that there aren’t charges in the pipeline.

All this Wall Street activity that resulted in the US taxpayers forking over $3.8 trillion in bailout money – it’s really hard to imagine that some good-guy-with-a- badge somewhere can’t figure out who harmed our society as a whole.