Ray Mathoda: November 2008

Capital and Risk-Sharing: Smart Crisis Fighting Tools That Should Be Used Much More

I’m glad to see the government is finally using 2 “smart” tools – capital and risk sharing – to help address the financial institution panic and resulting failures we have seen since earlier in 2008 which have seriously escalated the financial and economic crisis facing the US and global economies today. While these tools don’t comprehensively address the myriad of financial and economic issues facing the US or the world today, they:

· Help stabilize Banks when no other 3^rd party can/will do so: this is critical to stabilizing consumer sentiment, the markets and economy

· Are leveraged in their impact to the real economy: Because Banks typically lend $10 to $20 for every dollar in capital they hold

· Help minimize the tax-payer bill from all this government investing and intervention: by acknowledging the uncertainty around where the housing and credit/financial markets will bottom out, and putting a “cap” on the maximum losses a private investor can incur on an investment

· Help establish a floor for asset values (by limiting downside risk for investors): and therefore support and encourage the return of private investors into the capital markets

The need for government provided capital was obvious to me months ago at Indymac since such a significant capital infusion would likely have prevented the Bank’s failure and no private capital was available for the job. Every investor who had invested capital into any financial institution in the 12 months leading up to Indymac’s failure had lost all or a big portion of their money by the summer of 2008, so this lack of private capital was a rational market outcome. And risk sharing can and should reduce the size of the loss the government creates by selling Indymac’s assets as it will help mitigate the negative financial impact of the fact that Indymac’s assets are being sold by the government into the worst housing asset market since the Great Depression.

A wise man once said it was possible to “transform a breakdown into a breakthrough” and I think the tools above can be powerfully applied to the global economy today. After all, no large company is just a “US” company today. All major American companies are generally global in the markets they serve, the organizations they work with, and the workforces they leverage (even “little Indymac” which only operated in the US supported over 1000 employees in India). So by supporting US Banks and Financial Institutions the US government is already supporting the global economy (not just the US economy).

Why not do this more directly and on a bigger scale worldwide? As someone who is optimistic about the global economy’s long term prospects, I think we should. The US taking an ownership stake in a wide array of businesses all over the world could indeed help turn this breakdown into a breakthrough.

Redefining the War on Terror

The Mumbai "terrorist" attacks are a clear message to President Elect Obama, us, and the rest of the world. The problems of the world aren't just economic....they are equally urgent, social and extend deeply into our homes and places of worship.

The Bombay attacks are highly symbolic in their location/s, organization-level and timing. And they hit home. I definitely feel the significance of these particular attacks personally. The violence was directed at the heart of India's financial system where my (our) friends hang out, my (our) colleagues stay when they visit India, and our companies establish offices when they enter the Indian market (the 5 star hotels Taj and Oberoi in Bombay have been the India office for many a blue chip multi-national corporation). The targeting of westerners by the attackers is particularly galling since it targets a big source of support and growth for India and it's democracy, philosophies and people. India is getting more integrated with the west and the global economy, and the attacks sought to strike at the core locations and symbols of this progress.

So what? Since change is in the air, here's the 2 key changes I'd like to see made immediately in our"war on terror":

1. Rename it in a way that reflects what it is. In some ways I think we have glorified what is really going on, by allowing this global problem to be named a "War on Terror" fought against Terrorists. Certainly the acts can and do bring terror into people's hearts. But why not (at least) try to take away this terrible power? There is clearly no moral equality in this war, and the battleground is people's minds and hearts (not a physical battlefield). The truth is these so called terrorists are generally pathetic (and often unlucky) losers perpetrating violence in the name of God. Calling their movement what it is will go a long way towards accelerating it's end, in my view...and also helping make it less and ultimately non-violent.

2. Acknowledge that this is not only about Islam and is truly global/multi-national. Violent Islamic fundamentalists are certainly creating massive problems worldwide, but the problems extend beyond Islam. In my (our) lifetime the forces of religious fundamentalism have risen dramatically across the globe in reaction to the forces of globalization, westernization and modernity....and many outside Islam are also perpetrating violence in the name of their God. Broadening the focus beyond Islam will, I think, help address it more quickly in Islam also...as it will remove the ego and pride barrier created by the perceptions of denouncing an entire (and majorly important and large) religion.

Equality for all: US Supreme Court Decision and Timing

I am a strong believer that civil rights issues should be resolved through the legal (not political) process and feel it is only a matter of time until the US Supreme Court strikes all the discrimination that has been "constitutionalized" during the last 8 Bush years on the issue of gay marriage (sadly, fully 30 states now "ban" gay marriage via their constitutions). I was feeling like a naive optimist after a conversation over brunch this past weekend, where a (clearly very smart) lawyer made a strong argument that the US Supreme court wouldn't do what I say it will...at least not for the next 20 years!

Then today I saw 2 key arguments/quotes that give me hope that every individual and family will have equal rights and equal protection under the law in the USA sometime soon (despite the recent and unfortunate voter approval of the discriminatory Proposition 8 in California):

I was reading a fascinating article on the Princeton alumni website today entitled: "Her husband bakes, Scalia sings: Ginsburg describes the lighter side of the Supreme Court". Here's a direct quote from the article:

As she examined a small booklet with the text of the Constitution, she described her "favorite provision:" the end of section one of the 14th Amendment. She read aloud from it. "... (N)or shall any state deprive any person of life, liberty or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws."

You can click here for the full article: http://www.princeton.edu/main/news/archive/S22/48/08A80/

Then, I saw an LA times opinion piece by Brian Gray, a Professor at UC Hastings College of Law in San Francisco, which draws a parallel between the arguments against Prop 8 and a decision made by the US Supreme Court on a Colorado proposition, which had (and I quote): 'barred the state and its political subdivisions from adopting or enforcing any law "whereby homosexual, lesbian or bisexual orientation, conduct, practices or relationships" are the basis of a claim of discrimination.'

Here's what happened on the Colorado issue (and I quote again):

"Following the enactment of Colorado's Amendment 2, its opponents filed suit claiming that it unlawfully singled out gays and lesbians as a class to deny them rights that other citizens not only possess but take for granted. These rights include access to housing, government services, public accommodations and public and private employment opportunities without regard to an individual's race, sex, religion, age, ancestry, political belief or other characteristic that defines each of us as a unique human being. Amendment 2, the opponents argued, therefore denied gays and lesbians the equal protection of the laws, which is a guarantee of the 14th Amendment to the U.S. Constitution.

To the surprise of many, the U.S. Supreme Court agreed."

Click here to read this fascinating LA Times article: http://www.latimes.com/news/opinion/la-oe-gray17-2008nov17,0,1425883,print.story

How long do you think it'll be before all individuals, gay or not, have full equal rights in the USA?

Buying foreclosed homes...a lot beneath the surface

I just read this great article from this weekend’s LA Times describing the reporter’s experience purchasing a foreclosed home. I have seen/heard many similar stories from my business partner Avantika, a top performing realtor in LA who has bid on and sold several foreclosed properties recently....so thought I'd post this article. Call or email her (av@avantika.com) if you want to ask a question, buy/sell a home, or know someone who is buying or selling and could use a top notch real estate agent....in Los Angeles. ray

How I bought a foreclosed home

There were pitfalls on the the way, but an L.A. Times reporter found that research, strategy and being free of loan baggage helped.

By Peter Y. Hong
November 9, 2008

I did not set out to buy a foreclosed house. ¶ Earlier this year, I wrote about selling my condominium unit in 2005 to rent, rejecting the hyped promise of an always-rising real estate market. Now I've purchased a foreclosed home -- but that doesn't mean I've bought into the new wave of hype in real estate, the idea that cheap, repossessed houses are a sure bet. ¶ There's usually good reason many foreclosed houses languish with no buyers. They may be badly damaged or situated in places that seemed attractive only in the frenzy of a real estate bubble. ¶ The foreclosure inventory is loaded with properties far from job centers, stripped or even vandalized by previous owners or in abandoned developments with no parks, schools or even neighbors nearby. ¶ As a result, finding a decent house amid the wreckage of the real estate crash can be a long, tedious process. Then, actually buying one can also be tricky. When a foreclosed house in good shape and in a desirable location gets to market, it often attracts multiple offers, even in this struggling real estate market.

But a foreclosed house might still be an easier way to get what you want than trying to get stubborn individual sellers to lower their list prices. In both my day job covering the housing market and my own search for a house, I've seen what has worked for many buyers of foreclosed homes.

This is what worked for me.

Click here for the full article:
http://www.latimes.com/business/la-fi-cover9-2008nov09,0,2623620.story?page=1

Real Estate Construction Costs: Deflated in LA

There has been a constant 'inflation' in real estate construction costs over the past few years driven by the usual suspects: high commodity prices and a tight labor/talent market (with high demand for construction labor driving labor costs higher and higher over time).

So recently, I was pleasantly surprised to hear one of our clients (who is involved with redeveloping 2 properties they recently purchased) tell us about their ongoing experience with construction costs. 2 key points to note:

1. The price of development was great i.e., lower than expectations! They had a solid bid to get their work done for about $80 per square foot. Note that the numbers one generally sees for construction costs are in the $150-$250 (or higher) per square foot range. So this is amazing...and the key reason this was possible was due to the really slow labor market right now. People have lost jobs and can't find work as real estate development has slowed tremendously...so they are taking whatever work they can get, and reducing their rates to "win work".

2. They actually got a fixed bid on their project! Wow....just a few years ago, no contractor would take on that risk.

I guess in some ways the above should be no surprise. This is how the market works. In a down cycle, things get cheaper...and in some cases much cheaper. However, I don't think most people realize what a great time it is to construct right now. Good time to buy a fixer-upper (which is already much cheaper than it was a few years ago) and then further add value by improving the property.

PS: I'm talking Los Angeles

The tyranny of the majority

On May 15th, 2008 the California Supreme Court made a historic decision. They ruled that it was a violation of the equal protection clause of the California Constitution to not afford gay couples the right to marry – almost exactly the same ruling they had made in 1948 on inter-racial marriage (which was at the time not allowed in California). Between June 16th (the day gay wedding licenses started being issued) and November 4th, approximately 18,000 couples got married in California.

The evangelical right was having none of the above. They knew that if gay marriages were allowed to continue in California (a major cultural force in the USA, and a state with the 7th largest economy in the world)…it was only a matter of time before they would become be allowed nationallly. After all, this exact sequence had occurred on the issue of inter-racial marriage. 19 years after the 1948 California ruling noted above, in 1967 the US Supreme Court (in a famous decision Loving v. Virginia) made the same ruling thereby eliminating all barriers to interracial marriage in the USA.

So on November 4th just as racial discrimination was dealt a massive and perhaps final blow with the election of the first African-American President of the USA, Californians voted by a 52.5% to 47.5% majority to take away this fundamental right to marry from gay couples in the state. Ironically, the same voters made the correct decision to expand animal rights in California.

Anger and sadness have enveloped millions in California since Proposition 8 passed last week…and this issue is by no means settled. Here are the thoughts of one prominent Los Angeles lesbian and mother who is in a 22 year committed relationship. I should also mention she is Deputy Mayor for Housing and Economic Development Policy for Los Angeles…working tirelessly to create more affordable housing for the poor and disadvantaged.ray

Yes we Can! Reflections on Gay Marriage in California

Helmi Hisserich, Deputy Mayor, Housing and Economic Development Policy

On November 4th, Gays and Lesbians were pushed to the back of the bus. The vote to change California's constitution to ban same sex marriage was an act of prejudice against a minority group and a vote for second class citizenship. It is a sad irony that happened on the same day
that America voted for our first African American President. But it is also a reminder that the fight against prejudice is long and painful.

For the past 173 days I have thought about the meaning of marriage almost every day. I am a lesbian who has been in a relationship for 22 years. My partner and I have been faithful to one another, for richer or poorer, in sickness and health for more than two decades, but we have never had a wedding. We have been registered domestic partners since the law first allowed it in 1998, but that is definitely not the same as marriage. On my paycheck, my taxpayer ID says "single".

On May 15th, 2008 when the moderate Republican Supreme Court said the California Constitution guaranteed the right of same sex couples to be married, a sense of acceptance and equality came over me that was so powerful it I felt it deep in my bones. My God, I do have the fundamental right to pursue happiness in marriage with the person I love. This is what it means to live in a free country, this is the meaning of equality. My gay and lesbian friends all talked about it, especially those of us who are in long term relationships. We all felt we were being protected and accorded dignity under the law. It felt amazing. Prejudice is funny that way, when it is removed you realize
how accustomed you have become to being treated with less respect you deserve.

The 173 days between the California Supreme Court decision and the November election were painful. For me, it felt like a walk to the gallows. I know good people who are awkward and uncomfortable about homosexuality. I knew the yes on 8 campaign was playing on peoples fears. It made me sick to think that people by referendum could vote to take my rights away. In California you can change the constitution with a simple majority vote, but you need a two third majority to raise sewer fees. What kind of justice is that?

On election night, I was at the Music Box theater in Hollywood, which was the rallying place for the No on Prop 8 campaign. When Barack Obama was elected president, the place went wild. People were cheering and crying. We all understood the importance of this election. Many of us had worked on the Obama campaign as well as the No on 8 Campaign; donating time and money to bring about change. For an hour we felt jubilant beyond measure. But then the reality hit that our friends and neighbors had voted to eliminate our constitutional right to marry. The happiness faded.

The day after the election, my daughter came home from 6th grade and told me kids were saying gays and lesbians are disgusting. She said she felt like people hated our family without knowing us. That is what prejudice is, I told her, judging people without knowing them. But 50 years ago a black person and a white person could not get married, and today someone from an interracial family was elected the president. She asked if we could change the constitution back to what it was. At first my though wandered to the difficult struggle we face to gain acceptance, but as I looked at down at her shining face in her blue community organizer t-shirt, the future became very clear - "Yes we Can".

Elusive Search for the Bottom: Housing Market Update

A lot of people around me, especially those focused on buying real estate as an investment in this historically challenging real estate market, are obsessed with when US home prices will “bottom out”. I believe people sometimes focus on finding the lowest home price at the expense of other equally important economic factors such as the cost of construction/”fixing the place” and financing costs…both of which are at historic lows right now, and thought I’d share some of the latest news/information relevant to this topic:

1. The general consensus of economists (this is available from several media sources) is that home prices, which have already tumbled 20% from their peak three years ago, will probably sink another 10% before stabilizing.

2. Per a Wall Street Journal article on October 29, 2008 (see below for an excerpt, and a link to the article), the consensus at a National Association of Home Builders conference recently was that “home prices will bottom out as early as the middle of next year (2009)”.

3. Finally, there were several articles this past week discussing the troubled mortgage modification plan the FDIC has implemented at Indymac since they took management control in July. The FDIC is proposing implementing this type of plan at a much broader level nationally to reduce the total number of foreclosures in the future. I agree that foreclosures are generally bad for everyone involved (including the homeowner and the lender)….and the more that’s done to avoid them systematically, the better. I also believe addressing this issue will help home prices “find their bottom”. While the White House has not made a decision on the FDIC backed proposal yet (and likely won’t till we have a new President), JP Morgan announced over the weekend that it is launching a similar program which should help prevent foreclosure for about 400,000 homeowners. All this is good news from a housing finding its bottom standpoint.

I won’t take an official position on when the market will bottom as I believe it’s already a great time for folks with a long term investment horizon to invest in real estate. And as a wise person once said: “you only know the market bottomed once it’s too late (i.e., once it’s started rising again). But here’s some thoughts on what the above could mean for you:

Selling: If you’re a current homeowner….this is generally not a good time to sell….so unless you believe you must sell for financial or other life reasons (e.g., job change), hold off on selling the real estate you own currently. The key caveat here is if you think you’re going to need to sell in the next 24 months or so. If this is the case, I would consider selling now as you’ll likely maximize your home value by selling today vs. in the near future.

Buying: If you’re thinking about buying for living or investment purposes, then the key is to have a long time horizon (e.g., 5 years or longer). For folks who fall into this category, I believe it’s a good time to start looking at possible opportunities including foreclosures.

Key Recent Articles:

Economists Predict Home Prices Will Bottom Next Year (WSJ, 10/29/08)
When will housing's sickening slide stop?
According to economists at the semi-annual National Association of Home Builders forecast conference, not soon—though the end is in sight. The consensus: Home prices will bottom out as early as the middle of next year.
I've been attending these conferences for years, and last spring's was the gloomiest I'd ever attended. The latest conference, held last week, was also downbeat, but with a glimmer of hope—many of the economists seemed optimistic that the government's bailout plan, which includes buying toxic mortgage debt, will lead to housing's recovery. More affordable prices, pent-up demand, incentives on new homes, fewer housing starts and expected declines in interest rates for fixed-rate mortgages also should help ease the crisis, said David Seiders, chief economist of the trade group.
For the rest of the article, click here (you may need a WSJ subscription to read the full article): http://online.wsj.com/article/SB122522301876377101.html

Massive Effort to Save Mortgages (WSJ, 11/01/08)
J.P. Morgan Chase & Co. launched an ambitious plan Friday to modify the terms of $70 billion in mortgages for borrowers who are behind on their payments or soon could be.
The move by the New York bank will cover as many as 400,000 borrowers. They'll be moved into loans carrying lower interest rates, smaller principal amounts or other more-affordable terms.
For the rest of the article, click here (you may need a WSJ subscription to read the full article): http://online.wsj.com/article/SB122549543952589677.html

FDIC Plan Tests Limits of Leniency (WSJ, 11/01/08)
When the Federal Deposit Insurance Corp. seized control of IndyMac Bancorp -- the nation's 10th-largest mortgage lender by loan volume -- the agency vowed to ease terms for many of its troubled borrowers. In doing so, the FDIC wanted to show the mortgage industry how it could slash home foreclosures by making decisions both sensible and humane.
For the rest of the article, click here (you may need a WSJ subscription to read the full article): http://online.wsj.com/article/SB122548504641688959.html

Ray Mathoda

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