Scapegoating the Housing Crisis

Where Are Our Insulls?


When Franklin Delano Roosevelt was campaigning for the presidency in 1932, he gave a powerful speech in Portland, Oregon that named a scapegoat for the Great Depression. It was Samuel Insull, the Icarus-like utilities baron who had left the country after his corporate empire of holding companies spanning 6,000 communities was plunged into receivership. It was the biggest American corporate failure in history to date.

At the time, FDR decried ``the Ishmaels and the Insulls, whose hand are against every man.’’ It was widely believed that Insull had absconded with millions of dollars, leaving more than 600,000 shareholders with worthless paper. The fact that the opposite was true didn’t dissuade Roosevelt from pillorying Insull, who had spent his entire fortune and went into debt in an attempt to bail out his companies. Insull had gone from being one of the most powerful and respected businessmen of his time – one of the reasons people were still buying his securities well after the 1929 crash -- to the Simon Legree of finance.

As Congress, presidential candidates and prosecutors try to unravel who was responsible for the housing debacle and move forward, where are our Insulls?
Although having a single scapegoat for such a complex disaster that had millions of co-conspirators is ludicrous, it seems that the corporate titans who had some culpability are not only given a pass, they are silently exiting the public limelight with outrageously generous compensation packages.

Take Angelo Mozilo, the chief executive of Countrywide Financial, which doled out thousands of the riskiest mortgages. After earning $42 million at the height of the housing bubble in 2006, he left the company, recently acquired by Bank of America, with a $120 million package, including $36 million in severance, according to Congressional testimony. While I’m sure Mozilo earned his pay during the salad days of the company, he did obscenely well considering the abysmal risk management job his company did in screening out qualified buyers.

How about Wall Street chiefs Charles Prince of Citigroup and Stanley O’Neill of Merrill Lynch? Both were forced to leave their companies after their firms lost billions on subprime loan vehicles, neither receiving a cash severance. Don’t pine for them, though. O’Neill was entitled to $160 million in stock awards and other compensation while Prince was due almost $23 million in stock plus a $1.7 million pension.

All three gentlemen got a tongue lashing from Henry Waxman (D-Cal.), the chairman of the House Subcommittee on Investigations recently, but otherwise walked away free men with nest eggs most people on this planet will never even dream of having.

In contrast, Insull not only lost everything he owned because he used his worldly goods as collateral for bank loans to prop up his companies in the early 1930s, was extradited (some say kidnapped) from Turkey and tried for fraud three separate times. He was acquitted in each trial. Jurors could plainly see he went down with his ship. No such corporate captains seem to command boardrooms these days.

The one blessing that came out of Insull’s public demise was the nucleus of New Deal investor protections. When I read the original marked-up speech in which FDR both denounced the utilities magnate and proposed what could be done about averting future chicanery, my hands trembled. Here was a detailed conception of how everyone could be protected, securities markets policed and excessive corporate control curbed. Upon the ashes of Insull’s empire, new laws sprang forth that forced disclosure and reined in abuses. The lion’s share of those laws is still with us today.

While there’s much historical rear-view-mirror criticism of what FDR really accomplished with the New Deal, at least there was a comprehensive plan of action articulated from the White House. In the absence of a rogue’s gallery of scapegoats – it would be a very crowded room at this point – something like the New Deal would be welcome. A Fair Deal for future mortgage borrowers, brokers, bankers and Wall Street intermediaries is needed.

Markets work best when there’s a cop on the beat and aren’t supervised by Inspector Clouseau. Disclosure works best when all parties understand what they’re buying, the risks involved and how much it’s going to cost them over time. There’s no need to burn anyone in effigy, just fix the system – the real culprit in this whole mess.

John F. Wasik
johnwasik@gmail.com
www.johnwasik.com
Author of The Merchant of Power: Samuel Insull, Thomas Edison and the Invention of the Modern Metropolis and six books on investing.

Iraq, Energy and Arthur C. Clarke

As the great science fiction writer Arthur C. Clarke left his earthbound shell recently, we agonize over the fifth anniversary of the Iraq war. In spirit of his great world-mind, let's mull over one of our most vexing human tragedies.

While I see the war as an epic failure of the neocons' collective imagination, millions still think that we are fighting this hopeless battle to secure our energy present and future.

On that objective, the Bush administration has failed more than miserably. Some 160,000 troops over a half-decade have failed to secure two large oilfields or pacify a country the size of France. The border is as porous as a rotted fishnet, from 150,000 to 600,000 civilians have died, 4,000 of our bravest men and women have perished and more than 60,000 have been wounded.

Still, Iraqi oil is smuggled, sold on the black market and hasn't paid for much of anything in this country. The Iraqis can barely keep the lights on -- where electricity is even available. Their standard of living has plummeted and the cold civil war continues. Not even the British want to stay.

(For more on the oil thefts, see the New York Times expose (www.nytimes.com).

The real, unstated strategy was to create a geopolitical wedge between Syria and its destructive sphere of influence and Iran, which is the major funder of Hamas in Palestine. Those in the White House, CIA and the undisclosed secret location where Dick Cheney spends his days, truly believed in the "slam-dunk" theory of Middle East hegemony. Control Iraq and you shut down Iranian adventurism, stifle Palestinian terrorism and keep the Straits of Hormuz open to oil traffic. Who's the major beneficiary? Mostly China and Japan, who need the petroleum to keep going. China alone will become the world's largest consumer of black gold very soon and will do anything to keep the spigot open.

Insatiable demand from China, India and the West keep pushing oil prices higher. Wall Street and hedge funds make the crude pricing party rock with their endless speculation on oil futures and arbitrage against the dollar (dump the dollar and buy oil and gold). Those are the reasons oil prices hit $110 recently. I would bet for them to come down -- maybe to the $80 a barrel level -- because the price doesn't support the demand level. There's going to be a surplus of oil if the West enters a recession and pulls China and India back down with it. That seems to be falling into place with each passing day. So much for energy security.

While energy and commodity prices spiral ever higher -- making things like driving a long-haul truck or commuting unaffordable for those of modest means -- the US Senate dithers on comprehensive energy legislation. Meanwhile, the two Democratic candidates attempt to make us believe that they're on our side by spouting off "energy independence" myths, although they have offered almost no leadership in the upper house on passing a key energy bill the House has approved (see my blog before last).

Is Energy Independence possible with the greatest army, navy and air force in history doing our bidding? If it is, it won't come through force, but I doubt the power brokers in Washington will ever figure that out.

A well-thought-out, diversified energy portfolio is possible. Yet it's more likely to come from venture capitalists in Silicon Valley, homeowners in Germany and scientists in Tennessee (certainly not from Al Gore).

To date, some $3 billion in venture capital has been invested in alternative energy projects. That's quadruple the amount from 2000. Think of what might be possible if the US Government matched those dollars on every worthy project: Biofuels from cellulosic (not corn) products, solar photovoltaics, plug-in or electric cars, fuel cells, concentrated solar heating/electricity, green building and reprocessing nuclear waste. What if the estimated $2 trillion that is expected to prop up the Iraq War effort went into these research areas or subsidies for using alt-e? What if we even paid premium prices -- like the German government -- for power generated by alternative (non-polluting) power?

Mind you, I don't think we'll ever be energy independent. It takes a lot of petroleum to fuel trains, buses and cars. Our economy would grind to a halt without oil when you take into account the role of petroleum in the chemical, fertilizer, pharmaceutical and plastics industries. Just as we can't eliminate the lion's share of our petroleum use, we won't be leaving Iraq anytime soon because even a small dent in the world's oil pumping capacity is felt around the world. What happens to China happens to Wall Street and can clobber Main Street. The U.S. will be in the Persian Gulf as long as the British were in India.

Yet there are so many stories of hope; I'm only pessimistic about the political situation. The ceaseless ingenuity of Americans and their institutions outside of Washington never fails to flabbergast me.

I take you now to the foothills of the Smokies, where some exciting developments are underway courtesy of the US taxpayer and the US Department of Energy at the Oak Ridge National Lab near Knoxville. The lab is not only working on fuel cells, cellulosic ethanol, solar cells and energy efficiency, it has a hand in one of the largest zero-energy home projects on the continent. Not too far from the lab is Walden Reserve, a retirement development that will run on the energy it creates. Some 20,000 people will enjoy a golf course, spa, hiking trails -- and their own energy-stingy/electricity producing homes. I wonder if Al Gore is going to abandon his power-gluttonous mansion for this modest enclave of progress?

(For more on this, see ORNL's magazine http://www.ornl.gov/ORNLReview)

From Eastern Tennessee, let's travel into the cosmos and ask the late Mr. Clarke what he thinks is possible in terms of energy developments. First, let's review his three laws:

* When a distinguished elderly scientist states that something is possible, he is almost certainly right -- and vice versa.

* The only way of discovering the limits of the possible is to venture a little way past them into the impossible.

* Any sufficiently advanced technology is indistinguishable from magic.

Yes, we have a little magic left in our tortured culture of war and chaos. The man who gave us geosynchronous satellites, "Childhood's End" and "2001: A Space Odyssey" told us so. This is part of his lasting legacy.

The most indelible image I have of Clarke's work is one of the last scenes of Stanley Kubrick's mind-bending movie based on 2001. HAL the computer has somehow managed to mess with time itself. The last remaining astronaut ages rapidly in front of the monolith, then is reborn. Has mankind transcended war at that point through the force of technology? Or is rebirth simply necessary for us to reinvent ourselves?

All it takes is some genuine imagination, daring and magic and we have our answers!

Obama & Race

I've just read Barack Obama's speech on race.

He makes the point that we haven't got past the issue and he's right. It looms over us like Poe's Raven. Only this time it's Obama who utters "Nevermore!" If there's been a politician in recent memory who wants to make race irrelevant, it's him.

I've met him twice and I'm convinced of his integrity on this issue. He could have completely disowned Rev. Wright, but he chose not to. Like the intelligent observer of history he is, Obama reminded his listeners that the Constitution itself originally ignored the question of race and slavery. Without the support of slave-owning aristocrats like Jefferson and Washington, there would have been no constitution and no United States of America. For those interested in the tortured intricacies of the 1780s and 1790s, read Joseph Ellis's excellent early history of the first decades of the republic "The Creation."

What was compelling about Obama's speech is that he didn't duck the issue by telling stories, throwing out the usual jeremiads about race relations or the venom that comes out of this subject. Here's what he said:



"Race is an issue that I believe this nation cannot afford to ignore right now. We would be making the same mistake that Reverend Wright made in his offending sermons about America – to simplify and stereotype and amplify the negative to the point that it distorts reality.

The fact is that the comments that have been made and the issues that have surfaced over the last few weeks reflect the complexities of race in this country that we’ve never really worked through – a part of our union that we have yet to perfect. And if we walk away now, if we simply retreat into our respective corners, we will never be able to come together and solve challenges like health care, or education, or the need to find good jobs for every American.

Understanding this reality requires a reminder of how we arrived at this point. As William Faulkner once wrote, “The past isn’t dead and buried. In fact, it isn’t even past.” We do not need to recite here the history of racial injustice in this country. But we do need to remind ourselves that so many of the disparities that exist in the African-American community today can be directly traced to inequalities passed on from an earlier generation that suffered under the brutal legacy of slavery and Jim Crow.

Segregated schools were, and are, inferior schools; we still haven’t fixed them, fifty years after Brown v. Board of Education, and the inferior education they provided, then and now, helps explain the pervasive achievement gap between today’s black and white students.

Legalized discrimination - where blacks were prevented, often through violence, from owning property, or loans were not granted to African-American business owners, or black homeowners could not access FHA mortgages, or blacks were excluded from unions, or the police force, or fire departments – meant that black families could not amass any meaningful wealth to bequeath to future generations. That history helps explain the wealth and income gap between black and white, and the concentrated pockets of poverty that persists in so many of today’s urban and rural communities.

A lack of economic opportunity among black men, and the shame and frustration that came from not being able to provide for one’s family, contributed to the erosion of black families – a problem that welfare policies for many years may have worsened. And the lack of basic services in so many urban black neighborhoods – parks for kids to play in, police walking the beat, regular garbage pick-up and building code enforcement – all helped create a cycle of violence, blight and neglect that continue to haunt us."


Economic opportunity, institutional discrimination, lack of basic services in black neighborhoods. These have been long-standing problems that neither the Great Society programs of the 1960s nor Clinton welfare reform have resolved. Obama wisely gets us to refocus on these issues, instead of being distracted by rhetoric.

Why have 20 Chicago schoolchildren been shot to death this year? Why have inner cities languished while suburban development prospers? Why are there more than 1 million people incarcerated in the U.S. (many of them people of color with little education) -- an all-time high? Why do voucher programs gain support in cities? Have we, as a society, given up?

Obama noted that thousands of jobs have been lost in the inner cities. I can tell you from my own experience that Chicago, for example, once was a bastion of opportunity for people of every color. Men from Eastern Europe, the rural south and from all parts of the country knew they could get a job in a Chicago factory and mill. They knew that, despite the danger of the work, they could earn a decent union wage and retire in dignity. They knew the union would protect their right to work and not be exploited. I know because I saw it with my own eyes when I was reporting on the steel industry in the early 1980s. Black and Hispanic men worked decent jobs in the mills. A woman was president of the Steelworkers local that represented US Steel's South Works. A Hispanic man was president of another local.

Where did all of those jobs go? What happened to those families when all of the mills closed or relocated? South Chicago became a ghost town. I visited this once-bustling multi-ethnic neighborhood this past summer. Entire blocks are empty. The South Works mill, which occupied a piece of property larger than the entire Chicago Loop, was leveled to make way for a mega-development on prime lakefront property that for numerous opaque reasons hasn't gotten off the ground. There's more tumbleweeds there than the OK Corral.

So when Obama says we shouldn't shift the focus from the embedded and unique problems of race, I can respect that message. While I'm not sure yet if he's the right person to be president, he's certainly qualified to be a political surgeon general for his attempt to heal some old and troubling wounds.

The Economics of Ecology: House Energy Bill Needs to Pass Senate

I was interviewing a major "green" West Coast developer this morning, and, as these things go, the conversation turned to economics.

The question I always pitch at anyone building green on any kind of scale is this: "What will it take to transform green building into widely accepted mainstream practice and how can it make housing more affordable?"

Over the years, builders, architects and developers have been pretty honest on the answer: "it's the economics."

This particular developer was taking a bold move to mandate that 20% of the new homes in his planned community needed to have solar electricity (PV) panels installed. The gross cost of these power producers is a about $24,000 per home. Subtracting state and federal rebates and the net cost is about $16,000. He's able to get a volume-purchasing discount from a major vendor, who always does the installation, so he's done everything he could at this point to make his homes make and conserve energy.

Here's the economics piece and it's a big one.

When Congress first started toying with tax incentives for alternative energy, it was a limited approach, mostly favoring things like ethanol (50-cent-a-gallon subsidy to producers), solar appliances ($2,000 federal tax credit) and sundry other items like energy-efficient appliances, windows, doors and insulation. This piecemeal legislation left out residential windpower and geothermal and is due to expire the end of this year. Without the subsidies, builders have no incentive to do any alternative energy, except where electricity is expensive and offset by state alt-e tax breaks, which tend to be most generous on the West Coast. Why offer a solar appliance when you could upgrade your kitchen or bath? Consumer economics is a fickle beast. We choose comfort and convenience over lowering operating costs 99% of the time. Until we see obnoxiously high energy bills (they are coming), we opt for granite countertops as our environmental plum.

It would seem that Congress was really on board with the alt-e subsidy program after oil prices hit $110 a barrel. Although there's a bubble in that market as traders flee dollar-denominated investments to oil and gold, it's clear that energy demand is not going away and Congress is doing a miserable job of developing alternative sources.

Enter the House of Representative's "Renewable Energy and Energy Conservation Tax Act of 2008," which was passed last month under the capable leadership of House Speaker Nancy Pelosi. It's a good bill that deserves to be passed by the recalcitrant Senate. Here are some of the highlights:

* Bumping up the residential credit for solar appliances to $4,000 from $2,000. A great idea. This credit would also apply to geothermal and wind power installed in homes.

* Extension of the 30-percent investment tax credit for fuel cell and solar research through 2016. Do we need to give tax break for R&D on the cleanest forms of energy? You bet.

* A production tax credit for alternative refueling stations and cellulosic ethanol. I was considering buying a Honda Civic that ran on natural gas, the cleanest car on the road. But there are no ng filling stations in Illinois. It's only available in California.

* Plug-in Hybrid Car Credit of $4,000. This is a break for those who buy a car that you can recharge at home. Although these vehicles are not available yet through mass-produced automakers, they will be soon. They can get up to 100 miles a gallon.

* Eliminating the SUV tax break and various oil industry subsidies. The US tax code was subsidizing the purchase of the dirtiest, most fuel-guzzling vehicles on the road in addition to an ungodly wealthy industry fueling them.

* Breaks for energy-efficient appliances, buildings, smart electric meters and conservation bonds.

I don't think this version will pass in its entirety. The Senate has logjammed this legislation in the past because it seeks to take away huge subsidies for the petroleum industry. While I don't think oil/gas producers need any subsidy whatsoever -- look at the price of their raw product -- it's always a deal breaker with the Senate GOP.

It's also disappointing that neither the House nor Senate has approved a minimum portfolio standard for alt-e. For example, one proposal would have the country producing 20% of its power from alt-e in 20 years. This is ambitious, but necessary. Until Congress opposes the open-ended use of carbon-based fuels, we're going to be in trouble.

What can you do? Call, write or email your Senator and ask him/her to endorse the House energy bill. We needed this legislation 30 years ago. They've had plenty of time to consider why it's vital.

Technology and Its Discontents

I've just spent a wonderful evening with friends and neighbors. The talk turned to technology and we eagerly discussed new features on phones that are not quite phones anymore. They are communication/organization/information devices. They all have their own names, like nymphs in Greek mythology: Treos, blackberries, Razrs.

Although we can certainly reach more people and obtain more information, has it made our lives any better? Have we put this technology to its best primary use: to make our lives less nasty, brutish and short?

In the medical field, there's plenty of technology, yet it's often poorly employed. Doctors have become test-centric -- mostly due to their fee for service structure -- rather than focusing on results. Will an MRI relieve pain if a doctor doesn't have full access to his patient's medical records? Why can't a doctor call up all that information as easily as he can get a reservation for his favorite restaurant on his blackberry? Is something wrong here?

Acccording to the US Food and Drug Administration, medical errors kill about 98,000 people a year. That's nearly twice the number killed in all of the auto accidents in the US every year. Can this number be reduced? Surely if you can get a microwave to beep when it turns off, you can get an alarm to go off when someone's getting the wrong medication or too much of it.

This is not a screed on the US healthcare system, which is broken in so many ways, this blog can't do justice to this argument at the moment. I'm talking about technology becoming our servant instead of our muse. It should be both, but it isn't.

In the conclusion of Henry David Thoreau's Walden, he tells us "do not trouble yourself much to get new things, whether clothes or friends. Turn the old, return to them....Do not seek so anxiously to be developed, to subject yourself to many influences to be played on; it is all dissapation."

Smart Home: Green + Wired

By day, I write about the US housing crisis, investing and all things personal finance. It's a never-ending panopoly of dilemmas, exhortations and criticisms of our savings-challenged culture.

When the sun goes down, I wear my bright green fedora and explore the world of sustainability, which is a fuzzy concept that we need to define further. What is sustainability?

To me, it's pretty simple. It's living in a place without destroying yourself or the environment. Right now, we're pretty good at the destruction and consumption part. You already know the story: We're using up clean water, air, land and other resources like there's no tomorrow. And if we don't start understanding what it means to be sustainable, we'll be dealing with a self-fulfilling prophecy.

Take American housing. For more than two centuries, it's pretty much been the same principle: You get a piece of land, build a house or building on it and hope for the best. Our cultural psyche, based on optimism, was infused with this idea that we (European-based folks) were somehow chosen to succeed, that the land would be bountiful if we were good and our home was a sacred place. This was the core of the American dream. This twisted principle was taken to the extreme and pursued at the expense of Native Americans and Africans, but that's another polemic for another day.

Now with home prices in one of the biggest housing downturns in US history, more than 4 million houses sitting unsold and foreclosures hitting all-time highs, we need to re-examine the myth of the American home.

One of my candidates for de-constructing the "American Home is a Castle" fable is Michelle Kaufmann (see http://blog.michellekaufmann.com/) , an Oakland, California-based architect. She not only embodies the best and brighest of her generation, her willingness to buck conventional wisdom may well propel her into a league of her own.

Michelle's philosophy is rooted in smart design. This architectural ethos goes well beyond "good" design. It delves deep into the root of what's wrong with American architecture. First of all, conventional homebuilding costs too much. Builders are locked into the finest and latest in 19th-century technology. The balloon-frame house may have been a cost-saving innovation back in the middle of the 1800s, but it's like building a computer with vacuum tubes. It will take nearly six months to build the so-called modern home -- even longer if it's a McMansion. Why not factory-build it in modules? The construction would take days once the site is prepared. Homeowners can then save big on labor costs. Kaufmann's homes are manufactured in factories and shipped to the site. One of her models will be on display at Chicago's Museum of Science and Industry starting May 8. See it if you can.

Then there's the use of materials. Frank Lloyd Wright, for you archi-buffs out there, was obsessed with trying new materials and techniques. When he was designing his landmark Johnson Wax office building in Racine, Wisconsin, he designed elegant pillars to support the roof. They looked like Art Deco mushrooms. Local engineers refused to believe that they could adequately support much of anything, so he ordered a demonstration that piled tons of rocks on top of the columns. He easily won the test.

Like Wright, Kaufmann is trying to win over critics of her modular designs. After all, aren't modular homes really like trailers, critics retort? Nothing could be further from the truth. Modular design uses 50% to 75% materials and what's used is healthy, environmentally friendly and built to last.

Conventional building also has ignored energy-efficient design. As oil soars over the $100-a-barrel mark and all utility prices climb, this is an imperative issue in all buildings now. We can't afford to waste energy through buildings anymore. All of Kaufmann's homes employ efficient insulation, lighting, appliances, heating & cooling, energy monitoring, reduced/reused water systems and best of all, flexibility. Her houses can be designed on a website. Remember the Sears Craftsman homes that could be ordered by catalog and shipped to the site? Her homes are getting back to that concept, only the home is pre-assembled by module -- and then shipped.

There's a reason why the Kaufmann Smart Home is being assembled at the Museum of Science and Industry. The original building was once part of the 1893 Columbian Exposition (it was then an Arts Building), which heralded the dawn of the Second Industrial Age, ushering in electricity, motors and homes with incandescent lighting. On a small lagoon to the south of the museum was a Japanese temple on an island that inspired the fledgling architect Frank Lloyd Wright to re-invent architecture. Two of the other geniuses behind the great fair were Frederick Law Olmsted, the godfather of modern landscape architecture and Daniel Burnham, the legendary city planner and architect. All of these minds merged in this one place creating the foundation for our current built environment.

Now it's an innovative architect from Iowa who occupies the center stage of mold-breaking exhibition. And once again, I believe the world will pay attention in a big way.