Isaac Laquedem

Congressman Brad Miller comments on the other dudes in the banks

One benefit of visiting the nation's capital is the chance to see a Congressman.  My most recent sighting was of Congressman Brad Miller (Raleigh, North Carolina), who has recently been active in proposing ways not just to solve, or at least ameliorate, the mortgage and banking crisis, but also to keep bankers from causing another one.  Today I heard him talk about a proposal he made several years ago to restrict the worst kinds of subprime lending (a proposal that unfortunately didn't pass) and some proposals he's making now to clean up the Augean stables of the financial world.

One of the things I learned from his speech is that a bankruptcy court can rewrite most loan agreements between a bankrupt borrower and the unhappy lender if the value of the security is less than the amount owed on the debt, except for agreements secured by the borrower's principal residence (i.e., home mortgages).  In bankruptcy lingo this is called a cramdown:  let's say the borrower pledged an office building that used to be worth $3,000,000 as security for a loan of $2,500,000, but the building is now worth only $2,000,000.  The bankruptcy court can, to a degree, disregard the security provisions of the mortgage and treat this as a secured loan for $2,000,000 (today's value of the collateral) and an unsecured loan for $500,000.  The lender gets priority to recover the $2,000,000 from the building if it's sold, but has to wait in line with the bootless and unhorsed unsecured creditors to recover anything on the remaining $500,000.  

But there's an exception for a borrower's principal residence.  "Why," he asks, "can a bankrupt borrower cram down a loan on a vacation house, or even on a yacht, but not on the house where they actually live?"  It's a good question.  I don't know the answer.  I did enjoy his description of how financial executives explain the meltdown.  Mr. Miller likened what they are now saying to what he calls the "other dude" defense (he describes himself as a recovered trial lawyer).  The "other dude" defense is when the defendant in a criminal case, let's say a street robbery, says that he was just standing around, minding his own business, when this other dude -- who was about the same height and weight, and looked kind of like him, and even wore the same clothes -- came along and committed the crime, then ran away before the police got there.  Banking executives, he says, are using the "other dude" defense: they were just standing around, minding their own business, making safe and boring loans, when these other dudes came along and created the subprime mortgage meltdown.

Mr. Miller didn't believe in the "other dude" defense when street criminals used it, and I got the sense that he doesn't believe it when bankers use it today. 

The Ancient Uncle teaches me something new about fishing

This last weekend Venerable Mom and I went on a long drive to call on the Ancient Uncle, just released from one of his increasingly frequent hospital stays.  The last time I went to see him, a few months ago, I arrived a day or two after the hospital had paroled him.  When I arrived he was propped up in an armchair with his oxygen tank behind him and his tackle box and assorted fishing doodads spread out in front of him, tying and untying knots with age-gnarled fingers.  "What are you doing?" I asked.  "I'm getting my fishing tackle ready so that I can go fishing when the weather changes," he replied. 

He clearly was in no shape to go fishing then or anytime soon (even with assistance, he could barely stand), but I nevertheless appreciated how, even at his age (he was born during the Great War) he was looking forward to something he hoped to do in the future, no matter how unlikely it was that he would ever be in shape to actually do it. 

The next day, I drove home.  He went fishing.

Can your banker sleep at night?

The non-banking world has been perplexed (and in the case of Congress, downright angry) about how the community of capable and intelligent bankers could have got themselves, their banks, and the federal government into another fine mess, this one caused by banks making and buying bad loans and speculating in securities that they did not understand.  I asked a retired bank president for his thoughts on how banking has changed.  Here's some of what he told me, in his own words, which I've edited and rearranged somewhat.

In the 1980s "the process was was to make sure that you got credit reports and you knew your borrower.  Often times you went into the facilities that the borrower was operating.  This all helped give a perspective on the integrity of the borrower."  Lenders knew and understood their borrowers and the risks they were taking on when they made loans to them.

What changed from then to now?  "When I started reading about the subprime problem a couple of years ago," he told me, "I was flabbergasted at the process that the lenders went through -- or the lack thereof.  In many cases they weren't verifying credit information or verifying and understanding the assets and liabilities of the borrowers.  [Our bank] made subprime loans on the basis of getting information, good appraisals on the property, credit reports, etc.  The reason these loans were subprime is that the borrower may have had a credit problem a year or two back, or income verification may show that he's been on the job for less than the required amount of time, but the work situation was good."  These loans, he said, were good fee generators, the important point being that the lender took the time to investigate the borrower, determine the reasons the borrower was less than perfect, and evaluate the risk before making the loan.  But the current batch of subprime loans, he said, included many loans "where none of this investigation was being done."  Those loans were packaged into securities "and the ratings agencies were unable to properly rate these instruments.  People were assuming that they were AAA when in fact they weren't, and when a part of that mortgage package went bad, the whole package was tainted and its value dropped to near nothing."

However, he bought mortgage-backed securities for his own bank.  The difference: "We would buy them from firms that knew their product very well.  The products weren't so complicated, so we could understand them.  If we couldn't, we wouldn't buy."

And yet, the easy money that these loans and securities offered might have been tempting, if he'd stayed in banking a few more years: "I wonder if I would be jumping into these products because everybody else was doing it to make a lot of money."  However, bankerly caution wins out: "The underwriting was poorly done, really nonexistent.  A good banker today (and there are still lots of them around) wouldn't have done the kinds of lending that have gone on the past few years, and their banks are still good healthy banks."

He didn't intend it as a summary of his banking philosophy, but one thing he said summarizes safe banking, then and now: "We tried to do things so that we could keep the bank under control, and allow us to sleep at night."  There are still bankers today who can sleep at night; they may have been disappointed at not being profiled in the Wall Street Journal during the go-go years, but they're no doubt happy at not being profiled in the New York Times now.

Bring UP the curtain on Memorial Coliseum

Professor Bogdanski linked to this essay by William P. Macht, Associate Director of the Center for Real Estate at Portland State University, in which Professor Macht gives a number of alternate uses for Memorial Coliseum (not to mention simply using the building for its intended purpose) and makes a compelling case for not tearing it down. 

I was struck by one sentence on page 6 of Professor Macht's article, where he writes of the interior bowl of the Coliseum, "The blackening curtains that surround the bowl when darkening was needed are no longer operable and are left closed, thereby depriving the interior of the benefit of daylight."  I'd nearly forgotten about this unusual design feature of the Coliseum: all around the rim of the bowl are blackout curtains that could be raised to let in light, or lowered to keep the arena dark.  (See the picture at the bottom of page 19 for the Coliseum's appearance inside when the curtains are open.)  

The question that came to my mind is to ask why the curtains "are no longer operable."  Were they operable when the City turned management of Memorial Coliseum over to Paul Allen's Oregon Arena Corp.?  And if the curtains worked then, is it through the neglect or active fault of Oregon Arena Corp. that they don't work now?  And if it is the fault of Oregon Arena Corp. that the curtains don't work now, does the City have the right to declare Oregon Arena Corp. in breach of its management contract and to take back control of the building?  Just wondering.

Who's the bigger draw: Beavers or Winter Hawks?

I've spent the last few days combing through references to the paid attendance for the last few seasons at the Portland Beavers baseball games and the Portland Winter Hawks hockey games.  Each team seems to have poor attendance and good excuses. 

The thought that occurred to me is that if the Winter Hawks outdraw the Beavers (which might be possible) then it doesn't make sense to tear down the hockey team's home to put in a baseball field.  But as I'm not a fan of professional sports, I might just be carping to the converted.

Just for fun, here's an alternate use for the City's stadium funds

I'm entranced by the economic arguments offered in favor of using public money to turn PGE Park into a soccer-only field and to build a new minor-league baseball park, so that Portland can move one notch up in the soccer world.  Let's suppose that our friends in local government really have, or can find, $76 million to $89 million to put into sports arenas.  (Apparently, ordinary bank financing isn't available for projects like this.) 

Another prominent Portland project can't get bank financing; it's Tom Moyer's Park Avenue West Tower on Morrison Street downtown, on which he halted construction when the market for permanent financing dried up.  Compare the economics of the City borrowing money to build two sports fields with what would result if it lent money for Mr. Moyer's project. 

City investment:  $76 million (current estimate) coming from City funds (see item 6 of this report from the Mayor's office).  $120 million (roughly) for the office tower loan.

City repayment:  For the sports field bonds, repayment comes from rents and ticket tax revenues from the sports fields, if the teams and the fans can afford to pay them.  The Paulson family will guarantee the sports team's payments to the Spectator Facilities Fund, which would issue bonds for about 40% of the City's cost.  The Mayor's report does not indicate that the Paulsons would guarantee the other 60% of the City's new bonds.  For Mr. Moyer's office building, repayment comes from refinancing the building in a few years when the credit markets return to normal.

City cash flow:  For the sports fields, the city would pay interest to the bondholders, which it hopes will be covered by rent payments and ticket taxes.  For the office building, the city would receive interest on the building mortgage.

Property taxes:  The sports fields would be owned by the public and would not pay property taxes.  The sports teams would pay property taxes on the personal property (equipment, etc.) used in the businesses.  If the sports teams have $5 million of equipment they would pay about $110,000/year in property taxes on the equipment.  The office building will likely be worth about $160 million when complete, will be on the tax rolls at about 70% of that, or $112 million (this is a result of Measure 5, not a special favor), and will pay about $2.5 million/year in property taxes.  It will also generate about $100,000/year for the Downtown Portland Clean and Safe fee and some money for the City/County business income tax.

Lag time before job creation:  The city can't start work on PGE Park until it has a final design, land use approvals (even the city needs land use approvals), and bond funds in hand.  It has to wait until the end of the current baseball season, so not much would happen there until September at the earliest.  For the replacement baseball field, the City has to overcome some land use obstacles (see the e-mail from Josh Cohen to the Mayor, quoted in this post by Professor Bogdanski), survive citizen opposition to tearing down Memorial Coliseum, and get a design approved  -- let's say 1 year at the earliest, longer if one of the groups of citizen opponents takes it to the Land Use Board of Appeals, which I think will happen.  By contrast, the office building was already under construction.  It has all of its land use approvals except one for removing the condominiums from the top, and Hoffman Construction could put people back to work in a week.  You can't get more shovel-ready than that.

Likelihood of financial success:  With respect to the sports fields, the Paulson family has financial strength, but sports is a rocky business, and the City hasn't finished paying for the last remodel of PGE Park.  The office building, by contrast, is 55% leased already, and Mr. Moyer's track record for repaying loans has been sound for decades.

Likelihood of cost overruns:  Because the PGE Park remodel and the baseball stadium haven't been designed yet, no one knows exactly what they will cost, but the City's track record on projects of this sort has been that they cost more than planned.  Someone -- I hope Mr. Paulson and not the City -- will have to pick up the almost-inevitable excess cost.  The office building investment is a loan.  Loans don't have cost overruns. 

I don't seriously expect the City to consider lending money for Mr. Moyer's building, but I think this comparison is an edifying prism through which to look at Mr. Paulson's sports proposal.

The Convention Center hotel already exists

It's called the Doubletree at Lloyd Center and it lies a few blocks east of the northeast corner of the convention center.  It's about 200 feet farther from the convention center than the distance from one end of the convention center to the other, and it's one stop away by light rail.

The cheap and easy way to build a convention center hotel is to proivde some financing to the Doubletree to upgrade the existing hotel as necessary to suit the demands of conventioneers, and to face the fact that to planners of national conventions, our city is less interesting and less accessible than Seattle is..

It a tree falls and Gresham is there to hear it, it costs you $34,000

Morrell & Morrell, Inc., a homebuilder, wanted to improve the view of Mt. Hood from the back decks of a house that it was building in Gresham.  The view was blocked by a large old tree.  Morrell hired a logger to cut down the tree, and the logger obligingly did so.  The developer and logger overlooked two little points, reports the Portland Tribune; first, they didn't obtain a required city permit; second, the developer didn't own the tree.  The tree belonged to the Persimmon Country Club Homeowners' Association.

The City of Gresham told Morrell that it doesn't approve of what Morrell and its logger did.  In this tree-cutting case, Gresham's bite is worse than its bark: it proposes to fine the developer and logger $34,000 for trespassing and cutting a tree without a permit.  I expect the homeowners' association will also sue for damages, which it will easily recover.  I'd like to suggest one other remedy that the City might impose: require the developer to plant and maintain, in the back yard of the house, a row of poplars -- fast-growing trees known for being very tall.  The homeowners' association might want to plant some itself, on its own property, just to make a point.

What to name the seemingly inevitable baseball field on the Memorial Coliseum site

Allowing that Memorial Coliseum has its problems and needs some repair work, I remember when coliseums had nicknames instead of sponsored names.  Memorial Coliseum didn't have a cute nickname.  One local radio announcer (I think it was Bill Anderson, who called the Buckaroos games on KPOK 1330) occasionally called it the Glass Palace, after its most prominent architectural feature.  He (or whoever called it the Glass Palace) took some flak from members of the public, who rightly thought that it would be inappropriate to call a memorial to fallen soldiers by a cute nickname.  (Imagine your reaction to someone calling the Vietnam Memorial in the nation's capitol something like "the Tall Wall.")

I could picture replacing Memorial Coliseum with a baseball field (though I think it's a scandalous waste of money) if the memorial wall next to the Coliseum is preserved in some somber location on the site and the field is called Memorial Field. 

Not Exxon Field.  Not Nike Field.  Not Goldman Sachs Field.

Memorial Field. 

How to evaluate proposals to spend the City's money

I propose Isaac's Rule for evaluating every request to the City to spend money on something new that is not a core function of the City, whether it be the $150,000 to consider renaming a street, the unknown millions to convert a baseball field into a soccer field, the unknown millions to build a baseball field to replace the baseball field that is being turned into a soccer field, or the unknown hundreds of millions to build a hotel to house the conventioneers who aren't coming to the convention center.

Isaac's Rule is this:  Is this proposed expense more important than replacing the Sellwood Bridge?

The City Council should reject every proposal that fails this test.