By: David A. Smith
[Continued from Friday’s Part 2 and the preceding Part 1.]
Though a cemetery, as profiled in yesterday’s summary of December, is real estate used by and for the dead, and before there is a cemetery, there can also be a property that is used by no one, because those who would have used it are dead or have moved away, resulting in the property’s having negative value unless and until it is bought by someone who can envision an alternate use for it, as explored in the eventual resolution of Vera Coking’s anachronistic Atlantic City boarding house, whose fate I updated in Buying optionality, or Is there life after death?:
A few months ago, in August, I wrote at length (You have the right to remain: Part 1, Part 2, Part 3, Part 4, Part 5, Part 6 and Part 7) about the end of Vera Coking’s ownership of her decaying and largely unoccupied boarding house in Atlantic City, and how that one undistinguished structure became the focal point of a multi-year tussle involving gambling, eminent domain, local politics, and flamboyant characters like Donald Trump and Bob Guccione, both of whom had bad hair and neither of whom were ever able to persuade her to sell:
His hair may be worse, but I dress worse
Yeah, but he can kiss my fake tan
Coking, an elderly widow, made headlines for decades in her legendary fight to keep Guccione and then Trump from snatching her property at 127 S. Columbia Place for their casino projects.
Guccione and Trump could never meet her asking price.
That’s a classic journalist’s error of story trumping logic: Messrs. Guccione and trump each could have met Ms. Coking’s price; neither of them chose to meet her price. Instead they encouraged Atlantic City to take Ms. Coking’s property by eminent domain for economic development, at a price not set by her but by the court (and intended to reflect fair market value).
In some circles, that made Coking an obstructionist, while others celebrated her tenacity in holding off two powerful businessmen who usually got what they wanted.
Had either Mr. Guccione or Mr. Trump prevailed, they would likely have demonstrated what the market has now shown: Ms. Coking wanted more for her property than it was worth.
Determinedly ignoring what’s going on around her
That was her right – the right to be wrong about her property’s value.
[In 2011], the house’s listing price was nearly $5 million. By the time the auction came up last August, the asking price had fallen to $995,000.
And it traded lower than that, selling for $583,000. As I speculated before, Ms. Coking won her principle and lost her principal:
Our concept of private property derives from the pre-technological and agrarian era: a homestead was land that a family settled upon, built upon, fenced, and defended. The homestead had no infrastructure: the homesteader built his own water and sanitation; there was no electricity, and vehicles followed dirt paths and roads. The homestead owner had the right to remain foolish; the right to remain stubborn; ornery; as long as he remained independent, no one could tell him what to do with or on his own property.
You don’t own past here
Though Ms. Coking thwarted the expansion of Atlantic City’s casinos, farther north, in dirty-fingernail Everett, Mr. Trump’s successors such as Steve Wynn were greeted as anticipatory saviors, and though we Cantabrigians clucked in disapproval at the prospect of a vulpine neighbor, inviting him into one’s filthy riverfront backyard has civic upside, explored in Cleaning up at the casino: Part 1, “A fairly rough site” and Part 2, “What else could you do?”:
The referendum to repeal casino gambling in Massachusetts having been decisively defeated (as I and everybody else expected, in part because proponents of casino gambling outspent opponents 20 to 1), the Wynn group is proceeding with its site’s development (having wired the $85 million licensing fee the day after the referendum), despite the f embarrassing disclosures of both the local partners and allegations against Wynn (or its customers) which opponents of casino gambling or proponents of competing casinos have been hoping, so far with no luck, will cause the Massachusetts Gaming Commission to reopen its award.
“As mayor of Everett, I’m super-pleased to be hugging Steve Wynn and his money”
My 12-part comprehensive post examining the casino gambling possibility in Everett can be found here, in When the House Loses : Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, Part 7, Part 8, Part 9, Part 10, Part 11, Part 12.
Even as they do, an immediate benefit of casino gambling is taking shape, as I referenced in When the house loses: Part 3, and reported (conveniently after the referendum, which the Globe supported), in The Boston Globe (November 9, 2014):
Everett neighbors recall Wynn casino parcel’s polluted past
Even today, more than 20 years after [Everett Monsanto] plant closed, the [proposed Wynn site] remains badly contaminated.
‘Even today’? I can never understand journalism’s seeming disingenuity – contaminated sites don’t magically clean themselves just because they are no longer being polluted.
That site’s not gonna clean itself, Hiroshi
In industrial economies, waterfront property is a natural for manufacturing or industry, because it provides power (waterfalls), transportation (boats), and natural disposal (tides into the ocean). Cleanup is a modern invention adopted as an ethical luxury by societies rich enough to afford it.
History of the Monsanto site in Everett
Despite its name, the Mystic River is a lazy meandering partially tidal stream-meets-inlet with muddy banks and soggy marshes. Just above the Everett site it narrows and becomes too shallow for ocean-going craft, and was a lazy estuary of organic silt and sludge ground.
While most of December dealt with the property side of housing investment, two posts covered the financing side, starting with the Magyars’ post-crash economic hangover caused by bingeing on too much Swiss debt, and wondering if it’s really Better to be franc?:
Long ago I figured out that, when it comes to currency risk, never lend in foreign currency and never borrow in foreign currency. I would have thought this was obvious, but some of the world’s smartest bankers (the Swiss) managed to put themselves into just such a foolish position, as reported in The Economist (November 15, 2014):
Twenty thousand forints/ couldn’t make me change my mind
But in 2008 the forint, zloty and other central European currencies plunged against the franc –
Almost certainly as a consequence of the global credit crunch, and the flight to asset, currency, and sovereign-bank quality:
– sending borrowers’ monthly payments soaring in local-currency terms –
That’s why you should never borrow in a foreign currency – because your interest rates will go up just when you most need them to stay low.
– and leaving many of them owing more than their houses were worth.
And that’s why you should never lend in foreign currency – because your collateral will go down in value just when you need it to hold its value.
In short, it’s lose-lose.
Even the Chinese understand that
“Now, with the benefit of hindsight, we can see that it was a mistake,” says a senior official at an Austrian bank that issued lots of franc loans. “Most of the clients did not recognize the risk and in some cases we did not inform them properly.”
How then did the Hungarians – and more importantly, how did the Swiss, who should absolutely have known better – get into this mess?
Bankers will always have their revenge, always served cold and usually at a discount, because borrowers will always need them.
But Hungary is still not the most welcoming place: a “fair banking” law that is working its way through parliament aims to cap interest rates and monthly repayments, both of which will hurt banks’ profits.
A bank-bashing? Sign me up!
Not everyone was so profligate as the Hungarians, though virtue will not always be its own reward:
In Poland, the region’s largest economy, regulators began limiting loans in foreign currencies before the crisis; by 2009 they made up 38% of household borrowing.
That’s a lot, certainly, but roughly half of Hungary’s. And evidently the Poles didn’t default en masse:
They have been dropping steadily ever since, as:
1. Banks stopped offering foreign-currency mortgages
2. Borrowers became much more aware of the risk
3. Existing loans were slowly paid down.
In short, the bullet having been dodged, the Polish central bank and banking system wised up.
Miracles are found where you make them
UPDATE: In mid-January, the Swiss unpegged the franc from the Euro, setting off wild gyrations in the capital markets. I haven’t had time to sort out all the consequences, but intend to do so.
Finally, on New Year’s Eve, I closed the book on 2014 by starting a multi-part post with a bit of news so good that even the New York Times’s perpetual gloom could not obscure A fleeting miracle? Part 1, The grand bargain:
The Fairness Doctrine not applying to news, nothing obligates The New York Times (November 11, 2014) to balance out the gallons of ink it used crying woe at Detroit’s bankruptcy by giving equal space to the city’s emergence from bankruptcy, so I suppose we should be grateful that the headline gave us four words of positives before plunging back into the negatives:
Detroit Emerges From Bankruptcy, Yet –
Time to get mobile again?
To counterbalance the Times’s gloom, here’s the Detroit Free Press (December 10, 2014; red font):
U.S. Bankruptcy Judge Steven Rhodes approved Detroit’s emergence from bankruptcy in early November, but the effective date — when the city is officially considered to have exited Chapter 9 – could only come once lawyers for the city and creditors wrapped up final details of the deal that shaved $7 billion of Detroit’s $18 billion in debts and liabilities.
That happened later the same day, December 10, 2014, as reported by the Huffington Post (December 10, 2014; olive-green font):
Most of the settlements with major creditors, including Detroit’s pension funds and bondholders, will be paid with a distribution of about $720 million of bonds. The city will also reissue $287 million of existing bonds and borrow about $275 million from Barclays Capital to finance its exit from bankruptcy.
Along with the debt, the exit plan relies heavily on the “Grand Bargain,” where foundations, the state and the Detroit Institute of Art will contribute $816 million over time to ease pension cuts and protect city-owned art work from sale.
Many people would be happy at these events:
Three happy men: Michigan Governor Rick Snyder, emergency state receiver Kevyn Orr, and Detroit mayor Mike Duggan, on Mr. Orr’s last day on the job: December 9, 2014
But not the New York Times:
– Pension Risks Linger
‘Risks linger.’ In the world of finance and the world of actuaries, there are always risks – and in the case of Detroit, the risks prospectively are much less than the risks already incurred.
Beware these deadly facts about water!
Actually, the Times’ article contains two stories crammed into one: Detroit’s emergence from bankruptcy, and an expose of the financial looting that took place for decades and contributed to bringing the city to insolvency. Detroit’s bankruptcy reorganization may just be the catastrophe that triggers long-overdue fundamental reform of how public-employee pensions are calculated, paid out, and most importantly, obligated.
This piece, which straddled year-end, was also the stimulus for a multipart post even more enormous than that on Southbridge Towers, dealing with pension fund doublethink – but that will have to wait for the January wrapup.
Just you wait, faithful readers, just you wait
