By Scott Zwartz
December 18, 2015
with May 29, 2016 Addendum
While Wall Street was busily manufacturing the Crash of 2008, Alan Greenspan saw nothing untoward in the billionaires in control of America. Later he would naively say that he never imagined that businessmen would foolishly destroy their own businesses. Yet, they did just that. Where is Lehman Brothers? Because tax payers were forced to give trillions of dollars to the fools who caused the financial collapse, most of the corrupt Wall Street investment houses exist to today.
What does the Crash of 2008 have to do with the foolishness which Mayor Garcetti, the LA City Council, and the Hollywood Chamber of Commerce are promoting as Mr. Leron Gubler sets forth in his recent article in Fox and Hounds and the 12-18-2015 issue of CityWatchLA? Everything! Today, we have the same cast of characters spinning basically the same lies as they spewed forth between 2002 and 2008. The lie then and the lie now was and is: We have a huge shortage of housing and we must build, build, build to meet the demand.
There is no housing shortage now just as there was no shortage of single family homes between 2002 and 2008. Home builders, mortgage lenders, and Wall Street knew between 2002 and 2008 that there was no demand for more single family homes, but they did not care. All that mattered to them was to keep the hype going so that they could rake in billions of dollars selling defective bundled and securitized subprime mortgages as investment vehicles and then buy Credit Default Swaps (insurance) on the defective bundles.
The last paragraph explains why the public was duped during the Subprime Mortgage frauds and why they are now being duped by the bundling and securitization of residential income into investment vehicles. The public does not have the time to learn how to spot financial crooks. That’s how Bernie Madoff was able to deceive so many very sophisticated people for so many years. These crimes are not as simple as holding up a 7-11.
What an incomprehensible phrase — “bundling and securitization of residential income”! Since the same Wall Street corruption fooled Greenspan 10 to 15 years ago, it is not surprising that it misleads people today. Thus, the vast majority of people believe that there is a housing shortage and we must furiously construct more housing units.
The California Department of Finance has released its latest report on Los Angeles’ population increase which has fallen from 1.1% per year to less than 1% per year. How does such a small population increase result in such a huge escalation in rents? It does not. Other factors are at work.
First, however, we need to understand the most important fact on which both the Department of Finance and the USC Sol Price School of Public Policy agree — our population increase comes from an increase of the number of births over the number of deaths. The < 1% population increase does not come from immigration.
When the population grows due to more births, that does not translate into demand for more housing. Even the few families who decided they want a larger home do not increase the demand for housing since their own home goes on the market when they move to another home. The net demand for housing remains the same.
Immigration, however, causes a demand for new housing since people are moving into the area. Without significant immigration, there is no demand for new housing.
Another detail people should know is that the Hollywood Community Plan on which Mr. Gubler relies is The 1988 Hollywood Community Plan. It is based on data from 1960 through 1985, when Hollywood was experiencing a huge influx of new people. That ingress of people stopped in 1990, and since that time, there has been an exodus of people from Hollywood. So many people fled Hollywood’s Council District 13 between 2001 (when Garcetti was elected councilman) and 2010, that CD 13 ceased to qualify as a legal council district. Garcetti and Gubler called this literal destruction of CD 13, “revitalization.” Because a 1925 law requires Los Angeles to have 15 council districts, land from CD 4 and CD 10 was purloined in order to be added to a new CD 13. Gubler is still pushing the population data from 1960 through 1985 as if it were applicable today.
After the Crash of 2008, Congress did not reinstate a beefed up Glass-Steagall to prevent similar securities frauds nor did it outlaw Credit Default Swaps — the Wall Street businesses practices which crashed the world economy in 2008. Rather, the federal government gave trillions of dollars to the corrupt Wall Street investment houses on the belief that they were Too Big to Fail. Then the Administration invented the concept of Too Big to Prosecute. Let’s put this fiasco into neighborhood terms.
Let’s say your neighborhood has a nice Ralphs’ grocery store and a gang of thugs not only robs the store of all its cash, but they takes all the merchandise, and then burn the store to the ground. When the police arrive, they do not arrest the perps. Instead, they give the perps millions of dollars because they had bought fire insurance on the store which they had just burned to the ground.
Then, the thugs do the same thing to the nearby Gelsons. After the Gelsons is looted and burned to the ground, the cops show up and give the arsonists million more dollars. Yep, the thugs had bought fire insurance (aka Credit Default Swaps) on the Gelsons.
Soon, there are no more grocery stores because they have all been looted and burned to the ground, but the thugs have been made into multi-millionaires and billionaires. Since the thugs are too big to prosecute, they are free to find some other ways to make gigantic profits while destroying another part of the economy.
I will skip over the interlude where Wall Street used similar tactics to manipulate the world food commodity prices which destablized the Arab governments in the Middle East, gave us “Arab Spring,” and contributed to the rise of ISIS.
Right here at home, they decided to replicate the Subprime Debacle by the bundling and securitizing of residential rental income. That is why banks are not selling foreclosed properties the way they have done for at least 100 years. The bundling and securitization of rental income makes all housing units worth vastly more as the new “Subprime mortgages” to be sold to Wall Street who is bundling the residential incomes into securities to be sold as investment vehicles to really dumb people around the world. Of course, when the bundled rental securities begin to under perform, the sellers of these securities sweeten the deal by selling insurance, aka the Credit Default Swaps.
Because all types of homes from single family houses to condos to apartments are now worth much more than their value as living space, their prices are greatly escalating. When the population increases less than 1%, the demand for housing does not increase by 5%, 7% or 15%. The rapid price rise reflects the extra cash that Wall Street can make from the securitization of residential rental income. This myopic greed is why Garcetti, Grubler and the developers are desperate to construct as many housing units along Sunset and Hollywood Boulevards. The demand is not by families who want to live in these places but by financial institutions which want to cash in on the scam before the Crash.
While it is hard for many people to comprehend this type of criminality among white collar folks, people can learn about this area of high finance called Accounting Control Fraud, which I call Enron Accounting (Google “William K Black“). The game plan of Enron Accounting is simple. Lie about a huge demand for your product, conceal all losses, while reporting fake profits, and suck as much cash out of your business before the real world catches on and your company ends up BK.
One will notice that these developers are using LLCs and LLPs to construct The Palladium, the Crossroads, The Millennium and the other 70 projects in Hollywood. While there is nothing wrong with LLCs and LLPs in principle, they are being misused for fraudulent purposes. Just as Al Capone was finally caught for income tax evasion, these LLCs and LLPs are being used for financial manipulation which generally involves income tax fraud. But for the Obama Administration’s Doctrine of Too Big to Prosecute, the real threat of prison time due to the income tax invasion would deter some of these white collar crooks.
Thus, the construction of these thousands of additional housing units will continue at breakneck speed as Wall Street has an insatiable appetite for more housing units, whether or not they’re empty. It is as easy to write up a false lease with a high rent as it was to write up a fake mortgage.
December 4, 2017 Update
Large corporations can buy up thousands of homes and then securitize the rental income. Like Enron, the next step in the fraud is to “go public” so that the executives become stock holders with generous stock options. Thus, as the frauds hype the stock price, as Ken Lay did with Enron, the executives behind the growing fraud, make more and more money from their stock options as well as receiving unwarranted salaries and other perks.
These types of frauds are similar to Pyramid Schemes in that they run out of people. The Subprime Mortgage securitization market came to a halt when the nation ran out of qualified buyers. So, the lenders made loans to unqualified buyers since the mortgage company’s income came from selling the mortgage to Wall Street and not from holding onto the the mortgage for decades and collecting the mortgage payments. Then, the ran out of under-qualified home buyers and eventually they exhausted the supply of actual human being, leaving no option but to write up completely bogus mortgages to sell to Wall Street.
Just as the mortgage brokers ran out of people to buy homes before 2008, there is a finite number of people to rent homes. Due to the nature of this type of fraud, however, new home renters are needed to conceal the losses.
To launch the fraud, the corporation takes good care of its renters and selects the highest quality renters. As time passes, however, properties need more maintenance and the corporation runs out of higher quality of the renter decreases. Thus, the expenses increase while the reliability of the renter decreases.
The advantage to the bundling of mortgages was that the maintenance, insurance, taxes and all other costs associated with the properties were not borne by the corporations. When they are bundling rental income, however, the corporation has to pay all of these costs. Thus, the early returns when the properties are in good condition and the quality of the renters is high gives way to homes in disrepair, a lower quality renter and continued costs to the corporation.
Unless the corporation continues to invest in maintenance and cater to the renters, the rental payments decrease . When the corporation is faced with the choice between spend millions of dollars to improve the properties and attract high quality renters vs writing bogus house leases, the mathematics favor of writing new fraudulent leases. Since there is no money at all behind these bogus leases, the pyramid nature of the scam crashes the entire enterprise as happened with Enron. Right up to the day that the corporation files for bankruptcy, the executives will be claiming that there are no problems.
The same thing happened with Equity Funding in 1970’s, with the Savings and Loans in 1980’s, with the Dot-Com’s in the 1990’s, and with the mortgage frauds in the 2000’s, but everyone is positive that this time their fraudulent schemes will continue forever.