Wed, 10 Feb 2010 03:27:15 +0000

There are only two banks in the Dow, JPMorgan Chase, which was up 32.2% and BofA which was up 7.0%.· When banks fail, you know how a healthy bank will take over their deposits at ridiculously low prices?  We’re on a list to get press releases from the FDIC, most of which we just skim, but we’re starting to see more and more bank failures where no one wants to take over the deposits. We just saw this with Barnes Bank in Utah . Other than because the deposits are unattractive for all the obvious reasons, we wonder what other dynamics might be in play such that the FDIC can’t find a single bank to take them over.

• A musician named Dave Carroll recently had difficulty with United Airlines.  United damaged his treasured  Taylor  guitar ($3,500) during a flight, and he spent over nine months trying to get United to pay for damages caused by baggage handlers.  During his final exchange with the United Customer Relations Manager, he stated that he was left with no choice other than to make a music video for YouTube exposing their lack of cooperation.  The Manager responded: “Good luck with that one, pal”.
  He posted a retaliatory video on YouTube, and the video has received over 6.5 million hits.  United Airlines contacted the musician and attempted settlement in exchange for pulling the video. Naturally his response was: “Good luck with that one, pal.” Here’s the video.  It’s funny, and the music is really good.
• Next time you have a disgruntled customer, he might not record a YouTube song about you, but he could create a website that comes up every time someone searches for your company.  Say your company is First Global Bank. You might want to register FirstGlobalBankSucks.com and every other such name that might come up when someone’s doing an innocent search for your bank’s website.
• Taylor, Bean’s wholly-owned thrift Platinum Community Bank was seized when Taylor , Bean transferred $220 million in impound accounts to Platinum and then onto their WH lender (Colonial Bank) to clean up stale loans. This ballooned the thrifts balance sheet in round numbers from $100 million to $300 million, a huge no-no. The money was transferred on July 2nd last year.   Does that date sound suspicious? Did you notice that it was two days after the June 30 Call Report?  It looks like “someone” at Taylor , Bean chose that date on purpose to avoid disclosing to the OTS. The word is that they hoped to have the stale loans cleared up by time they had to file their September 30 Call Report, return the impound money, and go about their business.  Can you believe their chutzpah? And their stupidity?

• We were surprised to read that 56 institutions failed to make their TARP dividend payments that were due on November 15.  AIG was probably the most prominent one.
• Once a year the Heritage Foundation issues an Index of Economic Freedom, ranking countries based on economic openness, trade, property rights, the rule of law and the amount of regulation. Hong Kong was #$1, followed by Singapore , Australia and New Zealand .  The U.S. ranked #6. Out of 183 countries looked at, China ranked #140, and this should send a message to those doomsayers who think China will rule the world.  The three worst countries were Cuba , Zimbabwe and North Korea .  No surprise here on the last three: Free minds are inextricable linked to free markets, and you can’t have one without the other.
• After he read here about bank coffee mugs, Paul Chandler wrote us that he has a collection of old bank piggy banks.  “Citizens Federal is a cast iron cable car, Morris Plan is a covered wagon, and the Bank of California is a gold miner.  I have probably 60 to 80 of these I picked up over the years.  Do you know anyone else that collects them or am I the only one crazy enough.”  We think this just totally interesting and suggested he photograph them and put them on a website of some sort. By the way, do any of you also collect them?
• Earlier this week, Glen Bell died at 86.  Mr. Bell was the founder of Taco Bell, and  doesn’t that make you kind of chuckle? We never spent more than nano-second thinking about it, but we just assumed that it had something to do with tacos and with a bell that maybe you rang when the tacos were ready. Did one out of million people think it was named after a guy named Bell ? It’s like the huge arena in San Francisco named The Cow Palace because they hold the Grand National Rodeo there every year (rodeos = horses and cows). Kids grow up there having older brothers or sisters telling them it was named after some guy named Alexander Cow.
• Remember how we wrote recently that accepting 99% perfection is not good enough, that if you do 300 loans a month and you accept a 1% error rate, you’ll make three bad loans a month or 36 a year?  We got lots of e-mail on this, almost entirely from people who seem fed up with people who don’t care enough to do things the right way.  One woman wrote “Our culture seems to make sloppiness acceptable. Don’t people take pride in their work anymore?”
• We know a bank CEO who was describing what he does to a group at dinner, most of whom weren’t in the banking business. He said that he spent a lot of time working with his Board, and this one guy, a doctor, later commented that it sounded like this guy didn’t really do much.  A key part of a CEO’s duties is to work with the Board to help define the bank’s strategic plan, to help them think about risk, and to give them the tools to make major decisions.  This doctor was totally wrong, and we’d probably have avoided a lot of the financial crisis of the post few years had more CEO’s worked with and spent more time with their Board members.   
• We wrote a letter to Phil Angelides, the lawyer running the hearings in Washington on the financial crisis.  Our suggestion: Don’t just question executives, but question the Board members as well. They’re the ones who had the final say in what their institutions did and what kind of risk they were willing to take. They, too, could have been victims of a bull market optimism, but taxpayers still deserve to know what oversight and due diligence steps these Directors took.
• Google is sitting on $22 billion of cash, and Apple holds $23 billion of cash. Could there be a stronger statement about the power of the New Economy companies? Why did we bail out Old Economy losers like GM and Chrysler when it’s the New Economy which is creating such big winners?
• President Obama just celebrated the one year anniversary of his inauguration, and when we hear people criticize him, it makes us think of one his greatest accomplishments:  It is that people can like him or dislike him, not because of his race but because of his policies.  We like that he’s no longer our first African-American President but simply our President.
• Some of the smaller banks getting into warehouse lending aren’t doing monthly curtailments for loans in warehouse after 45 days. They’re just making the lender buy the loan out, all 100% of it, after the 45th day.  We like it.  It’s pretty tough, but it does get people focused on the problem.
• We’re also seeing newer warehouse lenders raise the spread over the index as well as the floor after the 15th or 20th day.
• Not all is bad in Bank Land . Westamerica Bank just reported a 5.48% net interest margin, a 44% efficiency ratio, and reserves equal to 198% of NPA’s. They repaid their TARP money, and for the past two quarters they reported an ROA of 1.93% and 1.97%, with an ROE of 19.1% and 19.8%. This $4 billion bank has about 90 branches and is headquartered in Marin County , a few minutes north of San Francisco and just across the Golden Gate Bridge .
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We’re writing this is a hotel room in Ohio .  We were in Cleveland the last few days, and we’re here in Columbus for a day.  One of the many things we like about Cleveland is the Burning River Beer they brew here.  One of the things that started the environmental movement (and Nixon’s creating the EPA) was that the Cuyahoga River in Cleveland was so polluted that it caught fire and burned for weeks!  The only bigger disaster was when the people of Cleveland elected Dennis Kucinich as Mayor.  
We’re getting this out earlier than we had planned.  When we get back to sunny California , we’ll get out another issue early next week.  See you next Tuesday.

Garrett, Watts & Co.

“Helping mortgage lenders increase revenues, control costs, and better manage risk.”Corky Watts     (408-395-5504)Joe Garrett      (510-469-8633)Mike McAuley   (281-250-2536)

The fights in the trenches of zoning law (i.e. local government limitations on land uses in particular areas) are usually about housing density in residentially zoned areas. Generally, developers, urbanists and some environmentalists are pushing for higher residential densities. Generally, existing local residents, believing that it will improve their property values, favor lower residential densities.

The details of the disputes vary. It may be between large lot single family housing and small lot single family housing. It may be between small lot single family housing and small lot single family housing with granny flats. It may be between single family housing and duplex/townhouse developments. It may be between duplex/townhouse developments and low rise apartment buildings. It may be between low rise apartment buildings and high rise apartment buildings.

I'm personally skeptical about the benefits of government regulation through zoning of residential density. I acknowledge that some regulation is needed. An apartment building that does not have adequate parking gobbles up the government owned commons of street parking. Buildings that are taller than local fire equipment can handle puts residents and neighbors at risk. Development without access creates an irresistible urge to trespass. But, I personally would favor zoning based on externalities, rather than simply based upon land use or building type ("form based zoning").

The evidence that high density housing is bad for neighboring low density housing as a general rule is weak. The main difference between a handful of unzoned cities and the overwhelming majority of cities that have zoning, is that housing density is more mixed. Commercial and industrial uses mostly segregate themselves even in the absence of land use regulation, because of the fundamental economics of the real estate market. Shops create commercial traffic that benefits other shops. Many factories want land cheaper than it is available subdivided into housing lots in a residential subdivision.

Even people who aren't worried about townhouses tainting neighborhoods with single family homes, often believe that commercial development needs to be regulated. One of the main accomplishments of the New Urbanist movement has been to remind people that residential and commercial developments are not inherently incompatible. A coffee shop in otherwise residential neighborhoods, a la the Wash Perk coffee shop at Ohio and South Emerson in my neighborhood, or a main street style development with ground floor retail and top floor residential development of the kind common in my home town of Oxford, Ohio, can mesh easily and comfortably into a more vital neighborhood.

But, even the radicals of zoning reform usually hold fast to one of the earliest principals of zoning that took hold long before more comprehensive "Euclidian zoning," named after Euclid, Ohio, that city whose case established the constitutionality of the practice) in the 1930s: Industrial uses should be separated from other uses.

There is reason to doubt even this bedrock principal of zoning theory.

Significant recent scholarship has looked at industrial zoned areas in New York City. In New York City, commercial and residential property values have historically been very high. Lots of people want to live in New York City and have offices there. Nobody wants to build new factories there and the factories are remain are increasingly marginal. Effectively, these are subsidies for industrial uses that are sited in places that have much more value with non-industrial development.

Some commentators, like one in this week's Newsweek magazine, think this is good, because it keeps the local economy diverse, buffering it against catastrophies like a financial sector collapse by giving it other sources of jobs of tax revenues, and bemoan the loss of New York City's factory jobs. Others use this situation as evidence that it is not economically sound to keep residential and commercial developers who are willing to put up with stink and noise, out of industrial zoned areas.

On the other hand, lots of uses that are classified as industrial aren't nearly as bad neighbors as they used to be.

Downtown Denver, a stone's throw from city hall and high end residences in the Golden Triangle and LoDo, has a factory that employs four hundred people and produces about half of the nation's supply of the product it produces. This involves processing metal and goes on twenty-four hours a day, five days out of seven every week. It draws almost no complaints from neighbors. It is the U.S. Mint. You could easily confuse it for another court house or government office building. Right next door to the U.S. Mint is another land use that terrifies neighbors despite being mostly benign, a jail (with a new jail under construction).

One of most noxious land uses in downtown Denver is one you wouldn't expect: Civic Center Park, which is a favorite for vagrants, truants and open air drug dealing. When a festival or serious protest isn't in progress, Civic Center Park can feel decidely unsafe, despite the fact that the state capital, state judicial building, central branch of the Denver Public Library, Denver court house, municipal headquarters, Denver Post headquarters and corporate office buildings ring the park.

I have a dairy shipping center in the middle of my own West Washington Park neighborhood that is similarly benign. The Celestial Seasonings tea factory in Boulder may generate a bit of noise and traffic, and have a faint aroma, but is a far better neighbor than a dog kennel.

Modern factories aren't silent and do operate at night creating some traffic. But, the lessons of Upton Sinclair's "The Jungle" have been almost fully assimilated. A large share of modern factories have little or no smokestack emissions. They are clean inside and out. They have about the same rate of occupational injury as office work. Their workers are healthy, reasonably well paid adults, not exploited children and marginal sweatshop workers. The heavy work is done by sophisticated machines and a good share of the people who keep those machines working are technically skilled professionals. Many modern factories are better neighbors than supposedly bucollic farms, gas stations, dive bars widely permitted in residential neighborhoods, or a house full of college students. Your average urban interstate highway provides far more externalities than your average factory.

Sure, there are still some industrial uses that most of us would not want to live near. The pet food plants between downtown Denver and I-70 cast a stench that not infrequently wafts all the way to urban residential neighborhoods half a dozen miles away when the weather is wrong. Oil refineries not only stink but sometimes produce horrific and dangerous accidents like a recent incident in metropolitan Denver where a truck full of gasoline tried to race a train and lost. A coal fired power plant is not a good neighbor for an elementary school, despite modern emissions scrubber technology.

But, the share of industrial uses that are seriously problematic to their neighbors is much smaller than they used to be, and the amount of a buffer needed to make these uses tolerable is much smaller. Most factories these days do not look like the now closed Gate Rubber Plant that is poised between West Washington Park and Platte Park, which is now a brownfield development that will be used for residential and commercial purposes.

Given the reality of the modern factory, an externality control based approach to land use makes more sense, even for properties that would normally be zoned industrial, than traditional Euclidian zoning for these uses. The same conclusion applies to warehouse uses often confined to industrial zoned areas. Warehouses may actually be better neighbors than many kinds of residential and commercial use.

Aside from an increasingly thin class of heavy industrial activity, that doesn't even include most modern automobile assembly plants, zoning isn't a very good way to regulate modern land use. And, the touchstone for identifying which activities do need to be set apart, likewise, should be tangible externalities like air pollution, vibration, water contamination, smell, noise, and demands on city services, rather than older taxonomies. A modern feedlot behaves more like a oil refinery for land use purposes than most modern factories.