FDL Book Salon Welcomes Eric John Abrahamson, Building Home: Howard F. Ahmanson and the Politics of the American Dream

Welcome Eric John Abrahamson (Wiki) and Host Cynthia Kouril (FDL)

Building Home: Howard F. Ahmanson and the Politics of the American Dream

If you ever wanted to know the real life background of the movie’s Mildred Pierce or It’s a Wonderful Life and to understand the social legislative, regulatory and economic forces that contributed to the post-WWII residential development of California, this book will provide you with a wealth of information.

If you want to confirm that strict regulation will not prevent someone from building up a huge and profitable business in a “managed economy”, Howard Ahmanson is your case study, he became very rich in the insurance and Savings & Loan businesses during a time when both were regulated far more so than today, or even most living memory.

If you want a backstage look at California Republican politics before Earl Warren or Richard Nixon went to Washington, there’s a bit of that in there. If you are a California history buff, there may be much in this book that is new to you.

Building Home follows the life and career of Howard Ahmanson who took a substantial, but not enormous inheritance, and used it to found first an insurance company, and later a Savings & Loan that turned into an empire worth hundreds of millions of dollars. In doing so, he was part of a small group who transformed the landscape of Southern California building up suburban developments from what had been ranches and orange groves.

As the sole owner of Home Savings & Loan, he made his fortune by catering to the dreams of the middle class for home ownership. His loans were of the conventional type and he cross-sold homeowner’s insurance to people who obtained mortgages from him. These were conservative mortgages, not no doc/ no doc/ liar’s loans, because in those days, the industry was very heavily regulated. This heavy regulation had the added benefit of keeping the savings and loan industry itself stable. What a relic of history.

Ahmanson is also another kind of relic. A one-percenter who believed in the civic duty to give back. He did so, in terms of the involvement in the University of California, involvement in politics, and by creating a foundation that gave out grants in education and the arts. Are you old enough to remember when Masters of the Universe actually felt the need to give back? Can you remember the days when regulations were seen as good things? When the phrase “consumer protection” was used by someone other than Elizabeth Warren? If you’re too young to remember what the world was like when we had decades of prosperity and relative economic fairness in the “managed economy”, or if you want to take stroll down memory lane, back to the days of economic regulation, you may want to crack the spine on this book. (more…)

FDL Book Salon Welcomes Eric John Abrahamson, Building Home: Howard F. Ahmanson and the Politics of the American Dream

Welcome Eric John Abrahamson (Wiki) and Host Cynthia Kouril (FDL)

Building Home: Howard F. Ahmanson and the Politics of the American Dream

If you ever wanted to know the real life background of the movie’s Mildred Pierce or It’s a Wonderful Life and to understand the social legislative, regulatory and economic forces that contributed to the post-WWII residential development of California, this book will provide you with a wealth of information.

If you want to confirm that strict regulation will not prevent someone from building up a huge and profitable business in a “managed economy”, Howard Ahmanson is your case study, he became very rich in the insurance and Savings & Loan businesses during a time when both were regulated far more so than today, or even most living memory.

If you want a backstage look at California Republican politics before Earl Warren or Richard Nixon went to Washington, there’s a bit of that in there. If you are a California history buff, there may be much in this book that is new to you. (more…)

LIPA Squared

The draft legislation which the Governor is trying to jam through the legislature in the next two weeks contains a provision to create a LIPA Refinance Authority. That is a LIPA for LIPA or, as I like to think of it, LIPA Squared.

During the dog and pony show on Wednesday night, there was a Power Point presentation which suggested that LIPA could refinance its bond to take advantage of lower interest rates. At the time I assumed that meant lower interest rates created because of Quantitative Easing by the Federal Reserve, I was wrong.

The draft legislation contains a provision to create a new LIPA Financing Authority that will issue new bonds.

 7. Securitized restricting bonds are likely to be the most attractive to the investing public and result in the lowest possible yields if they are issued by a newly organized, special purpose public benefit corporation or other corporate municipal instrumentality of the state.

The bonds are going to be created as a “bankruptcy remote vehicle”.

 6. If the securitized restricting bond were issued by a bankruptcy remote entity with an AAA or equivalent rating in current market conditions to finance a portion of the cost purchasing, redeeming or defeasing the outstand debt of the authority, and other associated costs, the debt service on the authority’s debt could be reduced and the cost of electric utility service could be lowered.

Sound familiar? That’s because it’s pretty much the same concept as the REMICs used by banks to securitize mortgages. Remember how that worked? The bank would bundle together great mortgages with not so great mortgages and the top quality mortgages made the top tranches of the Residential Mortgage-Backed Security (RMBS) attractive and glamorous. Additionally, the RMBS would also carry default insurance from some giant like AIG. The combination of some great mortgages plus the default insurance allowed the top tranches to attain a triple A rating. This, of course, means the lower tranches had worse ratings.

The problem is that the existing LIPA bonds which are to be bundled into the “bankruptcy remote” vehicle that would issue new derivatives do not have any “great” bonds to create the needed glamour.

5. As of December 31, 2012, the three major rating agencies generally rated the authority’s debt in the single-A range, though Moody’s Investors Services assigns approximately seven hundred million dollars of the authority’s debt slightly lower ratings of Baa1 and Baa2.

There is no New York state guarantee or other default insurance. So how the heck are you going to transform Single A, Baa1 and Baa2 rated bonds into Triple A rated derivatives? All of the elements you need to create a Triple A rating for the top tranche are missing, plus the increased borrowing costs for the lower tranches are not mentioned. The borrowing costs for the lower tranches with lower ratings are obviously much higher.

Those of you in finance, please give the draft legislation linked above a read, starting at Part B on page 29, and let me know in the comments if I have missed something. If this LIPA Squared idea is really as completely illogical and impossible as it seems, I’m going to have to raise a ruckus. However, I find it hard to believe that anyone would do something this obviously dumb and not expect to get caught, so am I missing something? Please, forward, tweet, etc. to your buddies in finance and get me some expert opinions.

New Adventures in LIPA Privatization

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As I have previously written (here, here, here, here, and here), the relationship between LIPA (Long Island Power Authority) and National Grid has been dysfunctional for a long time. This is mostly the result of a poorly written contract between them, but has been made worse by the fact that LIPA has not had a CEO for years and the long term interim CEO was known to have been turned down for the permanent job, rendering him the lamest of all ducks.

The LIPA Board of Trustees set out to remedy those problems that it could on its own. It engaged in multiple management and operations studies by well known and respected consulting companies. Based upon the recommendations from the consultants, it developed a new plan for LIPA that would allow for greater day-to-day control by LIPA of operations and costs and more accountability for the contractor hired to do the operation of LIPA’s Transmission and Distribution System (T&D System).

It put out a request for proposal (RFP) based on this new concept, and the bidder with the highest score for quality of bid and lowest cost was chosen, PSEG. The new “ServCo” contract with PSEG is currently set to begin on January 1, 2014. An approximately 2 year transition contract was also issued to PSEG for 2012 -2013 during which PSEG came in and familiarized itself with the system, made over 80 suggestions for improvements and began installing new software and hardware in preparation for the 1/1/2014 takeover. All good so far, then came Hurricane Sandy.

I believe that Governor Cuomo sincerely wanted to help, to do something wonderful to make things better for the people of Long Island who were left in the dark for weeks while National Grid and the leaderless LIPA staff mis-communicated and failed to properly supervise the work of the out of town crews. He appointed the Moreland Commission to study what went wrong and make recommendations.

Governor Cuomo’s Moreland Commission produced a report about LIPA that was such an example of towering ineptitude that it set off a firestorm both on Long Island and in Albany. It blamed the public/private concept for the disfunction and called for privatizing LIPA, which would saddle ratepayers with approximately $4 Billion in orphan debt and give a windfall to some unnamed private buyer. It would have dramatically increased borrowing costs. Considering the sophistication and business acumen of many of the Commission members, it was unfathomable that such cluelessness could have been allowed to be published over their signatures. Did they even read what their staff had written?

It was such an obviously ridiculous proposal that one had to wonder what backroom baksheesh occurred or was anticipated. Now royally screwed by his own Commission, the governor was in a tough spot. Short of imitating Emily Litella, what could he do to avoid admitting failure? [cont’d.] (more…)

New Adventures in LIPA Privatization

As I have previously written (here, here, here, here, and here), the relationship between LIPA (Long Island Power Authority) and National Grid has been dysfunctional for a long time. This is mostly the result of a poorly written contract between them, but has been made worse by the fact that LIPA has not had a CEO for years and the long term interim CEO was known to have been turned down for the permanent job, rendering him the lamest of all ducks.

The LIPA Board of Trustees set out to remedy those problems that it could on its own. It engaged in multiple management and operations studies by well known and respected consulting companies. Based upon the recommendations from the consultants, it developed a new plan for LIPA that would allow for greater day-to-day control by LIPA of operations and costs and more accountability for the contractor hired to do the operation of LIPA’s Transmission and Distribution System (T&D System).

It put out a request for proposal (RFP) based on this new concept, and the bidder with the highest score for quality of bid and lowest cost was chosen, PSEG. The new “ServCo” contract with PSEG is currently set to begin on January 1, 2014. An approximately 2 year transition contract was also issued to PSEG for 2012 -2013 during which PSEG came in and familiarized itself with the system, made over 80 suggestions for improvements and began installing new software and hardware in preparation for the 1/1/2014 takeover. All good so far, then came Hurricane Sandy.

I believe that Governor Cuomo sincerely wanted to help, to do something wonderful to make things better for the people of Long Island who were left in the dark for weeks while National Grid and the leaderless LIPA staff mis-communicated and failed to properly supervise the work of the out of town crews. He appointed the Moreland Commission to study what went wrong and make recommendations.

Governor Cuomo’s Moreland Commission produced a report about LIPA that was such an example of towering ineptitude that it set off a firestorm both on Long Island and in Albany. It blamed the public/private concept for the disfunction and called for privatizing LIPA, which would saddle ratepayers with approximately $4 Billion in orphan debt and give a windfall to some unnamed private buyer. It would have dramatically increased borrowing costs. Considering the sophistication and business acumen of many of the Commission members, it was unfathomable that such cluelessness could have been allowed to be published over their signatures. Did they even read what their staff had written?

It was such an obviously ridiculous proposal that one had to wonder what backroom baksheesh occurred or was anticipated. Now royally screwed by his own Commission, the governor was in a tough spot. Short of imitating Emily Litella, what could he do to avoid admitting failure?

After influential groups, such as the Long Island Association began voicing support for allowing the ServCo contract with PSEG to go forward as planned, the Governor apparently seized on the fact that PSEG’s good customer service record was popular on Long Island (rather than considering that the ServCo model was a vast improvement over the status quo) and suddenly proposed that the start date for PSEG be accelerated to put them in place RIGHT NOW, so that they would handle the 2013 summer storm season. That would have gutted the carefully planned rollout and caught PSEG flat-footed and without the new storm management system it is building. It was a recipe to force PSEG to fail. I assume that PSEG turned that idea down, because as of last night’s hearing in Nassau County, PSEG is not starting until 1/1/2014.

On May 13th, the Governor doubled down again on the terrible privatization idea and issued draft legislation that would put most of the planning and budgeting and policy functions of LIPA into the hands of PSEG, which orphans decisions such as new power plants, modernizing existing plants and renewable energy. Worse, it would created a third party bureaucracy, a new 50 person arm of the Public Service Commission on Long Island which would have advisory powers only since LIPA’s bonds require all decisions to be made by the LIPA Trustees, while stripping LIPA of some 70 people, making it impossible for LIPA to perform the aggressive day to day oversight called for in the ServCo contract.  So, if the governor is down on public/private partnerships why in heaven would he want to go from a two party public/private to a three party public/private that has LESS daily supervision?

After the various storms, the NY State Comptroller’s Office performed audits. After Hurricane Earl, the audit showed staggering waste fraud and abuse on the part of out of town crews and led to major management reforms. The new legislation strips the Comptroller’s Office of its oversight function, one of the few things that have been actually effective in dealing with storm costs. The Comptroller, a native Long Islander who still lives here, has slammed the proposal.

Last night I attended a forum in Nassau County about this legislation. The overwhelming response of citizens was either negative or questioning.  Elected political allies of the Governor’s came to offer their support, but their remarks so closely parroted the talking points offered by the panelists sent by the Governor that is was apparent that they were reading from the same talking points

Worse, I have been getting telephone calls from financial analysts and hedge funds concerned that there seems to be a new hair-brained scheme every couple weeks. LIPA bonds are in danger from being put on a “sell” recommendation from the current “hold”.  Holders of large positions in the bonds have hung in there because of the improvements in oversight and management promised by the new ServCo model, but their loyalty to those bonds will be betrayed if this legislation becomes law. Oh, and there is no guarantee that the IRS will continue LIPA bond’s tax exempt status under the arrangement in the draft legislation and it creates yet a another new bureaucracy to do refinance. Yep, that’s now a four way public/private partnership.

This entire fiasco happened because there is a false premise that the new ServCo contract that begins 1/1/2014 is the same as the status quo, it is not. The choice is not between the craptastic contract between LIPA and National Grid and the Governor’s hasty and ill conceived draft legislation. There is a third choice, to allow the ServCo contract, slowly, deliberately and thoughtfully arrived at and already in the transition stage, to go forward as planned.

Governor Cuomo could do something important to make things better. He could finally appoint a CEO for LIPA and obtain a commitment from that CEO to appoint and support the work of an in house inspector general for LIPA.

Did Long Island Power Authority Try to Poison Pill National Grid From Buying PSEG LI?

In 1986, then Governor Mario Cuomo announced creation of Long Island Power Authority (LIPA). See, “Andy’s fuzzy math” Nichole Gelinas, New York Post, 1/10 /13

It took until 1998 to complete the sale of all of Long Island Lighting Company’s assets.  LilCo employees, managed by LiICo managers continued to provide day-to-day running of the system.

The  transmission and delivery (T&D) system and the Shoreham debt were purchased by LIPA for a combined total of $7Billion. The gas system and power plants are sold to a new company that merged with Brooklyn Union Gas to form Keyspan. Keyspan hired the LilCo workers and managers. And they continued to run the system in a contract called the Management Services Agreement (MSA).

In 2005, a management study was done by FTI Consulting which says:  

FTI believes that the contract renegotiation with KeySpan provides the Authority with the optimum economic outcome for its customers at this time. It facilitates the overall monitoring of the new MSA by the Authority by changing the nature of the contract from a cost plus type contract to a fee for service contract.

[p. 37 in the document, p.41 in the pdf].

In 2006, the negotiation mentioned in the FTI report took place; however instead of tightening up any vague language which was allowing mismanagement to occur, the contract was further weakened even up to the point of allowing a pass through of storm costs to LIPA. The system operator no longer has any incentive whatsoever to control storm costs. See, p. 38 of the document, p. 46 of the pdf.

A Comptroller Office audit  reveals that immediately  after this weakening of the contract, storm costs surged from the tens of millions of dollars to the hundreds of millions of dollars. See, p. 3.

In 2007, soon after the pass-through of storm costs went into effect,  National Grid bought KeySpan. Evidently, LIPA didn’t get a vote. Customer satisfaction ratings failed to meet the contractually required threshold. This failure to meet customer satisfaction thresholds continues all the way into 2012  . [cont’d.] (more…)

Did Long Island Power Authority Try to Poison Pill National Grid From Buying PSEG LI?

More on Long Island Power Authority: So What’s Up With Privatizing LIPA? Part 1 and Part 2. Testimony on Privatization part 1 and Part 2.

In 1986, then Governor Mario Cuomo announced creation of Long Island Power Authority (LIPA). See, “Andy’s fuzzy math” Nichole Gelinas, New York Post, 1/10 /13

It took until 1998 to complete the sale of all of Long Island Lighting Company’s assets.  LilCo employees, managed by LiICo managers continued to provide day-to-day running of the system.

The  transmission and delivery (T&D) system and the Shoreham debt were purchased by LIPA for a combined total of $7Billion. The gas system and power plants are sold to a new company that merged with Brooklyn Union Gas to form Keyspan. Keyspan hired the LilCo workers and managers. And they continued to run the system in a contract called the Management Services Agreement (MSA).

In 2005, a management study was done by FTI Consulting which says:  

FTI believes that the contract renegotiation with KeySpan provides the Authority with the optimum economic outcome for its customers at this time. It facilitates the overall monitoring of the new MSA by the Authority by changing the nature of the contract from a cost plus type contract to a fee for service contract.

[p. 37 in the document, p.41 in the pdf].

In 2006, the negotiation mentioned in the FTI report took place; however instead of tightening up any vague language which was allowing mismanagement to occur, the contract was further weakened even up to the point of allowing a pass through of storm costs to LIPA. The system operator no longer has any incentive whatsoever to control storm costs. See, p. 38 of the document, p. 46 of the pdf.

A Comptroller Office audit  reveals that immediately  after this weakening of the contract, storm costs surged from the tens of millions of dollars to the hundreds of millions of dollars. See, p. 3.

In 2007, soon after the pass-through of storm costs went into effect,  National Grid bought KeySpan. Evidently, LIPA didn’t get a vote. Customer satisfaction ratings failed to meet the contractually required threshold. This failure to meet customer satisfaction thresholds continues all the way into 2012  .

After Hurricane Irene, I attended a public hearing where the acting CEO of LIPA and a representative from National Grid were questioned. It was very clear at that meeting that the relationship was that of a failed marriage. If any of you watched the press conferences during Super Storm Sandy or its aftermath, you could see how broken the relationship was between LIPA management and National Grid. Recall, National Grid came into the Long Island market not because anyone at LIPA chose National Grid, but because National Grid bought KeySpan.

In 2010, there was another management study done by Navigant Consulting which concluded that full municipalization would result in the lowest rates for power.

There was also a study done by Lazard in 2010; however Lazard did not reach any conclusions, instead suggesting further research was needed:

(more…)