April 04, 2013


Other People’s Money: Inside the Housing Crisis and the Demise of the Greatest Real Estate Deal Ever Made. By Charles V. Bagli. Dutton. $28.95.

     Apparently the main thing wrong with traditional American-style capitalism, with its emphasis on individual abilities, success and leverage, is – just about everything. That the whole model is fatally flawed is the underlying viewpoint, or perhaps the conclusion based on evidence, of this book. New York Times reporter Charles V. Bagli’s uncovering and unraveling of the story of the failed deal for the Stuyvesant Town-Peter Cooper Village middle-income housing project in New York City will certainly lend credence to those who believe the Times is unabashedly left-wing in its orientation, and never more so than when reporting on business and its interrelationship with politics – which happens to be what Bagli covers in the real-estate realm. Bagli reports the deal for Stuyvesant Town-Peter Cooper Village by humanizing the residents of the 11,232 apartments in the high-rises and by systematically dehumanizing, if not exactly demonizing, the financiers and dealmakers of Tishman Speyer and BlackRock Realty, who paid $5.4 billion for the property and defaulted three years later. Although the featureless brick buildings were compared to “the architecture of the police state” by one critic, the stories of the people who lived in those buildings are told to excellent effect. Everyone knew everyone else in the building, or at least those in nearby apartments; one man learned blackjack from one neighbor and Spanish from another; residents were police officers, firefighters, a banquet coordinator, a transit-system motorman – the salt of the earth. Yes, there was a desegregation battle, and yes, “it felt like a military camp at times,” as one resident put it, but by and large, as Bagli presents the story, people were happy in the complex – and tremendously well protected, through rigid rent control and later somewhat less rigid rent stabilization, against the vicissitudes of the economy.  MetLife, the longtime owner of Stuyvesant Town-Peter Cooper Village, was not so protected, having to ask city officials for any rent increase and falling short of the modest 6% profit it was supposed to be allowed to make.

     Eventually, MetLife decided to cash out – right near the top of the real-estate boom. Its deal with Tishman Speyer and BlackRock Realty was, like all major deals of this type, financed by multiple sources, and there is nothing invidious about this, despite Bagli’s repeated expressions of dislike for the use of OPM, “other people’s money.” That’s capitalism; and what is the alternative for major deals of any sort? Not to do them at all? In any case, Bagli carefully reports on the various parties who put a lot of money into the deal, such as the California retirement system: “The managers sought high-return real estate investments in order to meet their swelling obligations to retirees” – retirees who, as it happens, were the same sort of people who lived in Stuyvesant Town-Peter Cooper Village, albeit on the other coast. Tishman Speyer did get to raise rents in the complex, at least in some apartments, calculating that “rents for deregulated apartments at Stuyvesant Town and Peter Cooper Village were running at least 12 percent below what was being charged at comparable buildings nearby, while rents for rent-stabilized apartments were 30 to 40 percent below market.” But New York City’s strong controls on what a building owner could charge put limits on rents. When the financial crisis in housing started to take hold in 2007, things rapidly worsened for the complex’s owners. And they had to contend with a lawsuit that said they “had illegally charged market-rate rents for more than three thousand apartments after ‘wrongfully pocketing nearly $25 million in New York City tax benefits.’” The notion of a lawsuit attacking building owners for charging market-rate rents – no one said above market rate – may seem ludicrous, but not in New York City and not to Bagli. And this is just one element of the story of Stuyvesant Town-Peter Cooper Village, which Bagli has clearly studied and analyzed inside-out, right-side-up and upside-down. His reporting is excellent, his writing clear, his exploration of the greed (which could also be called, less onerously, the determination to make profits) of the principals thorough. His reporting on the owners’ mortgage default in January 2009 is well done, although his outrage over the fact that Tishman Speyer and BlackRock Realty lost less than did many of their investors is hard to understand: this is how major deals are put together in American capitalism. Yes, Stuyvesant Town-Peter Cooper Village was “a disastrous investment,” but it is hard to argue with Rob Speyer’s comment that “a company is not judged by a single transaction.” One gets the feeling in Other People’s Money that that is exactly how Bagli thinks a company should be judged. However, “the complexes remain intact,” Bagli points out, and a MetLife executive is quoted as saying that most tenants “still have rent stabilization protecting them.” So could there possibly be a flaw in a political system that guarantees people well-below-market rates for properties whose maintenance, upkeep and improvement must be paid for at market rates, with owners responsible even when macroeconomic factors result in a vacancy rate far higher than any in a complex’s history? That is not an issue that Bagli raises or, apparently, cares to raise. The ones he does raise are fascinating, and the detail with which he reports them is highly impressive. But the book leaves behind a feeling, even after nearly 400 pages, that there is more to say about Stuyvesant Town-Peter Cooper Village and the housing-driven financial crisis that caused the deal for it to fail; and more to say about how this deal could have been done differently, if it could have been; and whether the whole concept of “rent stabilization” is an anachronism or a necessary counterbalance to the market forces of which this particular deal ran afoul because of circumstances partly within and partly beyond the dealmakers’ control.

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