Saturday, February 13, 2010

Grand Theft: Production Homebuilders ... by gimleteye

On January 7th, Lennar announced quarterly profits for the quarter that ended November 30th. Lennar said it will receive a tax refund of $320 million as a result of federal legislation that “temporarily allowed companies to recoup losses from taxes paid in profitable years.”

“The provision, called a net operating loss (NOL) carryback, allows a firm to get a tax refund from a profitable year when it experiences in a loss in a later year. Normally, NOL carryback claims are limited to two years, but the Worker, Homeownership and Business Act of 2009 temporarily extended that to five years. Lennar said it will gain a $320m tax refund from the provision.”

Only four days later, on January 11th, Lennar announced that it closed a deal to acquire a 40% stake in a loan portfolio with combined unpaid balance of about $3 billion held by FDIC. Its cost? $243 million.

I don’t want to make too fine a point. Oh, what the hell.

The profits that Lennar and like-minded homebuilders racked up in the housing boom that busted at the end of 2006 were built on the back of fraudulent debt created by the nation's banks, thanks to the lazy eye of federal banking regulators, that shed billions in fees, commissions, and income—leaving the economy in shambles. The direct result: several trillion in taxpayer obligations, or, bailouts.

I can’t tell you how many trillions of US equity blew up in smoke, some of which was claimed as “profits” by homebuilders and the supply chain. But I can say with certainty, that in 2005 I helped lead an effort to prevent Lennar from building a project that was planned outside Miami’s Urban Development Boundary right in the middle of historic Everglades wetlands.

Florida City Commons was the name of the 1,000 acre project. Most South Florida environmental groups, with small paid staff if any, were siphoned off to battle the plan, that enlisted a county commissioner, the county commissioner’s brother who was mayor of Florida City, and sister, who was a paid lobbyist for the project. Lennar lobbyists and executives commandeered local governmental approval processes, wetlands destruction permitting by the US Army Corps of Engineers, state agencies and, by extension, scared the living daylights out of regulators whose primary mission is waiting out until their pensions vest, or, living to fight another day. Lennar proposed in its original application to regulators: 3,000 single family detached homes, 1,200 single family attached Townhouses, 1,800 multi-family condos, 300,000 sq. ft. of retail, 90,000 sq. ft. of office, and 1,800 seat cinema, a 240 room hotel, and a high school for 1,200 students.

The agonizingly bland response by regulators, hardly captures the spirit of the fight against this corporate icon of South Florida, whose founders' names adorn medical schools, university buildings, and other public spaces. "Plant and wildlife surveys near the proposed project area have detected the presence of listed species at the federal and state level in addition to the Florida panther, Eastern indigo snake, and wood stork... These species have been observed sufficiently close to the proposed project site that they could be either utilizing the site on an occasional basis or could occupy the site if a different end land use were selected. Please revise the provided list to include a comprehensive list of state and federally listed plant and animal species that have occurred or might occur within the project area, or occur or might occur near the proposed site." (Memorandum to South Florida Regional Planning Council from Miami-Dade Environmental Resource Management, August 17, 2005)

In this respect, the housing boom—that literally consumed the last irreplaceable farmland in South Miami-Dade —provided the economic energy to organize the enforcers of economic growth built on foundations of fraud: at the time, and still, one can’t find a mainstream newspaper, a Chamber of Commerce, and scarcely an elected official who would stand up to that tornado and call it, for what it was. (Lennar gave one sitting county commissioner an insider deal on a land lot in another platted subdivision in western Miami-Dade County.)

This is how the fraud had a flip side; how the politics of conformity acted like a wood chipper on the public interest in environmental protection. The Florida City Commons project was projected to bring $1 billion in economic benefits, supported on the wings of the promise that industry’s self-interest can protect the public interest better than regulations. Like a thousand other platted subdivisions whose demographics and arithmetic conforms to mortgage pools fobbed off to Singapore, or Geneva, or the Isle of Man, the professional consultants and regulators were joined at the hip to provide the gold plated assurances of the engineering cartel this incremental bite of suburban sprawl would enhance Florida’s natural environment.

Florida City Commons was never built because it ran into the buzz-saw of the implosion of the housing market. Within a crow’s flight of the wetlands that would have been drained are other Lennar projects that define, now, the ghost suburbs littered with foreclosures in Florida. Condo farms and cheap housing made from toxic Chinese particle board sold to anyone who could fog a mirror or read a full page ad in The Miami Herald. Before it sunk under its own weight, the Lennar plan had consumed tens of thousands of man-hours, of regulators, public hearings, private dinners and mutual handshakes, agency operations, and so forth

I could go on. Oh why not. Multiply Florida City Commons a thousand times: platted subdivisions in California's Central Valley, or Las Vegas, or suburban Dallas. Imagine that volume of energy of which Lennar and the nation's largest homebuilders significantly participated, and you get a sense of the American dream -- it was called, remember, "The Ownership Society"-- steered onto a coral reef in a dense, unforgiving fog and high winds. Now, today, five years later, instead of revolting against the politics of the Growth Machine—which to be fair, was mostly a Republican enterprise though this whole tax credit scheme to homebuilders was a confection of a Democratic majority—has turned into a mish mash of confused ideas, ignorance and prejudice rising under the banner of The Tea Party.

There is no accounting and there is no accountability. The deformation of the US economy by allowing homebuilders to become so influential masked the structural imbalances—such as the loss of manufacturing capacity and industrial supply chains—allowing the entire fabric of a national economy to be defined by debt and “jobs” built on fictions, a zillion liar loans, and the breath-taking conversion of sober bankers into Las Vegas gamblers, turning Wall Street into a Ponzi scheme for personal wealth enhanced on the crack cocaine of CDO’s that turned to dust under the pressure of reality.

So here comes Lennar and its homebuilder allies in 2009 crying to Congress and to the White House: let us write all our losses from this miserable Great Recession against the profits we “earned” in the housing asset bubble.

Do the math, if you can stand it.

Lennar gets a $320 million tax break, spends $243 million to obtain $1.3 billion in distressed loans and still puts $77 million from the tax credit in its corporate pockets. Something for nothing. The wetlands are gone. The homebuilders’ influence on public policy and by decision makers put into office by the engineering cartel that thrives from the work of putting infrastructure into open space to service homebuilders: it is all intact. Lennar’s partner in this “distressed debt” is the FDIC: that in addition to insuring your devalued dollars at the bank, is caught up as an accomplice in the Grand Theft wrecking our nation.

This is the result of government for corporations who have your best interests at heart.


CATO said...

Greetings Comrade Gimleteye (nom de Guerre) Though I admire your defense of the UDB and agreed with it wholeheartedly, your opinion as to what actually caused the bubble and later the bust are miopic.

But First lets name names

"(Lennar gave one sitting county commissioner an insider deal on a land lot in another platted subdivision in western Miami-Dade County.)"
That would be commissioner and possible mayoral or congressional candidate Joe Martinez who also got a group of "freinds" to work on his house for free.

The "ownership Society" got plenty of help from Barney Frank's boy pal Herb Moses (He parted something but it surely wasn't the red sea). Yes it was a Bush administration thing but they had plenty of accomplices on the other side. Comrade Gimleteye remember to politicians on both sides its all about the Dead Presidents.

As for lennar they are just a big cog in this machine, with easy money (thanks to Greenspan and the boys at the fed) fast credit (thanks to Moses)and lots of eager lemmings tossing money at them what else does a home builder do? Build homes?

I think your putting the cart before the horse, yes Lennar is guilty of shortsightedness in its attempts to strectch the UDB and overbuilding in general, but builders where not the engine that drove the bubble causing the subsequent bust. The Federal Reserve and the government agencies like FNMAE, FREDDIE MAC, FHA and Wallstreet firms with a wink and a nod from DC shoulder most of the blame.

Finally thanks for the heads up on tax refund my company had a great 05 and some subsequent lean years due to inactivity (I also saw it coming and held on)I have forwrded info to my accountant and if I am able to get something back you can expect a well desrved token of my appreciation. Not only for your tax tip but your work on holding the UDB and "some" of your informative post on this blog.

Mr. Freer said...

People should really check their spelling before they post comments.

Geniusofdespair said...

Sorry Mr. Freer, it was long ago established: Spelling doesn't count on this blog.

CATO said...

Look at that I got a tax adviser (gimleteye) and an editor (Mr. Freer)
JEEEZ this is the most helpful blog i've ever been on.


Jill said...

Oh, now, of course Lennar deserves a tax break. They needed something to help pay for all of that Chinese drywall they've had to replace.
Don't you know it's taxpayers' responsibility to support big business and all of those fat bonus checks their executives receive?

youbetcha' said...

Well now, Cato. I can't spell and and I can't type. I did the latter on purpose, btw, I didn't want to take classes to grow to be your secretary.

If you want to name names, why don't you throw in Juan, Stevie, Joe x2, Michael, Wayne, Jeffrey, Miguel x2, Cathy, Pepe, Natacha, Katie, Trudy, Rodney, Barbara, Otis, Roy, Niesen, Carter, Clifford and about another 100 names... Duh, these are the folks that make the list for the most likely to be annoying.

Maybe we can do a TV series "Zoning Gone Wild"...however, most of those characters HAVE to keep their clothes on.

Anonymous said...

Cato I think you have lean years because you are always online

Anonymous said...

Thank you, President Obama, for the bailout of developers. You could care less about my tax money. I thought Bush was reckless, but you are even worse. Yet another reason to vote you out of office.

Jill said...

Hard to imagine Lennar qualifying as a samll business.To qualify for the new five-year carryback provision, a small business must have no greater than an average of $15 million in gross receipts over a three-year period ending with the tax year of the NOL. Businesses with more than $15 million in gross receipts still qualify to carry back their 2008 NOL for two years.
This is from their 2008 stockholder report:
"Consistent with our long-term strategy, the focus on our balance sheet continued to be our top priority that meant:
Maximizing our cah positing by generating cash flows of 1.1billion. Enhancing our balance sheet liquidity with a homebuilding cash position of $1.1 billion and $251 million of cash received subsequent to a year end related to a tax loss carry back."

Anonymous said...

I have mixed feelings about this. I think builders do, indeed, build and the Fed Gov screwed up big time which created the atmosphere for this. CRA from the 80's didn't help much either. What I would like to see now is some regulation that allows me to write off the loss from my collapsed home value. I thank Lennar and our BCC for that. Incidentally, Lennar scored back with the S and L thing went down. They got $500M of land in Texas at half book from Resolution Trust. The government was happy to unload it no doubt. It's what business does. D R Horton is advertising, by the way, if anyone wants a new home in Homestead.