Appropo of my post on Prop 9 and crime, here’s what I do not want California to become:

In Britain, there is a long and honorable tradition of local councils’ leasing small plots of land, called allotments, to people without gardens of their own who may grow fruit, vegetables, and flowers upon them. The tenants also receive small sheds on their plots for storing tools, fertilizers, garden furniture, and so forth. Unfortunately, another, less honorable, tradition has recently developed: stealing from allotments. Seventeen of the 50 allotments in Bromsgrove, Worcestershire have been robbed recently, for example, and the shed of one tenant, Bill Malcolm, has been broken into three times.

So Malcolm put a barbed-wire fence around his patch of land to discourage further depredations. The fence, however, did not meet with the approval of the local council, which worried about the risk of injury – to future burglars. Injured burglars might then sue the council. Another council, in Bristol, told allotment holders not to lock their sheds, in case burglars damaged them while breaking into them.

…from City Journal

Continuing the theme of matching support and opposition, I’m supporting Proposition 12 and opposing Proposition 9. Prop 12 authorizes $900 million in new Cal-Vet bonds. Cal-Vet is a program that provides home and farm loans to California veterans; the program has been very successful, hasn’t (to date) lost money, and has helped people who served the country. What’s not to like? It has the added benefit of injecting capital into the housing markets at a time when that could be a useful thing. Here’s the Contra Costa Times:

While the state is legally responsible for paying back the bond money, it has never had to use taxpayer money, even during the Great Depression of the 1930s, to cover the cost of a defaulted loan. J.P. Tremblay, deputy secretary for the California Department of Veterans Affairs, said, “The state has never had to come in and bail out this fund.”

Proposition 9 proposes to change the criminal laws to – among other things – give the victims of crimes a say in sentencing, parole hearings and other parts of the criminal justice process.

I’m all about retributive justice, but this goes way too far for me. The goal is to move justice away from personal vengeance and hand the rights over to the impersonal state. As long as the state does a decent job – and I think our justice system does a decent, not great, job (we’re not the UK, where resisting burglars in a crime), I can’t support these kinds of changes.

Here is some of the language this would add to the codes – the parts I particularly object to are in bold:

(b) In order to preserve and protect a victim’s rights to justice and due process, a victim shall be entitled to the following rights:

(1) To be treated with fairness and respect for his or her privacy and dignity, and to be free from intimidation, harassment, and abuse, throughout the criminal or juvenile justice process.

(2) To be reasonably protected from the defendant and persons acting on behalf of the defendant.

(3) To have the safety of the victim and the victim’s family considered in fixing the amount of bail and release conditions for the defendant.

(4) To prevent the disclosure of confidential information or records to the defendant, the defendant’s attorney, or any other person acting on behalf of the defendant, which could be used to locate or harass the victim or the victim’s family or which disclose confidential communications made in the course of medical or counseling treatment, or which are otherwise privileged or confidential by law.

(5) To refuse an interview, deposition, or discovery request by the defendant, the defendant’s attorney, or any other person acting on behalf of the defendant, and to set reasonable conditions on the conduct of any such interview to which the victim consents.

(6) To reasonable notice of and to reasonably confer with the prosecuting agency, upon request, regarding, the arrest of the defendant if known by the prosecutor, the charges filed, the determination whether to extradite the defendant, and, upon request, to be notified of and informed before any pretrial disposition of the case.

(7) To reasonable notice of all public proceedings, including delinquency proceedings, upon request, at which the defendant and the prosecutor are entitled to be present and of all parole or other post-conviction release proceedings, and to be present at all such proceedings.

(8) To be heard, upon request, at any proceeding, including any delinquency proceeding, involving a post-arrest release decision, plea, sentencing, postconviction release decision, or any proceeding in which a right of the victim is at issue.

(9) To a speedy trial and a prompt and final conclusion of the case and any related post-judgment proceedings.

(10) To provide information to a probation department official conducting a pre-sentence investigation concerning the impact of the offense on the victim and the victim’s family and any sentencing recommendations before the sentencing of the defendant.

(11) To receive, upon request, the pre-sentence report when available to the defendant, except for those portions made confidential by law.

(12) To be informed, upon request, of the conviction, sentence, place and time of incarceration, or other disposition of the defendant, the scheduled release date of the defendant, and the release of or the escape by the defendant from custody.

So Yes on 12, and No on 9.

A political entrepreneur who fraudulently registered a number of California residents as Republican voters – when they thought they were signing petitions – has been arrested, in part because he fraudulently claimed to be a California resident, as is required by law for those who register voters.

The left blogs are rightfully chestbeating over this – and it supports my contention of widespread efforts to game the system. I don’t begin to have enough information yet to know if this is a real issue or a tu quoque. But I’m beginning to think through a way to look back at this election and try and study the real impact – if any – of registration and voter fraud.

I’ve been asked exactly why I’m for Prop 11, other than that it is redistricting reform. I don’t think the language is perfect (I could – of course – write better…but wait, I’m not Glenn Greenwald…). Specifically, I’m unhappy that Congressional districts are left out, and the process is somewhat cumbersome. But – it requires the people who serve on the apportionment commission cannot be lobbyists, have been elected officials at the state level, and they cannot serve in elected office or as legislative staff or registered lobbyists for ten years after their term expires.

I like that. And I like the criteria for selecting the districts, which include: 1) compliance with the Federal and State Constitutions; 2) compliance with the Voting Rights Act; 3) be geographically contiguous; 4) respect the integrity of political divisions and communities of interest; 5) be geographically compact; 6) where possible, create Senate districts from 2 Assembly districts. I might have reversed the order of 2) and 3), but I’m not sure that’s legally possible.

Here’s the meat of the proposition:

SEC. 3.3. Section 2 is added to Article XXI of the California Constitution, to read:

SEC. 2. (a) The Citizens Redistricting Commission shall draw new district lines (also known as “redistricting”) for State Senate, Assembly, and Board of Equalization districts. This commission shall be created no later than December 31 in 2010, and in each year ending in the number zero thereafter.

(b) The Citizens Redistricting Commission (hereinafter the “commission”) shall:

(1) conduct an open and transparent process enabling full public consideration of and comment on the drawing of district lines;

(2) draw district lines according to the redistricting criteria specified in this article; and

(3) conduct themselves with integrity and fairness.

(c) (1) The selection process is designed to produce a Citizens Redistricting Commission that is independent from legislative influence and reasonably representative of this State’s diversity.

(2) The Citizens Redistricting Commission shall consist of 14 members, as follows: five who are registered with the largest political party in California based on registration, five who are registered with the second largest political party in California based on registration, and four who are not registered with either of the two largest political parties in California based on registration.

(3) Each commission member shall be a voter who has been continuously registered in California with the same political party or unaffiliated with a political party and who has not changed political party affiliation for five or more years immediately preceding the date of his or her appointment. Each commission member shall have voted in two of the last three statewide general elections immediately preceding his or her application.

(4) The term of office of each member of the commission expires upon the appointment of the first member of the succeeding commission.

(5) Nine members of the commission shall constitute a quorum. Nine or more affirmative votes shall be required for any official action. The three final maps must be approved by at least nine affirmative votes which must include at least three votes of members registered from each of the two largest political parties in California based on registration and three votes from members who are not registered with either of these two political parties.

(6) Each commission member shall apply this article in a manner that is impartial and that reinforces public confidence in the integrity of the redistricting process. A commission member shall be ineligible for a period of 10 years beginning from the date of appointment to hold elective public office at the federal, state, county, or city level in this State. A member of the commission shall be ineligible for a period of five years beginning from the date of appointment to hold appointive federal, state, or local public office, to serve as paid staff for the Legislature or any individual legislator or to register as a federal, state, or local lobbyist in this State.

(d) The commission shall establish single-member districts for the Senate, Assembly, and State Board of Equalization pursuant to a mapping process using the following criteria as set forth in the following order of priority:

(1) Districts shall comply with the United States Constitution. Senate, Assembly, and State Board of Equalization districts shall have reasonably equal population with other districts for the same office, except where deviation is required to comply with the federal Voting Rights Act or allowable by law.

(2) Districts shall comply with the federal Voting Rights Act (42 U.S.C. Sec. 1971 and following).

(3) Districts shall be geographically contiguous.

(4) The geographic integrity of any city, county, city and county, neighborhood, or community of interest shall be respected to the extent possible without violating the requirements of any of the preceding subdivisions. Communities of interest shall not include relationships with political parties, incumbents, or political candidates.

(5) To the extent practicable, and where this does not conflict with the criteria above, districts shall be drawn to encourage geographical compactness such that nearby areas of population are not bypassed for more distant population.

(6) To the extent practicable, and where this does not conflict with the criteria above, each Senate district shall be comprised of two whole, complete, and adjacent Assembly districts, and each Board of Equalization district shall be comprised of 10 whole, complete, and adjacent Senate districts.

(e) The place of residence of any incumbent or political candidate shall not be considered in the creation of a map. Districts shall not be drawn for the purpose of favoring or discriminating against an incumbent, political candidate, or political party.

(f) Districts for the Senate, Assembly, and State Board of Equalization shall be numbered consecutively commencing at the northern boundary of the State and ending at the southern boundary.

(g) By September 15 in 2011, and in each year ending in the number one thereafter, the commission shall approve three final maps that separately set forth the district boundary lines for the Senate, Assembly, and State Board of Equalization districts. Upon approval, the commission shall certify the three final maps to the Secretary of State.

(h) The commission shall issue, with each of the three final maps, a report that explains the basis on which the commission made its decisions in achieving compliance with the criteria listed in subdivision

(d) and shall include definitions of the terms and standards used in drawing each final map.

(i) Each certified final map shall be subject to referendum in the same manner that a statute is subject to referendum pursuant to Section 9 of Article II. The date of certification of a final map to the Secretary of State shall be deemed the enactment date for purposes of Section 9 of Article II.

(j) If the commission does not approve a final map by at least the requisite votes or if voters disapprove a certified final map in a referendum, the Secretary of State shall immediately petition the Supreme Court for an order directing the appointment of special masters to adjust the boundary lines of that map in accordance with the redistricting criteria and requirements set forth in subdivisions
(d), (e), and (f). Upon its approval of the masters’ map, the court shall certify the resulting map to the Secretary of State, which map shall constitute the certified final map for the subject type of district.

The state Legislature gets to dismiss 8 candidates from every pool of 20 – 4 for each party, and overall the selection process seems fair.

So yeah, I’m happy to support this, and believe that at the end of it we will get better political districts in California, which will make some small contribution to better politics, I hope. It can’t be any worse.

I’ll do it like a test – start with the easy ones.

There are two California initiatives on which I have the strongest positions, Propositions 8 and 11.First, Proposition 11, which would attempt to reform gerrymandering.

To begin, we live in a horribly gerrymandered state. The elected officials pick their voters, no the other way around. Take a look at my State Senate district:

Note the way that the conservative Palos Verdes peninsula is joined by a strip of land the width of the beach to the more-conservative community of Long Beach, rendering what was a potentially balanced district – including both Venice and Palos Verdes – firmly Democratic.

There are arguments about the impact of this, but the reality – as I see it – is that this insulates the elected officials from the people they are supposed to represent, and it encourages more extreme and intransigent partisanship because in reality, the only race that matters is the primary – where the most dedicated partisans have the greatest voice.

Year, after year, our political leadership has lied to us about their willingness to do something about this issue. Here’s LA Times correspondent George Skelton in 2007:

Let’s back up and recall the precise promise.

In 2005, Schwarzenegger was backing a goofy redistricting proposal on his special election ballot. It would have forced a mid-decade redistricting, rather than waiting for the customary next census. Worse, it would have required any redistricting to be approved by a statewide vote, a political consultants’ bonanza.

If voters would reject the governor’s ballot proposition, Perata told me, “Our commitment… is to fashion a bipartisan solution in a thoughtful way and put it on the ballot next year.” Ditto, said Assembly Speaker Fabian Nuñez (D-Los Angeles).

The Schwarzenegger measure was soundly rejected by nearly 60% of voters.

Then the Democratic leaders didn’t deliver.

Schwarzenegger, Perata and Nuñez last week suggested that maybe they’d get it done next year and place a redistricting reform measure on the November 2008 ballot. Has a familiar ring.

We deserve better government than we have, and if the outrageous gerrymandering in this state is even potentially a barrier – let’s knock it down.

Yes on Proposition 11.

Next, Proposition 8, which would change the California constitution to ban same-sex marriage.

I’ve written before about my views on gay marriage. I support it, I understand why some people don’t, and I do not find them evil for opposing it. But I believe – strongly – that we will be best served by increasing the opportunities for stable, nuclear families. I personally know enough committed gay and lesbian couples that I can say with real confidence that letting gays and lesbians marry and rear children will add to social stability, not tear it down.

Do I support gay marriage? Of course. Do I think that all right-thinking people do? Of course not.

But for those who don’t, I keep wanting to ask – given the array of horrible sexual behavior that we all see around us every day; given the fact that most of the specific sex acts homosexual couples commit are committed by heterosexual couples as well – shouldn’t we look more favorably on a gay couple that has made a lifetime commitment and is living it out, and willing to do so before the state, and maybe a bit less favorably on someone like me?

Because society isn’t made by what happens in the bedroom, and that’s the only place where gay and lesbian couples are different from we straight couples. Society is made in the kitchen, and in the living room, and over the dining table. And as a society, we need as many stable families sitting with children over their dinner and homework as we can create. And as a just society, I cannot see how we can deny that right to people simply because of what they do in the bedroom.

No on Proposition 8.

David Blue’s post below motivated me to get off my rear and do a post on voting.

I have been bitching for a long time about the mechanics of voting. That’s because at root, I believe that the act of voting and the spinning plates of government we erect on top of that act are the secret sauce that makes America exceptional.

We spent a lot of focus on the horrible, awful, truly bad decision to handle voting with poorly-built computer terminals. My biggest problems with them were twofold: first, that they present the opportunity to steal elections wholesale, rather than retail – i.e. a very small group of people can commit meaningful fraud; and second that fraud is impossible to detect on the systems – which means both that we can’t readily defend against a small-group attack, and that in this hyperpartisan age, no one will trust that the results haven’t been hacked – we can’t demonstrate fairness and accuracy.

And when people’s trust in the results collapses, we get a collapse of the legitimacy that the whole spinning-plates-thing depends on.I think that we will see the low tide on the issue of machine voting in this election, and that slowly we’ll see the junk machines get junked, and begin to move to transparent, auditable systems for collecting and tallying votes. We’re not done here, by any means, but I think that the tide is moving in the right direction.

I’m wrestling with how much to be concerned about the rest of the voting ‘system’ – the process from registration to voting to tallying to auditing. And with the news about the terrible job ACORN is doing is delivering high-quality registrations, it’s worth some time to muse on this issue.

So let me start with some framing comments and thoughts.

First of all, I’m no Bruce Schneier. But I do read his work, and I stayed in a Holiday Inn once, so I assume I can talk about security issues with a straight face. Second, I absolutely believe that every election we are likely to have will have some measure of error and fraud in it. People are involved, a lot is at stake, and the systems and machines used were built by people as well. But I think that we can agree on three serious goals that any system ought to meet: It ought to be impossible to steal enough votes to effect a state or national election without involving thousands of people – which makes an effective conspiracy really unlikely; It ought to be apparent on audit that some kind of problem exists (again, absent a massive conspiracy); and finally, and most important, the protections against fraud ought to be as electorally neutral as possible – i.e. we ought to be thoughtful that our election protection and election auditing systems don’t have a built-in bias that itself effects the outcome of the election.

It seems to me that we’ve got three likely areas for fraud in our electoral process. The first is in the process of registering and voting. There’s a long and honorable tradition of “voting early and often” as it’s been said, and in many voting communities run by political machines, being dead is no excuse for not being a supporter. There’s accusation that Mayor Daley (the dad) defrauded Richard Nixon out of the Presidency by manipulating the vote in Chicago.

The act of casting and counting votes remains a vulnerability. In New York, lever-operated mechanical voting machines could be tampered with by putting a pencil lead in the gears. In Seattle, multiple recounts and the sudden appearance of a box full of votes elected a Democratic governor. In San Francisco, boxes of ballots were found in the Bay.

And none of this takes into account the kind of systematic error that can be triggered benignly – as by a Democratic election official designing hard-to-understand ballots in Florida in 2000.

I continue believe the major focus ought to be on the voting and counting arenas, because (as I’ve said) it is plausible that a criminal conspiracy small enough to remain secret could dramatically, fraudulently, and untraceably change the outcome of an election.

But today, we have another issue, and I’m struggling to learn enough to decide how significant it really is, and that is the issue of registration and voting fraud by voters.

It is a two-edged sword, and it is a particularly sensitive issue because – unlike fraud that takes place at the counting level, which is in principle neutral between the parties, this issue does have impacts electorally. That’s because – to draw a sweeping generalization – the people who are good at filling out forms and detailed paperwork, and who are likely to have fixed addresses and lots of documentation tend to be more Republican. That means that efforts to manage electoral fraud that rely on paperwork, fixed addresses, and documentation tend to impact likely Democratic voters. This means that hyperpartisan Democrats are happy to see laxer standards on all those fronts, and hyperpartisan Republicans want to see tighter standards.

Ideally, there is some kind of magic knob we could set dispassionately that would be at the exact point where fewer good registrants are kept from voting and more illegitimate registrants are kept from voting. The question is – do we have that today? The answer is unclear.

I’ll take on one extreme Brad Friedman, who I’ve discussed this with but not at the length it really requires. Brad’s argument, simply is that there is no vote fraud. There are registration errors, a minor amount of registration fraud by low-paid workers for ACORN – which ACORN catches in its internal checks, and GOP political operatives who are hellbound to disenfranchise as many poor, minority voters as they possibly can.

I’ll agree with Brad on #1 and on #4. I have to kneejerk reactions on #2 and #3, and they come from Friedman’s uncritical acceptance of ACORN’s statements and the absolute confidence with which he takes them on faith. Brad doesn’t take the positions of election officials on faith; why should he uncritically accept that of ACORN? (that’s a rhetorical question)

But Brad raises the issue that even if ACORN were to be fraudulently registering tens of thousands – what does it matter? Registrations are irrelevant to election outcomes, only actual votes matter. And for it to be a problem, tens of thousands of people would have to make visits to polling places and cast ballots. Brad suggest that this isn’t an issue, since under HAVA, all first-time voters who have not registered in-person at the registrar’s office are required to show ID.

Looking at the Los Angeles County Registrar’s site supports Brad’s position:

Is identification required to register? …top

The Help America Vote Act (HAVA), enacted by Congress in October of 2002, states that individuals registering to vote for the first time in the state/jurisdiction, must provide either a valid California driver’s license or state ID card number. Applicants who do not have either can provide the last four digits of their Social Security number. If the voter provides a driver’s license or state ID number when he/she registers to vote, and the number can be matched to a state record, then the voter will not be required to show ID when he/she votes.
Otherwise…

• If an individual registers by mail, has not previously voted in an election for federal office, and votes in person, the voter must show photo ID or a document that indicates both the voter’s name and residence address.
• If an individual registers by mail, has not previously voted in an election for federal office, and votes by mail, the voter must submit a copy of a photo ID or a document with both the voter’s name and residence address.

and

What form of identification is acceptable at the polls for voters whose status is new? …top

STANDARDS FOR PROOF OF RESIDENCY WHEN PROOF IS REQUIRED BY HAVA

As indicated in FAQ #2, HAVA requires that certain voters are required to show proof of identity in order to vote.

The Secretary of State has adopted regulations, pursuant to Elections Code section 14310 (e), that specify what documents may be used to prove a voter’s ID. The Office of Administrative Law approved these emergency regulations on January 28, 2004.

(Click here for a link to Section 20107 of Article 7 of Chapter 1 of Division 7 of Title 2 of the California Code of Regulations.)

Important points to note include:

1. The regulations are required to be “liberally construed to permit voters and registrants to cast a regular ballot. Any doubt as to the sufficiency of proof or a document presented shall be resolved in favor of permitting the voter or new registrant to cast a regular ballot.”

2. Any voter who is required to provide ID but is either unable or unwilling to do so must be advised that he or she may vote a provisional ballot.

3. A voter can prove his or her identity with an original (or copy) of:

A. “A current and valid photo identification” — This means “a document prepared by a third party in the ordinary course of business that includes the photograph and name” of the voter. These documents can include a:

• Driver’s license or ID card of any state
• Passport
• Employee ID card
• ID card provided by a business
• Credit or debit card
• Military ID card
• Student ID card
• Health club ID card
• Insurance plan ID card

B. A voter can also provide proof of ID with the following documents that do not include a photo of the voter, if that document includes both the name and residence address of the voter. The document must be dated subsequent to the date of the last general election, unless the nature of the document is permanent.

• Utility bill
• Bank statement
• Government check
• Government paycheck
• Document issued by a government agency
• Sample ballot issued by a government agency
• Voter notification card issued by a government agency
• Public housing ID card issued by a public agency
• Lease/rental statement or agreement issued by a government agency
• Student ID card issued by a government agency
• Tuition statement or bill issued by a government agency
• Insurance plan card issued by a government agency
• Discharge certificates, pardons, or other official documents issued to a voter by a governmental agency in connection with resolution of a criminal case, indictment, sentence, or other matter
• Public transportation senior discount cards issued by a governmental agency
• ID documents issued by government homeless shelters and other government temporary or transitional facilities
• Drug prescription issued by a government doctor or other governmental health care provider
• Property tax statement issued by a government agency
• Vehicle registration or certificate of ownership issued by a government agency

So, on one hand, there are requirements for identification, and Brad is absolutely correct in his claims. On the other, this presents some pretty obvious exploits, as they say in the technology security space.

Let me suggest one.

I show up at the registrar and register as “Brad Friedman.” I explain that I have no ID, so I’m assigned a state ID number, or I’m registered by am ACORN volunteer who enters the SSN that I give them. I give an address where mail can actually be received…say, a laundromat where I work.

Now, I have to show ID when I show up to vote – I’m assuming that there is some indicator on the big sheet they list the names on, and that the poll workers are conscientious and catch it. So let’s agree that I have to show ID.

Well, the sample ballot that I received is the ID I need…the system is self-proving, i.e. the fact that I got a sample ballot means that I’m entitled to vote.

Now I’m not suggesting that this would actually work – although it’d be fun to try. Nor that it has happened at a scale that influences elections. There are absolutely concerns – reports that Milwaukee’s turnout was greater than the number of registered voters, the Indiana 105% voter registration figures – but those concerns are no more valid claims that elections have been stolen than the concerns about voting technology are valid claims that elections have been stolen by Diebold.

And I’d love to hear from people and do some research into how we would know- retroactively – that fraud like this had been committed. Because I can’t think of a way.

I’m not losing any sleep over it, because in reality, the amount of effort that would have to go into actually creating phantom voters and having real people walk in and vote on their behalf at a level to tip a state Assembly race, much less a Presidential race, is so great that I can’t see it working.

But just like losing a book of checks ought to be OK because your signature is needed on each one before it can be cashed, having all these ‘phantom’ registrations is bad as well.

But I’ll also suggest that a combination of phantom registrations and lax handling of ballots by politically-appointed election officials is a plausible risk. If I can go in and ‘create’ votes either electronically or in the old-fashioned Chicago way (and that’s not a dig at Obama, just a comment on the kind of politics we’re discussing) of manipulating ballots and election documents centrally, then we are looking at real risk.

And I think it’s evident that if McCain loses by a close vote, with the deciding votes in big cities where there are strong ACORN or other registration irregularities, some rabid Republicans will echo the rabid Democrats who claimed that Diebold stole Ohio, and we’ll – again – be living with election results that are more clouded than they ought to be. And I’m just tired of that.

Now I’ll disagree with Brad on one other point. From my conversations with him, I think it’s fair to suggest that his criterion is that no one who is entitled to vote should be denied that right, period. And that’s a genuine value to have; the problem is that if doing that means that 10 people get to vote fraudulently, what’s the impact? In the criminal justice system, I think it’s reasonable to set the standards so that no innocent person is likely to be convicted. I wonder if that’s a good standard to apply to elections.

This November, Californians will have 12 state initiatives to vote on. Over the next few days, I’m going to try and cover what I think of each of them.

The right to legislate by initiative is one of the great features of California politics; it’s also one of it’s great failures. As a defense of the people’s interest against legislative action – or inaction – it’s a good thing. The fact that the people’s interests may need to be defended against the Legislature is a horrible thing.

For detailed information on these initiatives, including arguments for and against, go to the California Secretary of State’s site. 1A – Bonds for high-speed rail

2 – Ban ‘factory farming’ of domestic animals

3 – Bonds for designated Children’s hospitals

4 – Parental notification of minor’s intent to have an abortion

5 – Drug rehabilitation

6 – Police funding lockup, gang crimes

7 – Renewable energy requirements

8 – Bans gay marriage

9 – Victims rights

10 – Renewable energy bonds, alternative fuel vehicles

11 – Redistricting reform

12 – Cal-Vet bonds

Macmillan Reference USA has just published an ‘Encyclopedia of Race and Racism‘. I’m inherently wary of efforts like this, but this one is over the top…

Harry’s Place points out that, first it has a category for ‘Zionism’ and next that that section was written by a noted anti-semite and the author of the webzine ‘Race Traitor‘. You can imagine what he wrote.

Go over and read about the whole shameful episode. My personal favorite is the response from the publisher of the encyclopedia, Frank Menchaca.

“After careful review of arguments from both sides,” he wrote to David Harris, “neither Mr. Moore (John Hartwell Moore, the encyclopedia’s Editor in Chief) nor I feel we can operate as arbitrators of these controversies.”

Right. having published this calumny, they can’t be responsible for standing behind its validity. It’s as though they hired Velikovsky to do the section on the solar system.

I am passionately opposed to efforts to limit free speech, but I am equally passionate about truth in advertising. This book is no more an ‘encyclopedia’ than this blog is, and I’ll both be letting the folks at McMillan know my feelings about it and I’ll be visiting my local library. I have no problem with the library holding this book – just as I’d have no problem with the library holding Mein Kampf or State and Revolution. But let’s not offer it the authority of being considered an encyclopedia.

Here’s a video with Nicholas Taleb on the financial crisis (h/t John Robb). Check out his expression at 4:52 as his counterpart utters platitudes about regulation and the market.

My mom wanted to listen to Brad’s radio show, so we played the mp3 last night. Listening to it, I was reminded both that I’m too damn polite for radio, and that I have some unfinished business with Dave Dayen. We went back and forth on the subject of the evil subprime originators vs. Fannie and Freddie and never got to finish the point.

Brad suggests that no one cares; but I do because the responses to housing mortgage policy are going to be critical in the next Administration, and I think we need to be approaching this issue with wide open eyes.

Let’s start with the issue D-Day and I were disagreeing on when Brad rescued him. Here’s the Washington Post:

In January 2007, as years of loose mortgage lending were about to send the nation’s housing market into devastating decline, Fannie Mae chief executive Daniel H. Mudd wrote a confidential memo to his board.

Discussing the company’s successes, Mudd said one of Fannie Mae’s achievements in 2006 was expanding its involvement in the market for subprime and other nontraditional mortgages. He called it a step “toward optimizing our business.”

A month later, Fannie Mae outlined plans to further expand its activities in the subprime market. The company recognized the already weak performance of subprime loans but predicted that they would get better in 2007, according to another Fannie Mae document.

Internal documents show that even late in the housing bubble, Fannie Mae was drawn to risky loans by a variety of temptations, including the desire to increase its market share and fulfill government quotas for the support of low-income borrowers.

Since then, Fannie Mae’s exposure to loosely underwritten mortgages has produced billions of dollars of losses and sent its stock price plummeting, prompting the federal government to prepare for a potential taxpayer bailout of the company. This month, Fannie Mae reported that loans from 2006 and 2007 accounted for almost 60 percent of its second-quarter credit losses.

So let me pull out the section on “what happened” from the Milken Institute slide deck I link to above and let’s dig a little further into this.

Dave and Marcy Wheeler were taking the “Fannie had nothing to do with this” position. I countered with “I’ve got this 92-page Powerpoint from the Milken Institute that says otherwise…”

Dave immediate dismissed it, saying “Did Fannie or Freddie make subprime loans?” And while I went to get the appropriate slide from the deck to show him, we moved the conversation along – because according to Brad, no one cares.

But I do, and I’ll suggest that we all should. because they did, and further because of who they were and their position in the financial ecology, what they did was dramatically more important than what any other single institution chose to do.

So let me cherrypick from the entire deck (which you can download here as a pdf) and present what I see as some key points.

First, here’s the residential mortgage market. Note that subprime and delinquent loans (set out in the next two slides) are a relatively small part of the market.

First subprime:

Note that less than 10% of loans outstanding are subprime, and that represents roughly 5% of the total housing value in the US.

Next, here’s the state of the market today:

Note that 66% of the houses in the US have mortgages. Of those, 9.2% are in arrears, and 2.8% in foreclosure – which compares with approximately 50% who were in the same state in the Great Depression. That 9.2% represents 6% of the homes in the US, and the 2.8% represents approximately 1.8% of the housing stock in foreclosure.

Here are slides from the section of their presentation on what went wrong. Let’s go through them and let me try to fit an argument:

The first slide in this section:

This shows the assets and MBS (Mortgage Backed Securities) of Fannie and Freddie, in comparison to the entire residential real estate assets of commercial banks and savings banks – the scale of Fannie & Freddie become fairly clear.

Next we have the escalating leverage within Fannie & Freddie.

Look at how the asset/MBS ratios changed from 2003 to 2006.

Now look at the impact on the solvency of the two institutions:

The righthand set of columns for each – with the assets marked to market – show how the debt/equity ratio of Freddie and Fannie deteriorated from 50 – 60X (one dollar of equity for every 50 – 60 dollars of loans held on the books) to 167X and 255X, respectively – and insolvency.

Now this insolvency has two cascading problems; the first of which is the sheer scale of the two organizations (see above). The other is that securities of Fannie and Freddie were largely held by banks and other financial institutions. Here’s an article from Bloomberg on August 22:

Fannie Mae and Freddie Mac’s $36 billion in preferred stock was downgraded to the lowest investment-grade rating by Moody’s Investors Service, which said the increased likelihood of “direct support” from the U.S. Treasury may devalue the securities.

The ratings were lowered five steps to Baa3 from A1, New York-based Moody’s said today in a statement. Moody’s kept its Aaa senior debt ratings on Fannie and Freddie stable and affirmed the subordinated debt because the Treasury will likely make sure the companies continue to make interest payments in any bailout.

…

Regional banks including Midwest Bank Holdings Inc., Sovereign Bancorp and Frontier Financial Corp., may have the most to lose. Melrose Park, Illinois-based Midwest has $67.5 million, or as much as 23 percent of its risk-weighted assets, in the preferred stock, while Philadelphia-based Sovereign owns about $623 million and Everett, Washington-based Frontier about $5 million.

The downgrade “puts a little more pressure on banks to record some sort of impairment charge on these securities,” Daniel M. Arnold, an analyst at Sandler O’Neill & Partners LP in New York, said in a telephone interview. “The more and more likely it becomes that the value of these isn’t going to return back to where it was,” the harder it is to avoid writedowns.

(emphasis added)

As I understand it, shares and securities of Fannie and Freddie were widely held in the financial sector, because they were considered such high-grade securities that banks wanted them to count as a part of their equity – the required capital they need to be able to continue to make loans or even just stay in business. Here’s a Sept. 12 press release from Central Bankcorp:

Central Bancorp, Inc. (NASDAQ: CEBK) (the “Company”), parent company of Central Co-Operative Bank (the “Bank”), announced today that the U.S. government’s actions with respect to the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and Federal National Mortgage Association (“Fannie Mae”) will adversely impact the value of the Company’s perpetual preferred stock investments in Fannie Mae and Freddie Mac.

…

At June 30, 2008, the Company had five securities totaling $10.1 million of perpetual preferred stock of Fannie Mae and Freddie Mac, which had an unrealized loss of $799,000. The impact of the above actions and concerns in the marketplace about the future value of the perpetual preferred stock of Fannie Mae and Freddie Mac have caused the values of these investments to decrease materially, and it is unclear when or if the value of the investments will improve in the future. Given the above developments, on September 11, 2008, the Company concluded that it will record a non-cash other than temporary impairment on these investments for the quarter ending September 30, 2008, the amount of which is expected to equal the difference between the net book value of the securities at September 30, 2008 and the market value of the securities at September 30, 2008. As of the closing price on September 11, 2008, the market value of these securities was approximately $890,600.

If the investments were valued at zero and if the Company was not able to record a tax benefit for the loss, the resulting capital ratios would render the Bank adequately capitalized because the Bank’s total risk-based capital ratio would fall below 10%. The impact on the Company’s and Bank’s capital ratios would be as follows…

Note that the last paragraph is contradictory – the “resulting capital ratios would render the bank adequately capitalized because the Bank’s total risk-based capital ratio would fall below 10%” But it’s clear that holdings in Fannie and Freddie securities were widespread in regulated financial institutions, and that their capital ratios were at risk from the insolvency of these organizations.

Now if you’ll recall, this all started when I suggested, arguing with Marcy Wheeler, that Fannie and Freddie did have something to do with the meltdown. Dave Dayen countered with “do Fannie and Freddie make subprime loans?” And I was flipping through the deck, looking for this slide:

You’ll note that 61% of the loans Freddie had in its retained portfolio in 2006 were subprime, and a further 25% were Alt-A.

It’s the kind of thing you wish you’d had at your fingertips when you’re arguing in public…

As to Fannie, in 2006 the ratios were 46% subprime and 35% Alt-A.

I’ll send this link over to Marcy and Dave (as well as Brad) and see what they have to say.

Meanwhile, let’s continue with the Milken presentation.

Here’s another slide showing the insanely risky leverage of Freddie Mac in relation to other financial firms.

Here’s a slide showing the overall level of leverage at major investment banking firms.

Now, let’s shift focus to S & P and Moody’s. Here’s a table showing securities issued by rating – note the vast majority of all rated securities were rated AAA. Now on the right is a table of the MBS that were downgraded by rating. Over 50% of the issues MBS’ were downgraded.

I’d suggest that people have a lot of reason to be really, really unhappy with the rating agencies these days.

Here’s the way we magically created creditworthy value out of – noncreditworthy value:

Via financial engineering, we managed to create a lot of perceived value. The solidity of that value, on the other hand, proved not be so great.

Engineering took place on a lot of levels – fraud at origination existed as well. But overall, it hasn’t been that great – it looks like it was about $1 billion at peak to date.

Out of a total mortgage market of some $8 trillion, $1 billion in mortgage fraud is serious, but seems far from central.

As a final note, the question is whether the crisis is incomes-driven; i.e. that it was caused by declines in people’s incomes from job loss or wage reductions. Let’s look at their data.

Looking at this chart, it’s apparent that the biggest driver of foreclosure rate wasn’t job or income loss – it was home price collapse.

And now let me try and fit a theory to this. We had a speculative boom in housing (and commercial real estate) fed in large part by low interest rates and lax loan standards. That boom had to end sometime, and that time is now. Typically the damage would be limited to some suburban banks like Countrywide, but in this case the damage is throughout our financial institutions. Why?

The collapse of the boom is much more damaging than it needed to be, I’ll suggest, for two significant reasons:

Because the far-and-away largest institutions in the market, Fannie and Freddie, added risky loans to their portfolio while they were immensely overleveraged – putting them significantly at risk. But their securities were still treated as something other financial institutions could use as equity, meaning that they could in turn highly leverage them. So when Fannie and Freddie were shaken, the effects on the balance of the highly leveraged financial industry were vastly amplified.

This wasn’t the sole cause, and there are complex enough issues here that financial historians will be studying and debating this for generations.

But it’s vitally important to note the roles of Fannie and Freddie because the likely policy going forward will likely continue to rely on government market-makers and sources for mortgages, and if we don’t pay attention to what went wrong here, we’re likely to do it again.
–