More Thoughts On Valuation And What The NYPL Should Have Received As Recompense For The Public When It Sold The Donnell Library

Two November 7, 2007 NY Times stories about real estate deals that turned out to be connected

On January 12, 2007 “the most expensive building sale in U.S. history” closed: Tishman Speyer’s $1.8 billion sale of 666 Fifth Avenue to the Kushner Companies (owned by Jared Kushner, who also owns the New York Observer.)  My last Noticing New York article included information about how this related to another real estate transaction that also occurred in 2007 (through sale of rights to build a bigger building) just a few doors down, the New York Public Library’s sale of the five-story Donnell library, newly renovated and in excellent condition with additional basement space to boot, for a net of $39 million.

This small net to the NYPL is after taking into consideration of its plans to get back a less than one-third size underground `replacement’ library by perhaps 2015, the plans for which were thoroughly discussed in that article.  The basement library space will be at the bottom of the 50-story luxury hotel and condominium building going up at the site of the former Donnell.  See: Friday, May 24, 2013, Previews Of The Proposed New Donnell Library: The NYPL Unveils Its Version Of The “Silk Purse” Libraries It Envisions For Our Future.

Since there was newly turned up information in that last article I wrote I thought it would be worthwhile to come back and reconsider the amount that the NYPL sold Donnell for, in light of that information.  How good or bad a deal did the NYPL structure for the public?

Based On Other 2007 Transaction For Nearby Property Did NYPL Get Less Than One-Third Of What Donnell Was Worth To The Public?

First off, 666 Fifth Avenue on the same block and just down the street from Donnell according to the Real Deal was 1.45 million square feet so its purchase price of $1.8 billion comes out to $1,241.38 per square foot.

If the recently renovated Donnell was a valuable asset and worth keeping for the public (as I and many others believe it was), then by the measure of $1,241.38 per square foot for real estate in that area the 97,000 square foot, Donnell might have been worth $120,413,793 to the public, more than three times the $39,000,000 that was netted for the library system when the NYPL sold it.

But maybe that isn’t fair: The $1.8 billion that was paid for 666 Fifth Avenue was reported to be too high a price, the result of “reckless underwriting” according to the New York Times.  The office rents didn’t fully support the value paid (rents covering only 0.65 percent of the debt service on the loan that was put together by Barclays).  So perhaps the estimated value of the public keeping Donnell if done through the kind of calculation above should be adjusted downward a bit.  A bit maybe, but in the relative scheme of things not by all that much: Read on.

Did somebody know when 666 was bought that there was other potential value in the building?  We will momentarily get to what the sale of rights to the new Donnell site owners brought in to the 666 Fifth owners. 

November 7, 2007: Two Real Estate Transactions Written About In the Times With Link That Public Doesn’t Realize

Again, the two November 7, 2007 NY Times stories about real estate deals that turned out to be connected

In coincidence that stands out as strangely interesting the New York Times ran an article describing what a very bad deal the purchase of 666 Fifth Avenue was on November 7, 2007, the very same day that the Times first reported the surprising news that the Donnell had been sold.  At the time, nobody (at least nobody on the outside) knew that the two deals would wind up being related when the 666 Fifth owners would sell the owners of the new Donnell site the right to build taller at that site.

See:

    •    Financial Ground Has Shifted Under a Record Deal, by Terry Pristin, November 7, 2007.
http://www.nytimes.com/2007/11/07/realestate/commercial

    •    New York Public Library’s Donnell Branch to Share Space With Hotel, by Robin  Pogrebin, November 7, 2007

Foreseeable Future: Doom and Gloom?

Maybe the Times description of what a bad deal the record-setting 666 Fifth avenue transaction was helped put aside the question of whether recent prices for real estate in the neighborhood were significantly better than what the NYPL was being paid for Donnell.  The Times November 7th doom and gloom article about the 666 Fifth deal (“666 Fifth `was the poster child for what was not right in the underwriting,’ said J. Larry Duggins, an executive managing director of the Centerline Capital Group”) toys intriguingly with some (mitigated) foreboding about the then ongoing real estate bubble that was, in fact, going to burst the following year (before NYC real estate prices again resumed climbing):

Many people in real estate worry that the subprime mortgage debacle could lead to sizable layoffs in the financial services industry, emptying a lot of office space in Manhattan and causing rents to fall. But Mr. Konsker said a number of tenants outside that industry are currently looking for space. And so far, although the pace of leasing has slowed, there is no evidence that asking rents have declined.

At this month’s May 8th NYPL trustees meeting NYPL president Anthony Marx apologized for only one aspect to the Donnell sale, the long delay in the provision of a `replacement’ library (now projected to be complete in 2015) that was originally supposed to be provided in just three and a half years (after 2008), telling the trustees about the delay:

Of course none of us could foresee that the economy would change and change the schedule of this. . .

NYPL Offers Reasons To Sell Donnell

The Times November 7th article about the sale of Donnell does not mention any thoughts about how good or bad the real estate market was at the time of the announced sale or whether the NYPL was getting a good price for the Donnell.  All it said about the NYPL's decision was:

    . .  said it had little choice because the branch, built in 1955, was in dire need of renovations that the system could ill afford.

    * * * *

The library says Donnell is in serious need of repairs, with the oldest elevator of any branch in the system and outdated air-conditioning, heating and electrical systems. “It’s not in great shape, to say the least,” Mr. LeClerc said, adding that the library had to have pieces specially made to repair the old-fashioned air-conditioning system.

The assessments above are subject to question given that there was a history of recent and substantial Donnell renovations and the reflexive habit that library officials have of conjuring up extraordinary air conditioning repair costs whenever they want to sell real estate.

The Times November 7th report on the sale was also misleading in not sufficiently indicating by how much the $59 million gross sale price would be substantially reduced (by $20 million) to build a `replacement’ library, thus allowing the reader to infer a greater likely benefit for the NYPL:

“We looked into the opportunity to capitalize on the asset itself, build a gorgeous new state-of-the-art collection and have a whole lot of money left over for other branches,” said Paul LeClerc, president of the New York Public Library. (Proceeds from the sale are to go toward other branches’ building needs.)

Profits Make 666 Fifth Avenue Purchase A Good Deal After All?

Was the 666 Fifth deal realy not a good one?  By January 17, 2012, Terry Pristin, the New York Times reporter who had reported November 7th 2007, on the 666 Fifth financial woes was reporting that, with a restructuring that involved the entrance of Vornado realty (Bloomberg LP’s landlord), and the sale of the additional building rights to the Donnell site, the purchase had weathered the financial crisis and was again on solid footing.  See: Surviving a Big Risk on Fifth Avenue.

Building ownership value was unlocked by buying out low rent leases and until the restructuring was put in place, reserves that had been set up in advance were drawn upon covering the deficient cash flow.  Several months later The Real Deal ran an article (August 01, 2012) with calculations of how much everybody in the real estate industry made from 666 Fifth Avenue deal: Tallying who won at 666 Fifth Avenue- Ranking winners, losers in wake of Vornado $707 million purchase of the trophy tower's retail condo, by Adam Pincus.

    •    Kushner Companies: Estimated profits of about $100 to $120 million on the retail side offset by a “loss” or infusion of new equity on the office rent side of more than $200 million- So that amounts to at least $80 million as an additional forced investment of capital.  The Real Deal does not specifically mention whether its calculations took into account Kushner’s sale of rights to the Donnell owners to build extra floors which, according to the Times brought in at least $30 million, potentially reducing that aforementioned $80 million figure for the infusion of capital.

    •    Carlyle Group (partnering with Crown Acquisitions): Estimated profits of $200 to $230 million on retail condominiums within the complex.

    •    Crown Acquisitions: Estimated profits of $25 to $50 million

    •    Lenders: Estimated interest payments of $113 million

    •    Brokers: Estimated $7.5 million in commissions on the retail side.

    •    Retail tenants (Brooks Brothers, Hickey Freeman and the NBA Store): Estimated $74.9 million for lease buyouts

Missing from the calculation is what Tishman Speyer (and other parties) made in the original sale when selling the building for the high $1.8 billion price: According to the Times the building was sold for “more than three times what the building fetched in 2000.”  

Note- In writing about Mayor Bloomberg’s business conflicts of interest Wayne Barrett has written about the mayor’s relationship with Tishman Speyer: Bloomberg Keeps His Billions Separate From His Mayoral Obligations? Yeah, Right!, by Wayne Barrett, Tuesday, Sep 1 2009

Donnell Bid Process And Sale

Following the Donnell sale through to an actual real estate closing is a bit of a saga.  The November 2007 sale was to Orient-Express Hotels but they ultimately transferred their right to buy before closing.  NYPL Chief Operating Officer described the initial sale to Orient-Express as a “private transaction” that `wound up' as a competitive process, but explained that Orient-Express had “an almost unique interest” in the property because they owned the 21 Club restaurant on an adjacent 52nd Street lot, which would mean they could use that restaurant’s kitchen to build a hotel.  Said Mr. Offensend:

We reached out. . . or we didn’t reach out, but our financial adviser reached out to several other parties who we thought might have specific reasons . . . so there were quite a number of developers in the development community who were contacted to see if they wanted to compete with this process and we did end up with a competitive process.

The closing of the sale of Donnell was July 27, 2011 to Tribeca Associates and Starwood Capital, who bought the real estate contract from Orient-Express and closed, according to Offensend, with the NYPL’s approval.

Based On Information About “Air Rights” Transactions, Was Donnell Sold For Many Millions Below Its Value?  Perhaps Hundreds Of Millions Less?

The Tribecca Associates’ website says that “air rights” comprised 50,000 square feet, or about 15%, of the building rights (50,000 out of 340,000 square feet).

In 2011, Tribeca Associates LLC, in partnership with an institutional partner, acquired 20 West 53rd Street from the New York Public Library System, as well as approximately 50,000 square feet of air rights and a light and air easement to develop this 340,000 square foot mixed-use project.

The Partnership intends to develop a landmark 120 key, 5-star hotel and approximately 130,000 square feet of luxury residential condominium units that will feature hotel amenities.

With a Plaza District location directly across from the MoMA, this building will feature unrivaled access to the city’s finest shopping, dining, cultural venues and will be in the heart of the midtown office market.

Are the 50,000 square feet of “air rights” the rights purchased (15% of the buildable rights) from the 666 Fifth owner? . . . . The original deal with Orient-Express was described in the Times in November 7, 2007 as a deal to build an 11-story hotel (making the low price paid to the NYPL perhaps a trifle less startling) but the building now going up is described in the Daily News as 50 stories and sometimes reported elsewhere as being 45 stories.  That hardly accounts for the difference between 11 stories and 50 or 45.

The 50,000 square feet of “air rights” probably includes, but is not exclusively comprised of, the rights purchased from the 666 Fifth owner.  March 6, 2012 The Real Deal reported on the acquisition “air rights” by Starwood Capital and Tribeca Associates to go to 45 stories: $30.825 million for air rights from the owners of 666 Fifth Avenue (just slightly over the figure mentioned in the Times), and $16.6 million for air rights from Orient-Express from the 21 Club (probably dating back to the July 2011 closing).  See: Starwood, Tribeca move forward with Midtown condo and hotel.

At $47.425 million for 50,000 square feet, that would come to $948.5 per square air rights foot, that would seem to be high for the market.  If the 50,000 feet is just what was bought from the 666 Fifth owner (treating the $16.6 million acquisition from Orient-Express as part of the overall land cost) per square air rights foot would price at $616.5 probably close to the market.  If the 50,000 feet is what was bought from Orient-Express per square air rights foot would price at $332, which might be considered rather low for the market across from MoMA.

Some comparison figures:

    •    $600/square foot at 43 East 60th Street (15 CPW Developers Pay Record Price for UES Air Rights, Tuesday, February 26, 2013, by Sara Polsky)

    •     $400 and $500 a square foot in 2007- "Two years ago [2007], demand for air rights was, well, through the roof. `For residential use at the peak of the market, [air rights] were between $400 and $500 a square foot,' said Stuart Siegel, executive managing director at commercial real estate firm Grubb & Ellis." (Air rights, once coveted, plummet in value, September 01, 2009, By Katherine Dykstra)

    •    $450 a square foot- “in recent years the norm in prime neighborhoods has crept toward $450 a square foot” ( The Great Air Race, by Robin Finn, February 22, 2013)

    •    $500 a square foot - 508 W. 20th St., next to the High Line - very close in time to the announced purchase of rights for the Donnell site. (The $ky’s the limit High Line air rights fetch $500/sq. ft., by Annie Karni, March 4, 2012)

    •    $450 to $550 per square foot- Churches in the vicinity of Donnell. Houses of the holy- (A look at the religious institutions lobbying to get inside the pearly gates of a rezoned Midtown East and cash in on air rights — and their spiritual counterparts who’ve already sealed deals around NYC, by Hiten Samtani, March 01, 20130)

    •    $430 per square foot - Park Avenue and East 60th Street in 2005.  ($430 a Square Foot, for Air? Only in New York Real Estate, by Charles V. Bagli, November 30, 2005.)

I am reviewing these figure in order to back into the buildable rights value of the Donnell site prior to addition of the air rights.

    •    If the very high $948.5 per square air rights foot was paid for 50,000 feet of air rights then the NYPL sold the owners the remaining balance of 290,000 buildable square feet.  If  those square feet are multiplied by $948.5 per square foot figure then perhaps the NYPL should have sold Donnell for $275.07 million.

    •    If the more probable $616.5 per square air rights foot was paid for 50,000 feet of air rights from the 666 Fifth owner, then maybe another 26,764 square feet in air rights would be attributable to the $16.6 million Orient-Express transaction, leaving the NYPL with 263,236 buildable square feet to sell, which at that price would sell for $162 million.

    •     If the very, very low $332 per square air rights foot was paid for 50,000 feet of air rights from the Orient-Express, then maybe another 92,846 in square feet was bought from the 666 Fifth owner leaving the NYPL with 197,154 square feet to sell which, at that very low price, would have sold for $65.46 million.  But, setting aside the concept of air rights to simplify this calculation, The Real Deal in October of 2007, around the time of the NYPL’s Donnell deal, was pricing real estate in Manhattan at a much higher buildable square foot price: $650 (nearby 62nd Street and CPW)  $1,050 (12-story prewar 823 Park Avenue at 75th Street) $400 (from 60th Street to 86th Street, between First and Lexington Avenues).  See: Developers see land prices jump, October 17, 2007,by Juliette Fairley.  So even if we went down conservatively to a price of $450 per square buildable foot based on these figures that would mean that 197,154 buildable square feet should have garnered the NYPL at least $88.7193 million.

NYPL Transaction of a Kindred Spirit

Prior to the 2007 Donnell deal, the NYPL was criticized for lack of “transparency” and failing to structure a proper bid process to sell off  NYPL property of special value to the New York City public.  Back in 2005 this transaction was also during the tenure of COO David Offensend, who started at the NYPL in 2004.   The criticism was that there was “a hasty and secretive process” suggestive of the fact that “the people in charge of the sale knew perfectly well” there something particularly unusual going on.  The NYPL as seller was represented by a broker who had a conflict of interest relationship since it was also an adviser to the buyer and, in another conflict of interest, an adviser to the NYPL was both an adviser to the seller and connected with those who made the failed competing bid.  No matter, the “swiftly organized” “closed bid” was clearly set up to favor the particular wealthy buyer in play.

The NYPL wound up garnering only $35 million for the property in question, $4 million less than the NYPL netted through its sale of the Donnell.  In this case the property in question wasn’t real estate but a painting: “Asher B. Durand's `Kindred Spirits,’ one of the great Hudson River School landscapes, a civic treasure.”

The criticism came from various quarters but the criticism quoted above and published in the New York Times came from Michael Kimmelman, who has since become the Times architectural critic and is also a strong critic of the NYPL’s Central Library Plan, essentially a convoluted real estate deal with strong similarities to the Donnell transaction in how it shortchanges the public.  See: Critic's Notebook: Civic Treasure: A Need for Transparency, Not Secrecy, by Michael Kimmelman, May 18, 2005 and Critic’s Notebook- In Renderings for a Library Landmark, Stacks of Questions, by Michael Kimmelman, January 29, 2013.

Kimmelman’s 2005 statements with respect to the sale of Durand’s “Kindred Spirits” readily apply to the Donnell and Central Library Plan real estate deals:

It's time for transparency. Increasingly, we demand it from government, the media and Wall Street, in response to dwindling public faith. The same should apply to libraries and museums, which also regularly test our trust.

Former NYS Attorney General Louis Lefkowitz

Kimmelman goes on to invoke the spirit of former New York State Attorney General Louis Lefkowitz who, as Kimmelman points out, “stepped in” in the early 1970's when the Metropolitan Museum's private sale of works by van Gogh and Henri Rousseau and others caused a scandal:

Public institutions must avoid even the appearance of impropriety when selling art. That's why the New York attorney general in the 70's, Louis Lefkowitz, responding to the ruckus over the Met's private sale of pictures, recommended that museums sell through open (not closed-bid) public auctions. That still makes sense. Public auctions or some other public process, obligatorily announced loudly, widely and well beforehand, plus the chance for local museums to match prices after a sale, would mean greater visibility and precious time to gain public faith.

The reason Lefkowitz stepped in when he did is because the New York State Attorney General is charged with overseeing and ensuring proper conduct of the state’s charitable institutions like libraries and museums.  Kimmelman’s reference to Lefkowitz may be viewed as an invitation to the Attorney General of the time to step in and investigate the sale of the Durand painting.  Had that happened perhaps many further ensuing events like Donnell might also have been halted.

Former NYS Attorney General Eliot Spitzer in Frontline documentary “The Untouchables” about the impunity of NYC financial titans when it comes to misconduct  

The New York State Attorney General who did not swing into action in May of 2005 was Eliot Spitzer, the “Sheriff of Wall Street,” then running for governor and now, after his early exit from the governorship, is a talking head in such documentaries as Frontline’s “The Untouchables” where by narrating to prove he knows how to investigate (“I’ve always believed that you start at the bottom up”) he helps prove that a conscious lack of investigation is currently treating big fish on Wall Street as being immune from prosecution for fraud.  Although there is a fair amount of overlap between some of those involved in the Wall Street financial crisis and those involved in the real estate industry, Spitzer, form a real estate family himself, never took on New York City’s real estate industry.

Andrew Cuomo was NYS Attorney General when the Donnell sale unfolded

 The New York State Attorney General who was in office when Donnell was unfolding in the fall of 2007 was Andrew Cuomo, now the Governor of New York.  The current New York State Attorney General who could still be looking into what happened when Donnell was sold, especially as it pertains to the currently unfolding Central Library Plan real estate deals and the fact that NYPL President Marx and COO Offensend apparently view the Donnell deal as model for what is to be done with library real estate throughout the system, is Eric Schneiderman who took office January 1, 2011.

Side Note: Lest there be some confusion for those not remembering the sequence of things, Kimmelman’s Durant piece includes the following:

The Metropolitan Transit Authority recently auctioned off development rights over the Hudson rail yards on the West Side. It accepted what was not necessarily the highest bid, saying the lower bid was in the public's interest.

The bid being discussed goes back to the time the Bloomberg administration was trying to push through the West Side Stadium for the Jets.  It was not the 2007 bidding process which Tishman Speyer initially won in March of 2008 and then failed to follow through on (so that the Yards wound up going to the Related Companies.)

How Many Hundreds of Millions More Keeping The Donnell Would Have Been Worth To The Public, Calculating Based On The Value Of What is Being Put Up In Its Place

Even had the NYPL sold Donnell for a figure like $89 million (the conservative low figure calculated above based on buildable rights), thereby netting on the order of only $69 million after building a much smaller replacement library, the question is whether it would have been a suitable deal in terms of the assets the library system was thereby giving up with such shrinkage and retrenchment in the face of city growth.

We can also look at the value of assets at that address in terms of the value on what is being built to replace the Donnell on its former site.  The 7,381 square foot penthouse in the building going up there is being offered for $60 million: Cut Glass: Baccarat Wants $60 M. For Its Crystal Penthouse, by Stephen Jacob Smith, Feb 26, 2013.  That’s a value of $8,129 a square foot.  According to that measure the old Donnell would have been worth about $789 million to the public.

It is, of course, much fairer to look at the average total asking price for the building’s 61 condominiums occupying a total of 130,000 square feet: $523 million, about $4,023 per square foot, making the Donnell’s 97,000 square feet worth about $390 million to the public.

No matter which way you cut it, the NYPL’s sale of Donnell gave up a valuable, nearly irreplaceable asset belonging to the public.  In its place will stand a building with 61 condominiums occupying a total of 130,000 square feet valued at $523 million and a luxury hotel with maybe 151 rooms in the remaining 210,000 square feet, which all totaled will be worth perhaps to $1.4 billion to its owners.   . ..

. . .  This is why New York's citizens are having such difficulty fending off the real estate industry to protect our publicly owned property.

Client 9 (Spitzer): Divided by 3, No 2 Ways About It

(Above, Eliot Spitzer taking the oath of office.)

Before expressing any Noticing New York reservations (there will be some) you should know that “Client 9: The Rise and Fall of Eliot Spitzer” is such a superlative film that it unquestionably raises the bar for the increasingly popular genre of political documentary. Its achievement is to navigate densely intricate subject matter with masterful adroitness.

The film is a product of the same book-and-movie collaborating team, Alex Gibney, film maker and Peter Elkind, book author, who produced a book and film each titled “Enron: The Smartest Guys in the Room.” “Eron” was a great documentary on a related subject (we didn’t read the book) but “Client 9" surpasses that previous film and you should see it.

Here’s Why

If political machinations fascinate you, you should see this film. If procedurals about using and abusing the law intrigue you, you should see it. If being witness to extreme brute force power games race your pulse, you should see it. But most of all, if you value your own personal economic and political freedoms you should see it because this film is very clear about the tenuous thread on which those freedoms hang.

Notwithstanding that the story is true and all its characters real, the film is like the best noir in that it is about people consistently behaving very badly, and we are not talking about the escorts, prostitutes and madams who are central to the plot. For the most part these bit players come off rather well. We are not even talking about Eliot Spitzer, the cornered John and disgraced, hypocritical politician.

Though the film proceeds like a detective story following what the New York Time review refers to as a persuasive “trail of bread crumbs” (we would say a “convincing” trail) it is no mystery if you have seen the film’s trailer that its real heavies are miffed Wall Street tycoons, accompanied by their lower echelon henchmen, hungry for revenge after Spitzer’s “Sheriff-of-Wall-Street” `Bingos!' identifying malfeasance they were up to. That the lower echelon henchmen include a G. W. Bush appointed United States attorney for the Southern District of New York (Michael Garcia) indicates how near the pinnacle of power we should consider the vengeful tycoons to be. Racing through its multitude of connections, the film reminds us of the contemporaneous Bush-Gonzales U.S. Attorney appointments scandal which involved orchestration by the U.S. Department of Justice and the White House to turn control over U.S. Attorney and their investigations to partisan political advantage.



(Trailer for "Client 9" above.)

The Lower Echelon Henchmen Working for the Messrs. Big

Other picturesquely entrancing lower echelon heavies provide exuberant and unabashed interviews that keep the film lively. The harlequinesque Republican operative Roger Stone is one of them. Joe Bruno, recently the head of the New York Senate and recently convicted on federal corruption charges for concealing conflicts of interest while receiving hundreds of thousands of dollars from a businessman wanting favors from the Legislature is another. Bruno was sentenced to two years in prison plus three years’ probation and to pay $280,000 in restitution. His conviction and sentence is in doubt because the U.S. Supreme Court has ruled that the federal “honest-services” law he was found to have violated (which makes it a crime “to deprive another of the intangible right of honest services”) is insufficiently specific to be constitutional. (The trial revealed that during his years as Senate leader, Mr. Bruno received more than $3.2 million as a consultant, with his public-employee staff handling much of the work for which he was being paid.)

Top Heavies

The two particularly identified Wall Street titans at whose doorstep Spitzer’s ouster from the governorship is laid are Maurice R. (Hank”) Greenberg, the former chairman of A.I.G., and Kenneth G. Langone, a former director of the New York Stock Exchange. Greenberg and U.S. Attorney Garcia were linked prior to Garcia’s pursuit of Spitzer: Garcia intervened to protect Greenberg from Spitzer’s prosecution by making a faux claim that he, Garcia, would prosecute Greenberg in the future. Greenberg’s A.I.G. is the firm that absorbed $182 billion (yes, “billion”) of the $700 billion bank bailout Congress authorized in 2008. While some of the banks that received bailout money are returning funds, A.I.G. is ultimately expected to succeed in returning only a fraction of what it received.*

(* A complicating wrinkle in straightening out the overall accounting in this is that, to its detriment, A.I.G. was, in the course of implementing the bailout, forced to be a conduit of funds to other financial institutions so that banks like Goldman and Barclays that returned funds to federal government did so with unearned profits, essentially free money, passed to them by A.I.G.. This, however, does not vitiate how great a role A.I.G.’s excessive risk taking had in precipitating and deepening the overall crisis.)

Rose Colored View, . . . Not

In trying to rehabilitate and distance himself from A.I.G.’s problems after the financial meltdown
Greenberg appeared on Charlie Rose and attempted to blame Spitzer for A.I.G.’s collapse, asserting that problems at A.I.G. could have been prevented had he, Greenberg, not been forced out as head by the accounting scandal Spitzer’s prosecution brought to light,. The film contains a snippet of that March 2009 Charlie Rose interview which Noticing New York mentioned at the time. Watching the program back in 2009 Greenberg’s argument to disassociate himself from A.I.G. problems was intriguing and we don’t recall that Rose, being a soft interviewer, challenged him about the improbability of his proposition that A.I.G.’s 2008 $182 billion problem was attributable to events that intervened after Greenberg’s June 8, 2005 departure from the firm. From the film it appears to have been quite the contrary: Greenberg’s efforts to doctor the A.I.G. books* with unreal assets were more likely a warning sign that bad financial practices were catching up with the firm. The scheme involved AIG attempting to get a fictitious transfer of nominal balance sheet assets from Warren Buffett’s Berkshire Hathaway's General Re insurance unit. (For more on this see: AIG's meltdown has roots in Greenberg era, By Lilla Zuill - Analysis, Tue Mar 3, 2009 10:06am EST)

(* Previously, AIG was fined over $100 million for helping other companies cook their books.)

In discussing Greenberg’s maneuvers one of the voices of the people involved attributes as particularly apt to Greenberg the phrase: “All I ask for is an unfair advantage.”

LOL or For Crying Out Loud?

Given that Greenberg and Langone earn the really big bucks* when they play the Wall Street game it is at times howlingly funny in a black humorish way to hear some of their inept disavowals during the movie. Langone maintains that he just happened to know about Spitzer’s purchasing mail orders to pay for escorts because he just happened to have a friend who just happened to be in line behind Spitzer in the Post Office who just happened to look over the Governor’s shoulder and then just happened to guess that what he was seeing would be something Langone would be interested in and know how to interpret. It would be funny were it not for the massive resources these Goliaths can mobilize and misuse.

(* Earlier in the year he left A.I.G., Greenberg transferred A.I.G. stock worth $2.6 billion - yes, billion- to his wife in what one non-Spitzer lawsuit alleged to be a fraudulent transfer.)

Speaking of power, Langone is most recently in the news again for his appointment to Andrew Cuomo’s gubanitorial transition team. (See: Cuomo Names Transition Team and Panels, Spotlighting a Hope for Broad Support, by Nicholas Confessore, November 11, 2010.)

Unequal In the Cross-hairs of the Law

“Client 9" is essentially on the same page respecting the legal investigation into Spitzer’s use of prostitutes as “Inside Job,” another recently released political documentary (still in theaters) that also avails itself of the use of Spitzer as one of its talking heads. Both films propose that Spitzer was suspiciously and unprecedentedly singled out and targeted by the prosecutor investigating the prostitution ring. “Inside Job” which looks at the entire arc of the financial crisis documents the pervasiveness of prostitution and drug use as an accepted part of Wall Street’s high-rolling cooperate culture extending to the very top of the industry and then interviews convicted madam Kristin Davis, who states unequivocally that the prosecutors who shut down her operation had absolutely no interest in leveraging her Wall Street client list into investigations of any Wall Street improprieties. That’s probably true but Ms. Davis is not be the most reliable bearer of such news.*

(* “Client 9" tells us that Ms. Davis, interested in publicity, used Roger Stone, the aforementioned Republican operative, as her campaign manager in a recent run as the Libertarian candidate for Governor- that’s at the same time Stone was assisting the Tea-party/Republican Paladino campaign. Stone was apparently attracted by the idea of using Ms. Davis to keep Spitzer’s downfall in the voters’ minds. Davis ran a competitor service to the Emperor’s Club escort service used by Spitzer and with Stone in the wings she has been saying that she too supplied dates for Spitzer. “Client 9" throws cold water on that assertion, reporting: “New York law enforcement says there’s no evidence of any link.” Still, Stone has managed to sow confusion: Ed Koch should know better but when he reviewed “Inside job”- primarily from the standpoint of endorsing its political positions- he misidentified Ms. Davis as “the madam who provided Spitzer . . . with prostitutes.”)

Countries Where the Law is Malleably Used by the “Siloviki”

The bottom line is that Spitzer, like Bill Clinton, was targeted for an abuse of the law. Like Clinton, they got Spitzer on his sex life. When you start with the man, not with noticeable misdeeds, and then figure out how the law can be shaped to get that man it is an abuse. Having gone to the movie just after reading an article about Putin’s trial of Mikhail Khodorkovsky we arrived in a frame of mind attentive to such abuses. (See: Talking Business, Unyielding, an Oligarch vs. Putin, by Joe Nocera, November 5, 2010.) The Joe Nocera Times article linked to describes the newest trial conjured up to keep Mr. Khodorkovsky, a former Russian oligarch, in jail (he has already spent seven years in jail) as as a purely “sham trial” where, as Mr. Khodorkovsky pointed out in his own statement, the “result is absolutely predictable” thus communicating to all watchers with “stark simplicity” the “obvious conclusion . . . that the siloviki [Russian slang in Mr. Putin’s circle of powerful bureaucrats] can do anything.”

Mr. Khodorkovsky, once worth $15 billion before he was stripped of his company that was then sold off to political insiders, was viewed as a threat to Mr. Putin because he was willing to back political parties opposed to Mr. Putin. The way Mr. Nocera articulates it, Khodorkovsky was therefore convicted of “Kafkaesque” “trumped-up tax charges brought by prosecutors acting on behalf of Vladimir V. Putin” with “what appears to be the complicity of PricewaterhouseCoopers” who bowed to improper pressure from Russian authorities. As such Mr. Nocera asserts:

He has become in the Putin era what Andrei Sakharov once was, a courageous dissident standing up to an authoritarian regime, a living, breathing rebuke to the absence of the rule of law.

Respecting this absence of the rule of law Mr. Khodorkovsky asks in his own court statements whether Russia will be a country “where the law is above the bureaucrat.”

How `Becoming ' is The Legal System’s Malleability to U.S.?

Probably the law in the United Sates isn’t yet so malleable as to be on a true par with the abuses in Russia but the targeting of Spitzer with all the power of the U.S. Attorney’s office is definitely on this slippery slope and anyone who wonders just how dangerously malleable the law has become so as to give our own homegrown “siloviki” unfair advantages need look no further than Atlantic Yards and Columbia University’s seizure of swaths of land by eminent domain abuse. Both those seizures are predicated upon a pretextual use of the legal concept of blight even when Charles Schumer, the U.S. Senator living very near to Atlantic Yards, says he knows there was no blight in the area. Schumer nevertheless tolerates these abuses that are bringing the Ratner mega-monopoly into existence. Watchers of Atlantic Yards progress are likely to have reached the obvious conclusion that ESDC, the bureaucratic sponsoring agency and the NYC-siloviki therefore “do anything.”

But more about Atlantic Yards later; that will be important to the way we intend to wrap up our observations.

Spectacularly-Resourced Investigations Into Hypocrisy

It is not that our Noticing New York perspective is that Eliot Spitzer didn’t do wrong or even that he shouldn’t have been removed from office because of his actions. His hypocrisy was pertinent to his public office holding and his misconduct no mere personal peccadillo deserving of privacy. That is true even if you support the legalization of prostitution. I hate to have to agree with Roger Stone but he puts it correctly when he says in the film: “Don’t bust people who are running call girl rings if you yourself are gonna patronize one.” (The argument that the escort rings were legally selling high-priced companionship rather than illegally selling sex comes across as speciously stretched.) Stone’s being right, however, doesn’t change the frightful inversion of democracy that results if the only way that our public leaders can remain in public office is when power brokers, by their grace, refrain from making adversarial politicians the subject of spectactularly-resourced personalized investigations.

Living by a Two-Edged Sword

There is plenty of complexity of blame for the film to locate in its anatomy. Sorting through some he-said/she-said juxtapositions in the film concerning Spitzer’s famous temper most viewers are likely to come away with the impression that there probably were occasions where Spitzer threatened others with the same kind of personalized vendetta by which his own use of the law and the power of the Attorney General’s office against them would be a concern, for the same very same reasons that the way they later came after him is a problem. Spitzer would apparently refer to being “at war” with those who challenged him. In this there was some `live by the sword, die by the sword’ justice in what happened to Spitzer.

The Emphasis of More Problems That Trooped In

The perception that Spitzer would go so far as to unethically cross boundaries was reinforced by the scandal ultimately refereed to as “Troopergate” where Spitzer made information public about State Senate leader Joe Bruno’s travels, including unflattering information about Bruno’s use of the state's air fleet. The film doesn’t spend much time sorting out the details of this story and is perhaps too kind to Spitzer in its summary. It was no doubt improper for Spitzer to focus on releasing information about Bruno the way he did (including use of the state police force to gather information) notwithstanding the valid public interest in having such information see the light of day (an interest in knowing about all politicians, not just selectively about Bruno). Spitzer made everything he did far worse by the surreptitious way he went about it together with his after-the-fact, ill-fated attempts at denial.

One strange caveat: As the film recounts, Spitzer’s spying?/collection-of-information-about? Bruno’s travels showed that Bruno was meeting with Hank Greenberg. That was almost certainly to plot Spitzer’s downfall. I am sure that some end-justifies-the-means theorists would therefore rationalize what Spitzer did in the name of self-defense.

Critically Needed: Action Not Just Criticism of Wall Street

"Client 9" makes extraordinarily clear that Spitzer in his investigations of Wall Street was performing an absolutely critical function that needs to be championed and needs to continue. You may never want to do business with Bank of America again after you hear the film’s explanation of how, in collusion with Eddie Stern’s hedge fund Canary Capital Partners LLC, the bank used a computer hooked up in its basement to siphon off from the mutual fund market profits belonging to the rest of us. The scheme involved using an illegal manipulation known as “late trading,” trading mutual funds after closing prices were officially closed. And everyone probably remembers Merrill Lynch’s false and misleading stock recommendations.

Proudly Attracted to Defining It Dramatically as “Hubris”

Spitzer is drawn to seeing his fall in the Greek tragedy terms of “hubris.” He has a quote in the film particularly on this point: “You know, it’s like hubris. It’s like those whom the gods would destroy they make all powerful.” (The Greeks also said those whom the Gods would destroy they first make proud and in Euripides’ Medea "Whom the gods would destroy, they first make mad.") Spitzer sees himself as akin to Icarus of Greek mythology who, with his wings made of feathers and wax, fell into the sea when he flew so high that the sun melted the wax.

Icarus: Flying Too High and Flying Too Low- Spitzer’s Successors

People sometimes don’t remember the complete instructions Daedalus, his father, gave Icarus about using the wings he had fashioned for them both to escape from the island of Crete. Daedalus cautioned him not only not to fly too high near the sun but also not to fly too low, lest the sea mists and waves sodden his wings and end his flight that way. Spitzer’s successor in the Attorney General’s office was Andrew Cuomo. Shortly before this month’s election that will promote Mr. Cuomo so that he will also succeed Mr. Spitzer as Governor, the Times ran a story reporting that while Mr. Cuomo as Attorney General was as interested as Spitzer in headlines he was not attentive to the follow through that would take a financial bite out of the misbehaving and compensate those hurt:

. . . the praise is neither universal nor complete, and there are many who assert that Mr. Cuomo has, not unlike his predecessor, been more interested in headlines than in undertaking the tedious chores needed to bring lasting reform, and that he has mishandled, sidestepped or prolonged some public integrity cases.

(See: Mixed Views on Cuomo as Attorney General, by Alison Leigh Cowan, October 26, 2010.)

So for instance, when Mr. Cuomo’s AG office got credit for catching “more than a dozen large health insurers . . . routinely using flawed data to shortchange consumers for reimbursements on out-of-network medical costs” the insurance companies two years later were “still using the flawed data to set payments to consumers” with “almost none of the money won in the settlements” going “to those who had been undercompensated.” Accounting for this perpetuation of the same-old is that a “new system is under construction” being overseen by a “handpicked official who had worked for Mr. Cuomo’s father when he was governor” being paid “$183,000 for what amounts to part-time work.”

The article also notes that “an investigation into whether the administration of Mayor Michael R. Bloomberg [who endorsed Cuomo] and some public officials violated lobbying laws in their redevelopment efforts is still unresolved after two years.” Cuomo also did not investigate Atlantic Yards when asked. Instead he accepted and did not return campaign contributions from its developer. A spokesman for Cuomo during the campaign explained that Cuomo’s ability to retain those contributions was all based on the timing of their acceptance.

So if people are asking the question of whether Spitzer flew too high it should probably alternatively be asked whether Cuomo flew too low. If we are lucky, Cuomo’s successor won’t. Cuomo is to be succeeded as Attorney General by Eric Schneiderman who, during his campaign for the AG’s office, offered to investigate projects like Atlantic Yards and eminent domain abuse.

And, as will be discussed shortly, although the film prompts people to ask whether Spitzer flew too high they should probably also be asking whether in his erratic flight Spitzer also flew too low.

Here is another conundrum: Is it that Spitzer soared too high or is it that things on Wall Street are so abysmal he seemed to soar high only by comparison?

Mythological Dichotomy?

With the film trafficking in the grandeur of Greek god mythology archetypes to define what happened when Spitzer fell to earth it would be tempting to construct out of the Spitzer chronicles, a “hyperion to a satyr” dichotomy if I may borrow Hamlet’s comparison of these extremes:

So excellent a king; that was, to this,
Hyperion to a satyr; so loving to my mother
That he might not beteem the winds of heaven

(Hamlet is comparing his deceased father to the sun god Hyperion and his usurping uncle Claudius to a satyr in Act I, Scene II.)

In other words it would be easy to see the film as dividing Spitzer into two distinct halves, the hyperion-cusader-for-principle and the sex-obsessed satyr. Indeed the film offers some thoughts specifically along these lines when early on it dreamily posits that while we want our public leaders to be gods, humans might philosophically be only hybrids: half angel and half animal. A plea made near the end of the film, though not necessarily adopted by it, that suggests that Spitzer should be charitably viewed as merely human.

The same Act I, Scene II of Hamlet quoted above, similarly dances later with the concept of viewing men as no more than human when Hamlet responds to Horatio’s comment that Hamlet’s father was “a goodly king” by saying “He was a man, take him for all in all. .” Hamlet then proceeds immediately, in his typical moody contradictory fashion, to grandeurize his father saying. . . “I shall not look upon his like again.”

A Political Piece of Work: Spitzer’s Third Side

View Spitzer charitably as only human? Half angel and half animal? This is where I think the movie falls short. It would be less apt to say that `Spitzer was just a man, taken for all in all’ than to say, `taken for all in all Spitzer was just a politician.’ And, as a flawed politician, we shall almost certainly look upon his like again . . . with tiresome repetitiveness, I fear. Let’s look at it this way: Though it may complicate the narrative, Spitzer had not two sides but three. Spitzer not only had his angelically principled side and a second side of animal temper and appetites: He had a third side which was that of the disappointing business-as-usual politician. To appreciate this you will need to know more than the film tells you. It touches upon what Noticing New York cares a lot about, the real estate industry in New York.

Disclosure: Working For Spitzer (Or Not)

Here is a note of personal disclosure that will lead into our Noticing New York reservations about the film: Spitzer was the last of four governors I worked for at the state housing finance agencies, those in order being Carey, Cuomo (the father), Pataki and Spitzer. Though I worked briefly for the Spitzer administration, the Spitzer administration when it arrived was not interested in continuing my services on behalf of the agencies and, taking that as a given, I did not wish to counter by raising the technicality that, legally speaking, my state service ought properly to have continued. Regular Noticing New York readers familiar with our predilections when it comes to proper process and the public purpose might infer that my departure from the government scene might have had something to do with those predilections. Though that might be a reasonable suspicion, it would be subject to far too many unprovables. One day perhaps, I’ll find out what was on the administration mind.

Twelve Years Difference

Substituting for any inferences I might make about my own departure I can observe some other things. Immediately upon coming in the Spitzer administration decided it wanted to do without the services of the individual I told them was most valuable to the agencies. This was an individual push-the-envelope investment bankers had long lobbied to get rid of. Twelve years before there had been some very deft maneuvering on the part of the nascent Pataki administration to retain this individual during the dangerously political lust-for-blood change-of- administration times that ensue right after an election. Initially, there was an interim “transition” retention of this individual, then a position and title change that kept him out of sight and out of mind and then eventually, as was appropriate, he resumed his climb eventually reaching new pinnacles of position at the agencies. Twelve years later the Spitzer administration took the helm and the bankers got their scalp.

Scrambling When the Crisis Came

I doubt that the Spitzer administration saw the financial meltdown coming when they assumed office in 2007. I credit the caution, skepticism, careful review, and stubborn negotiating of this gentleman to whom I am referring as being much of the reason that when the crisis struck the agencies' transactions fared pretty well. I’d like to think I made my own like-minded contributions to forestalling the kinds of problems that might have occurred. I understand that after the crisis struck the administration scrambled to reinvent the wheel and put back in place the style of safe guards that were second nature to this dismissed gentleman and perhaps myself. In between? I think there is evidence the agencies would have done better had he been kept around.

Spitzer as Reformer?

I also noticed that while the Spitzer administration ran on a platform of reform (along with the Alan Hevesi who never took office and was ultimately indicted) the administration seemed to think more in terms of reform applying to others than to itself. It might be appropriate to take as a just-for-instance, the subject of executive compensation, since that is an important subject in the “Client 9" film. In the film the question is whether or not Mr. Langone as a head of a not-for-profit restricted by New York State’s not-for-profit law’s provisions respecting reasonableness of compensation could properly be considered to have earned $139 million (yes, “million”) the year he left his position as head of the new York Stock Exchange. No laws were broken but I found that the idea of a natural, second-nature transparency on this issue was something the Spitzer administration couldn't accepted without breaking stride.

Spitzer and Atlantic Yards

The worst indicators I saw about whether process and the public were properly valued were in regard to Atlantic Yards. Although I saw an indication that the Spitzer administration was going to jump Atlantic Yards to the head of the line giving it an unearned priority over other projects, which would itself have been a bad thing, the most egregious conduct I saw from the Spitzer administration respecting Atlantic Yards I saw from outside government.
I have previously written about how the Spitzer administration ignored critical comment it was receiving about the Forest City Ratner mega-monopoly (including comments relating to state agency reform) and how, beyond that, it was deceptively burying negative comment it was receiving within the bowels of the executive office. (See: Thursday, February 26, 2009, Dear Eliot, . . . other things kept undercover may bear investigation.) That was consistent with what we heard about Spitzer’s reaction when he was approached about the megadevelopment by community advocates who came with New York City Council woman Tish James to meet with him in May of 2005. Back then everyone knew he was on the way to gubernatorial office.

Spitzer met the group bringing an entourage in tow. Reportedly losing his legendary temper Spitzer yelled, apparently willing to use his anger to make his visitors feel wrong for even darkening his doorstep with the issues presented to him. He said he didn’t care about process and he didn’t care about the community. (What I believe is a belated, somewhat inaccurate 2006 reporting of that meeting can be found in the Daily News.)

Why was Spitzer drawing the line and not dealing with the extreme improprieties concerning this major real estate project? Was it because he came from a real estate family himself? (Family real estate money financed the political campaigns that put Spitzer into office. Family real estate money also paid for Spitzer’s phenomenally expensive trysts with escorts that would otherwise have been totally out of the reach on a public official's salary.) Was Spitzer, as a politician, simply picking his fights and retaining allies?

The Goldman Rule: Lines That Shouldn’t Be Drawn

One explanation won’t hold up: You can’t easily differentiate the misconduct on Wall Street from the misconduct in the real estate industry. And, when it comes to real estate finance and the issuance of bonds, a lot of the players are the same: The Goldman and Barclays of the nation’s financial crisis are also involved with Atlantic Yards. Goldman Sachs is also swings over to the ownership/development side: It owns a huge new building in Battery Park City for which it was unfortunately allowed to override the Battery Park City master plan while receiving special subsidy deals and a zoning change to build bigger.

The subsidized, regulated, special-exception world of New York City real estate (and to an only somewhat lesser extent New York State real estate) is unforgivably complex in all its myriad nooks and crannies and, like Wall Street, it is increasingly a world where the power players take advantage of the average Joe and the mom-and-pop operations that represent the economy and livelihoods for the rest of us. Just as there are those who recommend that small players not turn their investment money over to Wall Street investment advisers because it is a rigged game, there are those who give similar advice about not investing in the city’s real estate.

There is a small club of big operators. Tools like eminent domain are discriminatorily wielded to benefit that small group who regularly dine with the Mayor and attend the same “charity” functions but will never be wielded against those in the big boys club. So, for instance, eminent domain is wielded to give Bruce Ratner (together with his Russian oligarch partner Mikhail Prokhorov) a 30-acre mega-monopoly over most of Brooklyn’s major subway lines, but eminent domain can’t be used in Manhattan against the powerful Dolan family to relocate Madison Square Garden to a new facility and give the citizens of New York a new and suitable Penn Station (the long-planned Moynihan Station).* What’s worse is that these government interventions to redistribute wealth from the rest of us to this small club of already supremely wealthy powerful insiders is poor resource allocation. Like so many other artificial interventions to transfer more wealth to the wealthy in our economy, it’s a drag on our economy that holds us back.

(* The spectacular gift that was the old Penn Station was destroyed and replaced by the current rabbit warren to effect real estate deals the industry wanted. The replacement station is pitifully decorated with pictures of the one that was destroyed- see picture.- Click to enlarge. Amazing what the real estate industry will do to the rest of us for the sake of one of their "deals"!)

Did I mention the regulation? The biggest players like Forest City Ratner, Columbia University (or Goldman) have nothing to fear from it. The financial crisis befell us partly because of a neutralized SEC (Securities and Exchange Commission). In both the financial industry and the real estate industry “agency capture,” industry takeover of the regulatory agencies is a problem that simply tilts the playing field more in their favor. (See this definition and discussion.)

Putting the Question of Eloquence Front and Center

As the film notes, we have been seeing a lot more of Spitzer again recently. Spitzer’s reemergence into public life after his fall from grace was predicated almost entirely upon his having something to contribute to the public dialogue. First, there was his Slate Column (does that mean he is competing with the rest of the world of bloggers including Noticing New York?) and then he began appearing regularly as a talking head on the televised media. Now he has a regular program on CNN. Is he up to the job?

We have always wondered about Spitzer’s eloquence. He surely has his well-scripted moments. I saw his campaign speech in its entirety three times. It was a good one, all about attorney general activism. He spoke about how, if the federal government wasn’t going to regulate Wall Street, he as Attorney General of New York was going to use a state’s rights rationale to step into the vacuum.* Hearing the speech three times I was able to notice what others probably couldn’t: Each time the speech was word-for-word, virtually the same. I voted for Spitzer but I was worried about this rigidity and limited range. It should be noted that Spitzer, like Cuomo in the last election, was never tested in the crucible of the campaign because it was a foreordained conclusion that he was going to win. We seem to have had a lot of elections like that in New York recently.

(* Ironic that this film is now partly about the vacuum Spitzer leaves behind him.)

Here is an observation about eloquence: It is often assisted by clear thinking and it is often impeded by an avoidance of obvious connections and analogies. By and large I wasn’t especially impressed by Spitzer’s appearances as a talking head or his grasp of the overall economic picture about which he ventured to talk, for instance, when in September of 2009 he appeared on Real Time with Bill Maher alongside Paul Krugman, a Nobel Prize-winning economist and writer who truly can be incisive and eloquent about the economy. It was Krugman who provided us with his brilliant column, The Madoff Economy, (December 19, 2008). The column showed how easy it was to make connections and analogize what has been going on with the economy as a whole with Bernard Madoff’s Ponzi scheme (including a misplaced idolization of men walking away with a lot of money and assumptions that they know what they are doing):

. . . surely I’m not the only person to ask the obvious question: How different, really, is Mr. Madoff’s tale from the story of the investment industry as a whole?

* * * *

. . . surely those financial superstars must have been earning their millions, right? No, not necessarily. The pay system on Wall Street lavishly rewards the appearance of profit, even if that appearance later turns out to have been an illusion.

Spitzer may have brought most of his Wall Street prosecutions under the Martin Act, the same act used to prosecute Ponzi schemes, but his own eloquence didn’t take flight, making the obvious connections.

The film does contain a Spitzer interview snippet that shows off the kind of talking head stuff that Spitzer was dishing up on the networks as he spoke about reining in Wall Street to address the problems of the economy as whole. While it is not bad, it is about the best we have heard from him:

The issue of CEO comp was something I was trying to get people to take a look at, It was off the rails.

* * * *

The ratio of CEO comp to average worker’s comp had gone from about 40 to 1 to about 550 to 1. CEOs began to just take everything they could. And ultimately that was going to destroy our economy because instead of running the companies to create long term wealth and long term investment, all the games we’ve seen, everything from backdating stock options to maximizing short term profits without sufficient investment for the long term, these are things which are cancers inside the economy.

It is not that the above isn’t true, but it is fragmentary and rather vague when there is so much more needing to be pointed out and said by those put on the airwaves as insightful spokespersons.

Outing Comes To Ouster: A Well Run Dry

Darren Dopp, who resigned as Spitzer’s director of communications over his own role in the Troopergate scandal, suggests that a primary reason Spitzer’s outing lead to ouster was that the “reservoir of good will was empty” drained by Spitzer’s “combative style.” That is probably largely true, especially if the phrase “combative style” incorporates Spitzer’s near vendetta-based crossing of ethical lines in pursuing his adversaries together with his hypocritical holier-than-thou superiority. Still, Spitzer might have had access to a deeper “reservoir of good will” if he had also not been hypocritical about the basic principles for which he was elected. Noticing New York would have been much more reluctant to see him hurried out of office had he been doing and saying the right things with respect to Atlantic Yards. He wasn’t and David Paterson, the Lieutenant Governor, was standing promisingly in the wings with a history of opposing eminent domain abuse. (David Paterson is obviously another politician whose hypocrisy helped usher him quickly out of office.)

Superman Returns?

Go see “Client 9." Just to leave you curious: Do you think you know who Ashley Dupre is? Maybe you don’t. Check out the film. And do you think you know the story about the “black socks”? Even if you think you do you might want to check out the film.

Here is one thing we won’t leave you curious about. Interviewed outside of the context of the film, Alex Gibney, the film's maker, has answered one question that a lot of people will probably leave the theater wondering: Gibney thinks Eliot Spitzer wants to get back into politics.

Eliot Spitzer back in politics? If that’s ever going to happen it is going to take more than Spitzer’s foreswearing call girls and mastering his splenetic rages. Having once promised us a set of Hyperion principles worthy of a sun god, it’s going to take Spitzer’s true adoption of a set of principles that apply honestly across the board. If Spitzer ever adopts such a set of principles perhaps he can then find a voice, the eloquence he has not yet mastered, the eloquence that is there to be claimed by those willing to tell the whole story, including how the New York real estate industry is like Wall Street. Sequestering the satyr won’t be enough. He’ll also need to banish that third side, his less talked about politics-as-usual blind-to-real-estate-industry-abuses side.

Plus Ça Change, (The More Things Change,) Plus Une Chose En Particulier Ne Change Pas: La Transaction Fixée (The Wired Deal)!

At Senator Bill Perkins’ Senate hearing on Atlantic Yards on Friday, May 29, 2009, Assemblyman Hakeem Jeffries questioned whether the MTA and its board members would be acting in accordance with their fiduciary duty to the public if, as the MTA is discussing doing, the MTA and its board act to bail out the financially ailing Forest City Ratner, the proposed developer of the proposed Atlantic Yards project.

What’s Contemplated in Terms of Bailing Out The Developer

In terms of bailout, the MTA is talking about:

1. Letting the developer construct a project of significantly lesser public value under rubric of "value engineering" (translated, that means, among other things, constructing a train yard with 7 tracks rather than 9 or the original 10, delivering a project of much lesser quality, and with less “green space”).

2. Giving the MTA’s property to the developer (property for which the developer did not bid in the first place) for a considerably smaller payment despite this currently being a time of financial need for the MTA. (We are now talking in terms of the pathetically paltry. See Atlantic Yards Report “What could $20 million buy?” series.)

3. Less will be done by the developer up front, and

4. Postponing, even further, the borrower’s obligation to deliver the ostensible benefits of the project. For instance, one housing tower that would be front-loaded with luxury units while others will be postponed.

Further, this proposed bailout is being pushed at a time when we are learning that the project will not, in fact, deliver the de minimus ostensible benefits it was once supposed it would. At least the arena, and probably for a very long time the entire project, will NOT be a net economic positive for New York City according to the reckoning of the City Independent Budget Office. Even when the boosters of the project (the government officials working for the development agencies) were telling the questionable version of the story, which they apparently hoped would sell the project, they said that the completed project would provide the benefits they calculated only upon the passage of 30 years. By current projections it may take 30 years before the project is even complete. Does that mean the “benefits” take sixty years to fully materialize? It seems fair to ask.

Fiduciary Duty Reminder

Not long after the Perkins hearing, Assemblyman Brodsky, who chairs the state Assembly Committee on Corporations, Authorities, and Commissions, followed up on Assemblyman Jeffries' question about the board members’ fiduciary duty to the public. He “warned . . . that, if the Metropolitan Transportation Authority (MTA) board accepts `less money’ for the property destined for the Brooklyn arena, it would “be a violation of the fiduciary duty”--their obligation to act with the highest standard of care. (See: Monday, June 08, 2009, Brodsky: MTA board’s acceptance of Ratner’s lesser offer for railyard would violate its fiduciary duty.)

Time Ushers in Changes (Et Non . . .)

We think the board members of the MTA and ESDC are now in a pretty good fix if they want to vote for Atlantic Yards but want to claim they are not violating their fiduciary duties. This is because time has done a remarkable job of melting away all aspects of Atlantic Yards, leaving nothing but one sinewy strand that won’t dissolve, one single cord that represents Atlantic Yards, its core essence. What is that core essence? It is Atlantic Yards as the wired deal, the mega-boondoggle, designed to serve no one but a single connected developer.

Pardon Our French (For a Change)

What can be a more instructive to learn about this exercise in civic malfeasance than to look, on one hand, at all that has changed, and, on the other, at the very little that has not changed, going back to when the original project approvals were rammed through with a concerted effort to shun a proper public vetting. Hence the title of this article. The French say that “the more things change, the more they stay the same.” (“Plus ça change, plus c'est la même chose.”) But in the case of Atlantic Yards, it seems as if just about everything does change and only one thing does not. We had thought, originally, to title this: “Plus ça change, (The more things change,) plus c'est la même chose particulier- Le Deal (Transaction) Wired!” but we will, instead use what we understand to be the better French and say: “Plus Ça Change, (The More Things Change,) Plus Une Chose En Particulier Ne Change Pas: La Transaction Fixée (The Wired Deal)!” No matter, the facts are perfectly plain in any language no matter the precision of our syntax.

What’s Changed? For Starters, the Economy

We have already written about how the changes in the economy should mean that now is the very time when the public should be expecting a much better deal from any developer it is dealing with. (As opposed to the significantly worse one now proposed for Atlantic Yards.) As we have written, other state and local governments are finding that public funds go a lot further and can buy a lot more considering the downtown in the economy. Furthermore, it is reported that Forest City Ratner is taking advantage of the downturn to get a much better deal from the contractors it is dealing with. (See: Thursday, April 16, 2009, The Great Recession: A Stimulus to Get Our City Back to “Bidness?” and Monday, June 1, 2009, Negotiating With Your Contractor: The Atlantic Yards As Kitchen Renovation Metaphor.)

If anyone tells you that a downturn in the economy is a reason the public should get a worse deal and the developer a better one (See: Friday, June 19, 2009, Keep your eye on the ball: FCR began renegotiating this deal well before the economic downturn), don’t believe them.

What Else Has Changed? Almost Everyone Else in the Cast of Characters, But. . .

It was startling to read the other day a No Land Grab accounting that summed up all of the individual players, public officials included, that have come and gone since the original Atlantic Yards mega-boondoggle was unveiled on the public stage. (See: June 6, 2009, More Disarray for the ESDC: Chairwoman Marisa Lago Quits.) Not only is Starchitect Frank Gehry now gone but Governors: George Pataki and Eliot Spitzer have departed, the latter rather ignominiously (including the way he acquitted himself on Atlantic Yards). It looks as if Governor Paterson is also likely to depart the Atlantic Yards scene sans any distinction unless he exercises his ability (and we would say clear duty) to let Atlantic Yards die the death it so richly deserves.

No Land Grab goes on with its listing, Assemblymember: Roger Green has departed, ESDC Heads Charles Gargano, Patrick Foye, Avi Schick, and Marisa Lago are all listed as departing. No Land Grab’s summing up was before the even more recent reports that ESDC Chairman Bob Wilmers, resigned from his post. (See: Thursday, June 11, 2009, Even more turmoil at ESDC: the Chairman resigns, and a Republican businessman from Rochester will be in charge.) No Land Grab reminds us that MTA heads Peter Kalikow, Katherine Lapp and Eliot Sander also have all departed. From the Forest City Ratner team there were these exits (in addition to Gehry) listed by No Land Grab: Jim Stuckey, Loren Riegelhaupt, Randall Toure. No Land Grab mentions that any key players missing was unintended. We would have added to this list the departure of landscape architect Laurie Olin. Concluding the list are departures from the “Team Nets”: Kenyon Martin, Jason Kidd, Richard Jefferson.

Changed Politics

The politics of Atlantic Yards have also changed. Once there were a few politicians who were sufficiently hornswoggled (or thought others were) to support the project in some (perhaps lukewarm) fashion. More recently, the project hasn’t found that kind of support. (See: City Council candidates don't support AY project, May 08, 2009, May 7, 2009, City Council Races (33rd and 39th CDs): Candidates’ Positions on Development and Effective Action They Would Take to Stop Atlantic Yards and Friday, June 19, 2009, Brennan, other elected officials urge MTA to delay June 24 vote, say hasty decision may hurt transit system.) The only kind of support it now gets is by Marty Markowitz or by the stealth of politicians like Bloomberg and Paterson who seem to prefer not to mention the project when they can avoid doing so.

Political support fell out from under the mega-boondoggle before the recent set of proposed changes that would make the megadevelopment so much worse, before the most recently released information concerning the calculations about the ways in which, for instance, the arena will be a net loss to the public.

IRS Position on Tax Exemption Changed

Even the financing permissible under applicable IRS regulations has changed. The contemplated financing of the Atlantic Yards Nets arena (about the only thing proposed to proceed in the near future) by the peculiar mechanism of “R-TIFC Bonds” (pronounced "Artifice-PILOT"- or "Return Total Intercepted For Costs-Payment In Lieu Of Taxes") is something that the IRS would not now permit for any project of this sort. It is a testament to exactly what we are talking about: Atlantic Yards as a “wired deal,” that somehow this very substantially changed deal may be “grandfathered” under an IRS regulation to allow this single project to issue Artifice-PILOT bonds that probably should always have been illegal. Procuring the IRS ruling involved New York public officials coordinating with the developer in making misrepresentations to the IRS when the IRS ruling was requested. (See: Tuesday, May 19, 2009, Looking back at that IRS letter: did ESDC stretch the truth about the project timetable? and Monday, July 21, 2008, Asking feds not to approve tax-exempt bonds for AY arena, DDDB criticizes city/state letter) Those public officials were likely already inured to the making of misrepresentations to the IRS based on prior similar conduct. See: Wednesday, October 1, 2008, Safety in the Numbers You Pull out of a Hat.)

In the Sea of Change What Doesn’t Change?

It is scary to think that with all that has changed, the economy, the design of the project, the architect and landscape architect, the project’s measurable public benefit (actually its total lack of actual measurable benefit), the politicians, the transaction technicians, only one thing durably remains- The designation of a developer who is on the receiving end of a humongous boondoggle. This fits with the theories of the conspiratorialists who tell us that politicians are just irrelevant intermediaries and that power truly resides in a plutocratic class of businessmen who get to tell politicians what to do. We don’t subscribe to such theories, but we are hard pressed to refute these ideas when confronted by scenarios like what we see playing out now with Atlantic Yards.

The Developer Hasn’t Changed? Let Us Offer a Correction

Actually, it is misleading to say in unequivocal terms that the developer hasn’t changed. The developer is nominally the same developer, but much has changed about the developer. What is different is that the developer is now teetering financially. Forest City Ratner’s credit is in the toilet and we have been watching, wondering whether they will go under entirely. (See: Tuesday, March 17, 2009, Three months later, Morningstar again says Forest City Enterprises stock is worthless.) The developer is certainly not now the kind of strong credit-worthy developer you would rationally contemplate choosing if you were going to hand out a monopoly for the development of a vast swath of the nation’s largest city.

Putting it more frankly, this is exactly the kind of situation where, because of the changes with the developer, public officials ought to be looking for ways to terminate the transaction with the developer.

Contemporaneous Beekman Problems

We found it interesting that, contemporaneously with Morningstar once more calling Forest City Ratner’s stock worthless, the developer stopped construction on its Beekman Tower in lower Manhattan. (See: Downtown Housing Complex May Downsize, by Matthew Schuerman, March 19, 2009.) The official story was that Forest City Ratner wanted to take advantage of the downturn in the economy to negotiate a better deal with its contractors. (You know, that better deal they don’t want to share with New York taxpayers when they do Atlantic Yards as we talked about earlier in this post.)

Musing on Forest City Ratner and Material Adverse Change

The fact is that Forest City Ratner reportedly did get that better deal on the Beekman (See: Savings on Labor Allow Work on Residential Skyscraper to Resume, by Charles V. Bagli, May 28, 2009.) but we were still wondering whether that was the real reason and the only reason that construction on the Beekman stopped when it did. In order for the Beekman to proceed, more bonds needed to be issued for the project. Those bonds could only be issued if they were backed by the bank providing its credit for the transaction. Might the bank have been reluctant at that point to further back FCR’s poor credit? In addition, the commercial real estate market in New York was way down so the value of the Beekman as an asset was probably unattractive additional security. It may not even be good for FCR’s balance sheet. (See: Manhattan real estate in freefall, by Edward Harrison on 22 February 2009.) So was the bank asserting its rights to withhold additional credit to the Ratner organization under the “material adverse change” clause, which the bank ought to have had in the documents whereby it would have been entitled to withhold the extension of credit for the issuance of additional bonds?

Abyss Dancing?

Forest City Ratner is still teetering but we noticed some strange coincidences as FCR danced near the abyss trying to scrounge up capital. Morningstar, (which had once called Forest City Enterprises stock worthless) on Thursday 05/14/09 raised the stocks fair value to $5.50 synchronously with the FCR’s filing of the Form 10-K filed after normal business hours (5:31pm) Wednesday 05/13/09 with the Securities and Exchange Corporation that set forth additional BAD news, and synchronously with FCR’s announcement that it was going to be selling more stock. (See: Thursday, May 14, 2009, Forest City Ratner mints money with new shares, stock declines only 16% coupled with Friday, May 15, 2009, Forest City warns SEC of potential new delays, new costs, and failure to meet (tax-exempt bond?) deadlines.)

Does it make sense for Morningstar to raise the value of the stock when additional bad news undermining the value of the FCR stock was coming out? Did Morningstar, in fact, know about the bad news that was going to come out almost contemporaneously with their upgrade action? We can imagine the dance that must have gone along with these events with someone at FCR probably doing some Morningstar hand-holding to steer things the way they wanted for the important date they would announce the sale of their stock.

We want to observe a coincidence of timing with respect to the following: On the Friday following the above described Wednesday/Thursday events, the Second Department ruled in favor of Forest City Ratner with respect to one of the pending lawsuits against the project. (See: Friday, May 15, 2009, Eminent domain case is dismissed unanimously; appeal in this and EIS case remain as last legal hurdles.) All we can say is, we found this very interesting.

Here is another thing we note. It was just days after FCR’s stock sale to infuse capital that the announcement was made (see above) that construction would resume at the Beekman.

Apparently at least $20 million of the stock being offered to infuse capital into FRC was bought by members of the Ratner family. That has us wondering too. (See: Wednesday, June 10, 2009, What should $20 million buy? How much walking-around money do FCE family members have?)

None of this dancing is likely to be sufficient, without more, to bring back Forest City Ratner from the abyss. Forest City Ratner wants the Atlantic Yards and it wants it on terms, in addition, where New York taxpayers bail it out.

A Change That Maybe Isn’t a Change: Was the FCR “Bait-and Switch to a Bailout” Contemplated From the Beginning?

Atlantic Yards was always designed as a meal ticket for Forest City Ratner paid for by New York taxpayers. We have always observed that the project looks less like urban design than like the perfectly designed sponge to collect the maximum possible public subsidy. Now people are waking up and they are commenting that they see now that there has been a “bait and switch.” (See: Sunday, June 21, 2009, DDDB breaks down the "bait and switch"; New York magazine critic seems to agree.) But the thing about this bait and is that the switch was always built in and part of the project from the outset.

The first thing to realize is that Atlantic Yards was never designed to deliver benefits to the public. That is one reason there was never any legitimate bid and a reason the site is not being built by multiple developers. The next thing is to realize just what was contemplated from the beginning. One can try to blame the proposed Forest City Ratner’s bailout on the economic downturn in the economy but that is not how it actually works.

To quote former ESDC head Marisa Lago, had we all along been speaking with what Ms. Lago has now dubbed “realism” (as opposed to the played-up “bait” version we got promoting the project) we would have admitted from the very beginning that the mega-monopoly being given to Ratner was such an enormously huge one, (Ms. Lago’s term: “transformational project”) that it would be a multi-decade project of perhaps 30 or even 40 years duration. (See: Wednesday, April 15, 2009, Permission to Speak Frankly: How We Know More and Less From Breakfast Interviews With Marisa Lago.) That means that the mega-development could never have been done in a single real estate cycle so encountering the “downturn” was virtually inevitable. So many years being involved also make it extremely questionable how much of the project 80-year-old Frank Gehry would ever have been around to design and supervise. Some bemoan Gehry’s loss: We don’t (his projects leak), but we do recognize how with Gehry’s departure it as been announced that what Forest City Ratner wants to deliver something truly “low-rent.”

What should be recognized is something we have been complaining about from the start: It is a completely backwards process to select the developer first, give them an exclusive monopoly over a swath of city and then negotiate the transaction with that anointed developer after the fact. Proceeding backwards deprives the public of any opportunity to exercise negotiating leverage and, as such, it must be presumed that just as a the downturn was foreseeable as virtually inevitable, the proposal for this bailout was foreseen and always intended.

In the End, For All To See

There is, however, a significant impediment to the inevitability of this proposed Forest City Ratner bailout going forward at public expense, a legal one at that. It has now become glaringly obvious that the proposed bailout shortchanges the public on each and every count. Any MTA and ESDC board member who votes to approve a bailout now will be casting a vote that is conspicuously a violation of their public trust. (No, voting as `instructed’ by the Governor is certainly not an acceptable excuse.) Each director’s vote involves an inescapably stark proposition since there is obviously one and only thing that stands unchanged by time: It is clear that a vote to approve “Atlantic Yards” means a vote to approve a deal for one sole remaining reason . . . because it is wired.

Répétez-vous après moi, s'il vous plaît: Plus Ça Change, (The More Things Change,) Plus Une Chose En Particulier Ne Change Pas: La Transaction Fixée (The Wired Deal)!