11 June 2010
Christine Richard's book
In 1998, it seems, MBIA, the bond insurance company at the center of Richard's story, bought out Capital Asset Research Management, a company that was in the business of buying "past-due tax bills from cities and counties at a discount and then [trying] to collect on the debts. These tax certificates also gave holders the right to collect interest and penalties and, if the debt went unpaid, to foreclose on the property."
Unfortunately, it soon became clear that Capital Asset had overpaid for the tax certificates. To pretty up the books, rather than writing these assets down and taking a loss, MBIA sold the tax liens to a special purpose vehicle (SPV)'s. The SPV paid MBIA an inflated price for them, having raised that money through the sale of bonds. What was the name of this vehicle? Caulis Negris: somebody's inaccurate and jokey attempt to render the phrase "black hole" into Latin.
Caulis Negris was a shell, it was still MBIA that was on the hook for payments to the bondholders. It turned out that most of the properties on which MBIA, through Black Hole, held tax liens were in the City of Pittsburgh. Richard got a list of all the properties in that city with Caulis Negris liens and looked them over, with the aid of a cabbie. "Almost invariably," she says, "we stopped at the worst property on the block, though sometimes that was a hard call." Some of them had clearly become magnets for drug abusers -- hence the title.
MBIA wanted to write down the value of its Black Hole slowly, so as to avoid any investor apprehension such as might have been instigated by a big single-shot write down. But that was no mere book-keeper's quirk. Its unwillingness to recognize losses "could hold up the redevelopment of entire neighborhoods." Not just one or two isolated blocks either -- Black Hole owned liens on 11,000 Pittsburgh properties.
Her story on this subject ran through Bloomberg News in November 2006. I'll give you a link to it.
Knowledge is warranted belief -- it is the body of belief that we build up because, while living in this world, we've developed good reasons for believing it. What we know, then, is what works -- and it is, necessarily, what has worked for us, each of us individually, as a first approximation. For my other blog, on the struggles for control in the corporate suites, see www.proxypartisans.blogspot.com.