Not All Money Is Green

I use to be part of a team that sold emerging market bonds for a bank. We consistently made millions of dollars annually. Yet, in many ways, our team was not well respected. In fact, there were other traders and sales people who made less money, contributed less, and were paid more.

It always use to bother me that even though my efforts created more value for the bank other people were paid more. It was as if the money I made was not “green enough” for the bank. I came to learn that in corporate America, pay is not only dependent on technical skills but on political skill as well.  Given the clients I handled I had no political power.

The golden boys at my firm had gone to the best schools and were groomed by the bank to handle the biggest accounts. Their careers would typically start out having them act as back up traders for large accounts and, as they matured, take over those accounts and even larger ones. To their credit, those guys were super smart, worked super hard and did well for their accounts.  In turn, the firm loved them because they maintained a steady flow of income for the banks.

What they did was not particularly hard. They were given the keys to the kingdom. Their real job was simply to not mess up.

My colleagues talked and traded with PIMCO, Fidelity and Soros. They traveled to California and played on some of the best golf courses throughout the U.S.  Meanwhile, I was shlepping around the streets of Bogota, Colombia visiting local brokers trying to successfully close small trades.  The search for those deals had me traveling to some pretty remote places. My hunch had been that there were a lot more deals to be done with some of those financial institutions because they were not being properly engaged and serviced.

The compliance department, the traders and management hated me for bringing these accounts. It was simply outside their wheelhouse and comfort zone…not to mention lacking in the requisite social standing. I traded with family offices in Venezuela, pension funds in Jamaica and trust companies in Trinidad.  Then, after a few short years, I was doing some of the largest trades in my firm with, admittedly, the oddest account list. That’s when I got noticed. It took me years but the money I was earning suddenly became green.

My story is not unusual.

If you study the historical development of the Jewish community in both the legal system and on Wall Street, you see the same story play out. The reason there are so many Jewish lawyers working in mergers and acquisitions on Wall Street is due, in large part, to the fact that early on those positions were looked down upon. None of the banks, or golden boys, wanted to do the grunt work in the legal space. This resulted in that market not being served. Given that many Jews could not get into the top investment banks, they were left with covering the scraps of the “fine print” on deals. Guess what happened?  As that area became in high demand, the only firms that could service the deals were Jewish law firms. (If you want to find out more about this evolution, check out Malcolm Gladwell’s, David vs Goliath).

Even in my current business dealings, I witness firsthand how people are looked down upon when they are perceived to lack the right pedigree. Just recently, I was in a meeting with some pretty high powered people for a capital raise and, by far, the wealthiest man in the room was the most humble and least ostentatious. The manner in which he spoke and his attire suggested that he did not have the means to even be in that meeting. During a discussion round table following the capital presentation, a banker asked this unassuming attendee if he was familiar with a certain well-respected and high ranking bank in the city in which the humble man lived. His reply was, “I am that bank. I own it.”  You could have heard a pin drop as the room went silent. Suddenly, a man who had been previously humored for his questions and comments was the authority in the room…whose every word had the undivided attention of all those present.

After the meeting, I asked him what had driven him to own a bank. He proceeded to tell me that earlier in his career he had lost everything because the bank he used would not extend him credit on the real estate deals he had done. Their refusal   forced him into bankruptcy. He vowed it would not happen to him again. With whatever funds had survived bankruptcy, and what he was able to bring to the table, he bought one of the worst banks around for a fraction of its worth and grew it into what it is today: lucrative, well-respected and top rated. In a room full of lawyers, wall street financiers and tech whiz kids, this man was by far the most successful and least assuming. How had he done it? He saw potential, embraced what others judged as worthless, and then did the hard work.

The famed real estate developer Frank McKinney, who builds only million dollars homes on speculation, got his start buying apartments in the worst parts of Florida. The locations were dangerous and his margins small; but, over time, he grew and transitioned his talents to high end real estate. His success stemmed from the fact that he was willing to do the job no one else wanted to do. When he told his peers about his low end real estate deals he was looked down upon. I would characterize their reaction as “his money wasn’t green enough.” But the experience he gained doing jobs that others would not do propelled him to the heights of his profession.

These stories have a common thread and timeless moral.  Career capital was amassed from a series of unusual opportunities…opportunities shunned by most for their “appearance sake” yet ultimately the source of enviable value for those who could see past appearances and who were willing to do the heavy lifting.



Real Estate Ownership

For years, the financial industry and media pundits have told us that the way to wealth is through real estate. So what do we really own when we buy a house?

Many people feel that once they buy a house they own it; but, if you have a mortgage, its the bank that owns the house not you. Forget to pay your property taxes? The tax man will take your house regardless of who “owns it.”

real-estate-businessThe real estate industry has an entire machine that promulgates the benefits of home ownership. From the ads on TV to radio commercials… the average consumer is inundated with messages assuring that real estate is the way to achieve financial success. Yet, when the real estate market crashed in 2008, many people were wiped out.

What happened?

Real estate prices had become so over-inflated that it was no longer economical to buy.  Without any more buyers entering the market, prices collapsed. It got so bad in some cities such as Detroit that houses could be bought for one hundred dollars!

In fact, business colleagues of mine started a company to capitalize on the rock bottom prices in Detroit.  Because of the huge downturn, the city was literally giving houses away. The municipality was going so far as to raze certain neighborhoods because there was just too many vacant houses. In fact, wilderness began reclaiming parts of the city with deer actually showing up in Detroit!

It wasn’t only houses that were on sale. Skyscrapers in parts of downtown Detroit were selling for under five million dollars. This was crazy when you realize that prime apartments in major cities such as Miami were being valued at the same amount as skyscrapers in Detroit.

The funny thing was that even at rock bottom prices, Detroit had a hard time finding buyers.  If you think about it, it makes no sense that a house could sell for so little.  But, if you truly understand how housing works and the role government plays in that equation, it makes perfect sense.

The $100 price was an only an illusion of the true price of the home. If you bought the home, there were bills that had to be paid; mainly the ongoing tax bill levied by the government that ran north of $5,000 dollars per year. So what my colleagues were really buying was a $5,000 annual liability that they would have to pay.  In addition, in order to buy the house, the old tax bills (tax liens) had to be paid off to make the house current.

This is why Detroit had such a hard time selling its houses for rock bottom prices. Nobody likes to buy a liability, particularly one that would likely increase if more people continued to leave Detroit.  The people who remained would have to pick up the shortfall in property tax revenue created by everybody else who moved.

Detroit became the epicenter of the lie of real estate. There is no such thing as home ownership in the U.S.  We are all tenants. Our landlord? The government. And their claim on your land has first priority as a lien over all other creditors.

Tax liens are all the proof you need to know to prove that the real owner of your house is the government. If you fall behind on your mortgage, the taxes on your property don’t get paid. When that happens, the local tax office will auction off the unpaid taxes that you owe to investors for double digit returns. If your tax bill remains unpaid for a long enough period of time, the tax lien holder owns your house. In terms of debt structure, tax lien holders are senior to mortgage debt.

So for example, if you fall behind on a $300,000 mortgage and a tax lien holder buys a $3,000 tax lien on your property, that tax lien holder now has a lien senior to the mortgage holder. If, by chance, you default and the bank cannot/will not pay off the lien holder, the tax lien holder can be awarded the house. So, even though the mortgage company took the biggest risk and lent most of the money, by law, they are junior to the tax man.

I give credit to the millennials. They see first hand the dangers of owning too much real estate and the stresses it can cause. They have shunned home ownership and seem less concerned about material goods. Out of the crisis in 2008 came the movement to own your own home; but, without having the government as your landlord.

Tiny houses are the solution to owning your house free and clear. The way that that they get around this law is by building small houses and placing them on a trailer. Because the house can be moved by vehicle and house never touches the ground, the government can not tax it. Although the houses are small, they are fully functional and can be bought for as little as $35,000 dollars.


Life in the U.S over the last fifty years has revolved around living in a communities. Home ownership has been a way for politicians (and municipalities) to tax homeowners to achieve their objectives. Public education has been the main selling point for living in these communities and the means by which politicians sold their plans. But look at what happened in Detroit. Citizens rejected the notion that it was worthwhile to stick around for a public education…one that was sub-par at best. Having lived in New Jersey for many years, I know first hand how run down many of these public schools have become.

The tiny house movement, home schooling and the move to online education courses have all become threats to the notion that we need to live in one community and have our tax dollars used for public education.

Man’s natural inclination is to be free… especially from the tyranny of government. Because government uses tax payer monies to pay for local, state and federal employees its fair to conclude that government employees’ lives and their income are more important than us non-government employed citizens. The fact that the government can take away our houses because of a tax bill,in order to keep funding its own sustenance and growth,  just goes to show you what governments’ and politicians’ priorities are.

The tiny house movement might just be the first step toward a nation of true home ownership. Bravo to the millennials on this one! They looked around and saw that more is never enough so they’ve concluded that…less is more.



The House on the Lake

The Martins use to live in a lovely house in Pleasantville. The town was unusual in that it was situated on top of a body of water.


It was an enormous lake that was designed to be in the center of the town. The homes were built around the lake so all the citizens could enjoy the majesty and all of the benefits the lake had to offer.

People came from all over the country to live here because it was so spectacular. And because of this, the local business community flourished. The local bankers and the housing sector benefited the most because of the great demand to buy homes there.

As people continued to move to the town, loans were made to home  buyers and in turn the builders employed thousands of workers to make these homes. The municipal employees that lived and worked there also benefited from the steady work and excellent benefits that the town offered.

Pleasantville was one of the nicest places to live in the world.

There was, however, one small problem. The lake was man made. It always needed an influx of water to sustain itself. Without the water, the lake would dry up, become barren and, in essence, destroy the community. The townspeople knew their livelihood and the value of their homes depended upon the lake being full for if it were to dry up,  property values would plummet, the banks would go bust, and Pleasantville would be no more

The municipality, knowing this, bought water by the truckloads and filled the lake each week. But over time, this got to be a prohibitively expensive and they had to raise taxes on the homeowners to cover this cost. At first it worked but then the  homeowners couldn’t keep paying higher and higher taxes necessary to purchase and transport the water.

So, the municipality decided to print money called Pleasantville dollars. The town started to use this “extra” money to truck in the water, and for a while it worked because  the water suppliers knew that Pleasantville was good for the money. Afterall, it was wealthy, had the best economy and now, a seemingly endless supply of dollars.

Then something happened. The town became addicted to the new money and started to spend it like crazy. Eventually it ran up enormous debts.  Plus,with so  many new dollars in circulation, the value of the Pleasantville dollars started to decline. So, the all its creditors stopped taking the dollars for payment.

When that happened, the suppliers of water stopped bringing water to fill the lake.

Without water, the lake began to evaporate and its level recede. In short order, the beautiful waterfront homes sat on top of a bowl of dry land. A dust bowl.  Because of this, home prices started to decline. People who were overextended on their home loans walked just away from their houses. Banks went bust. People were laid off.  In a few short years Pleasantville became a ghost town.

Sounds like a fairy tale gone wrong right? Well it isn’t. In the last 10 years, this fairy tale gone bad has happened here in the U.S and overseas.

In 2003, Nakheel properties embarked on an ambitious real estate project in Dubai. They literally began pouring sand and concrete into the sea to create a series of islands called “The World”. It was meant to encompass 300 islands covering anywhere form 14,000 to 42,000 square meters. The result? The project defaulted in 2008 (estimated at over 10 billion dollars) and the islands are slowly sinking back into the sea. Like Pleasantville, “The World” was meant to be an oasis of sorts for the world’s wealthy; but, in the end the financial ruin of that project caused devastation in Dubai.

Then there is China. Flush with cash and wanting to take part in the global economic boom, it created hundreds of ghost cities. These are actual cities with high rises and shopping malls. Some of them are the size of Madrid and Hong Kong yet nobody lives in them. They remain totally uninhabited. Economists believe that given the amount of people in China, Communist Party planners created theses cities thinking they would provide jobs and head off the civil unrest that massive unemployment can bring.

So you think the U.S is immune to these types of shenanigans?

The U.S just went through one of its worst recessions in history when the housing bubble burst because of mass hysteria surrounding the belief that the road to wealth was paved through home ownership…not responsible home ownership. Just ownership.

In our tale, the Martin family from Pleasantville went bankrupt. They were unable to pay the mortgage and forced to move to a new city where they are starting over. If it were just a fairy tale gone wrong, we could shrug it off and not retell the story. But the story is being acted out every days as countless Americans have been forced to move and start over. Its so easy to understand the confusion, followed by the anger and mistrust, at those whose solution had been to print more money and create more irresponsible home ownership.

You see, so many of these now wandering Americans thought they had already arrived in Pleasantville… and the view of the lake was just lovely and, of course, would remain that way.