Monthly Archives: January 2013

BrattonAmong other noteworthy details surrounding William J. Bratton’s new advisory contract with Oakland to beef up the city’s police department are Bratton’s ties to Motorola Solutions.

Motorola Solutions is already one of Oakland’s biggest vendors. The company has sold Oakland millions of dollars in equipment over the past ten years, mostly for use by the police. This year alone Motorola will probably bill the city for several million in goods and service.

William J. Bratton is currently a board member of Motorola Solutions, as well as a shareholder in the company. While Bratton’s position at Motorola is relatively new, his advocacy of expensive, hi-tech weaponry and systems for cops isn’t. In fact just three years before he joined Motorola, while he was chief of police in Los Angeles, Bratton oversaw approval of multi-million dollar contracts between Motorola Solutions and his police force.

As he has shuttled in and out of government posts and private corporations over the years, Bratton has grown into the classic revolving door figure, using his connections and prestige to link corporations with public agencies, playing matchmaker and facilitating lucrative contracts. This is in fact why Motorola tapped Bratton in join their board in 2010. According to a Motorola company filing, “Mr. Bratton’s significant experience in law enforcement both in the U.S. and abroad and his insight in criminal justice system operations,” have qualified him to occupy a seat on the board as an independent director. In 2011 Motorola Solutions paid Bratton $100,000 in fees, and another $160,033 in stock awards.

Like a lot of police departments, the OPD already does business with Motorola Solutions, a lot of it.

One of Oakland’s single largest contracts is an $8.45 million deal with Motorola for a suite of computer and mobile communications gadgets known as the Integrated Public Safety Services System, or IPSS. According to City Council reports from 2002 in addition to the $8.45 million to purchase the IPSS, the city also approved spending an additional $5.25 million on a five year maintenance contract also with Motorola, and another $3 million for “non-recurring costs for products and services,” related to the IPSS.

Picture 5

A screenshot from Motorola Solutions’ web site. The company is one of the largest vendors of communications and surveillance equipment to police forces in the United States.

A little background on how Motorola got the Oakland contract can help to shed some light on the big business that is police technology. In 1998 Oakland was awarded a $6.18 million federal grant, aptly named “COPS MORE”, to equip the force with state of the art communications and computing tools. By 2001 the city was preparing to put contracts out to bid for technology companies to develop a Computer Aided Dispatch (CAD) system, Records Management System (RMS), Automated (Field) Reporting System (FRS) and a Jail Management System (JMS) for Oakland’s police.

In 2002 Motorola, being a big cash-flush company, bought up one of the vendors Oakland was in talks with to potentially develop their new police technologies. Motorola, which was already expanding aggressively into the field of police technology —local “security” being a rapidly growing market after 9-11— lobbied Oakland’s administrator and staff to choose the company for one single contract, instead of the planned multiple contracts with multiple vendors. (Motorola registered as a lobbyist with the city of Oakland in 2003) Motorola’s salespeople visited Oakland and did their best to convince the police and city administrator to consolidate the work into one big order. Then they invited Oakland staff to Los Angeles for a meeting. Then, as the city administrator described it in a 2002 report:

“One week after the OIT [Oakland’s Office of Information Technology] Director’s visit with Motorola [in Los Angeles], members of the OIT/OPD/OFD [Oakland’s tech, police, and fire] staff attended the Motorola/Printrak Users Group Conference. Motorola presented its new direction to the conference attendees from across the USA and other countries around the world.  After considering the new direction as presented by Motorola and assessing the fact finding discussions held with the local government users at the Motorola/Printrak users group conference, OIT/OPD/OFD decided to change the course of the project as previously planned.  Rather than proceeding with a multi-vendor solution, staff believes that it is now possible to proceed with a single vendor solution (i.e. Motorola/Printrak).” (Office of Information Technology to Office of the City Manager, “A Status Report From the Office of Information Technology (OIT) On the Acquisition and Implementation of the Integrated Police/Fire Public Safety System and the COPSMORE Grant,” memorandum, City of Oakland, May 14, 2002)

This more or less worked out well for Motorola, and the company has made millions from the contract. The city ended up reporting some problems with the IPSS system, problems that were messing with OPD’s compliance with the federal consent decree. In 2005 the Independent Monitoring Team found that OPD’s “monitoring of MDT [mobile data terminal] traffic is impeded by computer software limitations, and that “there have been difficulties in implementing the original Mobile Module Motorola provided.” (OPD, “Negotiated Settlement Agreement, Fourth Semi-Annual Report,” May, 25, 2005)

Picture 4

A screenshot from Motorola Solutions’ web site. The company is one of the largest vendors of communications and surveillance equipment to police forces in the United States.

In 2010 and 2011, the last years for which information is available, Oakland spent $2.88 million on the IPSS maintenance, a cost that will likely continue so long as Motorola’s system provides the city with its data and communications integration for the police department (“2009-11 Proposed Policy Budget” City of Oakland, p. Y-79).

Another business deal with Motorola went completely haywire and was a small setback in OPD’s efforts to comply with the federal consent decree. In 2007 Oakland spent at least $65,000 on a software program called Evalis from a company named CRISNet. The purchase was meant to provide another technological solution to the department’s continuing inability to comply with the federal consent decree stemming from officer abuses and departmental incompetence. Evalis was a database that was to be used to identify “at-risk behavior activities” of officers, meaning it was a way for OPD to pinpoint bad cops with particularly egregious records of brutality, civil rights violations, and other criminal tendencies.

Just like with the IPSS system that was being developed by a small independent company, Motorola swooped in late in the game and bought out CRISNet, making that company’s contract with Oakland now Motorola’s. Then Motorola Solutions turned around and demanded more money from Oakland than was agreed to previously with CRISNet. Motorola claimed the Evalis system would be expensive to integrate into the company’s own product suites. Oakland balked and cancelled the contract, choosing to develop a system based on the existing Evalis software in place, using the city’s own technical staff.

The City Auditor’s Office, which analyzed the Evalis fiasco in a report last year, was not amused; “Regardless, the result is that OPD lost at least $65,000 on the Evalis system.” OPD claimed, however, that it was Motorola’s fault, and the cops had a point. In a press release responding to the City Auditor OPD stated, “the system was not used because Motorola bought Evalis after our purchase and its support of Evalis was cost prohibitive.” In other words, Motorola Solutions was trying to squeeze more money from Oakland.

Picture 3

Motorola Solutions sells the “connected law enforcement officer,” from a screenshot of the company’s web site.

Motorola has other business with the city, more police gadgets and software, all of which is supposed to bring OPD into the 21st Century and help the department comply with the federal court’s orders.

Between 2005-2007 Oakland also paid Motorola $40,000 to provide technical support for the police radio system. Motorola also sold Oakland 63 hand held Jaguar radios and in-vehicle equipment used with these radios for a total price of $140,000 (“Proposed Policy Budget FY2005-07,” City of Oakland, pp. D-191 and D-193).

Bratton, a supposed “super-cop” who is widely perceived as having modernized and professionalized the LAPD and NYPD, has over the last decade emerged as a proponent of various hi-tech police gadgets and systems.This is partly why Motorola Solutions has given him a board position and stock in the company.

Having built a reputation as a police disciplinarian during the mid-1990s when he ran the NYPD, Bratton began selling his expertise to any police agency willing to pay for it. Bratton created his own consultancy in 2000, the Bratton Group, LLC, and contracted with police forces in the US and “four continents,” according to his official biography. Shortly into his lucrative career as a private consultant Bratton joined Kroll Inc.’s Public Services Safety Group and Crisis and Consulting Management Group, eventually becoming Chairman of Kroll until it was purchased by Altegrity. In a way Kroll got Bratton his job with the LAPD. Bratton was part of the Independent Monitor’s team overseeing that city’s consent decree.

In 2007 Bratton sounded like the Motorola Solutions salesman he would later become when he and LA Mayor Antonio Villaraigosa held a press event to celebrate a panoptic wireless surveillance system the LAPD had installed in a public housing development. “Motorola’s wireless broadband network allows our officers to have information when they need it most to manage an incident, to inform first responders as they arrive at a scene aware of what they will face, and to use video to size up an uncertain situation,” beamed Chief Bratton. “Since the cameras were installed, major crime has dropped 32 percent in Jordan Downs in the last two months, compared to the same period last year.”

Motorola also sells a lot of goods to Bratton’s other former police employer, the NYPD. In fact Motorola employs no less than twelve lobbyists to influence how New York’s officials spend their billions of taxpayer dollars on radios, computers, cameras, and other police technology.

Just to give you a sense of how big a can of worms Motorola has become, Bratton is hardly the most politically connected ex-government figure on the board. Fellow board member Michael Hayden ran the CIA from 2006 to 2009, and prior to being head spook of the USA he ran the National Security Agency, all after spending a career in the Air Force. Needless to say, Motorola Solutions isn’t just tapping police departments through Bratton’s prestige and connections for future business, they’re also selling a lot of widgets to the military and federal spy agencies. But this is all another story….

Frridayopd940 (32)

OPD “mug shots” displayed during a department reunion held in Reno, Nevada in 2005. Many of the shots are of officers employed in the 1970s and 1980s, hired before the PFRS pension system was closed to new members. OPD’s cops from that era were mostly white men.

I’ve been working on an article over the last two weeks about Oakland’s much talked about, but little understood Police and Fire Retirement System (PFRS).

Fiscal conservatives constantly cry that the sky is falling, that the PFRS obligation to Oakland’s retired public safety employees will bankrupt the city, especially because of the massive issuance of pension obligation bonds used by Oakland to finance legally required contributions since 1997. These conservative commentators are mistaken, I think. The underfunding of the PFRS is certainly a problem, but not for the reasons they say.

I’m interested in re-framing the discussion about PFRS, away from the anti-tax, anti-government rhetoric that has so far monopolized things, and toward what I see as the real problem with PFRS: Oakland has a billion dollar obligation to 1,000 retired cops and fire employees who served between 1951-1976, virtually all of whom are white and elderly. Oakland’s police department (and fire dept.) was characterized by overt racist exclusion of non-whites from employment during this era, thus the lucrative benefits of the PFRS pension were made accessible to white city employees. This select club of men (and yes a few women and a handful of Black, Latino, and Asian members) now predominantly live in retirement enclaves outside the city of Oakland. These communities have much different demographics than Oakland, being much whiter, more affluent, suburban and rural, but they benefit from the pension payments that go to the PFRS members who live and shop within their jurisdictions and tax districts.

The PFRS obligation therefore amounts to a $1 billion obligation of Oakland, which today is 2/3 non-white and half below the age of 36. To meet these obligations Oakland’s leaders have put the city into serious debt, and in some prior years even paid millions out of its general fund budget, dollars that could have been spent on services for the city’s residents, or salaries of current employees. This legacy municipal pension obligation is therefore a massive inter-racial and inter-generational transfer of wealth. Here’s the abstract of the article. I’ll post a full draft version with references soon.

In 1976 the city of Oakland, California closed its existing municipal pension funds to new members. New city employers were thereafter covered by the rapidly growing California Public Employees Retirement System. The Police and Fire Retirement System (PFRS), by far Oakland’s largest pension, remained an obligation of the city, however. It’s thousands of vested members retired over the next several decades drawing benefits tied to the salaries of current members of the police and fire departments.

Between roughly 1950 and the present, de-industrialization, white flight, and the tax rebellion decimated Oakland’s fiscal capacity, causing the city’s services to decline dramatically in quality and availability. Beginning in the 1970s the PFRS endowment began to fall short of accrued actuarial liabilities. To meet its legally imposed debt to the pension, the city was forced to pay into the retirement fund out of its general budget, further harming current city residents by imposing austere budgets and cuts during economic downturns.

In 1985 Oakland issued the first ever pension obligation bonds (POBs) to forward-fund the system through a complicated tax arbitrage strategy. The federal government quickly closed this loophole, but POBs remained a favored strategy for the city to finance its legacy pension obligations because they provided contributions “holidays” and were supposed to reduce the overall financial burden on the city caused by its retired cops and firefighters. Subsequent recessions in equities markets further eroded the value of the PFRS system in relation to its growing obligations to retired police and fire employees. By the 2000s a significant chunk of Oakland’s tax-override funds were used to pay retired police and fire benefits, even while the city was forced further to cut much needed services, social welfare spending, and economic development programs.

Because of institutionally racist policies, and demographic shifts after World War II, the majority of the retired city employees benefitting from the PFRS fund are elderly white men who live outside of Oakland, while Oakland’s population has become majority non-white, young, and low-income. The PFRS obligation of Oakland now amounts to a large racial and inter-generational transfer of wealth from the city’s current residents to a very small suburban and rural group of former employees.

housing-market-recoveryThe US Federal Reserve’s quantitative easing program has created a mismatch in interest rates, rates of return on various securities, and home prices, that has prompted big-money investors to place billion dollar bets on what is being called a “recovery” of the US housing market. But if there is a recovery, it’ll be a strange one that benefits only a relatively few well-heeled investors who are making speculative bets on these possible price gains.

Home prices are in fact rising again, according to various housing indices. Home values increased almost every month on a year-over-year basis in 2012 compared to 2011, but this doesn’t necessarily reflect an increased demand from would-be middle class home-buyers. Without an actual rise in real wages and a drop in unemployment, and with a continuing backlog of foreclosures in process, it looks as if the number homeowners in America is still falling. Renting, meanwhile, is becoming the only viable option for millions.

So if it’s not a housing recovery that involves getting American back into their homes as owner-occupiers, what kind of recovery is it?

The answer is that it’s a price recovery. The prices of homes as securities, or commodities if you prefer, are recovering, and they’re doing so in a way that is more or less independent of the actual welfare of the average American.

In September of 2012 the Fed announced that its third round of quantitative easing would include purchases of $40 billion in agency mortgage-backed securities every month into 2015, a buying spree that could total $800 billion. The goal of this, say the central bank’s policymakers, is to support the nascent housing market recovery, which is necessary for a more general economic recovery.

Buying up mortgage-backed securities drives up demand for the smaller pool of mortgage bond bundles in the market, thereby driving down the yields on these remaining bonds, and theoretically promoting reductions in lending rates for home-buyers. Seeing lower mortgage rates, more Americans are expected to buy a first, or second, or bigger home.

The Fed’s purchases of mortgage-backed securities on massive market-moving scale is expected to stimulate demand for securitized housing debt by the investors with capital in search of returns. This in turn should induce banks and other mortgage lenders to reduce rates for home-buyers, thereby tempting millions of renters to take the plunge into home ownership. And if consumers buy homes in droves, shouldn’t the prices rise also?

The funny thing is that home prices have already skipped upward, even though the mass demand has yet to be manifested.

While it’s too early to say if individual buyers will be coaxed back into the market by the Fed, or whether most Americans even have the financial resources left to make such a purchase, two other types of buyers have found the stimulus too tempting to pass up.

Some private equity firms see the historically low housing prices, and the Fed’s actions to drive these prices up, as an historic opportunity to arbitrage a big return for their wealthy clients. According to a recent study of the the burgeoning foreclosure-to-rental business by Keefe, Bruyette & Woods investment bank, firms like Blackstone, GI Partners, and Colony Capital have already allocated between $8 and $10 billion to purchase foreclosed and short sale single-family homes in markets like the San Francisco, Los Angeles, Phoenix, Chicago, Atlanta, Miami, Las Vegas, and other regions with large inventories of empty houses with rock bottom prices.

Blackstone calls its billion dollar housing buy a “single family home rental platform.” Like other private equity investors, Blackstone intends to rent out its housing portfolio to families, many of who recently lost their homes to foreclosure and cannot afford to buy. Bloomberg News reported recently that home prices have ticked upward so fast in some of Blackstone’s targeted markets that the firm is accelerating its purchases in a dash to establish as big a position as possible before the price gains slow.

Rental profits alone have been tempting enough for some of these new private equity landlords. Yields on other possible investments (equities, corporate bonds, government bonds) remain low compared to the profits that can be squeezed from the discrepancy between currently cheap single-family homes, high rental prices, and rising home values. The prices on much of the single family housing in markets like Atlanta, Las Vegas, and Phoenix is said to have “over-corrected” during the financial crisis.

If home prices do keep rising thanks to the Fed’s appetite for mortgage bonds, the new private equity landlords can also cash out, or “exit” their investment, as they say in industry parlance, and book double digit rates of profit. One private equity investor, Oakland, California-based McKinley Capital is buying homes partly for this pure arbitrage opportunity. “McKinley plans to resell the houses in about five years for double what it paid and is targeting 20% annualized returns for its investors, which include wealthy individuals,” explains a 2009 report from the Wall Street Journal.

One of the few publicly traded companies buying up thousands of single family homes, Silver Bay Realty, summarized its business strategy in a prospectus recently filed with the Securities and Exchange Commission; “We believe that rental rates will also increase in such a recovery due to the strong correlation between home prices and rents. This trend also leads us to believe that the single-family residential asset class will serve as a natural hedge to inflation.”

But why own physical real property when the price gains in housing can be harvested in cyberspace trades of synthetic credit derivatives?

The second major play on Wall Street in response to the recent rise in home prices involves financial speculation through some of the same instruments that sped up the housing market’s crash in 2007-08. Hedge fund managers and investment bank traders are currently betting on home price increases through credit default swap purchases, through the ABX.HE Index, and even through direct purchases of non-agency sub-prime mortgage backed securities.

In 2006 a few hedge fund operators used credit default swaps to short-sell subprime mortgage-backed securities. These prescient investors made billions on the trade, billions that were extracted from AIG and other counterparties who expected home prices to continue to rise. Now some of these same gamblers are going long in the same markets.

Goldman Sachs is recommending that its clients buy ABX.HE Index contracts to reap some of the price gains in housing. The ABX.HE Index tracks the prices of credit default swaps that insure against the default of various subprime mortgage-backed securities, many of which collapsed in value during the financial crisis.

Interestingly, the ABX.HE Index was created in 2006, just in time for hedge funds to speculate through it. A 2006 research brief from the Nomura investment bank plainly described the speculative nature of the ABX.HE Index: “As in the indices of corporate [credit default swaps], the synthetic ABS indices allow an investor to express a macro view of the home equity ABS sector by either taking a long or short position in the form of a CDS.” Nomura’s staff offered that investors “may use the index to manage risk and to take advantage of any temporary pricing discrepancies.” In 2006 and 2007 hedge funds and a few investment banks mostly used the Index to take advantage of pricing discrepancies in CDS contracts insuring the toxic bundles of mortgage bonds known as CMOs and CDOs. Prices indicated that these mortgage debts and the insurance contracts on them were safe and high, just as they were collapsing. Now again traders are using the ABX.HE Index to make speculative bets on pricing discrepancies, this time caused very much by the Fed’s intervention.

The Goldman Sachs trader who established that bank’s big bet against subprime debt, Josh Birnbaum, now runs a hedge fund called Tilden Park. Birnbaum has bought perhaps billions worth of mortgage-backed securities in expectations that the Fed’s policies will hike up their values. “Some of these recovery plays are compelling,” Birnbaum told Bloomberg News in October 2012 after it was reported that his fund has gained 30 percent on the year. Others who participated in the 2007’s ‘Big Short’ bet against subprime debts are loading up in the opposite direction now. John Paulson’s hedge fund is said to own billions in mortgage related securities, as is Kyle Bass’s Hayman Capital.

Lucrative returns like this may not be captured by the average American, however. According to the US Federal Reserve Bank of St. Louis home-ownership rates are at a 16 year low. Foreclosures remain a serious problem for many, even if they’ve slowed since the peak in 2008. According to CoreLogic, a firm that sells foreclosure data to the real estate industry, there have been 3.9 million foreclosures completed since September 2008. Fewer Americans will benefit from rising home equity. Instead these gains will accrue to a smaller population of homeowners, with some markets becoming dominated by landlords, including the private equity giants who are gobbling up as much housing as they can.