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Chicago Housing
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| Jim Reynolds |
Steve Forbes: Jim, good to have you with us. Among your tasks, you’re chairman of the Chicago Housing Authority. So before we get into investment, here in New York, one thing about Chicago housing is the market seems to supply housing for every income strata.
Jim Reynolds: We do.
Forbes: And you don’t have the acute shortages we have in this city.
Reynolds: No.
Forbes: Why is that?
Reynolds: Well, I’ve been coming to New York for a long time, and I was born and raised in Chicago. I think it’s several fold. One — the number of people, obviously. Clearly, there’s a lot more folks in New York. Two, I also think that the price of real estate in Chicago never approached the prices in New York. They just don’t do it.
Three, candidly, we have available land and communities that can accommodate folks in Chicago. So we have communities, when as you have guys have boroughs out here, and it’s pretty much just Chicago: south side, north side, west side. No east side, that’s the lake. And so folks really live there.
Forbes: That’s where the bodies go, in the lake?
Reynolds: Well, there’s no evidence so far. But when you take those neighborhoods, there has never, ever been a shortage of housing, never. Never an issue.
Forbes: Let me throw a little grenade at you.
Reynolds: Okay.
Forbes: Do you think it has something to do with rent control, where builders, because of rent control in this town, go for high income people and don’t build the kind of housing that you might get if you have a more open market?
Reynolds: Never having been exposed to it because we’ve never had that in Chicago — but I’m very familiar with it in New York, how those apartments stay from one generation to another generation to another generation, and make for an extraordinarily inefficient real estate market — I would have to say that would have to have something to do with it. I’ve never understood rent control, or why rent control. I certainly understand why it may have been relevant at a point, but not why it stayed that way. We never had it, and we never had these issues.
Has Housing Hit Bottom?
Forbes: Talking about U.S. housing, from your vantage point have we reached a low? Or why haven’t the markets cleared yet? I mean, it’s been several years now we’ve had this crisis. Usually there’d be a bottom and then you’d start to see it pick up again.
Reynolds: I think you had been aware of Bernanke’s pronouncements in the last couple of days. One of the big flies in the ointment is housing. And I think one of the big things holding back this recovery is housing.
I think that when you look at the over-exuberance of the real estate market, the lowering of standards in the real estate market, the printing of money — phantom money — for instance in the real estate market, I think it’s been a hole that we’re not near the bottom of. I don’t know if you’re going to get to the bottom of it, as long as the employment situation stays the way it is. I think we really have a lot of wood to chop in real estate.
Forbes: Looking at banks, even though mortgage rates are low — at least anecdotally you hear tales that it’s very hard to get a mortgage even though the rates are low. Has that been your experience and your observations?
Reynolds: It’s my observation from people that I’ve spoken to. And Steve, you’ve been around a while, and you’ve seen how the pendulum swings. It’s like Dodd-Frank now. The pendulum is swinging in a totally different, overly restrictive capacity as it pertains to financial institutions.
I think it’s the same with banks and lending. They have gotten burned and they’ve got real estate on their balance sheet that they’d love to give away right now. I just left some meetings in Chicago, literally where the banks were trying to get some of the either housing authorities or certain of the philanthropic, civic organizations to take real estate for free. Just fix it.
And they won’t take it because the real estate’s not worth the price of the rehabilitation work that has to be done on it. And so yeah, I think that they are not keen on entering that back into that era of free lending. Certainly, down payments have gone up. Income requirements have gone up. And it’s tough right now to get a mortgage.
Loop’s Capital Reach
Forbes: Loop Capital. From a standing start, you’re over 160.
Reynolds: Thank you.
Forbes: Still relatively small, but you’re involved in a number of areas. How do you do that? How do you not get overextended? Or do you just do a handful of people in each area? How do you compete against the big guys in so many areas?
Reynolds: Yeah. Well.
Forbes: And live to tell about it?
Reynolds: And I’m still here. Well, I was just describing my typical visit to New York. And it’s typically hour long meetings all day long through the evenings. We have a pretty significant office here. It’s about 160 of us, but in the businesses that we’re in we’re staffed at a rate that we can effectively do them as long as we manage our client flow.
We have the number of clients that we can handle effectively. We do compete against the big guys pretty much daily; JP Morgan, Goldman Sachs, Morgan Stanley, Barclay’s are our competitors on most of our businesses. And we have a good amount of success because we focus.
And as long as we feel that we take the clients along that we can handle and deliver the level of service that they’re expecting us to deliver, we’re fine. And as we continue to add more clients we add more folks, which have been moving at a pretty good clip so far this year.
The Mike Tyson Strategy
Forbes: Now in terms of, you’re very sizable in the municipal bond market. And it seems that in some areas, you go to — like the southeast — where others are not. Sort of the Wal-Mart strategy, go where the others are ignoring it.
Reynolds: I call it my Mike Tyson strategy. And that is, it’s not a good idea to get in the ring with Mike Tyson in his prime because you’ll probably get knocked out. So as we battle the big guys, it’s not a great idea to go straight at them with the things they do well.
But it’s a very good idea to go at them with the things that they don’t so well, in the areas that they don’t cover as well and with clients that need those services to be done well. So we’ll go to the southeast because that’s not an area that the bulge bracket firms in New York really care about, or the global investment banks care about.
But we’ll do smaller bond deals, $25 million or below, because with their sizeable infrastructures, they don’t care about that. But we’ll add a little bit higher level of service to larger clients, higher than the big guys could deliver because they have such heavy deal flow that there’s only a certain amount of time that they can spend with each client. So we try to kind of do those things that we know either they don’t do well, or get into areas that they don’t focus on as much, or provide services that they just don’t care about, or that might be low margin for them but very high margin for us.
Muni Bonds
Forbes: This gets to munis. You have been quoted for a long time saying the world is not coming to an end in municipal bonds.
Reynolds: Yes.
Forbes: And so far, you’ve been born right. Why did you not feel that this was going to be another 2008 equivalent for muni bonds?
Reynolds: You know, I never could understand, Steve.
Forbes: If investors had listened to you, there would not have been panic selling that you had.
Reynolds: You are so right. I feel bad for those investors last year, 2010, pretty much from the second quarter on, that just redeemed all those municipal muni funds. I feel bad for the portfolio managers that had to face those redemptions and sell at fire sale prices.
We never really had that level of crisis in munis. I think at some point, it became popular to talk about it. It became popular for certain economic prognosticators, for lack of a better term, to just kind of raise the ire of municipalities. And I think it was more tied to politics than it was the economic realities of the situation.
Forbes: When this, of course, gets to pensions, in which Pew came out the other day with horrific numbers on funded liabilities in 31 states. You know about the budgets being in the red. Illinois is the worst in the country right now.
Reynolds: That’s right.
Forbes: And yet, you said Illinois, California, they’re not going to default.
Reynolds: No. And the market has absolutely been responding in that way. The spreads on the bonds on Illinois and California have actually been tightening, meaning yields going down relative to the risk-free assets, which is treasuries. When you look at actuarial liabilities on a pension plan, it’s not like the pension plan is going to have to pay those tomorrow.
You make assumptions about the life of the pension plan, the plan recipients, etc. When we looked out at the options that the pension plans had at their disposal, if they had the will to do so — and many are showing that will — those problems could be fixed.
We’ve seen in Illinois the average length before retirement went from I think 62 to 67. They’ve recalculated the ways that they come to what your pension is — instead of your highest year’s earnings it’s an average of three or five years, and the length of time that you have to work in the position before requirement before retiring.
So there are things. And now pension plans are looking at promised benefits to existing workers to make adjustments. And so when you looked at the weapons that they had in their arsenal, all of these things were fixable. But where the doubt was I think, was whether the public really believed that the politicians would actually fix it. And they’re starting to do so.
Chris Christie And The Debt
Forbes: On the budget side, too, you were encouraged with what happened in my home state of New Jersey a year ago.
Reynolds: I was.
Forbes: Where you could actually have a budget that was less spending than the year before, which was inconceivable not so long ago.
Reynolds: I don’t think you had a Chris Christie type individual there not so long ago. And he certainly is a doer. And he is not married or wedded to tradition. He’s going and taking the bulls by the horns. I know it’s ruffled some feathers, but I think it’s one of the things — it has started a wave around the country of governors, particularly Republican governors, addressing the budget issues very seriously.
Forbes: Well, it even happened in New York with Andrew Cuomo.
Reynolds: A Democrat.
Forbes: Yes.
Reynolds: And he is really aggressively taking on, whether it’s the unions, or whether it’s tradition, or whether it’s wasteful spending, or taking a really hard look at — you know, you always hear the terms of excess waste, but they never defined it. But by definition, they’re starting to look at some things and address them. So I think the governors are doing a pretty good job in those states.
Forbes: So you don’t see a tipping point where say, Illinois goes the way of Greece, 23% interest rates and that kind of thing?
Reynolds: Not even remotely close. When you look at Greece, or some of the sovereigns that have been in trouble, you see debt to GDP of 150%, 175%, 200%, numbers like that. In Illinois, debt to GDP may be 6% or somewhere between 6% and 10%. Generally speaking, in the states. And when you look at interest payments as a percentage of their budgets, it’s below 10%.
Forbes: So would you advise investors? Are munis still a buy now? Is there still that panic out there? Or the bargain’s gone?
Reynolds: They’re not like they were. But I would still be buying munis. And I would feel a great deal of comfort in buying munis. And I absolutely would not be redeeming any of my municipal holdings right now. As I said, I thought it was very painful for very unsophisticated investors who have done so last year, given the panic that we saw or heard from certain individuals. But there was never a foundation to it. And you never really heard, Steve, municipal professionals. If you really think about folks that were saying that, none of them were actually municipal professionals expressing those concerns.
QE2 End Is Priced In
Forbes: Another area where you’ve been outspoken on is QE2. That when it ends in June, it’s not the end of the world, even though Pimco,Bill Gross seems to think it’s going to roil the markets. Your point is it’s already priced in there.
Reynolds: And you and I both know that the ten year bond today is not the yield that you expect on the ten year bond today, it’s the yield that you expect on the bond ten years from now. And so this is what it’s worth today, for that value to be there ten years from now.
So when you look at the day QE2 ends, the market’s going to make a seismic adjustment because it’s over — the market already knows it’s going to end. And actually, Bernanke spoke and he said it’s going to end. And I think treasuries rallied a little bit in the face of that. But I would never say Bill Gross is wrong. He is a very sophisticated investor and a really smart guy. But certainly, the market had factored, I think, those things in.
Forbes: Would you buy treasuries today?
Reynolds: I wouldn’t. I wouldn’t, Steve because I would rather do some other things with my money right now. I think right now I could tolerate a bit more risk and a little bit longer time horizon. So I could wait out a cycle or two. Treasuries wouldn’t be on my menu.
Dodd-Frank And FinReg
Forbes: You mentioned regulation earlier, Dodd-Frank and the like. You’re a relatively small firm even though you’re growing and have done well, particularly in munis. How does a firm like you survive in an environment where you know there’s a cascade of new rules coming where the big guys — they can absorb it, but it hits you pretty hard?
Reynolds: Well, the thing about the boutiques and the regional firms is that they never aimed them at us. Most of the rules and the regulations are really aimed at the large global investment banks, particularly those global investment banks that either took TARP funds or were very active in the subprime market.
That almost, by definition, excluded almost every regional firm or boutique in the country because you needed such large balance sheets to write those. Certainly, it included some of the smaller banks. But when you look at the major restrictions in investment banking from Dodd-Frank; risk taking, they don’t take a lot of risk, or leverage when the investment banking firms would leverage 30 to one or 35 to one. Now you’ve seen the leverage come down to less than 10.
Forbes: Do you think it’s gone overboard, Dodd-Frank, whereas you’ve sometimes indicated? Maybe just focus on get the leverage right, that would solve most of your problems?
Reynolds: I’ve heard you speak on the topic, and I think my view has come reasonably close to yours. I think we just went too far to address a problem that we didn’t address when it was occurring. I mean, Steve, we have to ask ourselves exactly — and I know you have — where was the SEC when this was going on?
Where was the Federal Reserve when this was going on? When all those exotic, crazy mortgage products were being created and nobody said that doesn’t make sense. If you think about it, Steve, what’s the purpose of a no doc loan? Who would do that, I mean? And so what we’re doing is we’re going –
Forbes: Somebody said if you have to eat the cooking, you wouldn’t serve that stuff up.
Reynolds: That’s right. That’s exactly right. And I think that’s where it got. And so now we’re trying to regulate against an event or phenomenon that’s passed. So when you look at the restrictions say, on proprietary trading, or on capital restrictions, or how much of a product you have to retain now, it sort of, I think, is really hampering the competitiveness of one of our greatest industries.
And we’re not a large financial institution, and we compete against them, but I still want them to be great firms. I want them to be great businesses. And you’ve seen the earnings that have come out lately from the first quarter.
And we have not seen that. We have not seen top line growth. We have not seen great margins. We’ve seen earnings come from lowering reserve funds. We’ve seen earnings come from different types of businesses. So the long term implications could be something. Now I know Dodd-Frank is still being worked on. And my hope is that they sort of move back a little bit from where they’re heading.
Forbes: I just came back from Hong Kong where they were chortling. They said when the turnover occurred in 1997, turning Hong Kong over to China, nominally a communist country, who would’ve thought that Hong Kong would have more IPOs than New York?
Reynolds: It’s amazing. I just came back, as well. It’s amazing over there. A lot more.
Bernanke’s Priorities
Forbes: So do you think in terms of growth in the economy, and we’ve talked about housing, that it’s really going to be M&A activity that’s going to get these companies to grow? Since they can’t get it domestically, they have to either go overseas or acquire it?
Reynolds: That’s one of the things that concerns me the most. And if you look at what Bernanke said during his press conference, he had two priorities. And I think he upset a lot of folks when he gave those two priorities. But certainly one was jobs, and two was domestic growth.
As it pertained to the dollar, as it pertained to inflation, he felt, and I do feel, that if we can get this economy growing, we’ll get the dollar back on its footing. The dollar has actually slid a little bit more since he made those pronouncements.
I think the economy is it’s really it’s a conundrum right now. We’ve got to figure out how to get it going. We have not been able to. Tax policy, I know, is something that they’re really trying to address. And I think that’s going to be important to it. Most of the CEOs that I engage with and I talk to — and I talk to them about their growth, my guess is you do the same thing — they talk about growth overseas. They talk about capital investment overseas. They’ve got more cash on their balance sheets than we have certainly seen in modern times with large corporates, and they’re starting to use it on M&A activity.
So I think a lot of the growth is going to be in those large, fast growing emerging markets outside of the U.S. We just have to figure out how to get it growing back here. And I have not seen a clear answer to that yet.
Political Gridlock
Forbes: You expressed before the November elections that you wouldn’t mind seeing divided government again, that when one party controls everything, it usually doesn’t have a good result. But you also expressed the feeling that in this environment, don’t expect a lot to happen. Is sometimes nothing better than something?
Reynolds: I don’t know.
Forbes: Gridlock sometimes is good?
Reynolds: Yeah, sometimes you’re right, sometimes nothing is better than something depending upon what that something is. I don’t know. I think inside, Steve, I think all of us at our core wants to see this economy get moving again. And I think all of us get a little frustrated with the politicking on both sides.
I am concerned, going into another election year, that serious issues that pertain to the economy may not get addressed. Tough decisions that have to be made, whether it’s tax policy or things of that nature, may not get addressed. And that we may hit a period of more positioning and one-upsmanship, if you will, than “Let’s see how we can get America back on track.”
And that really worries me because there are a lot of people, more people than I’ve seen in my lifetime, out of work. And people that never traditionally even thought about being out of work before. People with college degrees, people with master’s degrees, kids coming out of college without jobs. And so I think we’ve got to address some serious issues. And I would love to see them put the politics aside.
Loop’s Infrastructure Fund
Forbes: One final thing. You’ve come up with several new funds?
Reynolds: Yes.
Forbes: And one of them is infrastructure projects?
Reynolds: Yes.
Forbes: Tell us about that. That as these states are strapped, there’s more than one way to get money for infrastructure.
Reynolds: You hit it on the head. I don’t think I could have summarized it any better than that, Steve. Raising taxes right now for states and cities, for the reasons I just talked about, on folks that are either unemployed or underemployed is a non-starter and unfair.
But when you look at some of the assets that cities hold, that states hold, on their balance sheet that are definitely worth money and that they can definitely leverage, and in many cases they could actually lease or go in joint ventures or public/private partnerships on, and improve the level of service delivered to their constituency, it makes a lot of sense.
We’ve been in and around this business now for some time in our public finance practice. And that’s what we do, is basically advice municipalities. The general result, though, is a bond deal. We have also a public/private partnership now for several years, and we’ve done some very big, high profile projects.
The first one, and probably most successful one done in this country, was the Chicago Skyway. But we advise on several others in New York, California, and Texas. When I look at what marrying the expertise we’ve acquired with municipalities and financial relief for municipalities, and structuring deals that are a win/win for all parties, I think it’s natural that at some point, assets that are on the balance sheets of cities and states just because they were always there are not going to stay there.
And that we could see the cities and states get back to providing good government and basic services to people that may not include owning all the highways, owning all the bridges, owning all the water systems, all the transportation systems.
Forbes: So do you have a new fund for Middle East or foreign investors, in terms of infrastructure projects, bringing two sides together?
Reynolds: Well, the one we have will be global. So it’ll definitely be aimed at the U.S. domestic market, but it won’t exclude global opportunities. And I’m on my way to the Middle East now to actually explore some of that. It’s funny that you mentioned that. So I will be visiting Qatar soon to talk about it.
Forbes: Terrific. Jim, thank you very much.
Reynolds: Thanks, Steve. It’s a pleasure.
source: forbes.com
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