San Diego continues to reward bad behavior

Hubris and horse manure go together. Just look at the national economic scene: in the past half century, America has turned economic logic on its head, with the gunslingers grinning all the way. Now we face the consequences. It’s true of San Diego too. The old values have been arrogantly jettisoned. Now the piper wants his money.

Let’s begin with the national picture. Fifty years ago, derivatives were almost unknown, and for good reason. People knew them to be gambling instruments, not investments. Back in the old days, guys with green eyeshades and fat cigars peddled puts and calls from smoke-filled offices that were often shared with bookies. It was not a reputable business.

Then in 1973, the Chicago Board Options Exchange was born. It sold these instruments — the puts, calls, strips, straddles, swaps — on an organized exchange. Initially, respectable people cocked an eyebrow at this wide-open gambling. (Derivatives are not assets or investments but bets on the direction of a stock, bond, or other financial instrument.)

Derivatives expanded exponentially and so did hubris. Financial companies claimed they had discovered a magic method for handling risk. Derivatives known as credit default swaps would guarantee a company’s debt. These swaps were then traded over the counter, almost totally unregulated.

Deregulation was critical to this new mentality. The old walls between banks and brokerage houses were torn down. Bank-reserve requirements were loosened; after all, banks had new computerized risk models and new tools — such as derivatives and offshore hideaways — that lessened the need for those stuffy old reserve requirements of yore. Thus arose the shadow banking system, which resembles a Ponzi scheme.

Remember when banks referred to themselves with words like “trust”? Back then, it was not a sin for a bank to be conservative, cautious. Now the face value of global derivatives is more than a quadrillion dollars. The U.S. government is going broke bailing out institutions like Fannie Mae and Freddie Mac, as well as the banks and investment banks that are tied to derivatives. Then when the bankers were drooling over a $700 billion taxpayer bailout, they bitterly opposed the House of Representatives’ passage of a bill to give credit cardholders more rights. The Federal Reserve fears the interconnectedness of the derivatives that caused the chaos; that is another way of saying that these crapshoot gambling chits of 50 years ago now control the financial world. Bear Stearns, Merrill Lynch, Fannie and Freddie, AIG, Lehman Brothers — their woes were all tied to derivatives, most of which are deliberately so complex they are impossible to understand.

Thus did derivatives climb out of dank bookie joints and come to dominate the world financial structure. But even though the government bails out the malefactors, $100 million-a-year executives still prefer deregulation. They want the government to hand them money but not tie their hands in any way. Hubris and horse manure go together.

Just look at San Diego. In 1996, the City hosted the Republican convention. The idea was to tout then-Mayor Susan Golding for the U.S. Senate. Golding’s money manipulator, Jack McGrory, found a source of lucre for supporting the convention: the pension fund. It was tapped. When the labor unions found out, they screamed. So they were promised more benefits. The city council gave workers the ability to purchase, at a below-cost price, benefits for which they had not worked. When the mistake was discovered, employees were given several months to purchase credits at the actuarially inaccurate rates. People piled in, and the City lost $146 million. Employees also got the Deferred Retirement Option Plan (DROP), which is egregious double-dipping. Employees at age 55 say they will retire in five years. They continue getting their salaries, but in addition, 90 percent of their highest one-year salary is deposited into their personal account each year, drawing 8 percent annual interest and cost-of-living adjustments. Then they retire with both an annuity and a lump-sum payment from the DROP account.

With astonishing hubris, officials declared this manna wonderful. They seemed surprised when a huge deficit arose. Then they illegally concealed the deficit in bond prospectuses. “They thought we could increase the benefits and decrease the contributions and there wouldn’t be a deficit,” says City Attorney Mike Aguirre, who is being attacked for going to court to try to do something about it.

The developer Sunroad decided to defy the Federal Aviation Administration by placing a tall building too close to an airport. Mayor Jerry Sanders, who had received major contributions from Sunroad and its owner, tried to help. They were thwarted, but not before Sanders’s ethics czar wrote a hilarious study attempting to whitewash the mayor’s role.

“They ignored the fire problem,” not following suggestions of a fire chief who resigned in frustration, notes Aguirre. “And they ignore the water problem, although we are more dependent on water from elsewhere than other cities,” says Aguirre. But all along, the Sanders administration has assured the public that both the fire-protection and water problems are under control. Yes, horse manure inexorably follows hubris.

Just as derivatives came to dominate international finance, redevelopment came to dominate and distort the local real estate scene. It started with the state telling cities that it would let them take a much larger percentage of the tax increment if they did redevelopment in so-called blighted areas. Prevarication became the main tool of governments: downtown San Diego was declared blighted. The City set up the Centre City Development Corporation and Southeastern Economic Development Corporation, and their missions were to line the pockets of developers by twisting the definition of blight.

When an organization’s core mission is dishonest, there are going to be scandals. An audit has found that Carolyn Smith, president of Southeastern Economic Development Corporation, authorized more than $870,000 in sometimes fraudulent extra pay to herself and her subordinates between 2003 and 2008.

When Nancy Graham was named head of Centre City in late October of 2005, the search committee boasted that it had “conducted a well-defined and thorough national search,” according to a news release. Yeah, it was thorough. The South Florida media at that time were full of stories about Graham’s conflicts of interest with a private developer named Related. I had a Reader column hitting on those conflicts in November of 2005, before she arrived. The California wing of Related was named to do a big project at Seventh and Market. In April of this year, I asked Graham if she had any conflicts of interest. “I have intentionally stayed away from this deal. I was at some meetings where we were not able to reach agreement,” she snapped, adding that she was getting annoyed with “unfortunate rumors or conspiracy theories that get started around here.” It later came out that she had accepted money from Related in 2007 while receiving $248,000 a year from Centre City. She resigned and left San Diego; the project was canceled. Aguirre is prosecuting her.

But Sanders reappointed three Centre City boardmembers who hadn’t done their due diligence on Graham, and the council agreed by a 7-to-1 vote. Donna Frye dissented, saying Centre City needed an ethical overhaul.

When she was running for mayor against Sanders in 2005, Frye said that Centre City should pay back $100 million that it owed to the City. Sanders “said it would kill a cash cow; he was all gloom and doom about the idea,” recalls Frye. But in his new budget, he is asking for money from Centre City, “and everybody says what a great idea he has. I find it entertaining,” chuckles Frye, who sees Sanders’s biggest problem as “the failure to deal with the financial problems.”

San Diego’s basic fault, says Frye, is that “it continues to reward bad behavior,” just as Congress rewards Wall Street’s bad behavior. It takes hubris and buckets of horse manure to do that.