“We need foreign capital.”

February 27th, 2013 by De Onion

Not all foreign capital is created equal. We need to be smart about how we get money into Bermuda. In order of the value of foreign capital:

1. Earned from global business and paid as salaries to Bermudians. The paycheques of Bermudian employees by definition come in from overseas and get put straight into Bermudian pockets – then those Bermudians go out and spend it, sending money zinging around Bermuda.

2. Earned from global business and paid as rent/expenses to Bermudians. All the service companies that do work for global business, all the rent payments to Bermudian landlords. Again, straight into the pockets of Bermudians and then around the economy – especially to the service companies.

3. Earned from global business and paid as salaries to non-Bermudians. A large fraction of these paycheques are immediately paid to Bermudians as rents, another fraction to Bermudian businesses in services, and purchases, and a smaller fraction goes with them when they leave.

The worst possible thing we could do is sell local land or companies to foreign businesses. For the most part these transactions tend to just put temporary money into the pockets of the Bermudian former owners at high valuations and then imply an endless stream of dividend payments out of Bermuda’s economy in perpetuity.

365 day a year tourist

November 3rd, 2012 by De Onion

Bermuda’s economy has undergone a shift that few seem to recognise: The rise of global business has spawned the 365 day a year tourist who lives in a Bermudian owned hotel. That “hotel” is actually a rental house or apartment.

We would do well as a nation to rubber stamp foreign exchange generating work permits in exempt companies and seek to build large “hotels” in Hamilton to house these people. With the right policies it can be done, and will cement Bermuda’s place as a global business centre.


November 3rd, 2011 by De Onion

I think if Bob Stewart’s math is correct and the present value of Bermuda’s total public sector debt (cumulative deficits + pension/health liabilities) is somewhere around 100% of Bermuda’s GDP then we’re not far off many of the world’s most indebted countries.

If the PLP continues to shrink Bermuda’s economy and rack up debt at the rate of ~$100-$200 million per year then Bermuda will inevitably default. It will take very radical implementation of government financial control (union-busting) and economic growth (abandoning term limits and welcoming immigration) to avoid this fate.

Hat tip to Denis Pitcher for posting first, but it has been on my mind for a while.

The real debt math

August 12th, 2011 by De Onion

So after watching the OBA’s presentation on the economy last night I’ve got a few thoughts:

Bob needs to take credit where credit is due – even this lowly blogger posted in 2007 about the upcoming drop in tax revenue and potential for a major economic slowdown. Bob Richards and Grant Gibbons were both sounding the warning horn many years before our current economic crisis and being attacked for it by members of the PLP.

As usual, the Premier has failed to address the salient issues and as usual, Bob Richards has provided a technically correct response that fails to put the salient issues into language that laypeople can relate to. He’s getting better and his presentation last night included a number of realistic proposals that would immediately set Bermuda on the right track… but let’s put the budget deficit and debt in a context of our daily lives so we can see how it hurts us each and every day.

There are about 37,000 working people who generate new wealth for the island and provide goods/services. While retirees, schoolchildren, housewives, and other non-working residents are taxpayers too they aren’t generating the wealth that fuels our domestic economy and allows for the consumption of goods and services so we’ll focus on workers because ultimately we (working people) will be paying for this debt.

Bermuda has about 1.2 billion dollars of debt and climbing.

1.2 billion dollars of debt divided by 37,000 workers = ~$32,400 dollars of debt per worker.Now, the real question – how much is the Paula Cox national debt costing each worker every year? This is important because all-else being equal this is how much more money could be in each worker’s pocket through tax cuts such as the cut proposed by the UBP to Payroll tax for people of modest incomes. This annual debt service money is effectively set on fire as far as Bermuda’s economy is concerned; it simply is paid on an ongoing basis to our foreign or foreign-owned creditors. It’s the taxpayer providing $70 million in interest payments for social services for bankers and bondholders. On top of that we need to pay down the debt, making contributions to the Sinking Fund so that’s an additional $25 million per year. $95 million per year total.

70 million in interest plus 25 million in principal equals 95 million per year out of the taxpayer pocket.

95 million dollars per year of interest/amortization payments divided by 37,000 workers = $2570 per worker per year.

So if you are a salaried or hourly worker look at your pay statement and add $214 per month, or $50 per week to your paycheque. Now take it away again – that’s the Paula Cox/PLP debt tax. If you have a job then you have taken effectively a $2570 a year pay cut thanks to the PLP’s financial management. Be sure to thank them!

Political Risk

July 10th, 2011 by De Onion

Well, it’s nice to see some liberalisation of immigration and housing, but these issues highlight what a political risk Bermuda has become.

The problem here is that to repeal the policies is too little too late – the problem is that these policies became law in the first place. Changes to both immigration and housing rules bought with them massive unintended consequences that have seriously hurt Bermuda and Bermudians– from the term-limit induced economic meltdown that began at the same time as the global recession to the blatant discrimination against Bermudians married to expatriates while foreign developers were given carte blanche to get into residential real estate.

This quote really sums it up:

Leroy Douglas, president of the Real Estate Division of the Bermuda Chamber of Commerce said: “I hoped that Government would be more receptive to some of our input. I’m delighted to see this coming to fruition.” He added: “In the past, rules and regulations were put into practice and we were given no opportunity to have a say. This is a start.”

At the core – the PLP politicians did not bother to understand the impact of the rules before they were put in place, and when warned about the likely consequences by experts they were ignored. The inability to listen to expertise is a real cultural problem in the party and is one of the major elements of their unfitness to govern. Thankfully some new ministers are finally getting the message.

Riddle me this…

October 28th, 2009 by De Onion

So, we’re seeing a public-private partnership to build large docks. Smells like an opportunity for more legal corruption.

Cross Island Marina will be built under a private-public partnership between the West End Development Company (Wedco) and South Basin Development Ltd….

“The multi-phased Cross Island Marina project will offer approximately 200 slips, along with support and club facilities. It will include a mix of slip sizes —100 to 250 feet and possibly in excess of 300 feet long — to accommodate both mega-yachts and those smaller in size. The marina will offer exceptional services for yacht owners, captains, crews and their vessels and it is anticipated that a large number of local yacht owners will take advantage of the new facility.

Here are my questions:
– Who is “South Basin Development Ltd.”? EVERY SINGLE SHAREHOLDER.
– Has the contractor been chosen? ie. is this just to keep Correia’s Gravy Train continuing after the cruise ship terminals and other Dockyard work is finished?
– Is it going to be public risk, private profit?
– Why would mega yachts come here to be serviced?
– Is there a shortage of slip space in Bermuda?
– How do the financials work? Who pays for what? How much will it cost?
– What local yacht owners (I can think of 5 “local” boats and some ferries that may be large enough to use such a facility)?
– Where are the people going to come from to run it/do the work?
– How will the average person be better off?

This smells like another hair-brained idea ripe for corruption and self-dealing. Convince me it’s not, given the history of government projects down there the burden of proof is on those claiming not to be crooked.

Slow motion trainwreck.

October 8th, 2009 by De Onion

Looks like the Gazette is picking up on what some of us have been predicting… in 2007 I was bullish on the construction industry because I thought that increases in employment would continue and demand for housing would rise to a corresponding degree. The combination of term limits, tighter financing, and global recession has taken us toward the scenario that became more clear in mid 2008.

Overbuilding of commercial buildings is the culprit this time.

In July 2008 I wrote:

The next casualty if real estate goes will be the construction boom. Prices of construction have already risen substantially in dollar terms If the public’s ability to buy falls then builders will not be able to sell quickly, returns to speculative builders will fall, and some may lose money and those most dependent on leverage will fail while most slow down the pace of building. Then the workers building them may then be unemployed – the failure of education and lure of the drug industry have sent a large number of young Bermudians into the combination of drug dealing and construction work. They are going to be pissed off and the effects on Bermuda will be quite painful.

Denis over at 21square.com has also written about this.

Odds of a large hotel project are very low, although there may be a lot of cleanup work done at Morgan’s Point I think we can be sure that the ultimate beneficiaries will be the usual Friends and Family Plan members. At the same time, the overspending by government during the boom times and deficit spending to fund current expenditure has left the government unable to prudently pursue large capital projects now in a time of cheaper construction.

The Bull Case.

August 8th, 2008 by De Onion

After my recent posts of relative skepticism about the Bermuda real estate market I think it’s worth outlining the bull case for Bermuda real estate. It can be located right here: Royal Gazette Employment Classifieds.

As long as the government continues to allow population growth then Bermuda’s economy will continue to grow largely independent of the rest of the world, and despite poor government (really terrible government could still cause a local recession/depression). However this population growth fuels the decline in standards of living as more of us are packed into condos/human filing cabinets, and spend more of our lives sitting in traffic. This population growth also shields government from responsibility and side effects of having a government producing large numbers of (mostly black, mostly male) people who are only employed because we are building as fast as we can to provide housing for the growing population, so as long as the government continues to keep the demand side for housing growing by allowing net immigration, and as long as they continue to artificially constrain the supply side through incompetent management of urban planning and building control, then we should see prices remain firm.

Of course, we are building a social house of cards by leaving the lower income Bermudians chronically under-housed, and by keeping prices and rents high are transferring wealth from the young and poor to older (mostly white) home owners.

Anyone who claims the PLP is the party of “social justice” is clueless.


July 17th, 2008 by De Onion

Since Bermuda’s government is picking up on the American right-wing’s penchant for outsourcing of government functions it’s probably worth it to start asking the question: Are government contractors more efficient than the civil service?

From the Wall Street Journal opinion section a somewhat slanted view:

One fact about government outsourcing is settled: It sure doesn’t save money. A Washington Post reporter who scrutinized Katrina reconstruction contracts in 2006 found that “the difference between the job’s actual price and the fee charged to taxpayers ranged from 40 percent to as high as 1,700 percent.” To cover damaged roofs with tarps, certain contractors billed the government $1.50 per square foot of roof covered; some of the people who actually did the work got under 10 cents per square foot. Guess who kept the difference.

The issue in my books are incentives – what are the incentives we create when we contract out government functions?

Of Bears and Bankers…

July 15th, 2008 by De Onion

Disclaimer: The following is speculative. I have no non-public information on current banking conditions whatsoever and am very likely wrong, or at least I hope the worst does not come true.

The Royal Gazette picked up a real estate story… just in time for me to finish another – somewhat speculative piece about real estate markets of the future.

The value of a bond is dependent on the amount of the regular interest (coupon) payments and the prevailing interest rates. When interest rates rise the interest payment amount of a bond stay the same, but it’s possible to get new bonds that make a higher interest payment, so the value of the old bond falls.

So for real estate: if interest rates rise, the amount that can be borrowed falls for any given payment amount.

The more that debt is used as a tool to buy property, the more that property will behave like a bond, rising as interest rates fall and falling as they rise. With increasing use of 100% financing and other “innovative” financing methods this part of what happened in the United States. Incidentally, this is why we should be very wary of any government initiative that simply serves to increase the amount of debt that consumers are able to take on to buy a property, such as giving away down payments. They tend to raise house prices in the short run, but if house prices fall and someone has borrowed all the money to buy it then the lender has immediately lost money. If the lender is the government then it’s the taxpayer who is in trouble – which in the USA is exactly what will happen as the US government is ultimately backing much of the mortgage industry.

What I missed is that the lender’s use of Mark to market accounting adds another dimension to the dynamic. And was the driver of the first waves of the credit crisis. Banks are highly leveraged – they often have leverage of on the order of 15:1, which is to say they have large amounts of assets and debt that are based on a fairly small amount of equity. When the value of their assets falls they then have to reduce their lending or raise capital to return their leverage (which they call “reserve ratio”) to more normal levels. As the credit crisis continues it is now appearing quite likely that some major financial players will (or already have) reached the point where their liabilities (debts) exceed the values of their assets, making them effectively insolvent. The US Federal government is then going to start to take these risks onto its balance sheet – as has begun with Fannie Mae and Freddie Mac, both of which would otherwise be sliding into bankruptcy, and if the Fed is not able to stem the decline in confidence those two will in all likelihood be joined by a variety of other financial institutions.

Bloomberg link.

U.S. banks can lend $12 for every dollar raised through the securities, so $100 million of the preferred shares may become as much as $1.2 billion in credit, based on Basel I banking rules.

When prices fall, the bank’s risk of loss in a foreclosure increases. Under the old paradigm with a 20% down payment on a house, it’s rare for banks to take a bath and the bankers are far less sensitive to downturns in the real estate market. This has previously been especially true, where large down payments and substantial discounts on valuing rental income have kept Bermuda banks safe from market declines. However, with first time buyers in Bermuda now being offered the ability to borrow more than 100% provided they live in a property for period, the banks have essentially made an economic loss the instant they write these mortgages (they have origination expenses). Accounting rules determine if banks need to show a loss on their income statement/balance sheets, and so the dynamic in Bermuda may be different if the banks don’t need to start taking huge write downs when prices do start do decline.

The problem is that the sale price of real estate is dependent on the bank’s ability to lend.

*cue ominous music*

Once a bank starts to lose money as house prices decline and credit starts to be constrained then they can’t lend as much so house prices decline and credit becomes more constrained so the banks can’t lend as much so house prices decline… and so on. A vicious cycle. The newest and most greatest loan/value ratio mortgages lose money first – and as prices decline successively older vintage mortgage holders find themselves underwater.

That’s essentially what has been happening in the USA. As house prices have declined mortgage rates have gone up, reflecting the unavailability of credit, which has effectively increased the cost of ownership.

In the US (and to a vastly lesser degree in Bermuda) bankers have decided to abandon risk controls because they have been in an almost generation long bull market for real estate that began with the taming of inflation in the early 1980s and which last had a major shakeup almost 20 years ago. The world has changed and there’s a very real risk that the USA will face massive financial stress as layers of debt unravel, what began with sub-prime mortgages issued by 22 year old Las Vegas mortgage officers has now spread because the growth of the US economy has for most of the past 6-8 years been dependent upon debt creation. The crisis has the potential to be truly crippling for America as the US Federal Government is in terrible financial shape after years of neo-Keynsian policy under Regan and Bush II and may be unable to produce a policy response to restore confidence, which in a worst case scenario will result in a truly spectacular recession and possibly a depression.

In theory, we in Bermuda should have been taking note and creating a sovereign wealth fund during the boom times instead of abandoning financial control in the government and spending hundreds of millions of dollars on farcical projects, and we DEFINITELY should not be spending like drunken sailors now.

Some time ago Bank of Bermuda head Phil Butterfield remarked in his sweeping style that “We have never lost money on Bermuda mortgages.” Sorry Phil, you have lost money on mortgages before and you’re about to again. However, the margins are so large on Bermuda mortgages that we probably don’t have to fear the kind of financial mass destruction that is happening in the United States (all bets are off for Bermuda banking if some major insurers go bankrupt, the government starts talking about exchange control, and a hotel or two closes at the same time).