Nighthawks, Edward Hopper

The vaunted “third space” isn’t home, and isn’t work – it’s more like the living room of society at large.  It’s a place where you are neither family nor co-worker, and yet where the values, interests, gossip, complaints and inspirations of these two other spheres intersect.  It’s a place at least one step removed from the structures of work and home, more random, and yet familiar enough to breed a sense of identity and connection.  It’s a place of both possibility and comfort, where the unexpected and the mundane transcend and mingle.

And nine times out of ten, it’s a bar.

So, a little story:  Once upon a time there was a scruffy real estate developer who shall go nameless, who made some prudent purchases in a derelict former industrial neighborhood.  He had a dream to turn that neighborhood into a vibrant new community that attracted talented young professionals willing to pay at least $1,000 per square foot to live there.  But times were hard and everyone thought he was nuts.  Now, the developer had three things going for him:  time, empty space, and a son who was actively dating.  The son would come home from a date and say, “Pops, you know that empty storefront down the side street by the pier?  Can my girlfriend turn that into a welding shop?”  And poof! A rent-free welding shop would appear.  Soon the area was populated with ex-girlfriends running quirky artisanal industries, but still times were tough and the talented young professionals would not come.

Here Comes the Grass – Look Out!

Then one day the son came home and said, “Hey Pops, my girlfriend wants to open a bar.”  The father considered this gravely, but finally agreed.  Bars were stinky and noisy and they sold liquor.  But they also attracted people and besides the place was just sitting empty now anyway.  The bar was opened, and lo and behold it became a Third Space:  a place where poor young hipsters could go and hang their weary heads over cheap beer after a long day of yarn bombing, and also where the local shipping company guys enjoyed the jukebox.  Before you knew it, alcohol was flowing freely, and the new locals and old locals were conspiring to illegally convert lofts into residential units and open food co-ops.  It wasn’t long before the bar started serving food, and then one day the unthinkable happened – it opened a café next door with really good coffee and quirky flavors of scones….

Look, I’m not telling this story to glorify bars as the ultimate third space intervention – I’m just trying to point out that bars occupy are particular niche in the place-making ecosystem.  They are like the prairie grass after the fire:  preparing the way for the scrub, and ending with the deciduous trees and their variegated canopy.  They are hardy pioneers, taking root where not much else can sustain life.

Wait, was that metaphor too much?  Yes, definitely.

A Beer and a Friendly Face!

But it’s also the point:  we shouldn’t romanticize third spaces as only being about brightly lit cafes, pedestrianized streets, and the local public library.  Bars work in their scruffy way by offering a place to get away from an overcrowded apartment or a squalid loft or a grimy job.  They are a place where someone with little to spare can go for a change of pace, and in many edgy neighborhoods those folks are overwhelmingly low-income, and many are also young.  These are the bright young things who do the hard work of place-making, but they aren’t necessarily looking for “vibrancy.”  It’s more likely they want cheap beer, a decent burger, and a friendly face.

The goal of a bar patron is to enjoy the primary benefit of any decent third space:  a place to linger.  I’m still looking for someone to generate a “lingering index” so that we can measure the impact of just plain old hanging out – but that’s really at the heart of place-making, and we shouldn’t forget it.

Place-making is thirsty work, so bottom’s up in praise of bars and the Third Space promise they hold!

This past Friday (May 11, 2012)  I had the pleasure of testifying before a joint hearing of the Committee on Small Business, and the Committee on Cultural Affairs, Libraries and International Intergroup Relations of the New York City Council.  The topic?  “New York City’s Cultural Sector and Derivative Small Businesses.”

Hello!  Mouthful!

But I was asked to offer framing comments to complement testimony by my colleagues  from the Naturally Occurring Cultural Districts Working Group.  I’ve skipped the preliminaries (you know, hello and thank you committee Chairperson for this opportunity to yadda yadda) and cut right to the meat and potatoes:  I’m testifying today in my role as an independent researcher currently conducting analysis on NYC cultural organizations and their economic profiles.  I’m pleased to have access to data provided through the Cultural Data Project, a national initiative which in New York State gathers a wide array of financial information from nonprofit cultural organizations applying to access public funds.  

Based on the data collected through CDP, we know a lot about the 723 nonprofit cultural organizations who reported financial data in 2010.  We know they had $2.4 billion in revenues.  We know that more than half that was earned income from a combination of ticket sales ($437 million), classes and workshops ($77 million), touring ($45 million), concessions ($34 million), space rentals ($83 million) and many other types of entrepreneurial activity.  We know that just 12% of that $2.4 billion (about $292 million) came from New York City, and that this amount includes capital funding in addition to program support.  We know this and many, many other details.

But we’ve missed the point.  We’ve placed a burden of proof on the nonprofit cultural sector:  justify your existence by showing us that art and creativity result in cash on the barrelhead.  We’ve required these 723 organizations to reveal, in painstaking detail, their economic innards in ways that we don’t ask of our Business Improvement Districts, our parks, our Industrial Retention Zones, or our corporate retention subsidy recipients.  

And yet, existing community-based cultural networks are already doing the same or similar work:

• Providing technical assistance to member organizations and affiliated partners to improve operations and to access other supports;
• Developing special programs to enhance sustainability, reduce overhead costs, and centralize routine functions;
• Holding events to showcase local partners, attract new consumers, and build local identity;
• Facilitating networking between members and affiliates to create new synergies and expand opportunities for growth;
• Providing marketing support that is community branded while still being producer-specific;
• Engaging the wider community in planning, programming and development to strengthen a sense of place.  

This work is happening within community-based cultural clusters all around the city now, but it’s largely unseen and certainly under-supported.  We must develop strategies as a city that allow us to recognize and support creative clusters.  We must:

• Begin by acknowledging that they exist, and that they exist in a structured way that deserves official and sanctioned designation;
• Create room at the table for these community-based creative sector network leaders to be actively engaged in planning and implementing programs and strategies with their business peers and public partners;
• Reduce or eliminate bureaucratic snags and barriers using the tools and processes of parallel networks;
• Create access to public space for community cultural uses through innovative agreements and carefully crafted exceptions;
• Increase support generally to neighborhood based cultural organizations; and
• Seek equitable diversity of representation and engagement in these efforts from community based cultural partners of differing size, structure, and aesthetic practice.  

We already know enough to affirm that creative clusters have a deep and lasting impact in their communities.  Indeed, in many cases they are already connected to or even embedded within networks of local small business leaders, community development partners, advocates and organizers far in advance of BIDs and other officially sanctioned community partners.  It’s time we made it official, and it’s time we made it stronger.  

My latest rock musical: The Bowery Wars (Part II)

There’s something you should know about me:  I’m a professional amateur.  For the past 7 years I’ve been composing and performing music in original theater works with my wife’s company, Downtown Art.  We’ve just opened our latest piece, Bowery Wars (Part 2), a rock musical about the history of the Lower East Side 100 years ago, Tammany Hall politics, gang warfare, and Romeo & Juliet.  It rocks, and yes you should come see it.

But I’m not just here to flog my latest masterpiece.  We professional amateurs are artists who fly under the radar.  We don’t make our livelihood from our art.  We do other things to put bread and butter together.  I happen to be a highly compensated community development consultant, but many of my peers are dog walkers, administrative assistants, massage therapists, and restaurant workers.  (By the way, in another shameless plug, you should check out my brother Dan’s blog on the lives of restaurant workers and artists in Chicago).  I also serve on the Naturally Occurring Cultural Districts Working Group, and I’m currently doing some research for the Municipal Art Society on revenue trends for the nonprofit cultural sector.  In my previous work I ran an “Arts and Economic Development” giving strategy from the Deutsche Bank Americas Foundation along with my colleagues Gary, Alessandra and Sam (hi guys!).

All in all, you might say I have a rather engaged perspective on the question of where arts and economic development intersect, and where they don’t.  There are four major trends right now in NYC.

1. Research:  the Cultural Data Project is the motherlode of new data.  Built to track the economic life of individual arts organizations, this data set provides a wealth of information regarding income, expenses, audiences, performances and many of the operational parameters of the participating nonprofit culturals.  (In my current MAS research, I’m studying a subset of 700 NYC based nonprofit culturals to understand income trends and how they vary by organizational size and activity.)  But CDP is not alone.  The NEA has been bringing on a whole team of statisticians to analyze data produced by the “Our Town” and “ArtPlace” initiatives, and other foundations and arts industry service organizations are conducting research as well.  The problem is, most of the research is not directly relevant to the nonprofits providing the data.
2. Infrastructure:  The hardest thing about making art in NYC is finding a place to do your work.  It’s expensive out there, folks.  New programs like SpaceWorks (in the process of being renamed), and existing stalwarts like Chashama are about taking under-utilized public and private spaces and converting them to temporary uses for making and exhibiting art.  FAB’s Dance Block is another great example at the grassroots level of helping artists connect with affordable elbow room.  There are a great many other examples, and they are being facilitated by aggressive new funding and financing strategies from the public and private sectors.
3. PlaceMaking:  ArtPlace is probably the biggest example, but Rockefeller’s Cultural Innovation Fund, Deutsche Bank’s Arts and Enterprise program and Ford Foundation’s work Supporting Diverse Arts Spaces all cover similar territory – helping cultural activities and institutions work within the context of their own community to strengthen local vibrancy and expand economic activity.  The idea has been popularized by researchers like Richard Florida and his Creative Class concept, which essentially says that vibrancy attracts talent, and talent attracts economic strength.
4. Grassroots cultural organizing:  the Naturally Occurring Cultural Districts Working Group also draws on this idea that cultural entities are catalysts of local development, but is much more focused on bottom up efforts connected to community organizing, public performance, and local visioning.  In many ways it’s congruent with placemaking strategies, but with a strong and clear intent of avoiding tricky little issues like gentrification and the exclusion of more marginalized local populations.

This is all great stuff, but there’s a problem.  While leaders in these various efforts are all in contact with one another through various channels, there’s been no effort yet to create a strategic framework that better integrates these four key areas of activity.  And we need to.  New York City’s cultural sector is facing a defining moment, and a real opportunity to lay the groundwork for the next 10 years of public/private partnership around the arts.  These four areas of activity are going to be central to this effort, and each could (and should) be leveraged by and connected to the others.  Much could be done to align resources to support specific geographies (hello, Bushwick!) and populations (particularly low income artists and residents), while also better achieving the goals of strengthening communities.  We’ve got to better connect the dots.

Did you ever feel like you need a consultant to help you figure out what you need your consultant to do?  Believe me, you are not alone.  As a recovering executive director (and boy is that going to make a juicy blog post one of these days), I’ve employed many consultants to help with everything from designing the company logo to dreaming up structured finance solutions for distressed homeowners.  Dear Man About Town, you ask, how ever did you do it?

Well, now a consultant tells all:  here’s how to hire someone like me.

A colleague of mine who runs a major consulting firm in town told me that in his experience the majority of consulting engagements don’t succeed in their original intent.  I mean, if we knew what we wanted at the beginning, then we probably wouldn’t need the consultant in the first place, right?  Well, kind of.

There are lots of different kinds of consultants out there, but usually when you’re looking to hire someone on a short-term basis it’s for one of two reasons:

1. You need someone who possesses technical skills that are not currently available on your staff to devise or deliver a particular solution; or
2. You need someone whose overall experience and insight can help you gain insight yourself, allowing you to move your organization forward in a more strategic way.

Some consultants can do both, but most specialize in one or the other.  In a way, the technical skills-based consultants are a more straightforward breed:  they are there to build your website, strategize with you on connecting to media, organize your event, improve fiscal operations, yadda yadda.  They are the consultants for those situations where you know what you don’t know.

But then there are those times when you don’t know what you don’t know.  Yes, even typing that phrase caused a frisson to travel to my former executive director coccyx.  These are the folks you bring on when you have to do strategic planning, board development, fundraising or capital campaigns, staff leadership building, transition planning, and a host of other process related tasks.

Triangulation: viewing from two different perspectives to arrive at a third.

In my fantasies, this consultant would be an avuncular (or auntly) figure with infinite patience and a deep willingness to divulge the secret aracana of such processes to me, setting me on a journey of self-discovery and new insight and guiding me safely to arrival in some promised land of achievement.  The reality is that at best you are bringing on someone who can think with you and help you triangulate to a better approach.

Regardless of which kind of consultant you are looking for, there are a couple of tips that can help you with your decision-making process:

• Do at least three interviews:  I’ve found in the past that the process of talking through my needs helps me clarify what it is I’m looking for.  In many cases, having a conversation with someone who proves effective at clarifying my thinking or defining my needs is a good sign that they understand what the job is.  It’s worth it to at least spend time on the phone with three potential consultant candidates to get your brain fired up.

• Consider work style and approach:  The person you hire should be someone that you feel you can rely on and get along with, in addition to having the skills you need for the job.  Think about the characteristics you appreciate in your staff, and seek a consultant who is a good fit for your organizational culture.

• Structure the engagement in phases or steps with deliverables:  This is where so many engagements fail.  Break the process down into digestible stages with clear points of communication and some proposed goals.  If your consultant is missing benchmarks, they should have an understandable explanation, and a plan to correct or amend the scope of work.  If things are headed off track, or if you re-evaluate your needs and realize that the engagement won’t yield the result you want, then ask the consultant to summarize and submit their existing work product and end the engagement.  Say thank you, pay them for what they did, and move on.

• Be up front about what you hope to spend:  I used to think if I told the consultant I had $5,000 then the project would automatically cost $5,000.  I learned two important things: (1) consultants will give you a better sense of what they can deliver if they have at least a ballpark estimate of the resources you can commit, and (2) building in phases with deliverables will allow you to negotiate at several points along the way.  You may discover the project can be completed more simply and with less cost than you at first thought.  Hurray!  You may also discover that the project appears far more complex, risky or demanding than you thought, and that it may not make sense to pursue further.  Knowing your budget will help you frame what’s possible.

• Be clear about communication procedures:  Most consultants should be in communication with you at least weekly to update you on progress and inform you of any snafus or surprises.  You may want to have them communicate via email with small bits of information more often, or you may want to have a deeper download every other week in person – or you may want a blend.  Ask the consultant how they prefer to communicate and be clear about your preferences as well.

• Have a contract:  Protect yourself and your consultant by having a clear agreement.  It should always cover basic issues including fees and charges, timing, consultant availability, the scope of work, confidentiality, intellectual property, and indemnity.  Be sure to include language that clearly states the consultant is not an employee (and by the way, don’t provide your consultant with corporate business cards, an email address, or a designated phone line – you want to steer clear of any impression that the consultant is an employee for legal and tax reasons).

• Get references:  You’d think this would be common practice, but it’s far more rare than you might suspect.  As to speak with 2-3 previous engagements and question them about the consultant’s responsiveness and reliability, as well as whether the final work product met the client’s needs.

A final note on consultant firms versus solo consultants:  Generally speaking, firms are more expensive than solo practitioners.  Firms have more overhead to support, and can run anywhere from 25% to 50% more per hour, depending the nature of the engagement and the experience level of staff committed to your project.  The strength of firms is that they can bring a diversity of talents and strengths, but make sure you’re clear about the mix you are hiring.  This is your money, and you are making the hire, so feel free to speak directly to any preference you have for a certain partner or line staffer.  Also, make sure you are clear about the time commitment of senior staff versus line staff, and how communication will flow among team members and you as client.

OK, I hope this helps the next time you need someone like me to help you do what you do better.  Remember, the first cup of coffee and the initial advice that comes with it is free.  Bottom’s up!

Reposted from my guest blog on Rooflines.  

New York City has everything, just like this bagel.  Yum!  The secret, as they say, is in the water.  And water, as they say, is life.

But there’s a hole in the bagel, dear Liza, dear Liza.

When I first came to NYC, still wet behind the ears and tasked with helping distribute money from Deutsche Bank’s foundation, I was sent to meetings.  Lots of meetings.  Very interesting meetings, where the community development banking luminaries of the day would hold court:  Carol Parry, Phyllis Rosenbloom, Mark Willis, Marc Jahr, Bob Rosenbloom, Michael Feller, Greg King, Hildy Simmons, Gary Hattem.  Or other meetings, where the United Way, Ford or Rockefeller called the tune, and the jolly members of NYRAG would troop in to talk about the inner workings of domestic microfinance, workforce development, educational reform, financial literacy, homeownership, arts and economic development, you name it.  There was a palpable core of philanthropic leadership really focused on the challenges of the city, and they held significant mass.  Their effect was gravitational: where they led, others followed.  They drove discussion, led thinking, catalyzed partnerships, commanded attention.  You may not have loved what they thought, or how they went about things, but their presence was manifest, and their impact was broad.

New York City still has the strongest and most vibrant philanthropic community in the country.  It’s still provides enormous leadership in social investment strategies, community development finance, building public / private partnerships, and program innovation.  But something has changed.  Over the years, there’s been a growing vacancy in the focus on New York City itself: on its systems, challenges, nonprofit leaders, and neighborhoods.

In short, despite the incredible presence of philanthropic leadership and resource, the attention has moved elsewhere.  I’m not sure that most folks have even noticed.  It’s been a creeping drift, a steady ebb.  A spreading hole in the center of our little everything bagel universe.

Hello, Cruel World

There are some darn good reasons for this, and there are also some sad realities.  Major foundation leaders, having stuck by NYC through the 70’s and the 80’s, watched as the rise of Wall Street and major corporate partners emerged to have a big stake in the philanthropic life of the city.  The banks in particular, with CRA obligations newly minted in the late 80’s, did some very creative work in advancing strategies for community development.  And they got organized:  building entities like the Community Preservation Corporation, the Mortgage Coalition, Neighborhood 2000 (now the Neighborhood Opportunities Fund), Living Cities, and a host of affordable housing finance programs in partnership with NYC’s Housing Preservation and Development - not to mention getting behind such entities as the New York City Housing Partnership, LISC, Enterprise and the Corporation for Supportive Housing.  The Low Income Investment Fund and the Non-Profit Finance Fund blossomed.  AMEX, AIG, Time Warner, the NY Times, and a host of other major corporations joined the fracas, and gave mightily.

As a result, I think major foundation leaders began to feel the the NYC market was crowded, perhaps even saturated.  They began to cast about for issue areas and geographies where their resources could make a bigger impact, where the philanthropic territories were far less trodden, and where their ability to act as conveners and leaders would carry greater sway.  To be sure, the needs of developing economies in other parts of the US and around the world were obvious and desperate, but the shift drew attention away from working in their own back yard.  That was left to emerging corporate partners, and by and large the banks.

Ah, the banks.

Early on, various banking partners were already building specialities (like construction finance or economic literacy), which defined their leadership in relation to the sector.  Then the wave of banking mergers and acquisitions in the 90’s and early 00’s (please say the word “aughts” when you read “00’s” – I think everybody should say “aughts.”  “Aughts” is cool.) forced consolidations and displacements in community development banking.  Teams were dissolved and rebuilt.  Specialities shifted business lines and levels of priority.  Management was moved away from local market leaders to regional or national heads.  Thus began a fragmentation – one that has grown apace since the economic collapse.

Retrenchment.  Reduction.

And I don’t think we’re at the nadir.  NYC has not suffered as bad as many other cities in the economic collapse, but we’ve got our share of problems.  Some real whoppers.  Our symphony of voices is rather quelled, however, and there’s not really a “there” there anymore.  Or, more appropriately, a “here” here.

A New Hope

I must credit the work of stalwarts like the New York Community Trust, which is ubiquitous in its philanthropy and which has managed to hold its own throughout these tumultuous times.  Deutsche Bank has also maintained a strong local presence, as have many community development foundations like Altman, Heron, Gimbel, Surdna, Sherman, and others.  A number of the banks still have local, though diminished, teams with respected individual practitioners.  A special shout out my beloved friends over at M&T and the NY Women’s Foundation, which continue to punch well above their weight in their service to the field.  Fannie is hanging in there (Hang in there, Fannie!), and we must mention Robin Hood, which stands alone in its capacity.  Ford and Rockefeller are still players here.  Gates’ impact has been profound.Yet, the center cannot hold.And this presents an opportunity:  where there’s a vacuum in leadership, there’s a moment for new leadership to emerge.  What will Bloomberg’s philanthropy look like as he extends his legacy beyond his mayoral leadership?  Will Helmsley Trust step up as they begin to define their role in the New York market?  Can former local leaders rebuild teams gone dormant or diminished, and reclaim some of the territory now standing open?

I hope so.  We need it.  Really.  Income inequality is no joke.  Employment disparities, especially among sub-populations like young people of color, are horrifying.  An emerging wave of distressed housing in neighborhoods hard hit by foreclosures is beginning to swell.  And the schools – oh – the schools.  I truly hope that new leadership emerges to pull us back together, to make the hole whole, and to commit the capital required for claiming (or reclaiming) the title of thought leader.

I spent 10 years as a corporate foundation program officer in New York City.  I managed our $5 million community development grants portfolio, which directly supported some 75 nonprofits.  After this, I went on to run the nonprofit intermediary charged with coordinating citywide foreclosure prevention efforts in NYC.  My organization had a $6 million budget, and distributed grants to about 30 nonprofit partners who provided direct foreclosure prevention services.

For at least part of this time, I was a real jerk.

I was the kind of funder who sat across the table from you and didn’t say a word for about the first 30 minutes while you went through your presentation.  I then spent the remaining 30 minutes grilling you about all the things that could go wrong with your program, or all the challenges it could face, or the holes / surplus on your balance sheet, or the weakness of your second line management, or the how you’d meet the gap in your proposed budget, or the timing of your implementation, or the proposed outcomes (ah, the outcomes… the outcomes…).  This is of course assuming that I knew anything about the program area in which you were working.  If I didn’t, then I would nod my head sagely and tell you I’d get back to you later.  Which I didn’t.

And this is if you were lucky enough that I returned your call or email.

And of course then there were the proposals that sat on my desk for weeks, then months.  Those carefully crafted 10 page proposals with footnotes and attachments – built to specification for the objectives of my particular program area.  But still they sat.

And then there were the site visits that I never made time for, and the reports I never read. (Yes, I got your report – it went straight to the file with a check mark for the grants administrator to note that you had fulfilled your reporting requirement.  The inner pages were ne’er besmudged with my fingerprints.)

And then there were the turndowns.  Oh, the turndowns.  Coming late if they came at all, letting you know how competitive the process had been and that unfortunately we couldn’t fund everybody.  That last bit was true, but I could have been nicer.  I could have provided some feedback to make your proposal stronger next time.  I could have at least called after you went through all the work of responding to the lengthy RFP.

I know – fat lot of good that does you now, my former almost grantees.

But I’ve learned a few things.  Giving away money, even someone else’s money, is a position of privilege and power.  It is a hard job, I understand.  Many people want to meet you, speak with you, get your attention, make you a friend – it’s an occupational hazard.  But it’s very easy (at least it was easy for me) to resent the attention, or dismiss honest efforts to build a connection, or to avoid people because of this position.  Hiding out is just so tempting.  But in hindsight I could be arrogant, dismissive, and unfair.

All funders should be required to go out and raise money.  They should join the board of a nonprofit that they care about (preferably one that’s small, local, and making a real difference in their community, but that’s terribly under-resourced), and try to raise some serious cash.  It’s an incredibly humbling experience.  I did it, and it taught me a lot of “golden rule” type lessons about the funder / grantee relationship.

The experience changed me, and I made a number of commitments:

• Be Accessible:  I really tried to answer all the phone calls and emails.  That’s hard!  Visible funders get a lot of requests.  I couldn’t meet with everyone, but in many cases I would at least set up a phone call and talk them through our program support areas.

• Be Helpful:  When I did connect with folks I tried to really listen to them about their programs and objectives to look for fits.  I gave feedback on how to present their proposal, including specific advice about how to discuss the relevant program.  Many times I would also try and think of other funder contacts who might be interested in seeing the proposal as well.

• Be Honest:  When someone’s not a good fit, I tried to tell them right off.  I also tried to let them know if I thought they ever could be a fit, and how they might address the gap.  If I turned someone down, particularly when a request had advanced to serious consideration, I called them and spoke to them about the decision.  

• Don’t Make Unnecessary Demands:  I finally realized that I needed to change our RFP process.  The RFP’s were too detailed, and groups that could have been potential awardees wouldn’t submit because they didn’t think their chances merited the amount of work involved.  I had always conducted information sessions before the RFP due date, but I expanded these to include panels of previous awardees discussing key aspects of their successful proposals and their projects.  Finally, we changed the response process to begin with a 2-3 page project summary response.  After we vetted these, then we would invite a much smaller pool to write full proposals, insuring that finalists had a much more competitive chance.

• Be Even More Helpful:  When someone became a grantee, I tried to use reports and site visits to offer support to the program and the organization.  This could range from referrals to other groups who were successful in similar projects that might offer some insights, to referrals to trade associations and intermediaries who could be helpful, to discussions with management about organizational challenges (staffing, leadership development, transition planning, and so on).  I felt it was my role to become an ally to the organization, not just a pocketbook, and my broad exposure to other stakeholders in the sector allowed me to offer important insights and resources that went way beyond the money.

I believe that philanthropy should balance relationship management with assessment and evaluation.  Relationships ultimately form the core of sound philanthropy – they are necessary to insure the deep knowledge required to support and groom programs and organizations for success.  Privilege and power can easily become barriers, and it takes constant awareness to combat these tendencies.

I wanted to tell you what I would do if I ever get the chance to do it all over (and after this post, that’s pretty damned unlikely).

Next time, I promise that I won’t be such a jerk.  

Hurricane flooded I-10/I-610 interchange, New Orleans, LA

Reposted from my guest blog on Rooflines:  In the halcyon days of my youth, way back in 2006, I went to New Orleans.  I traveled there at the behest of the corporation that I worked for at the time, as we had made a $2 million disaster recovery commitment to the city, and we were trying to figure out how to spend it.

Now, there’s two things you need to know about spending $2 million: (1) that’s a lot of money, and (2) it’s really not very much money at all.  When you get right down to it, in dealing with a post-crisis situation of the scale of Hurricanes Katrina and Rita in the troubled city of New Orleans, spending that kind of money in a way that was both responsible and impactful was a damned hard thing to do.

So there I am, the well-meaning Yankee, fresh off the plane in my shiny city slicker best, traipsing through the Lower 9th Ward.  I was there several months after the floods had receded, but it was still a silent, mud-stained, wracked and ruined wasteland.  I remember picking up a dirty and detached doll’s head (Woody, from Toy Story – a memento I’ve kept with me always.  He’s staring at me as I write this now), and thinking, well, I’ve got to start somewhere.

So I started asking around to everybody that I could think of.  I had friends who’d grown up in the Big Easy, and we got on the phone together and made a dozen calls, inviting their local friends still in town to get together for drinks that night.  They were young hipsters and professionals: designers, tech geeks, journalists.  We hung out in one of the sleek, still functioning hotel lobby bars along Poydras Street and I asked them to tell me about their city, their work, and their concerns.  It was a long list:  an overwhelmed city administration, an anemic nonprofit sector, corporate leaders who were MIA, moribund police and courts, and a long history of blight and abandonment suddenly made 100 times worse by the damage of the storms.

As the night wore on, I reflected on the work I normally did in the community development sector back in NYC.  I began to realize that there was a great deal I was taking for granted among the various partners I worked with.  As much as my colleagues and I might have complained about the troubles we faced, and the apparently intractable difficulties of stabilizing low-income NYC neighborhoods, frankly, that weren’t nothin’ compared to what New Orleans was going through.

I began to understand that, in comparison, NYC worked pretty darn well.  Why?  What made it work?  How did those parts fit together?

And suddenly I realized that there were parts.  Indeed, there was something like a whole ecosystem that allowed services to be delivered, housing to be built, programs to evolve, risks to be taken.  Roughly speaking, they fell into the following categories:

President Jimmy Carter touring the Bronx on Oct. 5, 1977 - Teresa Zabala/The New York Times

• The Nonprofit Sector:  Every city has a nonprofit sector.  In the case of NYC, many of the groups that I worked with in community development had evolved from the bad old “the Bronx is burning” days – organizing local residents and reclaiming neighborhoods street corner by street corner, vacant building by vacant building.  Over the years, they grew quite sophisticated by developing better strategies for raising philanthropic capital, securing government contracts to deliver services, and earning revenues through becoming builders in their own right (and retaining the relatively generous fees that stem from building new housing and community facilities).  They reinvested this capital in further expanding programs and capacity.  Today, we have an entire cohort of nonprofit organizations and nonprofit leaders who learned from doing, and who did it with darn little.

• The Public Sector:  At first, the City’s solution to the collapse of the real estate market in NYC was to take over those really bad buildings and become the landlord of last resort.  It was an understandable intention and a logical reaction given the lack of alternatives at the time.  But running deeply distressed properties on a tight budget managed by a substantial bureaucracy was not really what you might call a recipe for success.  Under the Giuliani administration, NYC started finding ways to divest itself of that huge portfolio of buildings and vacant lots and get out of the business of being a landlord.  I have no love of the former Mayor’s approach to governing, and I don’t agree with all the decisions made about how to dispose of those properties, but when I look at how many neighborhoods have benefited from the renewal of those properties by new owners I have to admit it was a far better solution in the main than what we had before.  The City sold buildings for $1 to those who would agreed to either fix them up or knock them down and make something even better.  It developed numerous programs and strategies to support nonprofit affordable housing developers, local entrepreneurs, and even corporate developers who had never built affordable housing before.  It created many incentives to tempt banks to lend.  In the end, it converted an enormous number of distressed and abandoned properties into productive and occupied homes.

• The Banks:  In 1977, the Community Reinvestment Act was born.  The idea was to create incentives for banks that took deposits from residents of low-income communities to provide credit back to them in the form of property, business and consumer loans.  Banks didn’t love this at first.  And it got even worse in the mid 1990′s when the accountability requirements to insure compliance with CRA were significantly expanded.  But then a surprising thing happened:  the banks discovered that there was both a real appetite for credit in these communities, and that low-income borrowers did have the discipline and resources to repay.  When the Low Income Housing Tax Credit created really steep incentives for corporations to invest in the creation of affordable housing, things really began to take off.  Banks realized that they needed local nonprofit partners and the capacity of the city to invest in buildings at scale.  Local partners knew what sites could be developed, and could effectively engage local partners to support that development.  HPD and other public sector partners worked with the banks to leverage those private dollars through public incentives, and the housing sprung up like mushrooms after rain.  As a matter of fact, NYC became an overbuilt city for a short while there in the 1980’s – too many places to live and not enough people.  Of course, this was all before rampant, unchecked securitization stepped in and ruined the party.  Bad banks!  Naughty banks!  But every one of those very naughty banks still has a team or two tucked away that’s exclusively dedicated to making those CRA based loans to develop affordable housing, invest in economic development, strengthen financial literacy, and all kinds of other nifty and (slightly self-interested) noble deeds.

• The Philanthropic Sector:  In case you haven’t noticed it, NYC is full of damn wealthy people and institutions.  Just chock-a-block.  You can’t throw platter of tiny muffins without smacking a family charity, corporate foundation or venture philanthropist in the noggin around here.  And that’s a really, really good thing for NYC.  These folks were raised in this town, or made their fortune here.  They enjoy the civic and cultural life of this town, and they are ready, willing, and able to spread a little bit of their surplus cash around to nudge it along.  And it doesn’t all go to pay for swank, self-congratulatory shindigs at Jazz and Lincoln Center.  A whole big mess of it goes to support those on-the-ground troops out there digging through the boroughs to find the few remaining developable vacant lots, or to the ducky young lads and lasses running food pantries and job training regimes and after school programs.  And my goodness but some of those philanthropy people are very smart indeed, and know a great deal about policy, and programs, and the power behind the throne.  Thank goodness they are on our side.  Please give more.

To insure good digestion and keep things moving!

• The Intermediaries:  You know: LISC, Enterprise, NeighborWorks America, the Corporation for Supportive Housing, the Low Income Investment Fund, the Nonprofit Finance Fund, the Association for Neighborhood and Housing Development, and loads of other roaming gangs of meddlers.  They are kind of like the glue that holds everything together.  Or rather, the acidophilus that keeps it all moving.  They are the trade associations of the community development sector:  advocating for a policy change here, pushing a best practice there, wheedling a little money in between (and then a whole lot more money), and finding ways to overcome the thousand little cuts the could otherwise slowly drain the sector.  They are very active now, and very well established, even to the point of becoming institutions in their own right.  But believe me, having been someplace where their people are not on the ground sniffing out trouble, cajoling unholy alliances, and horse-whispering into the ears of funders:  you really notice the absence.  You notice it because suddenly nothing works.

And there’s just one more thing about all this:  in NYC, the nonprofit leaders and the elected officials and the bankers and the grantmakers and the intermediary go-betweens all talk to each other.  You know, they know about each other’s kids, and they share gossip about their colleagues, and they steer their friends towards new jobs, and they complain about how expensive everything is and how hard they are working, and all the other hundreds and thousands of things that make of this mess a community, an ecosystem.  A whole food chain where ideas flow up and money flows down, more or less.  It’s not always pretty, and it’s not particularly efficient, but it’s a helluva a lot better than what I saw down in New Orleans after the storms.

Now, it’s a little bit wrong to pick on the Big Easy.  I could just likely chosen my hometown of Dayton, Ohio.  Or Baltimore, or Detroit, or Las Vegas, or any of a thousand other places in deep kimchi and where it’s not just that the resources are thin, but there’s a lack of the social lubrication between all these necessary parts to grease the wheels of change.

But when we last left our hero, he was two sheets to the wind in a hotel bar lost in thought among a serious-miened gaggle of hurricane survivors.  I realized that what I needed to do, what it made sense to do with my piddly little $2 million was to invest as best as I could in thickening some of those relationships.  That’s a story for my next blog.  Stay tuned.

Mom at the 9/11 Memorial

Re-posted from my guest blog on Rooflines.

In case you missed the first post in this series, you can link to it here.  You should read it.  My mom says so.  

My goal is to answer my mom’s simple question:  why did the economy crash?  She was asking me because she had read two newspaper articles that had completely different views as to why this very bad thing happened:  Five Good Reasons Why Wall Street Breeds Protesters (USA Today), and Wall Street’s Gullible Occupiers (Wall Street Journal).

In a nutshell, these two opposing views are:

1. Wall Street greed, lax regulatory oversight, and excessive executive compensation fueled a global debt glut that finally imploded; and
2. Federal housing policies forced Wall Street financiers to provide high risk mortgages to unworthy borrowers, ultimately leading to an unstable housing market that finally collapsed and brought the economy down with it.

In my first post, I explained some of the background for these opposing views, and I also spent a substantial amount of time discussing why view #2 appears to be (a) freakishly out of touch with reality, (b) so freakishly out of touch with reality that even people who normally want to blame the government for everything can’t agree with it, and (c) in spite of (a) and (b), freakishly popular.

To add vinegar to gall, I don’t think view #1 really doesn’t do justice to the issues either.

OK, So What Really Caused the Financial Crisis? 

Believe it or not, I agree with the Republicans.  Well, kind of.  I agree with the three Republicans who wrote their dissent to the Financial Crisis Inquiry Commission and scooped the majority report by releasing theirs the day before.

Well, I almost agree with the three Republicans who released their dissent the day before.  I also pretty much agree with the Democrats.  In fact, when you look at the FCIC report and the main Republic dissent, they pretty much agree with each other.  What I have to admit is that the Wall Street Journal editorial they published on January 27, 2011 contains the clearest summary I’ve ever read on why the economy collapsed.  I’m going to use their top ten list and do a bit of translating for my mom and all the other intellectually curious moms out there.  And so to begin:

1) Excess Liquidity:  After the collapse of the dot.com bubble and the aftermath of 9/11 in 2001, there were many investors around the globe sitting on lots of cash.  They had pulled money out of the stock market like gangbusters and tucked it away in nice safe mattresses like US Treasury bonds, where the principal sat safe but yielded very little interest.  Where, O where could these investors place their money that would be safe and still produce better returns?

Housing Price Appreciation Trends

2) Rising Home Prices:  One place that lots of folks put their money in down markets real estate.  Why?  Because real estate (so the historical trend told us) never goes down in value.   That was especially true for the good old USofA.  And lo and behold with all those investors piling into the US housing market real estate prices started going up and up and up.  What’s more, interest rates for borrowing were very, very low (thanks to monetary policy set by former Fed Chairman Alan Greenspan), so more folks could afford mortgages, and many people with mortgages were re-financing into lower rate mortgages.

3) Growth in Non-Traditional Mortgages:  But there just weren’t enough “prime mortgages” to meet demand.  Prime mortgages are home loans given to people with sound credit whose loans could then be “securitized” by (at least early on in the housing bubble) Fannie Mae and Freddie Mac. (More on securitization in a moment.)  So mortgage lenders started looking at borrowers whose credit was not so good, so called “subprime borrowers.”  Investors, it turned out, were willing to invest in subprime mortgages too.

4) Declines in Credit Quality:  OK, now for that “securitization thing.”  This is a big one.  In the 1990’s some very clever people on Wall Street figured out how to take, say, a few thousand mortgages and bundle them all together into a single security – kind of like a mutual fund, but made up entirely of mortgages from around the country.  These new securitized mortgages offered some real advantages:

• Securitization provided liquidity:  Instead of making a mortgage loan to someone and waiting for 30 years while they slowly paid back, as a lender I could sell the mortgage to someone else, then use the money I just got paid and make a new mortgage loan to another new borrower.   Therefore, I could make earn money by making loans, instead of earning money by collecting loans.  This is much faster and more lucrative.
• Securitization diversified risk:  If I put thousands of mortgages together, I spread the risk around a lot more.  This meant that using historical averages I could actually calculate the risk of not getting repaid.  It turns out that based on those historical averages the overall risk to the whole portfolio is very low.  I might lose 2% or so, but I could adjust my prices on making and selling mortgages to cover that loss.  As long as my assumptions about the level of risk were accurate, then the product would actually spread risk around nicely.

Unfortunately, securitization has a dark side.  As a mortgage lender, I’m now passing along the long-term risk to whoever buys that mortgage from me.  Should I care?  I mean, I’m making a tidy little commission on all these loans I’m selling, so maybe it’s ok if I just make a slightly riskier loan.  After all, if investors buy it, then that’s their problem.  And here’s where the race to the bottom begins.  Investors are snapping up mortgage securities by the mouthful (even the subprime stuff), and they think they are getting what has historically been a very safe investment, but is no longer safe.  In the meantime, however, there’s so much demand for these investments that the mortgage lenders are making these loans to homeowners with worse and worse credit, then passing that risk along.  Yes, some homeowners were gaming the system to buy investment properties and to flip real estate for profit.  And yes some homeowners were being wheedled and cajoled into taking on way more mortgage than they could afford.  But really the mortgage lending industry went hog wild and pretty much made loans to anyone with a pulse, and investors swallowed it hook, line and stinker.  It all got very, very ugly.

5) Poor Regulatory and Rating Agency Oversight:  By now, it should be abundantly clear that everyone is pissed off at the ratings agencies (Standard and Poors, Moodys, and Fitch), who presumably had the job of checking to see if these investments were of high enough quality.  The ratings agencies clearly failed in their obligation to accurately understand, assess and communicate the risks involved in mortgage securitizations.  Many investors also failed to understand the risks of what they were buying (ironically, very similar to many of the homeowners who failed to understand the mortgages they were sold), and relied on the ratings agencies faulty opinions instead of conducting their own research.  Ratings agencies, it turns out, were being paid by the mortgage lenders to provide their ratings – a very nasty conflict of interest.  Meanwhile, various federal regulatory agencies (the Federal Reserve, the Office of Thrift Supervision, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Securities and Exchange Commission) were caught up in turf battles, hampered by poor coordination, understaffed, and generally unable to keep up with the explosive growth in the banking and finance sectors.  No one was really watching the shop.

6) Long Term Debt Funded by Short Term Borrowing:  Now, what most folks don’t know is that many investors were buying mortgage securities using very short-term debt.  How short-term?  Well, it needed to be paid back the next day.  That’s right.  The next day.  But, you ask, if you are holding a security and you plan to hold it for a long time – at least a couple of years – how do you pay back the money that you borrowed the day before?  Well, you borrow the money again the next day.  And so it went.  As long as the mortgage securities were worth what folks thought they were worth, then this cycle of borrowing and repaying using overnight funds went unbroken.  The sh*t hit the fan when suddenly it appeared that the mortgage securities might NOT be worth what folks thought.  Remember in 2006 when we started hearing about rising mortgage defaults?  Well, those low historical averages of homeowners failing to pay weren’t holding.  It’s obvious now why this was so: they themselves were very over-leveraged.  They had borrowed more money than they could afford, and they couldn’t sell the house to repay what they owed either.  As default rates shot up, those securities looked like they were worth a lot less, and suddenly people had to pay back money that was due tomorrow.  Ouch!  But why didn’t the banks just pay back the loans with the money they had stashed away for a rainy day?  Good question, Mom!  It turns out they hadn’t stashed away very much money compared to how much they were borrowing.  In some cases, they had only $1 on hand for every $30 they owed.  This, as you can imagine, was a problem.

NY Times Graphic: AIG Credit Default Swaps

7) Contagion:  Ok, here’s another tricky issue.  Remember those mortgage securities?  Well, some investors said they would feel so much safer if someone would provide some insurance – just in case somehow things went really bad.  Luckily, there were people (like AIG) that said, sure, we’ll insure you:  if that mortgage security doesn’t pay you back, then we will.  But it wasn’t called insurance.  It was called a “credit default swap.”  But never mind that.  What you really need to know is that Person A said to Person B, you pay me a little premium, and if anything ever goes wrong then I’ll cover you.  But then Person C comes along and says to Person A, hey, can you make a bet with me?  I want to bet that mortgage security is going to go fall apart.  Person A says, you’re crazy, it’s a very safe investment – I’ll take that bet.  Person C pays Person A a little premium and essentially gets the same insurance that Person B did, even though Person C doesn’t actually own any of the investment.  Weird, right?  It’s like betting that your neighbor’s house is going to catch fire and getting your neighbor’s insurance company to write you a policy on your neighbor’s house.  Then the house does catch fire.  Now the insurance company has to bail out your neighbor, but they also have to pay you because you were right.  These little side bets amounted to about, oh, $60 trillion dollars in 2007.  That’s a lot right?  Yes, it’s five times the size of the entire US mortgage market.  Oh, and one more problem, all these bets were never disclosed.  They weren’t listed on anyone’s balance sheet, or traded openly on any exchange.  They were secret contracts between two parties, and they would come back to haunt everyone.

8 ) Common Shock:  By the time things started to really fall apart, you’ve got homeowners who can’t pay their mortgages, mortgage lenders who can’t earn more fees, investors who can’t pay back their lenders, and insurance providers who can’t pay back their claims.  In short, no one can pay anyone back, and a crisis that started out being about homes is now about markets.  We could have absorbed a collapse of the housing market.  It would have sucked, but we could have done it.  What we couldn’t absorb was the collapse of the financial market.

9) Rapid Succession of Failures:  Worse yet, it got really hard to tell who owed what to whom, and how much they owed.  It was like a giant game of hearts, and people couldn’t tell who was holding the Queen of Spades.  So what did people do?  They stopped.  Everything.  All at once.  The markets just froze up completely, like a heart attack, and weakened parties began dying: Lehman Brothers, Countrywide, AIG, Merrill Lynch, IndyMac.  Others went on life support: Fannie Mae and Freddie Mac, Citibank.

10) Panic:  And yes, if many others had failed, then all the others could have failed, like a plague.  World financial markets would have crashed so deeply that almost no one would be left standing, and the economies of the planet would have ground to a complete halt.  It was that serious.

So, crash.  Boom.  Bang.  It was, to paraphrase, nasty, brutish and long.  It’s still nasty, brutish and long, and now we’ve got Europe to worry about (another blog post, Mom).

But for all of you who have to argue with some Neanderthal who says we should have let the banks fail and the free markets would have corrected themselves, try these talking points:

• Homeowners who borrowed too much didn’t bring down the economy.  Banks who borrowed too much did.
• The free market is not rational.  It does not price risk well.  What it does price well is the opportunity to make tons of cash in the shortest time possible, and then get the hell out of Dodge.  Those who get this are rewarded.  Those who do not are punished.  Horribly.

Wait, There’s More!

In Part III of this blog I will discuss my favorite ideas about what to do next to help us clean up this mess.  Mom sends her love!