Monday, 15 July 2002, 10:22 am
The Story of Edgewood Technology Services – (Part One)
or… How I Lost $100 Million Discovering Who Makes Money Making Sure the Solari (Popsicle) Index Does Not Go Up
by Catherine Austin Fitts
My Scoop’s ” Real Deal ” Columnist
Will the Railroad Travel By Your House?
If you travel through parts of America you can see a history of towns that were suddenly bypassed when the railroad came through, or when Eisenhower built the interstates. Communities and the people in them went from thriving to destitute because the flow of information, goods and services was suddenly rerouted around them. They were left behind.
This fact was ever present in the first term of the Clinton Administration as new technology inspired legislation that redirected the flow of information and hence the resulting flow of capital goods and services to 63,000 American communities. The legislation had dry names like “Deregulation,” “Telecommunications,” “Banking,” “Welfare” and “Housing.”
What it was all about was where the “highways and railroads” of the twenty-first century would go first. Who would get the high-speed on-ramps first? Who would write the travel rules? Who would control enforcement?
It was a time in which 63,000 communities needed to make sure that they were on the new highway. The value of their homes, their personal skills and productivity, the economic health of their communities, businesses and job bases, the value of their pension funds and taxpayer investment was on the line.
Forget Your House, ’cause the Information Highway Is for Major
The power and effectiveness of the new technology depends upon fiber optic cables that must be laid by phone or cable companies. This is what truly unleashes the power of the Internet. One of the more insightful moments during 1993-4 occurred when a Bell Atlantic representative clued my company, Hamilton Securities Group, in on the roll out plans for high-speed fiber optics and pending network upgrades in the Washington area. First the fiber would be laid to K Street, where many law firms and associations were located. Second, the fiber would be laid out to Congress. Third, it would go to the White House and the federal agencies. Last, it would go out to the suburbs where many lawyers, lobbyists, and politicians and bureaucrats lived. After all of that, sometime in 2007, Bell Atlantic would schedule the fiber to be laid out to inner city residential areas.
This plan meant that the federal government was going to make no effort to protect the value and market relevancy of the communities that it supported with massive federal credit, welfare and subsidy. No one was protecting return on investment to taxpayers as telecommunication deregulation accelerated. It also revealed the pecking order. Forget the President and Congress. The next millennium’s railroads and highways would go first to the door of the corporate representatives who arranged the campaign donations.
S&L Scandal, Part II?
In 1994, the Clinton Administration grappled with how to address a large, expensive and unproductive portfolio of low income housing investment in American communities. The Department of Housing and Urban Development (HUD) was managing a portfolio of mortgage insurance that is now approximately $500 billion. It was subsidizing approximately 3 million apartments in the form of rent subsidies paid to private landlords and local housing authorities and through vouchers allocated directly to tenants.
My company had been retained to help HUD in the re-engineering of its portfolio. Our chief concern was that reengineering federal subsidies and franchises—whether through housing reform, welfare reform or banking and telecommunications regulation—- should be designed so that the taxpayer’s investment was respected. A large portion of the $1.2 trillion of federal credit, including HUD housing credit, was at risk.
Historically, HUD supported financing had been a mixed blessing. In 1997, Hamilton did an analysis of federal community investment in Philadelphia and concluded that it had a negative return on investment to taxpayers. In other words HUD investment in Philadelphia lowered the total Philadelphia GDP. Communities and taxpayers were worse off than they would have been if HUD had never existed.
This happened for several reasons. One reason is that federal investment often comes with incentives that decrease community learning speeds and encourage unproductive behavior on the part of landlords and residents. Another is that incentives are not organized around common performance standards, such as the Popsicle Index [See my column in the July issue.]. Government investment in a community is like an orchestra with no conductor and no score. Each instrument is doing its own thing and trying to get as much attention as it can. The result is noise, not music. To make matters worse, there is little or no disclosure so that citizens can assess how much total taxes and time they are paying to government and compare it to the return they are getting back. That means the symphony orchestra has no conductor and no score and the audience is listening in the dark.
In 1994, I was convinced that there was an opportunity to provide low cost access to job training and equity through the private markets. There would be a tremendous demand for job training and small business venture capital, including in areas with substantial taxpayer investment – the inner cities. The market opportunity in poor neighborhoods actually exceeded that of middle class neighborhoods because the cost of labor and overhead in poor neighborhoods was so low. Whether we were being laid off from government subsidy or from jobs at big corporations or government agencies, people of all backgrounds would soon be moving into more entrepreneurial and more technology-based jobs and businesses.
If we did not make this transition, then the taxpayers could get hit with an S&L style write down on our $1.2 trillion of federal credit, and lord only knows what that would do to our private investments, including our pension funds.
Satellites Can Send Our Data Servicing to Korea, But Not Downtown
In 1993, I was at a meeting at the Harriman Estate in New York, sponsored by the American Assembly, a think tank associated with Columbia University. I ran into Vince Lane, the marvelous head of the Chicago Housing Authority. I asked Vince what was new in his part of the world and he expressed his excitement about a new effort they had underway. Apparently, mothers at Cabrini Green, a public housing complex in downtown Chicago, were being bused out to the suburbs — and hour and a half out and an hour a half back — to work. I said, “Vince, that’s crazy. Why don’t you put a satellite dish on the roof of Cabrini Green and bus the jobs to the mothers so they can work near their children and elderly parents?
A major barrier to successful job performance for many women is their responsibilities as primary care giver for their families. While they are dependable for 40 hours of work a week, they are not dependable in a situation that requires them to be on duty from 9-5 at a distance from their home with little or no ability to handle emergencies or special needs.
Vince looked at me as if I was proposing something unusually novel. So I asked him to pull out his wallet, which he did. He had a Citibank Visa card. “Vince,” I said, “did you know that every day, Citibank sends all of its credit card data to Korea where women who do not speak English are doing the data servicing work? If we can send data servicing to Korea, why can’t we send data servicing into Cabrini Green? Especially when the Federal Reserve and FDIC are keeping Citibank afloat with taxpayers credit? At that moment, I realized it was time for me to do something.
When I got back to Washington, I started to talk with HUD about integrating on-line learning technology into HUD supported housing. Why was Internet access different from indoor plumbing or refrigerators? Once upon a time these too were considered luxury items. Then one day the standards and codes related to mortgage finance (most of which are taxpayer funded) changed and government agencies said, “Hey! No toilet. No refrigerator. – No money.” At some point we understood that we were better off if we all had toilets and that the value of the apartment unit would be greater if it had complete indoor plumbing and a place for a refrigerator. That means if the taxpayers are financing something, their collateral and financial interests are best served if the real estate they are financing is up to current market standards. It seemed to me that this was going to be true for the information highway. I am always better off if you, and everyone, have access to the knowledge and tools needed to be a productive member of society.
My theory was strengthened when I realized that communities using their own private capital were adapting to this new paradigm. Private developers were increasingly focusing their conferences on “smart” houses and “smart” buildings. They were trying to understand how better integration of the Internet, on-line access and the integration of new learning technologies could make their tenants safer and smarter and increase their properties’ value.
In planning sessions I walked through the economics of the current system. With fully loaded operating and capital overhead, the American people were spending $35-55,000 to pay for a woman with 1.8 children to not work or $154, 000 for her (or her mate) to go to jail, not including foster care for her children. Meanwhile, we were paying $120-150 per hour for data servicing and software development which was easily learned and could be done anywhere. If the guy with the laptop can work on the top of a mountain, why can’t moms work near their kids? Our anecdotal research showed that many people would drop illegal activities if they could earn $8 per hour plus health care working near their children.
The response was negative in the extreme. Computer skills were a competitive edge, I was told. Many of the older federal workers were still uncomfortable with computers, and had no intention of being bested by poor people. In addition,” electronic community development” was perceived as something that would marginalize the expertise of a generation of community development personnel. They did not want to lose government housing investment to technology systems or education. Besides, American voters would see computer learning centers and affordable Internet access as more waste of their resources.
The only way to combat that was to illuminate what taxpayer money was going where in American communities. Given that it was going where it was going to serve special interests, that was not possible. After identifying that HUD was spending a substantial amount of money for data servicing and would soon need to spend much more, it made no sense for taxpayers to pay for defaulted mortgages because rents were not met because people in HUD housing had no jobs. Why not have the residents doing some of the work? That way the taxpayers would not have to pay twice. Besides, why should a neighborhood pay taxes to distant agencies to do jobs that could be done for substantially less by people in that very community who needed jobs? Well, one reason is because training poor people to do data processing and software development would offend the large government contractors who profited from these businesses and were important contributors to everyone’s campaign coffers.
The Elderly, Women and Kids: Head ’em Up, Move ’em Out
The heart of the official fear of my plan was the absence of faith that such a plan could work. I informed HUD that since it could do nothing along these lines, I would finance it through Hamilton on a private basis with the company’s available reserves. One deeply honest and sincere Clinton Administration appointee then expressed concern for Hamilton’s exposure. I was planning on starting in Afro-American communities first. Black people were hopeless, I was told. I should focus instead on neighborhoods with Hispanics or Asian immigrants. The Afro-American poor could never be and would never be relevant in an information economy. Their circumstance reflected their own lack of ability. They required a warehousing solution, as they were not needed for the work force and were irrelevant to the productivity of a knowledge-based society. Reengineering incentive systems or access to education and capital was not enough. These were people who could not be productive.
I disagreed. We, all of the American people, are the assets. We are not some swing work force to be liquidated and moved around for the benefit of this week’s vision of an industrial society formed to serve elites. Besides, where we stand should be determined by our performance. Making sure that we have no access to knowledge or capital and then saying that an elite won on performance is yah-yah. It will kill the country’s learning speed. Competition increases learning speeds. Those who win in a rigged game get stupid.
A few months later, I had dinner with members of a think tank in Washington who were close to then Speaker Newt Gingrich. The producer of Gingrich’s cable TV show joined us at dinner. She was more direct. These people were hopeless. The state of poverty in poor black communities reflected the bad values of the children themselves. I asked if this applied to seven-year-olds. She said, yes, the living conditions of the children reflected the bad values of the children. The implication was that Black genetic inferiority meant that society would be better off if such people were dead.
What I could not fathom until much later was what the alternative plan actually was. Deregulation was going to increase the value of urban real estate. In the absence of education, job training and small business creation, the current residents would lose their homes and land through gentrification or eviction. If federal housing officials simply pretended that this was not happening and allowed gentrification to occur, millions could have to move under great stress, go homeless or die. Our estimates showed that more than 70% of the residents of federal housing were women. Fifty per cent were elderly and almost 20 per cent were single mothers with children. The numbers on privatization of the federal housing investment said that every effort to offer access to self-sufficiency was a substantial moneymaker for taxpayers. The ostrich approach was going to cost the taxpayers a fortune. Homelessness, disease, transfers to health care facilities and death is surprisingly expensive. The sexual innuendo was less than chivalrous. Almost all of the pending redevelopment profits would be controlled by men.
I listened to numerous other conversations like these and knew that my colleagues and I were living a lie about the origins of our own productivity. I had been raised by a poor Afro-American woman, Eleanor Gordon, in a poor community that was predominately Afro-America. I knew that Eleanor’s culture and values were in many respects superior to those of my family. Eleanor and the members of her family that I had known were spiritually and emotionally more evolved than any white culture that I had been a part of. They were very responsible and hard working, as was all of my family. The bad values in our neighborhood appeared when HUD housing and CIA supported drugs appeared. It was not Eleanor and her family that grew rich destroying my family and neighbors.
I also intuitively understood what later research made obvious. If you counted up what America was spending on black culture, whether religion, music, art, design, sports or other forms of entertainment, it reflected a resounding vote for the value of the productivity of black America. If black America was so without value, then how come so many white people shelled out so much money to infuse their lives with the meaning and love which had graced my childhood? The money said it all, though it was carefully disguised to protect the profits and control of corporations managed and primarily owned by white people.
As an entrepreneur, I decided that I would get to the bottom of this muddledness that confused issues of productivity and performance with issues of race and class and issues of genes, ability and values with access to knowledge and capital. A great believer in the Nike method of “just do it” I would start by prototyping a computer learning center and data servicing company in a residential housing project in Washington, DC. If I was right, that high quality data servicing work could be produced on a reliable basis in lower income black residential communities, then this would prove the idea for all communities and groups with business leaders and policy makers. It would also illuminate for me why professional white people had one vision of the urban Afro-American community that substantially contradicted the carefully disguised mathematics on how money really worked in America.
Edgewood to Milan, Can You Read Me Italy?
In 1995, I authorized a $500,000 investment by Hamilton to start a computer learning center and data servicing company in Edgewood Terrace, an assisted housing project in Washington, D.C. After a ten week training course in Microsoft Office Suite, the Edgewood Connection Computer Learning Center graduated its first class of ten. Nine graduates chose to proceed with starting a data servicing company, which they named Edgewood Technology Services (ETS). We hired a manager from an accounting firm and a data-servicing manager to run the operation and continue to train the staff. They and the trainees set about starting a company.
Meantime, the learning center was also teaching kids and retirees and the impacts were quietly dramatic. The speed at which the trainees were mastering computer skills was surprising. The reinforcement within families was powerful. The artwork created by the children demonstrated dramatic learning speeds and transformation. The day that the first child received an e-mail from a pen pal in Milan Italy was a milestone. Suddenly, Edgewood was accessible to the whole world and the whole world was accessible to Edgewood. The scorn of wealthy Washington neighborhoods was no longer the last word. They could be bypassed so long as the highway came to our door. The world seemed a place of infinite possibility.
* – Catherine Austin Fitts is President of Solari, Inc. She is the former President of The Hamilton Securities Group, Inc., Assistant Secretary of Housing in the Bush Administration and Managing Director and member of the Board of Dillon Read & Co. Inc. She can be reached at email@example.com.