CDO Meltdown (2)

(Part 1)

The single most valuable resource on theCDO meltdown is Barnett-Hart (2009); this was a thesis paper submitted for a BA at Harvard University, which received a lot of attention thanks to a favorable cite by Michael Lewis.¹ Fittingly, the thesis has won many honors, and it's pretty impressive to read.

A few points introductory to this essay; first, I'm not an expert and this post is my collection of notes on what I regard as helpful or trustworthy sources. The reason why I am writing about this topic is that it's very important to understanding the financial crisis and its concomitant economic catastrophe. Readers are almost certainly not going to share my political views of the matter, but I think some grasp of the mechanics of the crisis will help out in forming their own.

Second, readers interested in an explanation of CDOs are advised to read my first installment or, better still, the first 27 pages of Barnett-Hart's paper.

Additional Background from Barnett-Hart

Most of the CDO market growth took place between 2002 and 2007; a major driving force was the fact that real interest rates were abnormally low, and institutional investors like pension fund managers were required to invest only in AAA-bond assets. CDOs used the waterfall structure to create putatively AAA tranches from pools of assets of far lower rating. In fact, this would have worked except for the fact that the asset pools were (a) not successfully or adequately diversified (i.e.,the assets in the pool were prone to defaulting all at once), and (b) composed of loans of unprecedentedly poor grade (i.e., the loans were made to borrowers who were almost certain to default).

Another reason was that bank holding companies in the USA were now underwriting securities as well as re-lending deposits as loans. Banks could increase their leverage-to-equity ratio by unloading assets to a special purpose entity (SPE; also known as a structured investment vehicle, or SIV), then harvest the returns from the SPE. In a few years, an enormous share of assets and liabilities of the US banking system (including US subsidiaries of foreign banks) were parked in this shadow banking system.

The cash "freed up" by "selling" loans to off-balance sheet zombies (Barnett-Hart called them "brain dead," p.5) was then lent out again. This ruse allowed a large increase in the supply of loanable funds available to the banking system, and spurred a huge boom in housing prices.

About 13% of CDOs issued were created to vacate the balance sheet of a bank.²

The CDOs were exceptionally complex, large entities; they tended to be just under a billion dollars in size, were divided into 7-8 tranches, which usually included one unrated tranche.³ As they became more popular, structured finance came to be the preferred form of collateral (synthetic CDOs).⁴


CDO performance in the Crisis was highly varied. Quarter of issue, asset type, and underwriter (e.g., Goldman Sachs versus J.P. Morgan) each had an effect that was statistically significant. Bonds incorporated in CDOs generally performed much worse than those that were not (Barnett-Hart, p.12, figure 3). After 2005, synthetic CDOs became the main part of the story, but as of this writing, they remain a comparatively small part of the CDO crisis.⁵

A Digression on Subordination

A very important part of the CDO boom was the role of ratings and the enhanced return relative to ratings that CDOs offered to investors. CDOs were popular with investors precisely because they were rated much higher than the underlying securities taken separately would have been, had they been rated accurately. Credit rating agencies (CRAs) such as Fitch, Moody's, and Standard & Poor's assumed that the underlying securities were pooled and subordinated in a way that prevented serious losses to investors even if the CRA ratings were excessively optimistic.

One of the indices of "safety" (or unlikelihood of failure) was loan subordination. A typical bank borrows money short-term from depositors and lends it long-term to borrowers. In order to make a return on its capital, it must lend the money at a higher rate than it pays out to depositors. If this spread is large, then the bank can increase its reserves and its capital. In either case, the bank's excess of loan revenues over expenditures (i.e., interest paid in on loans less interest paid out on accounts) protects the depositors from default by borrowers. "Credit enhancement" includes this and other ways of reducing the likely cost of default: [putatively] excessive collateral, and credit default swaps (CDS), or "wrapped securities" (securities insured against loss by a third party) are other ways.

Ratings agencies use a complex formula to pool their estimate of the value of these guarantees; the subordination is supposed to reflect the excess of cash flow over obligations as a percentage, with each tranche in the CDO possessing a different subordination value.

The Effect of Ratings

Earlier, I mentioned that super-senior tranches were supposedly better than AAA, meaning that the waterfall agreement used in CDOs ensured that even market anomalies capable of hitting a AAA security were unlikely to impact a super-senior tranche. This was reflected in the subordination levels for super-seniors: as late as 2007, they were estimated at 22%, compared to <15% for AAA, <10% for AA, and <5% for BBB (Barnett-Hart, p.15, fig.6).⁶

The ratings agencies did not know how to cope with the huge demand for data that investors (and regulators were now putting on them). The financial system was trained to measure performance by returns relative to risk. High risk investments were supposed to have high rates of return; it wasn't especially impressive if they did. With CDOs, investment houses could churn out high rates of return on low risk investments, with AAA rating. This was the essence of "alpha," or performance of a portfolio adjusted for risk.⁷

The great majority of CDOs were issued in order to arbitrage the favorable interest and risk imparted by the CDO structure itself. Hence, the CRAs were major instigators of the CDO mania. Barnett-Hart goes so far as refer to the CRAs as "manufacturing AAA CDO securities from collateral with much lower ratings" (p.23), which certainly fits my understanding of the situation.

---

Sources & Additional Reading

1. Peter Lattman "Michael Lewis’s The Big Short? Read the Harvard Thesis Instead!" Deal Journal [blog], The Wall Street Journal (15 March 2010)


2. SIFMA spreadsheet (accessed for this post), in worksheet "CDO Purpose." Refers to period 2005-2010, during which 13% of the USD 1.3 trillion in CDO par value issued was for shadow banking. The remaining USSD 1.1 trillion was used for arbitraging the interest premium offered by putatively AAA/AA securities.


3. Barnett-Hart's paper examines 735 CDO transactions with an average value of $829 million each (pp.7-8). This accounts for about half the USD-denominated CDO transactions issued between 1999 and 2007. During this period, USD-denominated transactions accounted for about three-quarters of the total (SIFMA spreadsheet, "Denomination" tab). Unfortunately, the SIFMA data does not cover CDOs before 2000, but this was a minor year in terms of the total volume. After 2008, total CDO issuance plummeted to a tiny fraction of its 2005-2007 rate, especially in the USA.


4. According to the SIFMA spreadsheet ("Collateral" tab), structured finance was the collateral in 1% of CDO issuance for 2001; it shot up to 63% in 2005, accounting for 91% of the growth of issuance during this period. The reason, naturally, was a shortage of the other types of collateral. Still, the CDOs included as collateral about a half-trillion USD in "high-yield loans."
   
   Barnett-Hart's paper focuses on asset-backed security (ABS) CDOs, rather than structured finance. By February 2009, about half of these deals had been written off ("Half of all CDOs of ABS failed," Financial Times, 11 February 2009, via Naked Capitalism). This accounted for about USD 105 billion in defaults, out of a total of USD 815 billion (as of 9 Feb 2009; see "Banks’Subprime Market-Related Losses Top $815 Billion," Bloomberg). So basically about a third of ABS CDO failed, and these accounted for 13% of losses in the 2007-2008 Financial Crisis.


5. An additional USD 24 billion in losses was attributed to synthetic CDOs ("Warning over CDO losses if CIT defaults," Financial Times-14 July 2009). Since our estimate for synthetics comes five months later than the one for total losses and ABS-based CDOs, it's reasonable to assume the figures for the latter two were higher and synthetics performed much better. If not, ABS-based CDOs ($105 B) and synthetics ($24 B) lost $129 B of the total $815 B lost by the top 100 financial institutions worldwide in the Crisis, or about a sixth of the total. Moreover, ABS CDOs losses accounted for 81% of CDO losses overall.
   
   In view of the fact that over half of CDOs issued during the problem period (2005-2007) were synthetic CDOs, this suggests that part of the design principle of the CDO actually worked.


6. For a prescient critique of the methods used by the CRAs to compute debt subordination, see Xudong An, Yongheng Deng, & Tony Sanders, "Subordination Level as a Predictor of Credit Risk" Real Estate & Urban Analysis, University of Cambridge (April 2006).


7. "Alpha" refers to the rate of return on an investment (or the performance of its manager) relative to the rest of the market. If the manager invests in high risk securities, the return on the portfolio will be likely be higher than otherwise, and such investors will be compensated for greater risk; but higher risk also includes a higher risk of unpleasant surprise. For this reason, people who rate portfolio managers measure "alpha" to compensate for things like the manager's risk preference and the overall behavior of the securities market.
   
   The effect of high ratings on CDO tranches was to permit managers to achieve the illusion of high alphas because they were getting rates of return that exceeded what could have been expected, given the low risk of their portfolios.
   

---

Sources & Additional Reading

Efraim Benmelech & Jennifer Dlugosz, "The Credit Rating Crisis" National Bureau of Economic Research (2009)

Anna Katherine Barnett-Hart, "The Story of the CDO Market Meltdown: an Empirical Analysis" Thesis, Harvard University (2009)

Dr. Michael Wang, Shwn Meei Lee, & Dr. John Ku, "Risks and Risk Management of Collateralized Debt Obligations" (February 2009)
Yves Smith, "The Role of CDOs in Merrill’s Losses (Updated and Expanded Version)," Naked Capitalism (24 October 2007)

Global CDO Issuance, SIFMA (Excel spreadsheet). Outstanding source on CDO statistics.

CDO Meltdown (1)

By now, the collateralized debt obligation is surely a household word. The technical nuances of CDOs remain obscure, but the essential problem here was that financial engineers believed that, by using past data they could quantify risk of default, and then pool that risk. Pooling risk, under certain circumstances--explained below--reduces risk to manageable levels.

Those circumstances include two crucial conditions: the risk being pooled must absolutely have zero correlation. Very small correlation is all right--it's not the "zeroness" that's important, it's the certitude that it is low under all circumstances. The other condition, which is really just a reiteration of the first, is that the actions of the financial engineer must assuredly have no impact whatever on the risk itself.

The first condition, in other words, means that an event that affects all the things at risk (e.g., an earthquake hitting a large ratio of properties insured by a particular firm) must never happen. The second condition means that the act of creating an insurance pool, or financial instrument, can never actually influence the risk of the parties themselves (taken as individuals). If the invention of insurance sharply alters the behavior of the insured, then actuarial data is inherently inaccurate.¹

As is now well established, the CDO made credit extremely cheap. This was done by producing an estimate of risk that could be prepackaged into a tradeable security, bundled using a structured investment vehicle (SIV), and sold with a mathematically-inferred projection of return. While credit extended to high-risk borrowers has a high probability of default, this probability was supposedly offset by pooling (with other, lower-risk borrowers) to achieve a suitable investment-grade bond.

THE CDO: A SHORT DESCRIPTION

A collateralized debt obligation (CDO) is a type of structured finance product, in which the originator creates an entity like a special purpose vehicle (SIV) to own loans and distribute payments on certificates. The CDO represents a claim many different potential kinds of assets:

• investment grade and high-yield corporate bonds;
• emerging market bonds;
• residential mortgage-backed securities (RMBS);
• commercial mortgage-backed securities (CMBS);
• real-estate investment trusts (REIT) debt;
• bank loans;
• special-situation loans and distressed debt.

The first CDOs were used for repackaging high-risk corporate bonds and convertible bonds, but later developed into an entire parallel banking system.^2,3

CDOs are generally classified as "cash" or "synthetic." A cash CDO consists of a pool of bonds or loans. Their asset value is tied to the cash flow of the underlying assets, which consists of payments on the principle and interest.

Synthetic CDOs sell credit protection via credit default swaps (CDS) rather than debt-based assets. The CDO's asset value is pegged to specific tradeable assets, but it emulates the capital gains of the assets with derivatives (rather than ownership); hence, it is more highly leveraged. The collateral comes from a cash deposit by the depositor/investor.

The CDO pays out returns at maturity to investors at different levels of priority. In the event that there is widespread default, some of the tranches are guaranteed first, second, or third priority of repayment. The highest-risk [equity] tranches, with a high nominal rate of return, take any hits in the event of default. This is called a "waterfall structure."

CDO asset pools were quite large; typically, they involved nominal values of about USD 500 million to >USD 5 billion.⁴

RATINGS

Click for larger image

A crucial aspect of the CDO boom was the role of the ratings agencies, Moody's, Fitch, and Standard & Poor's. These agencies are quite old, but their business model has evolved over the last 40 years. Originally they were paid to rate securities by investors, who paid for their ratings. This business model dried up and was superseded by a new one in which the issuers of securities paid for the ratings.

There was an obvious conflict of interest in this arrangement, but structured finance and tranching made it worse. That's because the ratings for CDO issues were extremely important to the creation of a shadow banking system, in which liabilities could be parked off bank balance sheets, without the usual reserves or capital adequacy; and because ratings were so important to the design of CDOs.

Because of what a CDO is, it requires the ratings agencies to collude in the design and ultimate strategy of CDO-style structured finance. The tranches are rated separately; in theory, the superior senior tranch of 2006-vintage synthetic CDOs were actually better than AAA, since they had AAA-assets as collateral.⁵

COLLATERALIZATION

A critical part of the narrative was collateralization. A debenture is a debt instrument (like a bond) that is not backed by any collateral. Most bonds are debentures; CDOs supposedly would be safer than debentures because the creditors could, in the event of default, auction off the collateral. As we now understand, this collateralization was to allow the crisis to spill over more readily into the real economy.⁶ This was because CDOs created a bubble in housing prices (millions of people could borrow more than before, and bid up the price of housing--see Warren & Tyagi, 2004)

The effect of collateralization was most obviously to create not only a huge gap between the bubble price and the bust price of houses; it also flooded the rest of the credit markets with loanable funds for consumption. Arguably, this is a strategy that is not readily available for economies whose currency is not the universal reserve currency. That's because rapid expansion of the money supply is liable to lead to capital flight (interest rates fall below a competitive level). But it has a disproportionate effect on consumption, since entrepreneurs are guided by other considerations besides cheap loanable funds. This may explain why the US has such a large and persistent trade surplus. In any event, the CDO meltdown has led policymakers to wonder how the financial system could remain both innovative and stable.

(Part 2)

---

Notes

1. There is evidence it has a modest impact on the insured, but over time this impact has been statistically neutralized. See my post on "The Curmudgeon's Fallacy." Actuarial data, whether for insurance companies or financial instruments, seeks a stable estimate of risk so that the potential for loss is accurately priced. If the methods of assessing loss potential produce results that change frequently over time, then those methods are not useful for managing the probable costs of loss.


2. List of assets from Fabozzi, Davis, & Choudhry (2006), p.119


3. For a summary of the "parallel banking system," see Tobias Adrian & Hyun Song Shin, "The Shadow Banking System: Implications for Financial Regulation" , Federal Reserve Bank of New York Staff Reports, no. 382 (July 2009)


4. The largest CDO I was able to locate was MAX 2008-1 A1, with a notional value of USD 5.4 billion; it was underwritten by Deutsche Bank, which retained 94% equity in it. See Yves Smith, "Debunking Some AIG/Fed/CDO Theories," Naked Capitalism (4 Feb 2010). Smith cites disclosures of Maiden Lane III LLC transactions by Federal Reserve.


5. "A 'Rational' Explanation of the Financial Crisis" Macroeconomic Resilience (November 2009)
   


6. The real economy is distinguished from the financial sector. Usually there is some insulation between the real economy of goods and services, and the "not-so-real" economy of stocks and derivatives.
   

---

Additional Reading

Anna Katherine Barnett-Hart, "The Story of the CDO Market Meltdown: an Empirical Analysis" Thesis, Harvard Kennedy School of Government (March 2009)

Frank J. Fabozzi, Henry A. Davis, & Moorad Choudhry, Introduction to Structured Finance, John Wiley and Sons (2006)

Michael S. Gibson, "Understanding the Risk of Synthetic CDOs" Trading Risk Analysis Section, Division of Research and Statistics, Federal Reserve Board (July 2004)

Elizabeth Warren & Amelia Warren Tyagi, The Two-Income Trap: Why Middle Class Parents are Going Broke, Basic Books (2004). This book provides an invaluable explanation of how financial institutions and the two-income family combined to create a bidding war for houses in attractive neighborhoods. Warren & Tyagi wrote before the 2008 Financial Crisis but described a growing emergency in household finance that had burgeoned during the 1990's.

Credit Write-downs: Creditflux's list of credit write-downs announced since the start of the subprime crisis. Creditflux write-downs (Microsoft Excel Spreadsheet, 78 kb)

"Global Cash Flow and Synthetic CDO Criteria" Standard & Poor's Structured Finance

Slums & Favelas

According to UN-Habitat statistics, the slum population of the earth is expected to exceed 1.1 billion in 2010; the total urban population for this year will probably be about 3.5 billion.¹ A common problem in all countries is equity formation in the poorest areas, which often conflicts with supplying public services to those who live there. This is because one of the most important public services is assisting job creation and capital formation, closely followed by utilities, medical services, transportation, and public health.

Selected Slums, Worldwide
Name	Metro	Est. Pop.
Soweto	Johannesburg	1,695,047
Orangi Township	Karachi	1,200,000
Nezahualcoyotl	Mexico City	1,140,528
Ezbet El Haggana	Cairo	1,000,000
Dharavi	Mumbai	1,000,000
Mathare	Nairobi	1,000,000
Tondo	Manila	630,604
Kibera	Nairobi	550,000
Bumbu	Kinshassa	525,770
Kimbanseke	Kinshassa	523,180
Korail	Dhaka	500,000
Tondo	Manila	407,330
Manshiyet Nasser	Cairo	350,000
Valle de Chalco	Mexico City	323,461
Ixtapaluca	Mexico City	290,076
Cité Soleil	Port au Prince	250,000
Rocinha	Rio de Janiero	180,000
Govindpuri	Delhi	150,000
Heliópolis	Sao Paulo	120,000
Yerawada	Poona	109,308
Belen	Iquitos [Peru]	65,000
Timbauba	Recife	60,000
San'ya	Tokyo	35,000
Cingapura	Sao Paulo	N/A

In less developed countries (LDC's), cities typically grow at the expense of the countryside, and migration is usually "push-driven." The "push" takes the form of reduced income potential from small farms (in cases where land reform has taken place) and rural unemployment (in areas where it has not).² When rural immigrants arrive in the slums, they are likely to find grossly inadequate provisions for themselves. The authorities will not know what to do with them; the local residents won't want to pay the taxes for them, or have them occupy greenfields; the local workers won't want to compete with them for jobs.

This typically leads to informal settlements, known as favelas (Brazilian Portuguese), barriadas (Peruvian Spanish), "shantytowns", "slums," and so on. These are in the city because that is where jobs are to be found.

In cities of the LDC's, informality does the following:

1. criminalize residency: urban residents may lack a right to live in a particular place³; they almost certainly will live in a settlement that is not authorized (for example, on squatted land or structures; in land set aside for farming or watershed);
2. deny tax revenues: in most countries that are still developing, a chronic headache is a lack of financial resources to urban governments. This is a severe problem in the USA; in countries like India or Brazil, it's catastrophic. Government revenues are allocated on the basis of official population data, which is likely to undercount by a wide margin; and most urban expenditures must come out of locally-collected taxes.
3. criminalize employment: informal occupations include activities that are illegal per se, such as drug trafficking or prostitution, but they are not limited to those things. All human services are supplied by the informal sector of LDC slums, from medical to transport, garbage collection, banking, local security, and prepared food. But there is no licensing system, and entrepreneurs may face violent resistance to entering markets. As a result, gangs usually act as both state (regulator and civil court) and firm.
4. reduce productivity: Informal businesses are almost always tiny and confined to the smallest tools available; this prevents industrial efficiency. Informal banking is expensive, unreliable, and underused; home equity is precarious and often ignored by the authorities in "slum clearing" programs.

Typically slum dwellers learn that accumulating productive capital is a doomed endeavor; the authorities will think nothing of destroying it just to get the slum dweller to go somewhere else.⁴ Yet this violates a fundamental expectation that people have of their leaders, viz., that their leaders will defend them and theirs. In slum settlements, the official authorities are little different from an army of occupation, and in many cases are an army of occupation.⁵ Activists on behalf of the slum are usually seeking formal recognition of their property rights (at least, to the physical structures); often, when this is won, the state is still inclined to ignore what it claimed to have granted. It can do this because the slum dwellers are regarded as nuisances, not citizens.

Job creation, for most slum dwellers, comes from capital formation. Labor is superabundant in the slum; it makes the slum an economic benefit for the rest of the city, but a huge share of the income of slum residents comes directly from other slum residents, not outsiders. When enterprises employ workers in the slum, they are limited by capital. This is why charitable enterprises have glommed onto the microcredit bandwagon en bloc. After decades of paying top dollar to aid recipients to get them to integrate the "backward classes" into economies that are already struggling to industrialize, aid agencies are now acknowledging the existence of a separate third world inside the third world.

The microcredit approach to capital formation (and job creation) is the main method now in place for economic development in the Third World. As mentioned, it replicates on a national level the model of development used by the World Bank/IMF towards the LDC's at a global level. Prior to the 1970's, the preferred method of economic development and monetary stabilization was prophylactic: countries like Pakistan, Indonesia, and Brazil were encouraged to develop domestic industries to reduce the hazard posed by capital flight or sovereign debt default. If essential foodstuffs were produced domestically, the argument went, then famine was unlikely to occur as a result of currency crises. After the mid-1980's, most developing countries changed to export-oriented development policies. In some cases, such as southern Africa, this can generally be said to have been unsuccessful. In areas where it has been successful, some argument exists over whether it was the EOI policy or the centralized control of capital investment and imports that did the trick (e.g., China, Republic of Korea, Taiwan R.o.C., Viet Nam).⁶

One big advantage to donor countries of the microcredit-microdevelopment approach is that it can directly bypass the local government, and deal directly with local NGO's or with the residents of slum areas themselves. A downside is that slum enterprise is itself entirely unsupervised, and can use the aid money to defraud or extort from other slum residents. It's not clear how serious a problem this last item is. One problem is that the idea assumes that slum residents are capable of sound construction work; even in jhuggi jhopri settlements (or temporary shanty towns in India, typically settled by construction workers) it's unlikely that very many workers have the spare time, energy, or range of skill to build a seismic residence (Davis, 2006, p.72).

Another advantage is that development aid is directed for the most part to things that residents are likely to want. In the past, a common approach was to clear informal structures and build housing projects. In the table above, the link for Cingapura goes to an article about a fairly recent Brazilian program of development that began with a project and turned to renovation assistance. In the areas of Cingapura where the old structures remain (but in renovated state), one appears to have Jane Jacob's ideal city: a dense, but small-structure neighborhood navigated mainly by foot, in which residents often use the street as a sort of living room.

An obvious downside to this, however, is that the slum is actually gentrified; while the residents may seem poor by the standards of North American or EU managers, the new occupants are likely to be outsiders who snap up professionally-improved lots. The former residents migrate to a new slum. At the same time, as legal structures recede to accommodate informality, the very function of the laws (such as the preservation of public spaces, safe waterways, adequate drainage and sanitation, etc.) is defeated. The local government is defeated and sidelined; it may have deserved this, but microfinance typically enshrines the defeat as permanent irrelevance for the state.

---

Notes

1. UN-HABITAT defines a slum as "housing with one or more of the following conditions: inadequate drinking water; inadequate sanitation; poor structural quality/durability of housing; overcrowding; and insecurity of tenure." See Planning Sustainable Cities — Global Report on Human Settlements 2009, Part VI Statistical Annex , p.6. However, relevant to this post is the definition of slum used by the government of Maharashtra State: "a congested, unhygienic area or buildings that are public hazards."
   
   Population of the world and divisions thereof, see Ibid., p.9; population of slums (by country), see Ibid., p.24. Curiously, despite detailed statistics on slums in Latin America, Africa, and so on, none appear for the developed nations. However, global projections for the developed world as a whole appear in the site for the Global Urban Observatory (GUO)
2. That migration to cities is typically push-driven is my own personal inference based on studies of others. Take, for example, Michael Herrmann & David Svarin, “Environmental pressures and rural-urban migration: The case of Bangladesh” , UNCTAD (January 2009), p.5:

   The rapid expansion of the labor force in the non-agricultural sectors, which leads the way to an accelerated expansion of the population in the urban centers, is attributable to relatively strong push and pull factors. On the one hand, a relatively weak agricultural development, which has been attributable to the recurrence of natural disasters, enforces people to search for employment opportunities outside agriculture; on the other hand, a relatively strong development of the non-agricultural sectors, which has been due to the expansion of the textile industries, has enabled many people to find employment in the non-agricultural sector.

   Notice the "pull" comes from the creation of textile jobs, which are presumably more attractive than rural jobs. But rural jobs are simply unavailable; rather than leaving the countryside to seek an improvement, workers leave under duress: textile jobs are notoriously awful, especially for people accustomed to quiet and fresh air. Bangladesh slums are certainly not more attractive places to live than the adjacent countryside. And indeed, the next section of the paper cited above outlines the push-like character of pull-driven urban migration:

   Although agricultural labor productivity has increased in Bangladesh, it is not so much due to an increase of agricultural value added, as it is due to a decrease of the agricultural labor force, associated with accelerating rural-urban migration in the country. The development of the agricultural sector in Bangladesh is therefore more appropriately measured by yields in agricultural produce. Our data shows that despite considerable investment in agriculture, yields in important agricultural produce have fallen during the past decades. Since the early 1980s yields of groundnuts, rice and wheat fell by 1 mt/ha on average. The main reasons for the weak agricultural development are exogenous factors, notably climate-change induced natural hazards. Natural hazards destroy harvests and threaten food security, especially of poor households.

   In other words, policies taken by the (urban) authorities, or rich countries, have made it impossible for even a declining labor force to make a living off the land. Juxtaposed against the putative "pull" of urban jobs, it is clear that the "pull" takes the form of a Hobson's choice: move to a slum or starve.
3. Many, if not most, pre-industrial or incipient industrial countries have restrictions on labor mobility. For example, in the People's Republic of China, citizens could be compelled to live where the authorities chose, and denied permission to move. After the 1990's, there was still a requirement that citizens secure permission live permanently in any particular shi, or municipality. See Kenneth G. Lieberthal & David M. Lampton, Bureaucracy, Politics, and Decision Making in Post-Mao China, University of California Press (1992), Chapter 12, "Urbanizing Rural China: Bureaucratic Authority and Local Autonomy" p.354ff. In England, between 1662 and 1832, the Settlement Act effectively tied each certifiable pauper to one of the 15,000 parishes in the country.
   
   Restrictions on labor mobility are typically motivated by the need to certify the poor for eligibility for relief. In pre-industrial England, for example, one was allowed to move away from one's parish, but could not receive relief outside of it. Since most laborers seem to have been vulnerable to recurring episodes of unemployment and destitution, this was an important constraint from emigrating from depressed areas. In the collectives of the Communist regimes, rural workers were typically treated as serfs of the regime and confined to kolkholzy or sovkholzy their entire lives. This was a more extreme form of mobility restriction. More recently, China and Vietnam retain the Hukou/Ho khau system of household registration (Congressional-Executive Committee on China, "China's Household Registration System"-2006)(Refugee Review Tribunal: Vietnam [Australia-10 May 2005] ).
4. Probably the most devastating example of this was the 2004 destruction of Yamuna Pushta, an immense slum complex in Delhi. The demolition displaced perhaps 150,000 people. It was precipitated by Delhi hosting the 2010 Commonwealth Games. This tragic event was depicted in the documentary "Yamuna Gently Weeps" (trailer here). See also "Over 300,000 people to be forcefully evicted from Yamuna Pushta," Habitat International Coalition (2004). Another documentary of slum demolition is "Phnom Penh for Sale - Cambodia" (Journeyman Pictures 2009), where a settlement on Boeung Kok Lake, Phnom Penh, was demolished to make way for commercial development ("A further 160 families in Cambodia face forced eviction," Human Rights Blog, 2009). The settlements around Boeung Kok Lake that are under attack house some 4,200 families--a tiny fraction of the number liquidated overnight in Delhi. In 2008 alone, Amnesty International received reports about 27 forced evictions, affecting an estimated 23,000 people.
   
   In Lagos, Nigeria, there is the example of Maroko. Maroko was a former fishing village that became a refuge for urban poor driven from gentrified parts of booming Lagos. By 1990, its population was around 300,000. It was bulldozed in July of that year without any meaningful resettlement scheme. In this particular case, the perpetrator was a military regime internationally renown for kleptocracy. See Chinazor Megbolu, "Maroko Evictees Take Case to African Commission," This Day (14 January 2009). See also Davis, p.101. See also Davis's list of major slum evictions (102).
5. This refers not merely to obvious examples such as the Occupied Territories of Palestine, or to urban centers in Iraq, or formerly Tamil-controlled regions of Sri Lanka. In a great many LDCs, civil wars or coups have led to parts of a country being under military rule. In such cases, there was little, if any, difference in conduct between the nation's army toward its own population, and that of a foreign invader towards the civilians in combat zones.
6. See, for a brief summary of the history of development policy, see Rajneesh Narula, "Switching from import substitution to the ‘New Economic Model’ in Latin America: A case of not learning from Asia" , Latin America/Caribbean and Asia/Pacific Economics and Business Association (December 2002). Note that the merits of the respective policies are not at issue here; the point is merely that a change in policy regime took place, and the Bretton Woods Institutions were instrumental in this change.

---

Sources & Additional Reading

Tripti Lahiri, "Ayn Rand move over: In Pune, India, shantytown residents design by consensus" Christian Science Monitor, (25 March 2010)

Filipe Balestra website;"Sambarchitecture"; Sara Göransson has no dedicated website

David Basulto, "Incremental Housing Strategy in India," Archicentral (18 May 2009)

Filipe Balestra and Sara Göransson, "Incremental Housing Strategy in Pune, India," A Weekly Dose of Architecture (25 May 2009)

Bromwyn Curran, "The Cruel Utility of Slums" , Development Asia (January-March 2010), p.16

Mike Davis, Planet of Slums, Verso Press (2006)

Srinanda Sen and Jane Hobson, "The Pune Slum Census: Creating a Socio-Economic and Spatial Information base on a GIS for integrated and inclusive city development" GIS Development Conference Proceedings, Enschede, The Netherlands (May 2002)

The Society for the Promotion of Area Resource Centers (SPARC; the NGO that sponsored Filipe Balestra & Sara Göransson visit to Pune); publications page; see especially Sundar Burra, "Co-operative Housing in Pune" (November 1999)

Alex Perry, "Life in Dharavi: Inside Asia's Biggest Slum," Time (12 June 2006)

UN-HABITAT Global Report on Human Settlements,

Flickr Map of Netaji Nagar, Poona (Pune), Maharashtra State, India