Abstract
This paper contributes to scholarship on the relationship between financialisation and the production of urban space by examining the implementation of the Gulf Opportunity (GO) Zone Act of 2005 (Pub. L. No. 109–135). From 2005 to December 2011, the GO Zone provided over $23 billion in tax-free, low-interest bonds and other tax incentives to individuals and businesses in the Gulf Coast area affected by Hurricanes Katrina and Rita. Drawing on government documents, planning reports, and interviews, I identify the limitations of the GO Zone and provide a critical assessment of the use of financialisation techniques to revitalise disaster-devastated communities. In doing so, my investigation seeks to deepen scholarly understanding of post-disaster regulatory experiments to illuminate the mechanisms underlying the production and regulation of uneven spatial development. My analysis challenges accounts that locate financialisation in deregulatory initiatives and, in contrast, shows that financialisation is a state-driven process that exacerbates risk and is associated with a series of intense contradictions, regulatory failures, and crisis tendencies.
Introduction
Over the last two decades, the phenomenal growth of the financial sector, the post-2007 global economic crisis, and the recent recovery of the real estate sector have attracted the attention of many researchers interested in understanding how financialisation processes are affecting cities and urban life. While there are a variety of conceptualisations of financialisation, most scholars agree that financialisation is a process of capital accumulation in which firms and organisations generate profits (and surplus value) through financial channels rather than through trade and commodity production. Financialisation also implies a shift from a manufacture-driven to a finance-oriented economy, and the increased disciplining of corporate governance by financial rather than product markets (Davis, 2009; Fligstein, 2002; Krippner, 2005, 2011; Lin and Tomaskovic-Devey, 2013). Over the last few decades, a variety of financial tools such as mortgage-backed securities (MBS), tax-increment financing (TIF), adjustable rate mortgages (ARMs), real estate investment trusts (REITs), collateralised mortgage obligations (CMOs), collateralised debt obligations (CDOs), and Real Estate Mortgage Investment Conduits (REMICs), among others, have not only transformed product markets but increased the dependency of political institutions on financial markets for securing investment capital (Aalbers, 2012; Gotham, 2006; Helleiner, 1994; Hollingsworth and Boyer, 1997). Overall, scholars are increasingly examining the importance of credit, securitisation, and entrepreneurial policies to attract finance capital investors though disagreements remain over issues of theorisation, empirical indicators, and explanations of financialisation.
This paper contributes to scholarship on financialisation by examining the implementation of the Gulf Opportunity (GO) Zone Act of 2005 (Pub. L. No. 109–135). From 2005 to December 2011, the GO Zone provided over $23 billion in tax-free, low-interest bonds and other tax incentives to individuals and businesses in the Gulf Coast area affected by Hurricanes Katrina and Rita. Hurricane Katrina was one of the deadliest and most destructive hurricanes in US history, with over 1400 deaths and estimated damages ranging from $100 billion to $200 billion. The hurricane caused catastrophic property damage along the Mississippi and Alabama coasts with approximately 90,000 square miles of the Gulf Coast region designated as federal disaster areas, an area almost as large as the United Kingdom. In New Orleans, Katrina flooded 80% of the city, including 228,000 occupied housing units (45% of the metropolitan total) and over 12,000 business establishments (41% of the metropolitan area’s total businesses) (Brookings Institution, 2005). Less than a month after Katrina roared ashore in Mississippi, Hurricane Rita swept through western Louisiana and eastern Texas devastating coastal communities and flooding tens of thousands of homes and businesses and causing more than 120 deaths. The storm struck rural areas with estimated damages ranging from $10 billion to $20 billion. The storm’s effects were felt far away in New Orleans as the hurricane breached the broken levees in the Lower Ninth Ward and flooded the neighbourhood once more.
Governments have long used various tax provisions to provide financial aid to those individuals and businesses adversely affected by disasters. Yet targeting disaster-related tax provisions to specified areas is recent. The establishment of the New York Liberty Zone following the 11 September 2001 terrorist attacks was the first time Congress explicitly targeted tax benefits to a disaster-impacted geographic ‘zone’. The GO Zone Act was broadly similar to legislation that created the Liberty Zone which included the 16 acre World Trade Center site and surrounding urban neighbourhoods and commercial districts. Like the Liberty Zone, the GO programme used financialisation strategies including debt securities and tax incentives to stimulate community recovery. Unlike the Liberty Zone, which was limited in scope and scale, the GO Zone represented the first time the Internal Revenue Code (IRC) was used to provide post-disaster relief across a vast region of hundreds of miles containing millions of victims, many of whom were displaced.
My argument in this paper is that the GO Zone operated as a state supported financialisation strategy that reflected and reinforced socio-spatial patterns of uneven development. Specifically, I examine the implementation of GO Zone tax-exempt, private activity bonds, a novel pro-financialisation policy developed and applied to revitalise Gulf Coast cities. Unlike traditional tax-exempt bonds that are issued for public projects such as streets, utilities and public schools, GO Zone bonds were not payable from taxes or other public funds but instead were payable by the private developer to whom the bonds were issued. GO Zone regulations required that the developer arrange to sell or place the GO Zone bonds for their project based on their own creditworthiness and collateral. Interest on GO Zone Bonds was tax-exempt to investors, reducing the borrowing costs to the developers and, in theory, providing an incentive to developers to invest in the GO Zone. By acting as an indirect economic stimulus package to help businesses in the affected areas, GO Zone bonds denoted a state-driven approach to financialising disaster-devastated property. Broadly, the GO Zone represented an important component of financialisation to the extent that state regulatory activities attempted to transform damaged assets and devalued commodities into exchangeable products using financial instruments (e.g. private activity bonds) and thus incentivising developers to reinvest in the Gulf South.
I first identify the basic features of GO Zone policies and socio-legal regulations and describe their relationship to financialisation. Next, I discuss the risk-generating and risk-enhancing features of the GO Zone. I argue that financialisation is a process of altering socio-legal arrangements and policies to accelerate the circulation of capital, revalorise space, and increase market liquidity. As a crucial activity for spatially fixing mobile capital, the GO Zone aimed to channel tax incentives into particular locations and scales to overcome disaster-induced barriers to the accumulation process. Empirically, this paper identifies the limitations of the GO Zone and provides a critical assessment of the use of financialisation techniques to implement disaster relief and revitalise communities. Theoretically, the analysis seeks to deepen scholarly understanding of post-disaster regulatory experiments to illuminate the mechanisms underlying the production and regulation of uneven development in cities and regions affected by major disasters. Overall, this paper provides a critical understanding of the contradictions, crisis tendencies, and regulatory deficits that have been generated through the financialisation of post-Katrina space.
Financialisation and post-disaster redevelopment
Scholars around the world currently debate the causes and consequences of the financialisation of markets, the growth of financial linkages across national boundaries, and the implications of the ‘finance conception’ of corporate control in the US economy (Fligstein, 1996, 2002; Foster, 2007; French et al., 2011; Knorr-Cetina and Preda, 2005; Wainwright, 2012). Knorr-Cetina and Preda (2005: 1) note that ‘financial activities are a defining characteristic not only of the corporate economy, but also of politics, the welfare and social security system, and general culture’. As a multidimensional process, financialisation refers to the growth financial actors (banks, lenders, private equity corporations, etc.), new financial tools (mutual funds, asset backed securities, hedge funds, etc.), and the increasing significance of financial firms in different areas of the economy such as real estate (Ashton, 2012; Lin and Tomaskovic-Devey, 2013; Pike and Pollard, 2010; Theurillat and Crevoisier, 2012). Financialisation also implies the growth of new financing arrangements commonly known as conduit financing in which a conduit issuer, usually a government agency, issues municipal securities or private activity bonds to raise capital for revenue-generating projects. The funds generated are used by a third party (known as the ‘conduit borrower’) to make payments to investors. A conduit borrower is generally responsible for the payment of debt service on the conduit bond issue and is usually contractually obligated to maintain the tax-exempt status of the bonds. Conduit issuers have an unusual status under the Internal Revenue Code: they are generally not subject to federal income tax and are generally not the real obligors of the debt that they issue, but they are treated as ‘taxpayers’ for many procedural purposes. Importantly, the role of the conduit issuer set forth in the Code represents an application of state power, a mechanism under which the federal government has in effect delegated to state and local governments the responsibility for administering tax benefits. Economic activities relating to the provision (or transfer) of liquid capital in expectation of future profits in the form of interest and dividends characterise finance markets including bond markets governed by conduit financing arrangements.
There is a growing literature examining the economic and social impacts and implications of financialisation. Weber (2010) and Aalbers (2009) document the increasing use of techniques derived from the finance industry by state agencies and the development of neoliberal or market-centred policies to attract finance capital investors to revitalise cities (Rutland, 2010). In a study of the political-institutional shifts that have contributed to income inequality in the United States, Lin and Tomaskovic-Devey (2013: 1286) conclude that financialisation:
was not a neutral product of market mechanisms, but rather the result of specific political decisions to deregulate existing finance activity and to refrain from regulating new financial products, in an era of expanding neoliberal governance ideologies and finance sector political influence.
Gotham (2012), Wyly et al. (2012), and Dymski (2012) show that the real estate and mortgage securitisation process has been a major driver of financialisation that contributed to the subprime crisis and the global economic crisis. The roots of these interrelated crises derive from the consequences of post-1980s structural changes in mortgage markets, specifically the role of different financial tools in expanding credit and hiding the negative consequences of risky real estate loans and mortgages (for an overview, see Aalbers, 2012).
Examining the spatial impacts and consequences of post-disaster recovery and rebuilding efforts offers a fertile area to identify the drivers and consequences of financialisation processes. An earthquake, flood, tornado, or terrorist strike, for example, can produce a crisis of exchangeability by undermining normalised patterns of accumulation, disrupting commodity flows (relations between fixed and circulating capital), and destabilising networks of financial and real estate exchange in a particular territory. One of the major obstacles or barriers to realisation of profit, as David Harvey (2001 [1975]: 247) and Henri Lefebvre (1991, 2003 [1970]: 159, 212) noted, is the time involved in producing commodities, transporting them to market, and exchanging them for profit. In The Limits to Capital, Harvey (1999: 83) explained that capital ‘as value in motion’ is always under the threat of devaluation through decelerated turnover time. Production and realisation of profits takes time and entrepreneurs and firms can only realise profits after the completion of production and the selling of commodities. Disasters immobilise capital, destabilise the production-realisation circuit, and thereby increase the turnover time. Thus, the problem for capital is that disasters disorder extant socio-spatial arrangements that previously supported capital circulation, profit realisation, and investment in the built environment. In addition, disasters raise the spectre of illiquidity by temporarily destabilising the capital circulation and making otherwise standardised and transparent commodities and relations opaque and thereby non-transferable and non-exchangeable. In the case of disaster assistance and recovery actions, policies and socio-legal regulations attempt to carve up and differentiate scales to re-anchor capital and direct flows of capital into damaged spaces to restore profitmaking.
While much financialisation research has focused on the real estate and finance sectors, few scholars have explored the impact of financialisation on disaster-devastated spaces. Disaster relief has traditionally been a government function (or a charity function), but not an area for substantial and legitimate for-profit investment (as opposed to profiteering). There is a growing literature on financialisation as a global process that increasingly affects traditional government functions from parking services to public housing (Ashton et al., 2012; Forrest and Hirayma, 2009; Martin, 2002). Following broader discussions on globalisation and neoliberalisation (Brenner, 2004; Gotham, 2006; Swyngedouw et al., 2003), scholars have suggested that because of the removal of socio-legal regulatory barriers and the facilitation of capital circulation, global financial actors and logics are increasingly shaping urban spaces. Research by Torrance (2009) on urban infrastructure and Goldman (2011) on urban development draws attention to how the global circulation of financial tools and policy instruments have shaped emplacement of financial assets into tangible urban assets. At the same time, scholars recognise that there is no global scale per se at which financialisation processes hierarchically unfold and supposedly project an omnipotent and omnipresent logic upon sub-global scales. Rather, financialisation processes are facilitated, negotiated, and transformed in and through cities and various socio-legal regulations and infrastructures.
If we agree that financialisation ‘is a pattern of accumulation in which profit-making occurs increasingly through financial channels rather than through trade and commodity production’ (Aalbers, 2012: 10), then an important question is how financial channels affect the pace and trajectory of post-disaster redevelopment? That is, how does the shift from commodity production to finance production impact the production and regulation of the urban built environment and, more important, the redevelopment of spaces affected by disasters? Moreover, what are the outcomes and consequences of using techniques derived from the finance industry to resuscitate and renew disaster-devastated capital flows and networks of commodity production?
Data and method
Although general works by Martin (2002) and Krippner (2011) are extremely important, because of the broad and generalised perspective they bring to the study of financialisation, the kind of rich detail and investigative specificity of case studies and qualitative interviewing can offer a researcher empirical and theoretical gains in understanding the interconnectedness of local actions and global processes. Contextual factors specific to the city under study can complicate cross-city generalisations about financialisation. Local contextualities can render the financialisation process to have a relevant degree of place specificity. Thus, variation in the socio-spatial impacts of financialisation and their multiple meanings call for an examination of individual cases. As far as financialisation is an expression of larger social, economic, and political relations, the development of financialisation in any particular region or locale will express the particularities of the place in the making of its urban space.
This paper draws on both quantitative and qualitative data as part of a long-term research project that investigates the post-Katrina recovery and rebuilding process in New Orleans, Louisiana, and across Gulf South states. To identify the processes used by state governments to allocate federal GO Zone exempt private activity bonds, I obtained allocation plans for GO Zone bonds, issue amount of bonds at the county level, lists of beneficiaries, and descriptions of projects in Alabama, Louisiana, and Mississippi, the three states with GO Zones eligible to use the tax-exempt bonds. I also conducted semi-structured interviews with 50 public and private elites, environmental and civil rights activists, neighbourhood leaders and stakeholders, city planners, business owners, attorneys, and government officials involved with the post-Katrina rebuilding effort. For this paper on the GO Zone, I selected the interviewees due to their role in formulating and implementing GO Zone tax incentives. My analysis of interviews and documents focused on identifying the strategies and techniques used by various key actors and organised interests to convince their audience of the utility of the GO Zone as a post-disaster recovery strategy. I used snowball sampling to select interviewees focusing specifically on identifying those key actors who had first-hand knowledge with the implementation of GO Zone bonds and related GO Zone legislation. I recorded the interviews when granted permission and use initials to protect the confidentiality of my interviewees. In interviews, I asked questions about the goals and objects of various GO Zone financed projects, the limitations or problems with the legislation for developers, and use of various financing techniques to leverage bonds with other sources of project financing. I focused my research on asking ‘process’ questions to illuminate how people interpreted the meaning, significance, and purported goals and outcomes of the GO Zone. The data were analysed using process tracing, a method that uses interpretive inquiry to seek out information about intentions, motivations, constraints, opportunities, and consequences of social action.
Re-anchoring capital: The case of the Gulf Opportunity (GO) Zone
In December 2005, the US Congress passed H. R. 4440, the Gulf Opportunity Zone Act of 2005 (the ‘GO Zone Act’), which provided tax incentives and other financial incentives for individuals and businesses in Texas, Alabama, Mississippi, Louisiana, and Florida affected by Hurricanes Katrina, Rita, and Wilma. Importantly, the Act did not define a single, cross-state zone with the same tax incentives and benefits but defined a separate GO Zone for the three major 2005 hurricanes – Katrina, Rita, and Wilma. Both Hurricane Katrina and Hurricane Rita affected much of southern Louisiana and Congress designated overlapping GO Zones in the state. Figure 1 illustrates the GO Zone areas in each of the five affected states.
Map of the Gulf Opportunity (GO) Zone by state.
Under the GO Zone Act, Gulf Coast state governments were responsible for allocating four tax incentives between 2006 and 31 December 2011: (1) $14.9 billion in tax-exempt private activity bonds; (2) $330 million in low-income housing tax credits (LIHTC); (3) $350 million in GO Zone tax credit bonds, a newly created category of tax credit bonds; and (4) $7.9 billion in additional advance refunding bonds. In the GO Zone, tax-exempt financing allowed private business owners and corporations to borrow capital to acquire, construct, reconstruct or renovate non-residential real property, qualified residential rental projects, and public utility property in the affected areas. The bonds issued were to be used to finance a wide range of facilities, including manufacturing facilities, utilities, housing, retail facilities, and hotels. Table 1 shows the amount of allocation authority that Alabama, Louisiana, and Mississippi state received by provision. The table reveals significant state-level variations in the amount of private activity bonds, tax credit bonds, and LIHTCs. Tax provisions to assist recovery varied by states, with the most assistance provided to areas damaged by Hurricane Katrina, particularly in Louisiana and Mississippi.
Gulf Opportunity (GO) Zone Act of 2005 cumulative allocation authority by state (dollars in millions).
Note: States received GO Zone allocation authority for private activity bonds and LIHTC in addition to their annual state allocation. Florida and Texas each received $3.5 million in GO Zone LIHTC authority for 2006. Dollars for private activity bonds and LIHTCs are rounded to the nearest million.
Source: GAO (2008: 11) analysis of Joint Committee on Taxation and Gulf Coast state data.
In response to the Gulf Coast devastation, the federal government committed a historically high level of resources through an array of grants, loans, subsidies, and federal tax incentives. The bulk of federal rebuilding assistance from 2005 through 2008 came from two key programmes – the Federal Emergency Management Agency’s (FEMA) Public Assistance programme ($10.4 billion) and the Department of Housing and Urban Development’s (HUD) Community Development Block Grant (CDBG) programme ($19.7 billion). Federal recovery and rebuilding assistance also included payouts from the National Flood Insurance Program as well as funds for levee restoration and repair. Also to assist with recovery from the Gulf Coast hurricanes, the Gulf Opportunity (GO) Zone Act of 2005 provided a range of tax relief and incentives for individuals and businesses in the GO Zones. As Table 1 shows, the amount in disaster aid of GO Zone tax incentives, especially tax-exempt private activity bonds, was more than direct aid provided by FEMA’s Public Assistance programme and HUD’s CDBG programme. While GO Zone bonds ($14.9 billion) were less than the amount of CDBG funds ($19.7 billion), the overall amount of tax incentives was larger ($23,483 billion). This amount is one indicator that financialisation-oriented incentives were given a higher priority than direct outlay programmes and grants in disaster recovery. The creation of GO Zone tax exempt, private activity bonds and related tax credit bonds and advance refunding bonds was the first time the federal government employed financialisation techniques to respond to a major disaster that affected an entire region. The coupling of tax incentives to bond financing represented a novel approach to financing disaster related recovery activities.
The largest source of GO Zone financing came from tax-exempt private activity bonds, forms of debt issued by or on behalf of local or state governments for the purpose of providing special financing benefits for private firms and private activities. Since 1986, tax-exempt bond issues had been restricted to governmental agencies, qualified private activity bonds, or not-for-profit organisations (Zimmerman, 1991). These restrictions on tax-exempt debt were modified by the US Congress in the GO Zone to allow private business owners and corporations this unique advantage from 2006 to 2011. Unlike Industrial Revenue Bonds, GO Zone bonds were not subject to volume cap allocations.
Table 2 shows the main actors and government agencies involved in implementing the details of the GO Zone programme. Per the GO Zone Act of 2005, if a state required a bond commission to approve private activity bond authority, then the final authority to award GO Zone bonds rested with the bond commission. This was the case in Louisiana (Louisiana Legislative Auditor, 2008). If the state did not have a state bond commission, then the authority rested with the Governor. In Alabama and Mississippi, the Governors had the authority to approve GO Zone private activity bonds (GAO, 2008). As Table 2 shows, industrial development boards operated as conduit issuers of GO Zone bonds while developers operated as conduit borrowers.
Roles and responsibilities of major actors involved in the GO Zone programme.
Source: Table prepared by author using data from the US Government Accountability Office (GAO), Louisiana Legislator Auditor, Louisiana Department of Economic Development (LED), Governor’s Office Division of Administration (DOA), Louisiana State Bond Commission, and the Industrial Development Board (IDB) of New Orleans.
Developers were responsible for arranging to sell the bonds for their project. In a typical case, the conduit borrower and bond purchaser would negotiate the terms of the bond, and the borrower would furnish whatever collateral (e.g. mortgages, assignments of rent or revenues, personal guarantees, etc.) that they would normally furnish to their lender. Instead of receiving a promissory note from the borrower, the lender would purchase a private activity bond from the conduit issuer, which then loaned the bond proceeds to the conduit borrower to finance the redevelopment activities. In the excerpt below, one attorney describes the process in Louisiana:
You have a number of entities that are considered conduit issuers, for example, industrial development boards, economic development districts, the Louisiana public facilities authority, the Louisiana Development authority. Those are political subdivisions of trust that the state has established through legislative action that allows them to be a conduit issuer. Under the Louisiana constitution, every political entity subdivision would like to issue debt but for a private or a pubic issuer in this state, they have to come to the Bond Commission. They have to file an application and provide all the necessary financial and compliance disclosure. Their application is then evaluated by the staff bond commission. The staff bond commission would then make a recommendation or non-recommendation to the Commission members. The Commission members have a final say as to whether they can or cannot move forward with that transaction. (Interview with N. E., 28 May 2010)
A major goal of GO Zone bonds was to enable private businesses in the GO Zone to borrow at very cheap rates thus providing an incentive to businesses to reinvest and rebuild damaged areas. As one person explained in an interview:
Purchasers of bonds were looking for the same benefits as lenders. Since the interest on bonds was exempt from federal income tax and the federal alternative minimum tax, the lender/purchaser would thereby benefit by getting an advantageous ‘after-tax’ return than they would with a regular loan from a bank. (Interview with H. C., 29 May 2011)
We can view the GO Zone tax-exempt private activity bond programme as a mechanism for the financialisation of space in several ways. First, like other forms of bond financing, GO Zone private activity bonds were backed solely by the User’s credit and any credit enhancement that it furnished. Users could utilise bank letters of credit or other forms of ‘credit enhancement’ such as bond insurance to back GO Zone bonds issued to support the costs of revitalising facilities. Credit enhancement was a strategy to enhance the saleability of bonds and thereby obtain the lowest interest rates, as investors could examine and rely upon the credit enhancer’s financial strength and not the user’s. As a critical part of the financialisation process, credit enhancement aimed to improve the credit profile of a structured financial transaction or the credit profiles of such products or transactions. Once purchased, GO Zone private activity bonds could be publicly sold or privately placed, for instance, with an investment group or financial institution, and sometimes individuals, through negotiated sales (GAO, 2008).
Second, policy makers designed the programme specifically to re-embed localities into extra-local circuits of capital accumulation, thereby exposing cities along the Gulf Coast to global financial markets. Table 3 shows the geographical reach and scale of operations of large corporations that received GO Zone bonds in Louisiana, Mississippi, and Alabama. The table shows the largest bonds, the names of the corporations receiving the bonds, and describes the international scale of corporate operations. As the table shows, the receivers of GO Zone bonds were global corporations each with facilities and operations located throughout the world. Each of these companies operated subsidiary companies that could rely on a vast network of legal expertise to access GO Zone bonds for financing their projects and operations. The corporations listed in the table received more than one third of all GO Zone private activity bonds across the three states. In Louisiana, large corporations received approximately $3.4 billion, almost half of all bonds in the state. In Mississippi, large corporations received $1.1 billion, about one fifth of all bonds in the state. More than half of all bonds issued in Alabama – $1.45 billion – went to large corporations. This high percentage of bonds issued to a small number of large corporations in each state suggests that large transnational corporations reaped a large share of GO Zone benefits. While there is no specific evidence that policy makers explicitly designed the GO Zone programme to bypass small businesses and favour large businesses, the implementation of the programme advantaged business that had the collateral, financing, and networked connections to arrange and sell the bonds. Small businesses were faced with varying degrees of physical damage and social loss and, unlike large businesses, were not well capitalised and did not have the collateral and discretionary resources to get access to GO Zone bonds.
Geographical reach and scale of operations of large corporations that received GO Zone bonds in Louisiana, Alabama, and Mississippi.
Note: Exxon Corporation financed two GO Zone projects, one at $300,000,000 and the other at $200,000,000, in Louisiana.
Source: Prepared by author using data from the GAO (2008) and Louisiana Bond Commission. Louisiana data released through public records; request initiated by the author. Data for Alabama come from the Alabama Department of Finance. Data for Alabama are current as of 21 October 2010. Data for Mississippi are as of mid-June 2008. Data for Louisiana are current as of November 2011.
To jump start disaster-devastated local economies, governments moved beyond simply financing post-Katrina infrastructure rebuilding with traditional general obligation bonds, backed by the full faith and credit of governments. Instead, state and local governments along the Gulf Coast extended credit to privately owned development projects with nonguaranteed debt. Faced with a dearth of public aid and recovery money, governments attempted to capitalise on new areas of economic development activity, such as participation in the private activity bond market, to attract private capital for regeneration. As one person told me in an interview:
What the GO Zone Act did was to come in and say you can issue if you are a private entity, you can issue tax exempt bonds. So it basically removed all the restrictions that affected traditional bonds. One misconception was that the state was providing bonds, providing funds. The state provided nothing other than the ability to designate a bond that was going to be issued as a GO Zone bond and therefore eligible to be issued a tax-exempt format. The state provided no guarantees. The state had no responsibility for the debt issuance. They had no responsibility for the repayment. The issuance of the bonds was totally dependent on the credit enhancement of the authority or the beneficiary that was asking for the bond allocation. (Interview with K. W., 12 July 2011)
Third, the GO Zone used a series of neoliberal socio-legal regulations and tax rule changes to allow the state and local governments to issue tax-exempt, private activity bonds – for example, debt securities – for the ‘public purpose’ of financing post-disaster rebuilding. State and local governments have long issued private activity bonds and lent bond proceeds to borrowers. A private activity bond is one that primarily benefits or is used by a private entity. Over the decades, private activity bonds have maintained the language of public benefit, with eligible facilities listed in the US tax code including ‘privately owned and operated properties upon which the public depends’, such as transportation facilities, public works facilities, affordable rental housing and electric and gas utilities (Maguire, 2006). With the GO Zone, however, eligibility rules were modified, restrictions were removed, and the tax-exemption status was made available to all developers regardless of the ‘public benefit’ of their projects.
Like other financialisation techniques and processes, the implementation of GO Zone bonds was driven by a deregulatory logic in which strong public sector regulation and redistributive concerns were subordinated to private sector prerogatives and profitmaking desires. Deregulation did not mean the absence of state regulation but the extension of state power to actively facilitate financialisation via legal and economic guarantees of new kinds of financial instruments. The lifting of restrictions on tax-exempt private activity bonds was a concerted effort by policy makers to leverage capital through bond proceeds for projects in the GO Zone, thereby attempting to create the liquidity required for post-disaster revitalisation. What was new with the GO Zone was the issuing of debt securities and the extension of credit to privately owned corporations to encourage an explicitly ‘entrepreneurial’ approach to post-Katrina recovery. According to the Louisiana GO Zone website: ‘the essence of the programme is simple: the government has established a series of financial incentives to promote investment by the private sector in Louisiana rather than embarking on a public building campaign financed solely with public funds’ (Louisiana Gulf Opportunity Zone, no date). While the GO Zone was justified to residents through the assertion that benefits would eventually trickle down in the form of new jobs and rebuilt communities, the priority of the programme was on promoting private investment.
One popular view shared by many journalists and researchers is that financialisation can be explained with reference to ‘deregulation’ or the actions of finance capital and global financial institutions. Implicit in these arguments is that state activities have played a passive or secondary role to financialisation or have been bypassed and made irrelevant by the long trek toward financialisation. Much research has examined how financialisation has been an outgrowth of various deregulation measures that have broken down the institutional and legal barriers to international exchange and encouraged the buying and selling of risk (for a critical perspective, see Peck et al., 2010). Yet it is important to note that deregulation does not mean withdrawal of the state from regulating financial processes or activities. Nor does this term suggest or signify a reduction or diminution of state power and authority. Rather, deregulation is a conscious policy decision that reflects an application of state power to transform property rights and rules of exchange to enable actors in markets to engage in profitable exchange involving financial techniques and modes of activity. Different state institutions and agencies formulate and implement various policies, statutes, and legal-regulatory frameworks to encourage and facilitate financialisation. As we have seen with the GO Zone, state activity has been closely involved in the financialisation process and financialisation is specifically enabled through direct state intervention. This intervention is neither passive nor benign. Rather, state actions that drive and shape the pace and trajectory of financialisation also generate new risks, unforeseen negative consequences, and crisis tendencies that can imperil the subsequent development of financialisation.
Risks of financialisation in the GO Zone
One of the most significant features of the GO Zone Act was the increase in the number and magnitude of risks as a result of the enhanced capacity acquired by state institutions to actively integrate themselves into financial markets through the construction of new investment instruments. First, by passing the GO Zone Act, Congress created a taxation risk for the federal government in which the tax-exempt GO Zone bonds could potentially reduce future tax revenues. Cost of the GO Zone was not trivial. The Joint Committee on Taxation (2005) found that the cost of the GO Zone Act was $3.95 billion in the first tax year 2006, and estimated at $8.67 billion over 10 years. A related risk was that the revenue loss generated by tax-exempt bonds could expand the deficit and lead to higher costs of financing traditional government activities. A persistent budget deficit could ultimately lead to generally higher interest rates as the government might have to compete with private entities for scarce investment dollars. Higher interest rates could further increase the cost of all debt-financed state and local government projects.
Second, state governments faced a credit risk in which the GO Zone bond borrowers might default on payments and not be able to meet their obligations in a timely fashion. Since post-Katrina rebuilding was contingent on financing, some firms that could not find buyers for bonds were forced to request assistance from state officials to back the bonds with loans or to return the bonds to the pool. As a result, state governments faced major challenges and difficulties in financing post-Katrina revitalisation efforts through tax-exempt private activity bonds. Several examples are relevant. In 2008, the Renewable Energy Group halted construction on a 60 million gallon per year biodiesel plant in St. Rose parish because of the inability to obtain suitable financing to use $80 million in GO Zone bonds (Scallan, 2008). In January 2009, a proposed Film Factory, a movie studio, had lined up $67 million in GO Zone bonds before cancelling (Scott, 2009). Later that year, in September 2009, the Hyatt Regency hotel firm returned its $225 million location because it was unable to find buyers for the tax-exempt bonds (Times-Picayune, 2009). In 2010, GO Zone bonds helped finance the conversion of a former funeral home into a Borders bookstore. A year later, the national chain declared bankruptcy and the former funeral home reverted back to an abandoned and blighted structure unable to generate tax revenue for the city of New Orleans (see Figure 2).
Borders bookstore financed with GO Zone bonds.
Third, governments and investors faced a market risk if economic conditions deteriorated and interest rates fluctuated. Market risk varies according to changing relationships in the global finance and real estate markets, including changing rates of return on investments, shifting liquidity ratios, and alternations in securitisation processes, all factors that cities typically cannot fully control. As the level of current interest rates change, the price or market level of the bonds can change. The market price of a bond will increase as rates go down. Subsequently, a bond will lose value if interest rates rise. With the GO Zone, for example, the buyer of the bonds was responsible for arranging to sell or place the bonds based on their creditworthiness and collateral. In a typical case, a GO Zone bond would be issued to a bank as part of private placement or marketed by an investment bank to a pool of investors. The risk the developer or buyer of GO Zone bonds faced was the inability to sell the debt in the bond market. The challenge of GO Zone bonds was that although they offered some advantageous terms available to private developers, they were still debt instruments and had to find willing lenders and credit insurers in the financial world. If applicants receiving private activity bond allocations could not issue bonds within required time frames, the allocation authority was returned to the state to be reallocated. In turn, state officials were under pressure to allot all GO Zone bonds by the 31 December 2011 deadline.
The implementation of the GO Zone occurred in a context of the dramatic collapse of credit markets and the advent of a world-wide financial crisis in the years after 2007. Through 2010, because of investor discomfort about the devastation of Gulf Coast cities and deteriorated conditions in bond markets, many counties that were devastated by Hurricane Katrina had the most trouble getting access to bond financing. Interviews with attorneys and business leaders suggest that the downturn in credit markets combined with the ‘image crisis’ that many disaster-affected communities faced worked in tandem to dampen investor interest in using GO Zone bonds for rebuilding, especially in the hard-hit areas. In interviews, respondents opined about the limited success of the GO Zone bonds and identified the difficulties projects faced in obtaining credit, due in part because of the economic downturn that hit the United States after 2007. As one real estate agent put it:
There was just so much instability in the bond markets. Investors stayed clear of GO Zone bonds and decided to sit out, waiting until the economy improved. On the other hand, the lack of investors makes it a challenge for the GO Zone to work successfully. (Interview with S. C., October 2010)
Figure 3 shows the range of GO Zone tax-exempt private activity bond allocations by state and by county or parish as of mid-June 2008. The figure indicates that some of the most-damaged counties and parishes in Mississippi and Louisiana did not yet have any specific projects that received GO Zone bond allocations. The figure shows considerable unevenness in the location of bond activity with much investment flowing into undamaged areas while damaged areas received few if any GO Zone bond projects and investment.
Gulf Opportunity (GO) Zone bond authority allocated amounts (including bonds issued), by county and parish.
As the above points and findings indicate, GO Zone bonds did not meet the intended objectives of assisting redevelopment but reinforced and perpetuated uneven development. Using GO Zone tax incentives, state governments attempted to persuade investors into supporting redevelopment in disaster-devastated spaces while investors looked to capture the highest returns for the lowest risk, thereby leaving many of the neediest areas untouched by investment. These points highlight the lack of alignment or interest disconnect among state institutions and private investors vis-à-vis financialisation. Rather than assisting recovery in the most damaged areas, the findings suggest that financialisation tools can concentrate the tax incentive benefits in those firms that least need assistance and direct investment away from those areas that most need recovery resources.
Conclusion
This paper has examined the risks and socio-spatial effects of the implementation of GO Zone private activity bonds. A major goal has been to explain how governments attempted to reconstitute cross-scale flows to support the post-Katrina rebuilding of the US Gulf Coast. As I have demonstrated, the post-Katrina financialisation of the built environment has been a state-driven process that has involved the implementation of new socio-legal regulations aimed at enhancing flows of investment at multiple scales. Disasters like Hurricane Katrina not only damage homes and communities but disrupt global–local connections, networks, and financial activities pertaining to banking, housing, and commercial redevelopment activity. By destabilising normalised patterns of accumulation and social reproduction within and between territories, disasters produce crises of real estate financing. As this paper has pointed out, GO Zone tax-exempt, private activity bonds were designed to increase the turnover rate of capital by compressing the temporal and spatial barriers to capital circulation. Yet in the attempt to accelerate, extend, and intensify capital’s circulation process, the GO Zone also injected new forms of risk into the production and regulation of uneven development. Findings from the GO Zone implicate financialisation as partial, incomplete, and characterised by significant contradictions that impel future development. Built-in risks to the financialisation process – taxation risks, credit risks, and market risks (i.e. risks of spatial non-investment) – reveal a fragile and precarious financial architecture that is prone to significant crisis tendencies.
The empirical analysis and theoretical arguments I have laid out in this paper offer a cautionary tale for policy makers of the risks in trying to adopt financialisation tools and market solutions for post-disaster recovery. Since the Hurricane Katrina disaster in 2005, the US federal government has continued to turn to tax-exempt financing to stimulate post-disaster recovery. Midwest Disaster Area Bonds were created in 2008 following severe storms, tornadoes, and flooding that affected seven states across the Midwest. Also in 2008, Hurricane Ike Bonds were created to finance the rebuilding of areas affected by Hurricane Ike in Texas and Louisiana. The American Recovery and Reinvestment Act of 2009 expanded the qualification for tax exempt financing in the form of Build America Bonds and Recovery Zone Bonds. While there were differences in the structure and organisation of these financialisation programmes, they were all designed to harness capital flows and emplace them in the built environment in order to exploit place-specific and scale-specific conditions for accumulation. Thus, the ability to finance a variety of business projects cheaply with bonds that are exempt from federal taxes – has not only endured, but is growing.
The increased use of financialisation tools for post-disaster recovery portend a future of intensified conflict and struggle over issues of democratic governance, citizenship rights, and urban redevelopment. One of the key aspects of this paper has been to reveal how the GO Zone increased the dependency of political institutions on financial markets for securing investment capital as an expedient to revitalising disaster damaged spaces. As financialisation becomes an increasingly popular approach to encouraging disaster rebuilding, we will likely witness a shift of post-disaster recovery and rebuilding activities from government to the private sector. In doing so, financialisation addresses disaster victims and disaster affected communities as isolated customers, clients, and consumers. Moreover, finanicialisation obscures liability and accountability for problematic post-disaster outcomes, and renders null-and-void claims from disaster victims and communities that they have a democratic right to aid and recovery resources as members and citizens of a sovereign nation-state. In addition, financialisation prioritises the goals and interests of private companies and allows such groups to use public resources and power to achieve what are essentially private aims. As a result, financialisation approaches stressing restoration of private profits take precedence over public sector regulation, democratic oversight, and broader community recovery needs. Ultimately, financialisation strategies serve to close off and stymie public debate on alternative courses of urban rebuilding based on, for example, public investment, social redistribution, and social justice.
Finally, my conceptualisation of financialisation as permeated by crisis tendencies and intense risks dovetails with theoretisations that emphasise the conflictual, contested, and deeply contradictory nature of uneven geographical development. Many scholars have noted that uneven development is endemic to capitalism and represents a key expression of capital’s insatiable drive to mobilise spaces, places, and territories as forces of production (Brenner and Theodore, 2002; Harvey, 1985; Smith, 1984). Uneven development is both a medium of intercapitalist competition and class struggle, and an evolving socio-spatial organisation through which the process of financialisation has unfolded. At the same time, financialisation is permeated by tensions, antagonisms, and conflicts that reproduce some forms of social exclusion, challenge other forms, and transform others. Just as capitalist regulation and profit making occur as systems of rules, habits, and norms that constrain action, financialisation is a set of socio-legal relations that define relationships of inclusion and exclusion. As a result, financialisation has developed through the production of historically specific patterns of socio-spatial organisation, uneven development, and legal-regulatory policy. Today, post-disaster recovery and rebuilding activities along the Gulf Coast, New York (Hurricane Sandy in 2012), and other places are being challenged as the spectre of financialisation breeds irrational consequences and fosters doubts about the long-term resilience of cities in the context of increasing vulnerability to economic chaos and disasters. Thus, financialisation has become contested terrain, a political arena in and through which struggles over the nature of post-disaster recovery and rebuilding are being articulated and fought out both domestically and internationally.
Footnotes
Funding
This research received no specific grant from any funding agency in the public, commercial, or not-for-profit sectors.