Tuesday, October 07, 2008

Walking Close to the Buildings

Too bad the only people who know how to run the country are busy driving cabs and cutting hair.
-- George Burns (1896 - 1996)

During the Great Depression, there were a few rules that only those who lived through it would know about. Wall Street workers in those dark days, for example, were happy to work “Scotch” weeks – when not being paid for every week of work was accepted. It was better to have half a job than lose a whole one. There were other familiar words of advice that were not a joke.
People working on “the street” were told not to venture near the curb as they walked towards Broad Street. Looking up when crossing a street was advised.

When someone went out a window after reading the latest ticker tape, the arch of the falling body took them out to the curb, away from the sidewalk closest to the building. Those times are upon us again.

The worst period in the Depression, from a stock market point of view, actually did not arrive after the first round of major drops. A period of nearly a year elapsed after the initial calamity that brought everyone and everything to its knees.
The current scenario is playing itself out on Wall Street and Main Street – no matter whether you are a real estate investor, a shopkeeper, a member of the Town Board in the Hamptons, a City Council member in Manhattan – or, even if you managed to hold on to your Lehman Brothers job when Barclay’s picked up your ticket after the Bankruptcy.

The problem with watching the gyrations on Wall Street every day is that it has little to do with what is now in the cards for every one. No matter whether we see a capitulation, as it is called when a bottom is announced by the gurus, or whether we see a rally after all of the bad news is digested.
What ensues after that is already pre-ordained. It is starting to unfold now.

Mortgages under $500,000 are extremely difficult to obtain. What used to be called super-jumbos, million dollar plus loans which fueled the sale of Hamptons properties and Manhattan condos – are history.

The Southampton Press, for example, reported that:
‘As a sign of the worsening economy, Mr. Bishop noted that on Eastern Long Island there are at least 14 multimillion-homes being built where the owner of the home has stopped construction “because he doesn’t know what’s in his future. It’s not just about the 14 homes; it’s about all the construction workers that aren’t going to have jobs as a result.
….Families are having difficulty with the daily expenses and certainly with their housing costs as home values drop. And we know that this credit crisis that we are in the midst of cannot on its own correct. It sounds dire, but there is a risk that commerce could grind to a halt,” she said.’

Even buyers with perfect credit and huge amounts of cash find the process impossible to complete IF they can find a lender with such a product. And, yes, folks, the Europeans are leaving town in order to locate their accounts before their bank fails.

Villages and Towns, as well as Counties will struggle with budgets – and some will be forced to file for bankruptcy. That includes Southampton Town, East Hampton Town and Suffolk County. Dipping into the Community Preservation Fund (where Transfer Taxes from New Yorker home purchases went to buy open land) in order to pay local government employee salaries -- is a good indication of the severity of their financial situation. It is not a glowing picture despite the hostility demonstrated towards New Yorkers and investor-landlords.

Then, as the Hamptons properties become worth less than 50% of what they were “worth” two years ago, as credit lines evaporate, as home equity credit lines are withdrawn, as credit cards are cancelled by the lenders without notice, as car loans disappear -- forcing Ford and General Motors to be bought out –and potentially resulting in the wholesale repudiation of pensions in bankruptcy court – we may awaken to see the final Panic leg on Wall Street. That’s where the buck stops. In fact, that’s where everything stops.

When the Panic Leg finally resolves itself we will have arrived at the point where Manhattan landlords provide services in order to keep their rent-paying stabilized tenants.
It’s the point where coop and condo boards send out maintenance statements that double the fees to compensate for their deadbeat members – forcing a final round of foreclosures.
It is the point where some schools close, hospitals fail, houses and apartments are abandoned and political fundraisers are cancelled for lack of attendance and lack of money.

The Federal bailout and Paulson’s protection of his buddies at Goldman Sachs have made all of this possible. Whether Paulson leaves office in January, as he previously had indicated, he has taken care of Bush, Goldman Sachs and a few other well-placed friends.
It leaves behind the following problems which must play out before we reach that point, which have still not been addressed:

Credit default swaps which Warren Buffet, himself, divested his company of years ago – total an estimated value in excess of $800 Trillion dollars. That’s an amount approaching $1 Quadrillion dollars. If that blows up, even selling apples won’t help. And, by the way, JPMorgan Chase has several Trillion dollars worth of these little beauties lying around off of its balance sheet somewhere, ready to explode at the right moment;

The Hedge Fund implosion, which was blindsided by the SEC Short sale prohibition -- triggering redemptions that threaten that entire $2 Trillion dollar industry;

The Money Market Fund problem caused by The Reserve’s “breaking the buck” which resulted in a return of only 30-40 percent of the original cash paid out due to the failure of Lehman Brothers;

The rescue packages of General Motors, Ford and Chrysler, which will cost another $100 Billion.

And, finally, the credit card debacle is slated to hit us in 2009 as American Express and Capital One (among others) play their part in another $1 Trillion dollar disaster. Of course, that amount is predicated upon those companies having told us the truth about the severity of the problem.

This comes upon the heels of our $3 Trillion dollar military expeditions in Iraq and Afghanistan. If ever the “King needs a war” -- (Iran), it’s now.

As illegal immigrants and Latinos in the Hamptons leave town due to lack of work and the unconstitutional terrorizing of women and children in their homes -- white Americans will need to double-up and triple-up in houses in order to survive. Living situations, formerly considered illegal, that have promulgated attacks on landlords and New Yorkers, will now be permitted. Many of them will be Code Enforcement police who will not be able to afford a place to live on their own. Housing violations will suddenly seem unimportant and what was once considered overcrowding – will become the norm.

In Manhattan, real estate agents who have touted the strong condo market will be looking for jobs as the “European investor” heads for his hometown to hide his devaluing Euros under the mattress.

Political ploys like Mayor Bloomberg running for a third term along with his sycophantic supplicants on the City Council – buying himself another term in office – is only the most obvious move as everything is suspended.
Cynical plays that presume to be managed for the good of the people will become more prevalent.

Morality, ethics and fair-play will be sorely tested.

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