Spontaneous Jubilee in the air?

Why shouldn’t someone walk away from overbearing consumer, student or mortgage debt, so long as it is non-recourse? I can’t think of any reason to keep servicing debt if you have no hope of repaying the principal. What good is a high FICO score if you don’t want to run up another credit card balance or buy a home? Yes, landlords run credit checks, but it is getting harder and harder to fill vacancies, and this is what deposits are for anyway.

The “just walk away” attitude is gaining traction.  It could snowball into next year as yet more mortgages reset and U-3 unemployment enters the double digits. What can the legal system do if tens of millions of people decide to stop paying their unsecured loans? This lady is right — there is safety in numbers and government inefficiency. You get a fresh start in five years anyway, which should be right around the time real estate has a chance of recovering.

This is exactly what needs to happen. The unpayable debt will by definition be defaulted on, so the sooner the better. The banks that issued it need to go under. Stories like this are refreshing, because we need to clear the air.

Bailout not just for mortgage debt. Paulson wants to take any “troubled assets.”

Better brush up on your Sun Tzu and Machiavelli if you want to survive in this investment climate, because now we know what rules they are playing by.


Jeez. I wrote the following this morning, but I thought I was months ahead, not hours, and who knew they would use US tax dollars to bail out foreign banks? That is a surprise, but they don’t call it the international banking cartel for nothing.

I wrote: “The plan is to have the government take banks’ bad mortgage debt (will they add credit card, auto, student and corporate debt?)…”

Now I find this on Bloomberg this evening:

U.S. Treasury Widens Scope of Bad-Debt Plan Beyond Mortgages

By Dawn Kopecki

Sept. 21 (Bloomberg) — The Bush administration widened the scope of its $700 billion plan to avert a financial meltdown by including assets other than mortgage-related securities.

The U.S. Treasury submitted revised guidance to Congress on its plan, referring to its proposal to purchase so-called troubled assets, a change from its original plan for investments tied to home loans, according to a document obtained by Bloomberg News and confirmed by a congressional aide.

The change suggests the inclusion of instruments such as car and student loans, credit-card debt and any other troubled asset.

Firms that are headquartered outside the U.S. will now be eligible, in another change from the guidance sent to Congress yesterday, according to the document. The size of the plan remains unchanged.

“If you must break the law, do it to seize power: in all other cases observe it.”

Julius Caesar

They have long since crossed the Rubicon, and are playing winner take all.  Who know our bankers were such good students of history?

I can already hear the pro-Obama suckers saying, “what can you expect from the Bush administration and the Republicans? They are such fascists, always ready with a handout for their wealthy buddies.”

Well, take a look at Obama’s top donors and see if it isn’t a bunch of bankers who happen to be favoring him over the straw man from Arizona (here, here, and here). Besides, who better to enact a New Deal and get us into a really big war (Wilson, FDR, Johnson) than the Democrat wing of the ruling party?

Why bailouts will not stop the depression

The market is a force of nature, like gravity. To use it is prosperity. To fight it is misery.


By bankers, for bankers.

This is a bailout of bankers. The Fed was created by bankers, and the Treasury is run by a banker, so there are no surprises here.

The plan is to have the government take banks’ bad mortgage debt (will they add credit card, auto, student and corporate debt?), so that they are no longer insolvent. Solvency has always been the issue, not liquidity — that is a red herring. By no means will all of the bad debt (out of $50 trillion in total domestic financial and non-financial sector private debt) be absorbed by this program, which is going to move $700 billion at a time.

The fact that the government still relies on a market for its bonds puts limits on the pace at which debt can be socialized. There has been a great demand for Treasuries of late as safe havens, so the first tranche or two should be absorbed easily. Bonds may even rally more as assets prices continue to plunge.

Later, after the bulk of the deflation has passed and the bond market is saturated, this demand will ease and the Fed will have to buy greater and greater amounts of bonds with newly created dollars. The government’s spending needs are infinite, but the tax base and bond market are finite, so this phase of inflation can lead to currency failure. That can be chaotic, because contracts become meaningless when currencies are worthless. Out of such episodes arose Napoleon and Hitler.

Econ 101: Savings = Investment.  Lesson: reward savers with deflation.

We should embrace deflation, not fight it, because it restores sanity. The irresponsible go broke, and the prudent are rewarded. When money is tight, prices need to come down, and this encourages the savings that will turn to investment after the dust settles. Those who were smart enough to go into this crisis with savings are the ones you want allocating the capital for rebuilding, not the swindlers who beg for newly printed ‘stimulus’ money for their pet projects.

Your neighborhood, a government housing project.

Let’s assume the program actually removes all bad debt from bank’s balance sheets. Once again, they are fully capitalized and ready to issue loans, with assistance of course from an accommodating Fed. That will ‘fix’ one side of the reflation machine. On the other side, borrowers will still be choking on their existing debt and in no condition to take on more.

So the next step on the road back to inflation city will have to be debt relief for borrowers. As the owner of huge amounts of mortgages, the government is likely to be a very accommodating creditor. Can’t handle $2000 a month? Well, just pay $1000, but promise to spend the rest, ok! Or it could offer a quickie default: we take the house, but you can rent from us for cheap. In either case, the government has title to an enormous amount of housing stock, so all of America takes on the air of an inner city housing project.

(A side note: Once government becomes your landlord, it has a lot more leverage to force the installation of whatever it wants in your home, from ugly fluorescent lighting and those ‘efficient’ toilets that clog, to monitoring devices for your ‘safety’.)

The Crash is the Market, and It cannot be stopped.

Crashes are the market’s way of correcting the perversions of bubbles blown by bankers and governments. They are not market failures. The Market never fails. It is a force of nature. Bankers and politicians can shackle us with their guns and laws, but they cannot change the way the universe organizes itself. Any scheme but freedom, the absence of force (such as theft, a form of which is inflation), will be thwarted by the Market. Tax cheats, corrupt politicians, crooked brokers, smugglers and prostitutes are as plentiful as the laws that create them. In the absence of force (as George Washington said, “government is not reason; it is not eloquent; it is force”), the Market will reward honesty and industry above all else. When force is used liberally, society rewards George Bush Jr and Angelo Mozillo.

The government has tried to thwart the Market for so long, from the New Deal to the S&L crisis and beyond, that the distortions have become too big to support, and this time the Market is taking its revenge. Saving some big banks and some borrowers is certainly possible with bailout programs (rent seekers should call their lobbyists ASAP to get on that list!). But $50 trillion is way, way beyond anything the government can handle, so there will still be massive debt deflation left and right, and asset prices will continue to crash.

Debt revulsion is the fly in the reflation ointment.

To reflate, we need willing and able borrowers and lenders (inflation is the net increase of money and credit, deflation is their net decrease). Even if all bad debt is taken off the books of both borrowers and lenders, can the Feds rekindle America’s affair with debt? The answer is yes, eventually, but it won’t be any fun this time.

If the government forces the issue before the Market has cleared the way for growth, people will only be willing to borrow again to protect against the decline in the value of currency. During the crash, currency will continue to gain in value, so for at least the next couple of years, borrowers are going to be very wary of debt. They don’t want to repeat this nightmare, and besides, with asset prices crashing, the economy in a tailspin, and new regulations restricting commerce, where on earth can investors profitably deploy this capital? China? Not so fast — investing abroad may be restricted. Even with a 0% loan, can borrowers generate any return at all in this environment? With poor investment prospects and no need to protect against inflation, few will be willing to borrow.

This is why the traditional reflation machine will stay broken. This is the machine that Greenspan operated for the bankers with such mastery. But try as Bernanke might, this machine will not start up again until money or credit is somehow flooded into the economy through other means.


In Hugo Chavez’s Venezuela, people borrow not for productive uses, but to speculate in any kind of asset that will lose value at a slower rate than inflation plus interest. It is a sickening thought, because it totally perverts all economic decisions and leads to staggering waste. We have just experienced a milder version of this in the US, but at least we built a few useful things with the credit, though most will go to waste.

In Venezuela, people invest in new automobiles, sometimes fleets of them, because the sum of interest and depreciation on the vehicles is less than the rate of general price increases. Hence, cars bought new appreciate in Bolivars as they rust in driveways. Venezuelan society is in a later stage decay than the US, but it may resemble our future.

The new New Deal, and the Neverending War

So how do you get that stubborn price level (the rearward looking indicator, CPI, was negative in August — expect more and bigger negative numbers for many months to come) to start ticking up again with gusto? After a general asset price crash, which I emphasize cannot be prevented at this point, the government can spend and spend and spend.

If you think the bridge to nowhere was ridiculous, you haven’t seen anything yet. Our sociopathic leaders, with hearty encouragement by esteemed professors, seem to have no problem with the old Keynesian theory of burying bottles stuffed with cash and letting people dig them up. Hey, it puts people to work and raises the price level! Let’s all pray for more hurricanes while we’re at it. Think of the boost to GDP!

Expect lots of pork for ‘green’ energy projects, and expect those projects to cost more than they produce and have all kinds of perverse effects. Expect national ‘service’ programs (if mandatory, they are national enslavement programs) such as have been touted by Obama, Hillary and the media wing of the Fascist party (now the only party in power in the US).

We were all taught in school that although FDR’s valiant efforts helped put Americans back to work, what really saved the US from sinking into a big hole the earth was War, glorious War. How lucky of us to already have two of them going and plenty more enemies lined up just in case!

Vulture funds picking at Miami condos

50 Biscayne Boulevard, Miami

Vulture Buying = Bottom?

All excepts from Bloomberg:

Sept. 4 (Bloomberg) — Sales of distressed Miami properties have begun, signaling a bottom for south Florida’s real estate market and the end of waiting for vulture funds armed with about $30 billion to spend.

The sale of 120 condominiums last month to a Philadelphia private equity firm and Related Group of Florida, a development company led by Jorge Perez, “broke the logjam” for investors targeting the oversupply of condos in downtown Miami, said Peter Zalewski, owner of the Condo Vultures LLC consulting firm in Bal Harbour, Florida.

How exactly does a transaction or two signal the bottom? Just because some investment buyers are paying a certain price today doesn’t mean that that price can’t go lower next year.

“There’s a purging going on,” McCabe said. “It’s my belief that the vulture buyers would form the bottom of the real estate market, and we’re almost there. That bottom may last for three years as foreclosure sales go on.”

That’s right. Vulture’s, by definition, will be the one’s buying at the bottom, but just because they have started buying doesn’t mean the bottom is in.

McCabe estimates that at least $30 billion has been earmarked by funds to buy distressed Florida real estate. Some investors have been waiting almost three years to buy, he said.

And many will wait even longer if they see that the vultures can’t find buyers and just end up assuming maintenance costs and taxes. The true sign of stabilization will not be speculators buying, but speculators selling to people who intend to actually use the real estate. With the mortgage market practically frozen, a dearth of cash savings for down payments, and unemployment on the rise, we have a long ways to go. How could real estate possibly bottom before unemployment tops out and banks recover? That will be years from now.

Banks Start to Come Clean

At BankUnited Financial Corp., Florida’s largest bank, non- performing real estate loans jumped to 8.3 percent in the second quarter from 1.5 percent in the third quarter of 2007, according to a filing with the U.S. Securities and Exchange Commission.

Regulators told the Coral Gables, Florida-based bank it may lose its “well-capitalized” designation unless it attracts at least $400 million, the company said last week.

“Banks may be reluctant to make a deal because they want to preserve cash,” said Kenneth Thomas, an independent bank consultant and economist in Miami. “If they don’t make the deal they don’t have to write down their capital.”

The market needs for the banks to make write downs, but any recovery won’t happen until the banks recapitalize themselves. Many, if not most, will fail to recapitalize and go under. Banks will likely never be able to build assets back to anywhere near bubble levels, so a recovery will require all-cash and high-down-payment buyers.

Astounding Foreclosure Numbers

With 11,551 condo units in the 1,040-acre downtown Miami area expected to be completed this year, it would take five years to sell them off at the current sales pace, according to Brad Hunter, regional director at the MetroStudy real estate research firm in West Palm Beach.

In July, one in every 186 homeowners in Florida either had their home repossessed by a lender bank, received a notice of default or were issued a warning that their house was going on the auction block for failure to make monthly mortgage payments…

One in 186 homeowners in July alone is a rate of 6.45% per year. Continue like that for two or three years and you get well into the double digits. This is just a staggering number of foreclosures.

“The investors are not going to buy unless they get a bargain of 40 to 50 cents on the dollar,” Goodkin said. “In some cases, if you bought land for nothing it still might not work. The market is not going back to what it was in 2005.”

Even so, Goodkin said “the dam will break” and distressed sales will pick up in the first quarter of 2009 when loan delinquencies pile up.

“There’s no way for a bank to avoid these problems,” he said.

Bargain Prices?

The damn will break all right, but what will prices look like?

Perez and Lupert-Adler paid about $235 a square foot for the 120 units in 50 Biscayne, Zalewski said. That’s about half the $454 a square foot paid when three individual units in the building were sold in the fourth quarter of 2007, said MetroStudy’s Hunter.

It’s also comparable to the $175 to $240 a square foot it costs to build a new condo in downtown Miami, according to Ashley Bosch, president of Miami-based Block Urban Development LLC and president-elect of the Builders Association of South Florida.

Leah Witherspoon, a spokeswoman for Related Group in Miami, said Perez was traveling and couldn’t be reached for comment. Calls to Stuart Margulies, director of asset management for Lubert-Adler, were not returned.

Zalewski said he expects two bulk sales of new condos in the next few weeks, one of them for $190 a square foot and the other for $250 to $300 a square foot.

Buying condos in bulk could present legal problems, said Baldwin, the Miami attorney.

Florida law treats anyone who sells more than seven condos of a project with more than 70 units as the developer, making them responsible for construction defects or any lawsuits against the builder, Baldwin said.

“Bulk purchasers need to be wary,” Baldwin said. “They can really get spanked.”

Add legal risk to the list of costs of holding these apartments. But at least the prices are coming down. Sounds like a nice place, too:

Developed by Related Group, the 50 Biscayne condominiums, are scheduled for completion in 2007. The 54-story, downtown Miami property has studios, 1, 2, & 3 bedrooms for sale. Prices start at $400,000. The condos have water views and range from 750 – 2,000 square feet.

Property features

• Pool deck with infinity edge pool
• Tropical landscaping and cabanas
• Two-level club room with billiards
• Two-level spa & fitness center
• 15,000 s.f. of retail space
• 24-hour concierge & security
• 5 high speed elevators

Interior features

• 8′ 8″ ceilings
• Floor to ceiling laminated, energy efficient tinted windows
• High efficiency central A/C and heat
• Pre-wired for Smart building
• Spacious living room
• Stackable washer and dryer
• Italian teak cabinetry in kitchen and bath
• Imported black countertops
• Italian teak cabinetry
• Bosch oven, microwave, and dishwasher
• Imported porcelain tile floors in kitchen and master bath
• Granite or marble vanity in master bath
• Designer faucets
• Oversized jacuzzi tub

Just the facts

Categories: Related Group , High-Rise, Downtown, Miami
Height: 544 feet (169 meters)
Number of units:
Square Footage: 750 to 2,000 sq. ft.
Price Range: $400,000 to $1,350,000
Opening Date: 2007

But look at the current asking price range on the MLS:

Assuming the $210,000 apartment is 567 square feet, and the $885,000 place is 2000 square feet, the sellers are asking $370 and per $443 square foot, respectively. So based on these asks, Perez got a good deal at $235. Can he sell his studios for more than $133,000 and his 3BRs for $470,000? Maybe a few for now, but what about next year, when banks disgorge a flood of these things? And remember, more are still under construction!

What will a recovery look like?

Ultimately, it will be about the end buyers. Whether they have jobs, and what those jobs pay. Miami will never be the same as in the early 2000s, but there will still be a Miami – - grungier, more dangerous, more like the city in Scarface than CSI. Here’s a street shot in front of 50 Biscayne – - looks pretty bleak to me: no cafes, no shops, just a parking lot and a highway overpass (Google street view):

Looks like you have to get in a car to go anywhere, and I wouldn’t want to go out for a stroll there late at night. And you don’t even have the beach, just a dirty bay – - this is downtown Miami, not Miami beach. This glamorous building might just end up a giant ghost tower.

Some real numbers on Fannie and Freddie

Any hard look at the likely costs of this mess will have to include assumptions like Mike Morgan explains here. The numbers he uses are conservative, since it is not just recent vintage mortgages that are in trouble (truth be told, housing was already rising above trend by the late ’90s), and prices will be down a lot more before this is over.

Paint by the Numbers – We don’t need many numbers, but it seems like we have thousands of them bouncing around the media in order to justify one statement or another, or for the traders to have the ability to push the price of the common up, down, up, down, and up, down at will. It’s funny how Paulson went after short sellers in July for supposedly manipulating the markets, but he doesn’t think it is a problem for traders to push markets up when there is no basis for the move, other than number being manipulated . . . and the real numbers being silenced by the Fed. His blank stare at this type of market manipulation will eventually lead to a blow off and a much harder fall, instead of logically and systematically allowing the markets to work. As for the numbers we do need.

1 – $5 Trillion – Mortgages guaranteed by Fannie and Freddie

2 – $1.5 Trillion – Low end of the number for mortgages in Fannie and Freddie’s portfolios

3 – 65%* – Current value of property for mortgages made between 2003 and 2006.

4 – 30%+* – Percentage of Fannie and Freddie mortgages made between 2003 and 2006.

5 – $500 Billion – How much Paulson needs to come up with for Fannie and Freddie to stabilize
the markets.

6 – $5Trillion – How much Paulson needs to come up with for the banks and lenders to solve the problems or we could refer to this as how much was scammed out of the system during the
Housing/Commercial Ponzi Scheme.

*These two are conservative estimates. If we ever want to talk real numbers, these two are much worse, but they will do for this example. When you take apart the portfolios, even giving them the very best of the best, you are staring at a trillion dollar loss on $6.5T in mortgages. That is the very least Paulson needs to come up with to stabilize the Fannie and Freddie problems . . . temporarily.

Quick Fix – Fantasy Numbers – I say temporarily because housing prices are still declining . . . no matter what Case-Schiller (CS) or the National Association of Realtors (NAR) say. In fact, the leading home building analyst, Alex Barron, came out with a report on the Case-Schiller index this week . . . The Case Against Case-Schiller. . .

Case-Schiller does not properly account for foreclosures and new construction. Huh? Yeah, you heard it right. And for those of you still following the bouncing ball, foreclosures and new construction are the two central players in the housing and financial crisis.

I would add that that last estimate of $5 trillion in scammed money / wasted capital is just the real estate component of the debt binge. The actual misallocations are much larger, since debt has been used for virtually everything lately. People buy groceries with debt and pay for worthless educations with debt, and the corporate world came to rely on debt rather than earnings or equity for expansion.

As of last year, the total private debt outstanding in the US was approaching $50 trillion. The question is how much that has gone to money heaven.