Sunday, February 18, 2007

I'm Sick of Middle Aged Men Crying

So another condo project bites the dust.
And I truly cannot care for I know the type of people who have been pushing these condo and real estate developments not just here in the Twin Cities, but across the nation and please spare me the crocodile tears.

Typically they're some middle aged guy whose balance sheet consists of many millions of dollars in assets. This fans their ego because they can then go and claim to young twenty something women that they are "millionaire real estate developers" (because lot's of syllables impress stupid people).

They're further pinning their hopes on stupidity hoping these girls don't know the difference between total assets and net worth, for if one were to look at their balance sheets, yes, they do have millions of dollars in assets, but they also have millions MORE in debt.

And this gets to the heart of why I'm particularly disgusted with this caliber of people.

Here they are, living the jet set lifestyle. Claiming they're all that and then some. You look at their personal assets and they all have Beamer SUV's with some kind of Mercedes. They are the schmucks heading out to the ritzy suburbs driving next to you on the interstate with the blue tooth in their ear working in the fast lane as they head on out to their suburbanite mini-mansion worth $3 million. They're eating at the finest restaurants in town, knocking out $200 tabs, $175 of which were martini's. And they're flying south to their condo in Florida to get a couple rounds of golf in.

And what did they do to deserve this lifestyle?


Yep, that's right.


For you see, there hasn't been one iota of profit produced. They haven't made one penny in income. How is it then that I am driving in my 89 Cutlass Supreme next to somebody who didn't make a dime, yet drives a Porsche?

Simple, he used my money to buy everything he owns by borrowing it from a bank.

This is the defining characteristic of these real estate developers and the primary reason why you're going to see a much worse crash in housing prices come the next three months;


For you see, debt can be used for many great things;

College education
Expanding a company
etc. etc.

All of which would yield the cash flows necessary to pay the debt back.

But it can also be squandered.

A perfect example is what I like calling "Pulling an Argentina."

The world loaned Argentina roughly $90 billion (with accrued interest it was something like $132 billion). The idea what that Argentina would INVEST the money in its economy and infrastructure to help boost Argentina's economic growth rate. This would then yield higher tax revenues and allow them to pay off the debt.

However, Argentina instead decided to piss it away on a bevy of vote-bribing social programs at the provincial level and when "community centers" and "political aid" did not produce the economic growth necessary to pay back the lenders, Argentina decided to default on its debts and not pay the world back (which summarily resulted in a severe recession and the majority of Argentinians blaming "the West" for their economic woes).

The exact same thing is happening now. However, instead of Argentine social programs and wealth-transfers the money is wasted on BMW's, egregiously large suburbanite cookie cutter homes, planes, trips to Europe and a whole bevy of other consumables that are NOT investments and STAND NO CHANCE OF PRODUCING THE CASH FLOWS NECESSARY TO PAY BACK THE DEBT!

Now, some will contest that the money did indeed go into real estate development which is indeed an investment and there was the hope for getting paid back. However, this spotlights another major issue I have with this group;
They thought nothing of borrowing millions of dollars of OTHER PEOPLE'S MONEY while NOT KNOWING THE ENTIRE TIME WHETHER THEY WOULD BE ABLE TO PAY THEM BACK OR NOT!

If it were me, and I were to ask somebody to borrow $20 million, I don't know it might occur to me to conduct somekind of saaaaaayyyyy

"absorption study"


"market analysis"

to make damn sure that there was an excellent chance I would be able to pay them back.

And I'm just a dumb economist. Certainly these high-end professional "multi-millionaire real estate developers" would not doubt have an absorption study be a STANDARD part of their analysis before borrowing $20 million of other people's money.

Heh heh!

Good luck.

For in my exploits and trivails in the real estate development industry finding an absoprtion study done on any one of these developments is like finding a sexy red-headed, video game playing, PhD in economics that watches Bugs Bunny on a regular basis.

In otherwords, the VAST majority of the time these "multi-millionaire real estate developers" did not bother finding out whether their product would actually sell before asking other people for their money. And it wasn't like you'd need a genius to figure out the condo market was saturated. In addition to the bevy of article written up about the glut of condo's, this chart alone would have saved us all millions of dollars of losses and headaches;

Now, in a normal company in normal markets such incompetence would be rewarded with a firing or a severe drop in pay. But most of these developers are owned by one person and they answer to nobody. And remember, the primary purpose of you loaning them your money IS NOT so that they develop some real estate, sell it and then pay you back. It's to keep up their lifestyle! Why?????

"Because I'm an important and busy multi-millionaire real estate developer!"

Now, in addition to the banks who are going to get royally screwed over in 2007 there are other victims as well.

Small time contractors.

These guys own and operate small time carpentry, HVAC, plumbing, etc., outfits. Usually a small time, hard working blue collar guy and a dozen or so sub-contractors that all depend on this income.

And while I am the most ardent capitalist in the world, I find it disgusting that when the "multi-millionaire real estate developer" who has so completely mismanaged his developments that he is unable to sell any property and therefore stops pay his contractors and employees.

Oh, no, they'll keep paying themselves and making sure they can have those $200 dinners and can keep living in their $3 million home.

But they won't pay the contractors and hard workers that don't have the $3 million house (however, these "small time contractors" do have something they can wear as a badge of honor, it's called a "positive net worth."). Regardless, it's digusting that people who have done nothing but borrow money get to consume and enjoy such a high standard of living while the people who actually produced some measure of wealth get shafted by these guys.

However, for all of you who are on the receiving end of this housing crash, take consolence in this;

I have seen 5 middle aged "multi-millionaire real-estate developers" cry in my banking career.

Yes, these high and mighty, hoity toities with the oopdey loopdies who were "busy important guys," people who have been living off of others for the past 5 years, managing to produce nothing but housing that would not sell, undermining property prices by flooding our markets with realty nobody wanted are being taken down. When the banks refuse to extend their loans, they start to cry like little girls and they realize they may have to become like the rest of us schlepps and ACTUALLY WORK FOR A LIVING!!!! (it's actually quite unsettling to see).

And they're not being taken down by me.

They're not being taken down by the banks.

They're being taken down by the most powerful force on earth;


Which eludes to a point that I have made since Dotcom Mania;

Could you imagine how many hundreds of billions of dollars, jobs, GDP growth and other general good stuff would have been saved if somebody would have just consulted an economist before this all happened? Or maybe just read this article from The Economist in 2003?

But then again, what do I know, I'm not a "multi-millionaire real estate developer" with a bimbo on my arm, I'm just a dumb video game playing economist.


Alfred T. Mahan said...

Is it any wonder that economics has been nicknamed the "dismal science" (although "realistic science" is preferable, in my view)? The next time you come into contact with a person of this caliber, ask him or her if they have any tulips to sell as well, and see if they get the reference.

For that matter, do you? *chuckles*

Anonymous said...

They're being taken down by the most powerful force on earth;

Why is it that economics is so powerful?

Anonymous said...

Our economy would be much healthier if people had spent more time studying Minsky and less time learning Black-Scholes.

Anonymous said...

Tangentially related, I just started rereading my fave Dickens novel, Our Mutual Friend, and enjoying the exact same sham going on with the Veneerings and the Lammles.

Everytime someone thinks the latest financial shenanigans are brand new, they should go back to reading Dickens to find out he already beat them to it -- the people with negative net worth (and negative NPV) living in high style (Our Mutual Friend); pyramid schemes and fraudulent insurance companies, with a bit of blackmail and murder thrown in (Martin Chuzzlewit); fraudulent corporations that are puffed up with govt promotion, ending in the suicide of the CEO (Little Dorrit).

Anonymous said...

Yes, BUT, there will always be saps willing to borrow other people's money without consideration of an ability to pay it back.

The real responsibility here lies with the banks. It's the lenders' of capital that should be concerned with both its return and interest.