Tom Barrack's Latest Thoughts

Colony Capital's Tom Barrack recently gave us some very educational thoughts on the current mess we are in and how to avoid getting into another mess in the future:

Both distressed investors and investors in distress are anxious and discontent because they are languishing in the doldrums of "status quo." The unanticipated tranquility of zero interest rates and the new mantra of "pretend and extend" by holders of debt instruments have sent both groups into a holding pattern that has become a bit surprising.

The meltdown in the global financial system brought out the big guns. They possessed historical skill and incomparable talent as they harvested new funding. They were convinced that the opportunistic wave of the day would be distress. There are dozens of distress strategies and theories and most of them have not yet resulted in meaningful amounts of attractively deployed capital. Likewise, borrowers who themselves are in distress as a result of high debt loads and underperforming businesses and properties are finding that banks are not interested in lending money. Amazingly, banks also are not in a hurry to perfect their security or foreclose on businesses or properties. We are all stuck in the middle of a flat sea with no waves and no wind.

I was reading one of my son's school admission applications the other night. It was an essay question asking him to discuss what mistakes had he made and what he had learned. He chose a surfing incident in which he was a bit arrogant and he had turned his back on Mother Nature. It reminded me of some great investor guidelines. I have always felt that surfing is a great metaphor for investing. Below are a few credos that characterize both a big wave surfer and a successful investor:

• Know exactly how to exit before you enter.
• Being in the right spot is more important than the size of the wave.
• The waves you let go are more important than the wave you catch.
• If you miss a wave be sure that another will come behind it.
• Stay out of the water when wild amateurs are present.
• Avoid crowded take offs.
• Don't panic in a wipeout and don't fight the current.
• Success is achieved by taking risk, not avoiding risk.
• Push too hard and you get hurt - don't push hard enough and you can get hurt even worse.
• Get in the water yourself to evaluate the current by instinct - the height and direction of the swell, the wind, the tide, the temperature, the coral reef bottoms, the peak, the trough, the time between sets and the position - data without experience will deaden your senses.
• Know where the "impact zone" is and how to stay out of it.
• Humility trumps arrogance.
• You need to be in condition for the worst circumstance in the worst situation not the best circumstance of the best situation.
• A successful outing is being able to surf another day.

Our "Free" Market

An Atheist and an Unitarian

When the famous atheist Christopher Hitchens has a better understanding of what it means to be a Christian than you do, it may be time to reexamine your relationship and belief in Jesus Christ.

This is from a recent interview Hitchens had with a Unitarian Minister:

Maryiln Sewell: The religion you cite in your book is generally the fundamentalist faith of various kinds. I’m a liberal Christian, and I don’t take the stories from the scripture literally. I don’t believe in the doctrine of atonement (that Jesus died for our sins, for example). Do you make and [sic] distinction between fundamentalist faith and liberal religion?

Christopher Hitchens: I would say that if you don’t believe that Jesus of Nazareth was the Christ and Messiah, and that he rose again from the dead and by his sacrifice our sins are forgiven, you’re really not in any meaningful sense a Christian.

Guess Who?

Answers at bottom:

1. “Our Nation’s health care system, like our economy, is also in a time of change. Amazing medical technologies are improving and saving lives. This dramatic progress has brought its own challenge, in the rising costs of medical care and health insurance. Members of Congress, we must work together to help control those costs and extend the benefits of modern medicine throughout our country.”
2. “So tonight I ask you to join me in creating a commission to examine the full impact of baby boom retirements on Social Security, Medicare, and Medicaid. This commission should include Members of Congress of both parties, and offer bipartisan solutions. We need to put aside partisan politics and work together and get this problem solved.”
3. “But to create more of these clean energy jobs, we need more production, more efficiency, more incentives. That means building a new generation of safe, clean nuclear power plants in this country. It means making tough decisions about opening new offshore areas for oil and gas development. It means continued investment in advanced biofuels and clean coal technologies. And yes, it means passing a comprehensive energy and climate bill with incentives that will finally make clean energy the profitable kind of energy in America.”
4. “And my budget provides strong funding for leading-edge technology – from hydrogen-fueled cars, to clean coal, to renewable sources such as ethanol. Four years of debate is enough – I urge Congress to pass legislation that makes America more secure and less dependent on foreign energy.”
5. “I’m also calling on Congress to continue down the path of earmark reform. You have trimmed some of this spending and embraced some meaningful change. But restoring the public trust demands more. For example, some members of Congress post some earmark requests online. Tonight, I’m calling on Congress to publish all earmark requests on a single website before there’s a vote so that the American people can see how their money is being spent.”
6. “Still, in this economy, a high school diploma no longer guarantees a good job. I urge the Senate to follow the House and pass a bill that will revitalize our community colleges, which are a career pathway to the children of so many working families. To make college more affordable, this bill will finally end the unwarranted taxpayer-subsidies that go to banks for student loans. Instead, let’s take that money and give families a $10,000 tax credit for four years of college and increase Pell Grants
7. “When it comes to our schools, dollars alone do not always make the difference. Funding is important, and so is reform. So we must tie funding to higher standards and accountability for results.”
8. “The way out of this recession, the way to create jobs, is to grow the economy by encouraging investment in factories and equipment and by speeding up tax relief so people have more money to spend. For the sake of American workers, let’s pass a stimulus package.”
9. “Americans who have lost their jobs need our help, and I support extending unemployment benefits and direct assistance for health care coverage. Yet, American workers want more than unemployment checks; they want a steady paycheck. When America works, America prospers, so my economic security plan can be summed up in one word: jobs.”
10. “Now, the true engine of job creation in this country will always be America’s businesses. But government can create the conditions necessary for businesses to expand and hire more workers. We should start where most new jobs do – in small businesses, companies that begin when an entrepreneur takes a chance on a dream, or a worker decides its time she became her own boss.”

1) George W. Bush - 2004 SOTU

2) George W. Bush - 2006 SOTU

3) Barack Obama - 2010 SOTU

4) George W. Bush - 2005 SOTU

5) Barack Obama - 2010 SOTU

6) Barack Obama - 2010 SOTU

7) George W. Bush - 2001 SOTU

8) George W. Bush - 2002 SOTU

9) George W. Bush - 2002 SOTU

10) Barack Obama - 2010 SOTU

If you want to know why Republicans got booted out of power after 2008, it's because they sounded and acted way too much like Democrats.

Economists Get Creative

This is what happens when economists decide to get a little creative:

In Defense of Bankers

This will make you think two or three times the next time President Obama and others lambaste bankers as the evildoers and root cause of our current economic mess.

Since, I know most of my readers (hi mom!) will not read the whole memo, I will post the best parts below:

The President, in these last few days following the second revolution against big government started in Massachusetts, has come out swinging savagely against “banks” in numerous ways in numerous speeches. Let’s be clear. There are legitimate issues and reforms to be discussed. But my first question is why this exact moment? The answer is simple. When a failing government with authoritarian impulses needs help, it’s pretty standard strategy to call down a pogrom against an unpopular class of citizens. The bankers are nothing if not unpopular. Unfortunately for this President, he will, I hope, find the financial community not cowering from his Cossacks on a shtetl in the Pale of Settlement (Greenwich, CT), but meeting his accusations with logic and patriotism.

First let’s discuss the President’s recent rhetoric. Paraphrasing him, “we will get back all the people’s money.” And the applause line, “every dime!” OK, fine. But most of the banks, and in particular the ones in the headlines for paying large bonuses, have paid back all their TARP loans. This logic causes him no pause. Apparently, and we must read between the lines as this is the most transparent administration ever, he means all the money lent out to everyone through TARP not just to banks. So, loans to the car companies, and AIG, and FNMA/FHLMC, all must be paid back, but by the banks, who already paid back their own loans. Makes sense. Has this administration seen a human activity they don’t instinctively wish to socialize?

.......Now let’s talk about the narrative that’s been sold. We hear readily, from politicians of the President’s party, and his media choir, statements like “the bankers who brought us this crisis” as a lead-in to any discussion (sometimes about the weather). As one tiny example consider the New York Times editorial of January 13, 2010, with the Leftist dream title of, “Tax Them Both.” Early on they throw in the simple line “Let’s be clear, the crisis spawned by banks’ recklessness has cost the country…” Not the crisis aided by banks’ recklessness, but the crisis spawned by banks’ recklessness, no hint of caveat or nuance. The rest of us were just babes in the woods doing green jobs and singing Disney songs while birds danced on our shoulders, but the bad bank-witch made us eat her poisoned apples. This is one example but if you dare/bet me to come up with 10,000 more, I will win.

.......Government encouraged wild lending, virtually creating the sub-prime market, and up until the end our representatives swore the GSE’s were all ok (the fact that the President is flanked by Barney Frank while discussing how to ‘get’ the terrible bankers should alone make you turn the dial and watch cartoons). Government land use restrictions added more than a little oomph to real estate prices, particularly in areas where the bubble grew largest. In addition, government kept money easy (rates low) to grease the bubble’s wheels. Note, mixing metaphors is allowed when appalled in Greenwich. In New Canaan it’s frowned upon.

.......But the above, a world gone mad and all of us sharing blame, is not the “narrative.” The narrative is Wall Street gravely injured us all, to their sole shame, so now let’s get them! Why? Well, politicians certainly aren’t going to blame themselves. They aren’t going to blame individuals who, what’s that thing individuals do again, yeah, they vote. The press, certainly this press, with this government, mainly repeats the party line, sometimes with their legs tingling. So, who should they blame? Well, what better than casting sole blame on the evil bankers? Who likes a banker? I’m not sure I do and many are my friends. I’m not sure their wives or husbands like them. But that doesn’t make them guiltier than others. Every financial crisis, for at least our country’s history and probably way longer, has been blamed on bankers and speculators, and generally this has been one-sided, exclusionary of the many real culprits, and often dead wrong. The narrative once established is a powerful thing to fight, but fight it we must, as it’s simply not true. Bankers deserve their share of castigation, but no more than their share, and that inconvenient truth makes things a lot more complicated.

.....Although the stated reason for punishing banks is the false accusation that they wrecked the economy all on their lonesome, much of the populist resonance of this libel springs from the inconsistent argument that bankers are socially useless parasites skimming money from real transactions. This doublethink is very old. The belief is moneylenders and speculators are powerful enough to cause all our economic problems, but not useful enough to deserve a share of our economic successes. Where this power without usefulness derives from is never clear. In fact, highly skilled bankers (in the broad sense, including lenders, traders, asset managers and deal makers) are essential to an efficient modern economy and some of them will therefore earn very large amounts of money. What they create is as real as a shoemaker, as a modern economy would produce a lot less shoes if instead of banking we relied on something closer to the barter system. If you penalize these services, or legislate away the freedom to innovate and to get rich by doing them better than anyone else, you destroy both a fundamental economic freedom and a key component of economic growth.

......So, how do you fix too-big-to-fail? Well, this is complicated, give me a moment. I got it. You let them fail. There’s a famous episode of Happy Days (ok, by "famous" I mean I remember it) where Ritchie needs help against a bully. The Fonz (yeah, I went there) advises him to bluff, act like a maniac and the bully will back off. Ritchie does this and turns to the Fonz, with his back to the bully, and asks, “is it working?” The Fonz says no and Ritchie asks why? “Well”, the Fonz explains, “it turns out that for this to work, some time in your life you have to have actually hit someone.” Ritchie responds with those immortal words, “that’s a very important detail to have left out, Fonz!” Well our government repeatedly blinking and bailing out those who should have been allowed to fail (including the whole economy which occasionally should’ve been allowed to suffer more without a “Greenspan Put”) was a very important detail to have left out!

......We commonly hear that this crisis was a failure of regulation, but we rarely hear what exact regulation would have saved us, particularly from the real estate bubble that was most of the problem (most real-estate rules that changed in the last few decades were towards Left-leaning rules that exacerbated this bubble). Anyway, I don’t argue all regulation is bad, or that we couldn’t improve it, but I do argue that doing away with too-big-to-fail is way more important than tinkering with regulation, and in fact renders much of the tinkering moot. Also I’d note that the fixed income markets are far more regulated than the equity markets, which did not fail us this time or in their own meltdown in 2000. Better regulation might be part of the solution, but bad regulation was not the main cause of the crisis and good regulation cannot do much if we retain too-big-to-fail.

.......We should fix the system going forward but by making it more of a free market not less. Punish failure. Don’t institutionalize too-big-to-fail by accepting it and then try to regulate away large failures with telephone books of rules and coercive government interference. Cheer outsized rewards when they are the result of two-sided risk where skin was in the game, but castigate then eliminate outsized rewards when they are the result of one-sided risk where the government foolishly has the wrong end of the deal. Get the government out of social engineering and dictating to private individuals how to live, work, invest, and conduct commerce. Most of all, do not look for simple answers and scapegoats, particularly for political gain, it’s disgusting and beneath the dignity we should expect from our leaders.

State of Real Estate

This is one of the best things I have read in a while:

By David Galland, The Casey Report

No one has been more right on the housing market in recent years. So, what's coming next? Some of the housing numbers in the last few months look a little less ugly. Could housing be getting ready to get well?

MILLER: I don't think so.

For all intents and purposes, the United States home mortgage market has been nationalized without anybody noticing. Last September, reportedly over 95% of all new loans for single-family homes in the U.S. were made with federal assistance, either through Fannie Mae and the implied guarantee, or Freddie Mac, or through the FHA.

If it's true that most of the financing in the single-family home market is being facilitated by government guarantees, that should make everybody very, very concerned. If government support goes away, and it will go away, where will that leave the home market? It leaves you with a catastrophe, because private lenders for single-family homes are nervous. Lenders that are still lending are reverting to 75% to 80% loan to value. But that doesn't help a homeowner whose property is worth less than the mortgage. So when the supply of government-facilitated loans dries up, it's going to put the home market in a very, very bad place.

Why am I so certain that the federal government will have to cut back on its lending? Because most of the financing is done via the bond market, through Ginnie Mae or other government agencies. And the numbers are so big that eventually the bond market is going to gag on the government-sponsored paper.

The public doesn't have any idea of the scale of the guarantees the government is taking on through Fannie, Freddie, and FHA. It's huge. If people understood what the federal government has done and subjected the taxpayers to, there would be a public outrage. But you can't get people to focus on it, and it's very esoteric, it's very hard to understand. But it's not something the bond market won't notice. The government can't keep doing what it has been doing to support mortgage lending without pushing interest rates way up.

Refinancings of single-family homes are very interest-rate sensitive. Consumers have their backs against the wall. They have too much debt. Refinancing their maturing mortgages or their adjustable-rate mortgages is very problematic if rates go up, but that's exactly where they're headed. So anyone who's comforted by current statistics on single-family homes should look beyond the data and into the dynamics of the market. What they'll find is very alarming.

On that topic, recent data I saw was that something like 24% of the loans FHA backed in 2007 are now in default, and for those generated in 2008, 20% are in default, and the FHA is out of money.

MILLER: Fannie Mae had a $19 billion loss for the third quarter of 2009, and they are now drawing on their facility with the U.S. Treasury. We have all forgotten that Fannie and Freddie are still being operated under a federal conservatorship. On Christmas Eve, the agency announced that they were going to remove all the caps on the agencies.

So what about commercial real estate?

MILLER: When I saw what was happening in the housing market, I liquidated all my multifamily apartments, shopping centers, and office buildings. I liquidated all my loan portfolios, and I'm happy I did.

Then it occurred to me in 2005 and 2006 that the commercial world had to follow suit. Why? Because it's a normal progression. Obviously, when single-family homes decline in value, multifamily apartments decline in value. And when consumers hit the wall with spending and debt, that's going to have an impact on retailers that pay for commercial space.

Furthermore, the financing for retail properties had gotten ludicrous. The conduits were making loans that they advertised as 80% of property value when they originated them, but in reality the loan-to-value ratios were well over 100%. And I say that to you with absolute, categorical certainty, because I was a seller and nobody knew the value of the properties that I was selling better than I did. I had operated some of them for 20 years, so I knew exactly what they were bringing in. I knew what the operating expenses were, and I knew what the cap rates were. And, you know, the underwriting on the loan side and the purchasing side of these assets was completely insane. It was ludicrous. It did not reflect at all what the conduits thought they were doing. They were valuing the properties way too aggressively.

I became very bearish about the commercial business starting in late '05. In fact, I think I was in Argentina with Doug Casey, sitting on a veranda at one of the estancias, and he and I were lamenting what was going on in the real estate business, and I said there was going to be a huge adjustment in the commercial market.

Beyond the obvious, that the real estate market has taken pretty significant hits and some banks have been dragged under by their bad loans, what has really changed in real estate since the crash?

MILLER: I think the first thing that changed was that people learned that prices don't go up forever. Lenders also saw that underwriting guidelines for commercial real estate loans, especially in the securitization markets, were erroneous. They realized that some of their properties had been financed too aggressively, but still, I don't think even at the fall of Lehman, anybody was predicting a wholesale collapse in commercial real estate.

But they did see they should be more circumspect with loan underwritings. In fact, after the fall of Lehman, they completely stopped lending. I think they realized we had been living in fantasy land for 10 years. And that was the first change – a mental adjustment from Alice in Wonderland to reality.

Today it's clear that commercial properties are not performing and that values have gone down, although I've got to tell you, the denial is still widespread, particularly in the United States and on the part of lenders sitting on and servicing all these real estate portfolios. People still do not understand how grave this is.

Right now there are an awful lot of banks that do an awful lot of commercial real estate lending, and for about a year now you've been telling me that you saw the first and second quarter of 2010 as being particularly risky for commercial real estate. Why this year, and what do you see happening with these loans and the banks holding them?

MILLER: It's an educated guess, and it hasn't changed. I still think that it's second quarter 2010.

The current volume of defaults is already alarming. And the volume of commercial real estate defaults is growing every month. That can only keep going for so long, and then you hit a breaking point, which I believe will come sometime in 2010. When you hit that breaking point, unless there's some alternative in place, it's going to be a very hideous picture for the bond market and the banking system.

The reason I say second quarter 2010 is a guess is that the Treasury Department, the Federal Reserve, and the FDIC can influence how fast the crisis unfolds. I think they can have an impact on the severity of the crisis as well – not making it less severe but making it more severe. I will get to that in a minute. But they can influence the speed with which it all unfolds, and I'll give you an example.

In November, the FDIC circulated new guidelines for bank regulators to streamline and standardize the way banks are examined. One standout feature is that as long as a bank has evaluated the borrower and the asset behind a loan, if they are convinced the borrower can repay the loan, even if they go into a workout with the borrower, the bank does not have to reserve for the loan. The bank doesn't have to take any hit against its capital, so if the collateral all of a sudden sinks to 50% of the loan balance, the bank still does not have to take any sort of write-down. That obviously allows banks to just sit on weak assets instead of liquidating them or trying to raise more capital.

That's very significant. It means the FDIC and the Treasury Department have decided that rather than see 1,000 or 2,000 banks go under and then create another RTC to sift through all the bad assets, they'll let the banking system warehouse the bad assets. Their plan is to leave the assets in place, and then, when the market changes, let the banks deal with them. Now, that's horribly destructive.

Just to be clear on this, let's say I own an apartment building and I've been making my payments, but I'm having trouble and the value of the property has fallen by half. I go to the bank and say, "Look, I've got a problem," and the bank says, "Okay, let's work something out, and instead of you paying $10,000 a month, you pay us $5,000 a month and we'll shake hands and smile." Then, even though the property's value has dropped, as long as we keep smiling and I'm still making payments, then the bank won't have to reserve anything against the risk that I'll give the building back and it will be worth a whole lot less than the mortgage.

MILLER: I think what you just described is accurate. And it's exactly a Japanese-style solution. This is what Japan did in '89 and '90 because they didn't want their banking system to implode, so they made it easier for their banks to sit on bad assets without owning up to the losses.

And what's the result? Well, it leaves the status quo in place. The real problem with this is twofold. One is that it prolongs the problem – if a bank is allowed to sit on bad assets for three to five years, it's not going to sell them.

Why is that bad? Well, the money tied up in the loans the bank is sitting on is idle. It is not being used for anything productive.

Wouldn't banks know that ultimately the piper must be paid, and so they'd be trying to build cash – trying to build capital to deal with the problem when it comes home to roost?

MILLER: The more intelligent banks are doing exactly that, hoping they can weather the storm by building enough reserves, so when they do ultimately have to take the loss, it's digestible. But in commercial real estate generally, the longer you delay realizing a loss, the more severe it's going to be. I can tell you that because I'm out there servicing real estate all day long. Not facing the problems, and not writing down the values, and not allowing purchasers to come in and take these assets at discounted prices – all the foot-dragging allows the fundamental problem to get worse.

In the apartment business, people are under water, particularly if they got their loan through a conduit. When maintenance is required, a borrower with a property worth less than the loan is very reluctant to reach into his pocket. If you have a $10 million loan on a property now worth $5 million, you're clearly not making any cash flow. So what do you do when you need new roofs? Are you going to dig into your pocket and spend $600,000 on roofing? Not likely. Why would you do that?

Or a borrower who is sitting on a suburban office property – he's got two years left on the loan. He knows he has a loan-to-value problem. Well, a new tenant wants to lease from him, but it would cost $30 a square foot to put the tenant in. Is the borrower going to put the tenant in? I don't think so. So the problems get bigger.

Why would the owner bother going through a workout with the bank if he knows he's so deep underwater he's below snorkel depth?

MILLER: It's always in your interest to delay an inevitable default. For example, the minute you give the property back to the bank, you trigger a huge taxable gain. All of a sudden the forgiveness of debt on your loan becomes taxable income to you. Another reason is that many of these loans are either full recourse or part recourse. If you're a borrower who's guaranteed a loan, why would you want to hasten the call on your guarantee? You want to delay as long as possible because there's always a little hope that values will turn around. So there is no reason to hurry into a default. None.

So that's from the borrower's standpoint. But wouldn't the banks want to clear these loans off their balance sheets?

MILLER: No. The banks have a lot of incentive to delay the realization of the problem because if they liquidate the asset and the loss is realized, then they have to reserve the loss against their capital immediately. If they keep extending the loan under the rules present today, then they can delay a write-down and hope for better days. Remember, you suffer if the bank succumbs and turns around and liquidates that asset, then you really do have to take a write-down because then your capital is gone.

So here we are, we've got the federal government again, through its agencies and the FDIC, ready to support the commercial real estate market. They've taken one step, in allowing banks to use a very loose standard for loss reserves. What else can they do?

MILLER: Well, obviously nobody knows, but I can guess at what's coming by extrapolating from what the federal government has already done. I believe that the Treasury and the Federal Reserve now see that commercial real estate is a huge problem.

I think they're going to contrive something to help assist commercial real estate so that it doesn't hurt the banks that lent on commercial real estate. It'll resemble what they did with housing.

They created a nearly perfect political formula in dealing with housing, and they are going to follow that formula. The entire U.S. residential mortgage market has in effect been nationalized, but there wasn't any act of Congress, no screaming and shouting, no headlines in the Wall Street Journal or the New York Times about "Should we nationalize the home loan market in America." No. It happened right under our noses and with no hue and cry. That's a template for what they could do with the commercial loan market.

And how can they do that? By using federal guarantees much in the way they used federal guarantees for the FHA. FHA issues Ginnie Mae securities, which are sold to the public. Those proceeds are used to make the loans.

But it won't really be a solution. In fact, it will make the problems much more intense.

Don't these properties have to be allowed to go to their intrinsic value before the market can start working again?

MILLER: Yes. Of course, very few people agree with that, because if you let it all go today, there would be enormous losses and a tremendous amount of pain. We're going to have some really terrible, terrible years ahead of us because letting it all go is the only way to be done with the problem.

Do you think the U.S. will come out of this crisis? I mean, do you think the country, the institutions, the government, or the banking sector are going to look anything like they do today when this thing is over?

MILLER: I know this is going to make you laugh, but I'm actually an optimist about this. I'm not optimistic about the short run, and I'm not optimistic about the severity of the problem, but I'm totally optimistic as it relates to the United States of America.

This is a very resilient place. We have very resilient people. There is nothing like the American spirit. There is nothing like American ingenuity anywhere on Planet Earth, and while I certainly believe that we are headed for a catastrophe and a crisis, I also believe that ultimately we are going to come out better.

---

Andy Miller is the co-founder of the Miller Frishman Group (www.millerfrishman.com), which includes three companies serving different sectors of the real estate market – from mortgage brokerage and banking, to the building, management, and marketing of commercial real estate across the United States. His firm is currently deeply involved in the distressed real estate business, assisting lenders across the nation with their growing portfolios of non-performing loans.

We fix $6.00 Haircuts

I just saw this Office Depot commercial tonight and absolutely loved it:

United Welfare State of America

I just feel like I need to reiterate and emphasize a few lines from Congressman Ryan's speech I recently posted on:

In 2004, by our measure, 20% of US households were getting about 75% of their income from the federal government and have already become government dependents. Another 20 percent were receiving almost 40 percent of their income from federal programs, and are certainly already reliant on government for their livelihood.

All in all, about 60% of US households were receiving more government benefits and services (in dollar value) than they were paying back in taxes. We estimate that President Obama's first budget alone raises this "net government inflow" from 60% to 70%.

Nashville CRE Update

From an email I sent today to my clients:

Good afternoon!

I wanted to quickly update you on the latest information regarding commercial real estate sales for Davidson County for the 4^th Quarter and for Year-End.

In the 4^th quarter of 2009, we had 56 commercial closings in Davidson County. The good news about this number is it’s higher than both the 4^th quarter numbers for 2007 (52) and 2008 (40). The bad news is that we’re still 71% off the numbers we saw for the 4^th Quarter of 2006.

In total, we had 157 commercial closings in Davidson County for 2009.

This number represents a:

26% decrease from the 212 commercial closings in 2008;

61% decrease from the 406 commercial closings in 2007;

82% decrease from the 861 commercial closings in 2006

If you ask me what’s in store for 2010, I will give my standard answer when asked to predict the future: I don’t know.

If you ask me to use my intelligence guided by my experience to guess what’s in store for 2010, I will tell you my guess is that we will continue to see downward pressure on sale prices and lease rates due to the oversupply of buildings for sale and for lease, the current state of the credit markets and availability of capital, the current state of the job market, and the continued deleveraging of the financial sector (see chart below for an idea of the continued deleveraging we may see in the financial market).

I also believe we will see the volume of commercial sale transactions increase. The transactions will look about 30% - 40% worse than they would have looked in 2005, 2006, or 2007, but if sellers wait around for those prices to return, they could be waiting for a long time. We will not climb anywhere near the 2006 or even 2007 numbers for 2010, but I do believe we will crack 200 commercial sales this year and see a relatively steady increase in sales volume moving forward.

What goes down must come up, and I am confident that we have seen the darkest days of inactivity in the commercial market here in Nashville. There are still some very dangerous clouds looming on the macro level looking at the amount of Commercial Mortgage Backed Securities that are either in default or going to be in default, but I will leave it to the economists to try and see how those events will play out.

The great thing about 2010 is that it’s not 2009. I am seeing a lot more activity in the market and usually increased activity leads to good things.

Paul Ryan on Health Care and Progressivism

Please, please, pretty please, read this entire speech Congressman Paul Ryan recently gave at Hillsdale College on Health Care and Progressivism.

Congressman Ryan really has a gift for communicating the ideas of conservatism in a way that doesn't sound partisan or boilerplate.

Some of the highlights:

Progressivism came in on two great waves: the 1930s New Deal and the Great Society of the 1960s. President Obama often invokes Progressivism and plans to generate its third, and greatest, wave. American businesses large and small must be brought under centralized direction. Contracts, the very core of personal and social freedom, are scrapped or rewritten by the administration as decades old bankruptcy laws are cast aside in the reorganization of the auto makers. The compensation which employers pay to secure the services of executive employees is now reviewed and second-guessed by a presidential "pay czar." Marriage and family life, church and voluntary organizations are all being weakened mostly by nonrepresentative government agencies. First wave Progressives demanded the popular referendum. Third wave Progressives do everything possible to stop local and state referenda which citizens would use to end this assault on the pillars of free society.

..........Washington DC is no place to run health care services for the nation. Thus the Framers left public health decentralized. But if there were any doubt, the history of Medicare and Medicaid is the proof. Real cost control has become a national nightmare. Fraud has proliferated despite every effort to stop it. Program costs are always underestimated. In 1966 the cost of Medicare to the taxpayers was about $3 billion. The House Ways and Means Committee estimated that Medicare would cost taxpayers only about $12 billion by 1990 (adjusted for inflation). The actual cost? Nearly nine times as high - $107 billion. By 2006 Medicare reached $401 billion while Medicaid added another $309 billion for a total of $710 billion.

The health care programs Democratic leaders are pushing are outrageously expensive and fiscally irresponsible. The federal Health Care takeover will subsume about one-sixth of our national economy. Combined with current federal, state, and local spending, government will control about 50 percent of total national production. At this point the goal of centralized administration will be in sight, with less than half of our once free economy to be brought under government control.

........There are essentially three models for health care delivery available to us. First, today's broken model in which bureaucratized insurance companies monopolize the field in each state - this is the "business-government partnership" model, the "crony capitalism" that corrupts our economy. Second, the Progressives' model where centrally administered government takes over the field and government bureaucrats decide which services you are allowed to have. Third, the only true American model in my view, a free market in which health care services compete, and individuals - the consumer-patients and their doctors - are in control.

Bureaucratized health care is not and cannot be "compassionate" health care. Government agents don't make decisions about how to treat the sick according to personalized need ... they ration health care resources according to a dollar-driven social calculus. This isn't a flaw in their plan. It is their plan.

Dr. Ezekiel Emanuel, the Obama Administration's point man on health care issues, advocates what he calls a "whole life system," a comprehensive formula for health care rationing. Under this system, government makes treatment decisions for individual persons using a statistical formula based on average life expectancy and "social usefulness." In other words, socially "useful" patients deserve more care than "useless" persons. Consider the legislation's new Medicare board of unelected specialists whose job is to determine the program's treatment protocols as a method of limiting costs. We already have a new comparative effectiveness research bureaucracy whose sole mission is make government determinations about which health procedures it deems are most cost effective and will be allowed by health care bureaucrats. The whole purpose of this heartless calculus is to eliminate compassionate personal care by loved ones under free markets with a diversity of health resources at proportional costs.

.......But the struggle over federal health care reform, the Democratic leaders' signature program, goes beyond the problem of national health. This debate encapsulates the defining issue of our generation: should we reform and strengthen America's free market democracy, or should we abandon it for a European-style social welfare state, the dream of third wave Progressives? Ultimately this is about an ideological crusade.

.......The US is already perilously close to this "tipping point." While exact and precise measures cannot be made, the Budget Committee minority staff have developed the warning indicators. In 2004, by our measure, 20% of US households were getting about 75% of their income from the federal government and have already become government dependents. Another 20 percent were receiving almost 40 percent of their income from federal programs, and are certainly already reliant on government for their livelihood.

All in all, about 60% of US households were receiving more government benefits and services (in dollar value) than they were paying back in taxes. We estimate that President Obama's first budget alone raises this "net government inflow" from 60% to 70%.

.....American citizens once took pride in being responsible for their individual well-being and for governing themselves in freedom. They are now to become passive subjects of government leaders, wheedling for hand-outs, more concerned about their security than their liberty. Isn't it wiser to suppose that those who promote this program are smart enough to know what they are doing? When we reach their intended goal, those who still cherish human freedom will be reduced to near-silence. Whatever you call the post-American regime they would impose on this land, it will be no democracy.

......In the current economic crisis there has been no lack of greed, envy, ambition, and plain ignorance in corporate boardrooms, financial markets, and government hallways. The capital sins are always with us. But the foundations for this crisis were laid by Progressivism itself, above all by encouraging "crony capitalism." The Democratic leadership is trying to cure the diseases of "crony capitalism" with more "crony capitalism." What we really need is a new engagement with the principles Progressives repudiate, the principles that founded this land of freedom.

This nation was based on the self-evident truth that unalienable rights were granted to human beings not by government but by "nature and nature's God." The truths of the American founding cannot become "obsolete" because they are not temporal. They are eternal. "The laws of Nature and of Nature's God" are the sure touchstones of right and wrong for individuals and societies, for all time. They are the most inclusive ideas ever embodied in a government. If all human beings have equal natural rights, that is final. "All" means "all."

......President Obama famously said that he wants to "spread the wealth around." Democratic Party leaders hanker for those Old World notions of rule by the patronage of bureaucrats and judges. The chair of the House Financial Services Committee, Barney Frank recently said as much: Democrats "are trying on every front to increase the role of government." I appreciate his candor but I can't help hearing an echo of George III excusing "taxation without representation." We swore off rule by the "better classes" a long time ago.

These leaders underestimate the American people. They have broken faith with independents, Republicans, and their own rank-and-file. They have walked away from the foundational truths that made America the wonder and envy of the world. And the price of their infidelity will be high.

Joe Montana

They don't make QB's much better than Joe Montana:

Obama and Grade Inflation

President Obama recently gave himself a sold B plus grade on his first year in office.

Breitbart ran a story today looking at Obama's first year in office based on the numbers:

7,949.09—Dow Jones Industrial Average close on Jan. 20, 2009.

10,609.65—Dow Jones Industrial Average close on Jan. 15, 2010.

13 million—Number of people 16 and older unemployed as of January 2009.

14.7 million—Number of people 16 and older unemployed as of December 2009.

7.7 percent—Unemployment rate January 2009

10.0 percent—Unemployment rate December 2009

$787 billion—Cost of economic stimulus approved by Congress.

$10.6 trillion—Outstanding public debt Jan. 20, 2009.

$12.3 trillion—Outstanding public debt Jan. 14, 2010.

$296.4 billion—Federal spending from the financial crisis bailout fund before Jan. 20, 2009.

$173 billion—Federal spending from the financial crisis bailout fund after Jan. 20, 2009.

$165 billion—Amount of bailout funds repaid by banks and automakers.

139—Bank failures between Jan. 20, 2009, and Jan. 14, 2010.

274,399—Number of properties that received forclosure-related notices in January 2009.

349,519—Number of properties that received forclosure-related notices in December 2009.

34,400—U.S. troops in Afghanistan in January 2009.

70,000—U.S. troops in Afghanistan as of Jan. 12, 2010.

319—U.S. military deaths in Afghanistan from January 2009 through Jan. 15, 2010.

139,500—U.S. troops in Iraq in January 2009.

111,000—U.S. troops in Iraq as of Jan. 12, 2010.

152—U.S. military deaths in Iraq from January 2009 through Jan. 15, 2010.

539—Appointments to top federal policy positions submitted to the Senate

352—Appointments confirmed by the Senate.

180—Appointments in top policy positions carried over from the Bush administration.

12—Formal news conferences.

21—Foreign countries visited.

29—States visited.

10—Visits to Camp David.

2—Vacations

Let's all hope that our teachers, bosses, and parents don't use the same grading system as President Obama. If they do, we may have to rename our country Mediocrimerica.

Global Warming "Science" Revealed

The more that comes out about this flummery, the more disgusted I get:

Two years ago the Intergovernmental Panel on Climate Change (IPCC) issued a benchmark report that was claimed to incorporate the latest and most detailed research into the impact of global warming. A central claim was the world’s glaciers were melting so fast that those in the Himalayas could vanish by 2035.

In the past few days the scientists behind the warning have admitted that it was based on a news story in the New Scientist, a popular science journal, published eight years before the IPCC’s 2007 report.

It has also emerged that the New Scientist report was itself based on a short telephone interview with Syed Hasnain, a little-known Indian scientist then based at Jawaharlal Nehru University in Delhi.

Hasnain has since admitted that the claim was “speculation” and was not supported by any formal research. If confirmed it would be one of the most serious failures yet seen in climate research. The IPCC was set up precisely to ensure that world leaders had the best possible scientific advice on climate change.

Professor Murari Lal, who oversaw the chapter on glaciers in the IPCC report, said he would recommend that the claim about glaciers be dropped: “If Hasnain says officially that he never asserted this, or that it is a wrong presumption, than I will recommend that the assertion about Himalayan glaciers be removed from future IPCC assessments.”

The IPCC’s reliance on Hasnain’s 1999 interview has been highlighted by Fred Pearce, the journalist who carried out the original interview for the New Scientist. Pearce said he rang Hasnain in India in 1999 after spotting his claims in an Indian magazine. Pearce said: “Hasnain told me then that he was bringing a report containing those numbers to Britain. The report had not been peer reviewed or formally published in a scientific journal and it had no formal status so I reported his work on that basis.

“Since then I have obtained a copy and it does not say what Hasnain said. In other words it does not mention 2035 as a date by which any Himalayan glaciers will melt. However, he did make clear that his comments related only to part of the Himalayan glaciers. not the whole massif.”

..........Some scientists have questioned how the IPCC could have allowed such a mistake into print. Perhaps the most likely reason was lack of expertise. Lal himself admits he knows little about glaciers. “I am not an expert on glaciers.and I have not visited the region so I have to rely on credible published research. The comments in the WWF report were made by a respected Indian scientist and it was reasonable to assume he knew what he was talking about,” he said.

Rajendra Pachauri, the IPCC chairman, has previously dismissed criticism of the Himalayas claim as “voodoo science”.

Not should we? but Can we?

I am amazed at how many times we forget to ask the question "Can we?" when it comes to federal legislation.

From a recent NPR article:

A legal battle could end up in the Supreme Court. Georgetown University law professor Randy Barnett is already gearing up for that. He maintains Congress would be overstepping its powers enumerated in the Constitution if it required people to buy health insurance.

"Never in the history of the United States has the federal government ever required someone to engage in an economic activity with a private party. It's never been done, and anything that's never been done before has no precedent for it," he said. "It would have to be a new decision by the Supreme Court to uphold this new extension of power. And if they uphold this, then there's pretty much nothing that Congress can't do and that's the end of the enumerated power scheme."

Proponents of Obamacare are arguing that:

.....the mandate to buy health insurance would be seen by the high court as part of Congress' power to regulate interstate commerce.

Here is an excerpt from a very interesting article on this issue that appeared in a 1993 Wall Street Journal article:

.......In particular, Congress could exercise only that authority specifically granted to it by the people and the states.

There was a list — and not a very long list. One of the powers enumerated on it was the "Power . . . To regulate Commerce with foreign Nations and among the several States." One of the most serious deficiencies of the first union under the Articles of Confederation was that states were able to erect barriers to trade with other states and foreign countries. The Commerce Clause was added to the Constitution so that Congress could create the original North American free trade zone — within the U.S. itself.

The commerce power in the battered Constitution that emerged from the 1930s and 1940s, however, was very different. After being routed by President Roosevelt and his Congress, the Supreme Court fled to the Commerce Clause, finding there a way to avoid treading upon the vital interests of a Congress determined to regulate the economic relationships of the citizenry, not to mention its health, welfare and safety. In Wickard v. Filburn , in 1942, the court went so far as to rule that Congress could prevent a farmer from growing wheat for his own consumption. Too much of an effect on commerce, reasoned the court — this fellow gobbling wheat he grew himself. After all, he could have purchased it interstate. On that day, the Framers' ghosts wept.

Of course, the commerce power was still, in theory, limited. In Wickard , after all, the man at least was a farmer, someone engaged in growing and selling foodstocks. Commerce was in the air, somewhere. And the court continued to pay at least lip service to the notion that federal government is a government of limited authority, and that Congress can regulate only based upon some nexus to interstate commerce — or in reference to one of its other enumerated powers, like the power to tax and spend. So long as Congress provides a reasonable explanation of that nexus, its actions will be upheld. The limits of the contemporary Commerce Clause are not very clear, but most would agree there are some limits.

The final test, however, has come. In the new health-care system, individuals will not be forced to belong because of their occupation, employment, or business activities — as in the case of Social Security. They will be dragooned into the system for no other reason than that they are people who are here. If the courts uphold Congress's authority to impose this system, they must once and for all draw the curtain on the Constitution of 1787 and admit that there is nothing that Congress cannot do under the Commerce Clause. The polite fiction that we live under a government of limited powers must be discarded — Leviathan must be embraced.

The implications of this final extension of the commerce power are frightening. If Congress can regulate you because you are , then it can do anything to you not forbidden by the handful of restraints contained in the Bill of Rights. For example, if Congress thinks Americans are too fat — many are — and this somehow will affect interstate commerce — who's to say it doesn't? — can it not decree that Americans shall lose weight? Indeed, under the new system, any activity that might increase the costs of health care might be regulatable.