It Goes Around and Comes Around

Think back to the late ’80’s and the Savings and Loan crisis of that era and you should recall that it was a mostly regional problem.  Yes, the effects of those bad commercial loans spread to many regions of the country but the pain was not universal.  The real epi-center of that crisis was in the southwest–Texas, Oklahoma, New Mexico, Colorado and Louisiana were the states the hardest hit.  Only shortly before the crisis unfolded that area had been doing quite well economically.  The price of oil and gas was strong and climbing.  In the early ’80’s oil peaked at the then outrageous price of just under $40 per barrell.  There were plenty of predictions that the price would quickly move to $100 per barrell.  That oil revenue helped fuel a sharp increase in economic activity in the southwest.  The savings and loans were also awash in money at that time as were most of the banks. 

That availability of money and the oil profits sparked a large building spree by the developers.  There were deals for office buildings, strip centers, malls, apartments and almost any type of commercial construction.  I had many clients at that time who had the banks call on them asking them if they needed some money for a project.  It was not unusual for the banks to even suggest an area or project they thought would work.  The banks took a piece of the action in many of these cases.  They not only were looking to profit from the loans themselves but were getting a portion of the equity in the projects.  This was indeed a “partnership” between the developers and the banks.  But alas when the Feds got involved after the trouble started the position then was that everything was a fraud from the git go.  The Feds denied that there was any partnership with the developers.  There never was a document called a partnership agreement; however, the banks would have a “participation” agreement or use some other euphemism for it.   There were a number of lawsuits over that issue.  In any private litigation the existence of the partnership would have been proved without a problem.  But the Feds didn’t want the liability of a partner and also there was intense political pressure from Washington to scapegoat the “bad” guys–developers.  You can look up those cases if you like.  D’oench Duhm was the lead case on this issue.

The country as a whole was not sympathetic to the southwest and felt that the folks there were reaping the rewards of extravagance and risky business practices.  Many felt like there was no need to do much of anything and didn’t care what happened.  The take over of many of the s and l’s was a political cause celebre much like the bailouts of today.  You can go back and look at some of the editorials from that era from the northeast, midwest and west coast to get a flavor of the sentiments.  There were a handful of unscrupulous developers but only a handful.  Most of them were merely following the rules of the game at the time they made their deals with the banks.  The government changed the tax rules in ’86 which really gutted the real estate investment market.  Then of course the very regulators who had been cheering on the s and l’s to go out and make all these loans were suddenly “shocked, shocked” to discover that a lot of those loans had indeed been made.  It was part of the deal Reagan had to make with the Democrats to keep his budget lower.  It was a classic political trade off to close loopholes and yet get lower taxes through a Democrat controlled congress.   Those in the southwest didn’t want any special favors and didn’t get any.  There was about 300 billion in federal money poured into the debacle.  But even in those days that was a manageable number and didn’t seriously effect the national economy.  Of course that 300 billion number was mostly due to the incompetence and pusillanimity of the federal regulators themselves.  If the feds had allowed the s and l’s to rework the loans privately with their borrowers the loss would have been greatly diminished.  I worked on many of those cases and know whereof I speak.  I personally witnessed the government wasting millions and millions by demanding foreclores and bringing in new managers when a simple reduction in interest payments would have solved the problem at hand.  Odd that now the mantra is that Government, Inc. is forcing the banks to work with their lenders and do everything to avoid foreclosures; times and fortunes do change.

Now the wheel has turned.  It is Michigan, Ohio, Florida, Arizona, Nevada, California and New York City that have the problems.  Just check the numbers and the stats.  The fall in housing prices and the foreclosures are there.  Yes, I know there are some problems in other areas but they pale in comparison to those states and NYC.  All of this mortgage bailout help, foreclosure issues and falling home prices are there.   Explain to me again why I should be that concerned about those regions?  All I remember is vilification for the southwest when it had problems and the worst help in the world.  The help was from those people showing up saying “We are from the federal government and we are here to help you”.  Sure.  It took about 8 years for our area to recover from all that government help.  I certainly don’t feel any moral obligation to pay for someone’s mortgage in Victorville, California who bought a house he couldn ‘t afford with no verifiable income and it was 100% financed by some agency of the US government.  We are not all in this together when it comes to our economic life;  otherwise we would all share one joint checking account.  I don’t feel in the least responsible for every spendthrift in the country–how about you?   Let each person and each state work out their own problems.  That is what is best for all of us.  If California wants to tax and spend itself into oblivion that is their choice but I don’t feel in the least sympathetic for them.  If their path is the right one they will prosper and I am just dead wrong.  I ask however that I not be required to “invest” in their economy or political dreams.  We have choices and we have consequences.  I will live and struggle with my choices but I damn sure don’t want to suffer your consequences.   Seem fair to you?

“There exists in human nature a strong propensity to depreciate the advantages, and to magnify the evils, of the present times”.   Gibbon

Read more at www.olcranky.wordpress.com

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