The "Free Capitalist" Roped In

As anyone who reads my blogs knows, I was always leery of the real estate boom.  I've seen too many of them bust.  By the end of 2005, I was warning anyone who would listen they were making long term investments with a short term upside.  By the end of 2006, I was setting off flares.  Nobody wanted to hear, and here we are.

During all those smoke and mirrors, people were either shoveling money in or getting others to shovel in.  And they all had good excuses.  Everybody was doing it (Which was nearly true.).  There didn't seem to be anything wrong with it because it was all out in the open and no one was getting busted (Which was also true.  TV, radio, and billboards were full of ads for strawmen and flips, and neither the state nor the feds seemed to be cracking down on it in any way.).  And there was one company with a massive profile that seemed to be doing it all without any regulators saying "Boo": Franklin Squires.  I tell you it was impossible in the face of all that to convince people to stay away from the game.

And of course the face, the brains, the man on the throne of Franklin Squires was Rick Koerber.  And as things fell apart, a lot of the people who got into serious legal trouble seemed to be Koerber's alums.  Yet Koerber himself was unscathed.  In fact he got louder, directly challenging the regulators, at one point seemingly making the state securities division turn tail.

That was curious.  And the reason was obvious.  FIHP.  Koerber had friends in high places.  Specifically Herriman's own Carl Wimmer, who ran interference for Koerber and even instigated a legislative audit of the securities division when it had the temerity to investigate Koerber.  You tax dollars at work.

Well, the legislature couldn't audit the SEC or the FBI or Brett Tolman's office.  And now Koerber's indicted, and Wimmer is backstroking so fast I think he just burned Michael Phelps.  I guess he wasn't too big to fail (And trust me on this, nothing is.  Empires have failed.  What makes banks and brokerages think they can't?).

Remember as you go down the road that there are certain truths that never seem to go away:

If it seems too good to be true, it is.

There's no honor among thieves.

There's always a bigger fish.

Stock Drops

I represent a contractor in a dispute with Stock Building Supply over a supposed balance owed.  The case has been nearly dormant for awhile, and I've spent the last couple of weeks prodding opposing counsel to get things moving.  Last ninght I finally got a response, essentially along the lines of, "Hey, where have you been?  Stock filed Chapter 11.  This case is dead."

Now really, I try to keep up on things, but this completely fogged by me.  I went back and checked my news sources and saw that the whole thing has mostly been under the radar.  I guess it's a sign of the economic times that a major construction supplier can be sucked into a black hole, and the only coverage is between the classifieds and the obits.  Probably also a sign of what news reporting has become.

So what do we all take away from this?  Well, my client is basically in a wash.  He won't get the money he thinks he's owed, but he's not going to worry about Stock's claims against hime either (Yes, I know, the trustee/DIP could still pursue him, but he's too small a fish for these circumstances.).  Me?  I've had some potential billables get cut off, but I've been in this game too long to bother counting it until it's in hand (Let's just say I have a cash mindset, not accrual).  Other contractors?  If you were planning on using Stock, better get a new plan.  In general?  In spite of the smiley faces everyone is now painting on the economy, there's still a lot of turmoil and downside out there.

What a Mess

Well, as I wrote on Christmas Eve, the only thing keeping Sportsman's Warehouse going was the interest of a Canadian co-op, and the moment UFA Co-operative pulled the plug on that deal, it was off to bankruptcy court.  And as I predicted in that same Christmas Eve sermon and again on 14 January, General Growth Properties has likewise dived into bankruptcy court, leaving a wasteland in Cottonwood Heights (including killing off the TGI Friday's there) and stiffing the Fashion Place contractors for several million (If the contractors were smart, they'd form a consortium, foreclose all their mechanics liens together, do a workout with the prime lenders, and take over.  It's now the only east side regional mall between South Towne and downtown and looks to stay that way awhile.).  Commercial real estate loan defaults have quadrupled since last year as vacancies in all types of commercial space keep rising.  And, oh yes, home sales are down too, in spite of blandishments to the contrary from Realtors.  Exactly where is that bottom we're supposed to have reached already?

Sounds Like a Plan?

So the Draper City Council got all confused the other evening?  Seems that the developer of the Windsor development on the Jordan River (a mix of multi- and single-family housing) tried to address some criticisms by the Planning Commission by changing its proposal in the middle of the hearing.  By the time it was over, no one could keep straight which proposal they were talking about.  Then there was the little problem of no one having had a chance to look at the new proposal.  Finally the Council decided, in a 3-2 vote, to set the new proposal on for a new hearing.

This is the sort of thing that happens when you don't have a procedure that works.  I have to say I miss not working with the Washington State system.  If a council (city or county) is making a land use decision that is jurisdiction-wide (such as adopting a new use for a particular type of zone or amending street standards), it is acting legislatively.  It may be lobbied, it can amend the proposal at will (not quite, but close enough for this discussion), and it doesn't have to make a record of why it did what it did.  If there is a site-specific application, though (someone wants a rezone or conditional use permit on a particular parcel), the council is acting quasi-judicially and has to act like a court.  It has to make a formal record and base its decision on that record, and lobbying is right out.

That's where the staff and planning commission come in.  They make a lot of the direct contacts and build the record so the council has some insulation.  And if the applicant wants to change the proposal, it's back to the staff and commission to make a new record.

I've found that it works.  It certainly keeps applicants from switching horses in midstream, leaving councils wandering around in a fog.  They don't need any help with that.

Speaking of the Rule of Law

Magna is a peculiar institution.  For decades it has been run by two entities: the Town Council and the Community Council.  If you wanted to do something that required a land use decision, you needed the approval of both.

That's the problem.  While state law gives such authority to the Town Council, it gives no such authority to the Community Council.  The Community Council is simply a private entity that has been allowed to wield authority as if it were public.

I will readily admit that the Community Council has done a lot of good things for Magna.  That's not the point.  Suppose you wanted to develop some property or build a facility for your business, and you were told you would have to get the approval of the local Chamber of Commerce or Lions Club or Shriners or American Legion Auxiliary or whatever.  A group that can meet and decide in private.  Or not meet at all; a few, key members could simply get together at a church potluck and decide the fate of your proposal.

Why should any private group have that kind of power?  It shouldn't.  That's why such decisions need to be made by entities that are established and controlled by law.  The laws are there to protect you, and if you don't believe it, imagine the fate of your business hanging on the decision of the local ladies' book club after they've finished discussing Twilight.

Lowry vs. Rule of Law

As an attorney, I have a vested interest in the rule of law.  As a human being, I do too.  I believe that citizens are considerably better off if their lives are governed by a set of laws that remain set unless changed in certain, prescribed ways than they are if their lives are governed by the arbitrary edicts of a Great Leader.

Which is why Matt Lowry's take on the torture memos disturbs me.  He wants to characterize them as a shining example of a nation ruled by laws taking the time, in the midst of a national security crisis, to debate the legality of its response.  The memos may ultimately have been wrong, but the fact that we did not strike without first thinking through the legal issues means we remain a nation that respects the law.

There's a teeny-tiny problem with this argument, namely that the memos were condoning conduct the U.S. had tried and convicted people for after World War II, and the people "debating" the legal issues knew it.  They also knew that the laws against "enhanced interrogation techniques" had become more stringent over the intervening decades, not more lax, so the only reason to reverse our previous position was political expediency.  Which means those memos weren't part of a debate.  They were pre-ordained to justify an already decided upon course of action.  They were about as respectful of the rule of law as any of Hitler's or Stalin's show trials.

No, Mr. Lowry, the torture memos are not a shining example of our belief in the rule of law.  They are damning evidence of our readiness to abandon it.

The Snowball at the Top

Anybody remember what got this whole, economic avalanche going? Remember resets? You know, when adjustable-rate mortgages make their adjustments, and borrowers suddenly find they have to make real payments instead of the Monopoly money payments they've been making? It's why people blame this malaise on "sub-prime" borrowers (as opposed to blaming, say, the folks who convinced people to lend the money in the first place by telling them the borrowers were prime; but I digress).

We had a big pile of resets in 2007, and the wheels promptly fell off the wagon. Nobody's mentioning that Round 2 is coming up, though. Starting in April, there will be large numbers of resets that will run to the end of 2011. First the Prime ARMs take off, then the Agency and Option ARMs. Unlike Round 1, there are effectively no Sub-Primes in these resets. Some people think that makes it better. I think it makes things worse.

First, the chief problem Round 1 uncovered was that everything seemed to have been misclassified. Sub-Prime was everywhere, packaged as Prime, and nothing was worth what everyone had thought it was worth. Now we shall have the supposed "really good loans" resetting, and the question everyone should be asking is, "How many of them will prove to be garbage?" And when more gold turns to garbage, how much more confidence will drain out of the markets?

Second, when Round 1 happened, it was just the US. This time the rest of the world has already has already been sucked in. There's no way to get out and ship your investments to a safe haven.

Third, counter-measures have already been exhausted. With Round 1, we still had room to maneuver. Since then, capital markets have collapsed, rates have been slashed, debt has ballooned, and the US alone is hemorrhaging a half-million jobs per month.

Fasten your seatbelts, it's going to be a bumpy ride. And yes, I know she said "bumpy night" in the movie.

Learn from your Mistakes or Repeat Them

I often find myself wondering if there's anyone driving this bus.  First, in spite of completely failing to get Craig Mecham off the dime with his Sugar House pit, Salt Lake City has greenlighted Red Mountain Retail Group's mixed use redevelopment of the rest of that block and the one adjacent.  I'm no fan of the Granite Furniture Warehouse, but we don't exactly need another chain-linked hole in the ground on that block.  The City says this one is different because Red Mountain has all its financing in place.  Yeah, right.  Mecham said the same thing.  So did General Growth Properties with the Cottonwood Mall.  Show me the money.

Meanwhile, on the South End Sand Pile, R&B SunCrest has walked out of negotiations to take over the SunCrest development, claiming Draper is not acting in good faith.  What that really means is that Draper, to the shock of everyone, is not rolling over, taking R&B and Zions Bank off the hook, and agreeing to stick the already thoroughly ripped off citizens of Draper with the entire bill to fix that mess.  Bully for Draper.  Unfortunately, Draper has done little if anything to change the ordinances and procedures that made SunCrest possible in the first place, so it continues to permit time bombs and will be crisis hopping for awhile.

As an aside, I have to wonder about Zions Bank.  As a result of the SunCrest collapse, Zions ordered Draper to close its accounts and find another bank.  That's the sort of "take your ball and go home" behavior one expects on a playground, not from a major financial player.  It could be a blessing in disguise for Draper, though.  Zions has taken some serious hits in the last year, from having to pull off-book garbage back onto its books to having to take over busted banks at the FDIC's "request" to seizing crap collateral like SunCrest.  There's only so much that any business can absorb.  Maybe it's good that Draper moves on.

It Isn't Just a Residential Crisis

There's been a lot of noise about the housing market, bad mortgages, and banks failing as a result. People haven't been paying as much attention to the next real estate tsunami: commercial loans. The retail failures and dark spaces have been chipping away at commercial, though, and now it can't be ignored. The state seized commercial development lender MagnetBank Friday. If that isn't bad enough, the FDIC is having to eat this one because it can't find a buyer. What does that mean? Game over. In spite of the bailout money, no other bank could be convinced to buy in. The commerical picture is that grim. And what does that say about the effect the downtown mall and office buildings will have on the market? Or the odds of completing Cottonwood, Valley Fair, Sugarhouse, or the downtown Ogden projects? Or of filling the growing collection empty, faux-Tuscan commercial buildings that have sprouted up everywhere? There will be blood.