The economy: worse than the press is reporting... by gimleteye

The Miami Herald continues its hurried catch-up with respect to the financial crisis. Having missed reporting on the housing and construction asset bubble threat in the first place-- bending to the caution of advertisers who object to any negative coverage of real estate and growth, calling the publisher's office at the faintest wiff of negative press-- it is now reporting on the front page above the fold as though the managing partner of Greenberg Traurig, Cesar Alvarez, is noteworthy and quotable.

The Miami Herald needs to toughen up to face the economic hurricane; this is not a blameless unravelling, a coincidental and regrettable outcome of the economics of rapid growth and political influence peddling.

Here is what is noteworthy about Greenberg Traurig: it is the 1,800 lawyer firm that has been the lead block and tackle for zoning changes into farmland and open spaces for decades; a key player with such employees as Marvin Rosen, Jack Abramoff and locals like Miguel De Grandy and Lucia Dougherty who sharpened their skills as lobbyists for developers, helping drown out civic opposition to unsustainable growth wherever it occurred; in the City of Miami or Miami-Dade County.

The dis-credited, de-leveraged pillars of the community who saw nothing wrong with the way the Growth Machine was geared and lubricated, from lowly zoning councils at the county or city commission to Wall Street financiers and production homebuilders who peddled their financial crack cocaine-- turns out to be the greatest Wealth Destruction Machine in a hundred years.

In the Herald story, Alvarez is given the first quote leading to the Herald's own assessment, "South Florida's economy faces a surge in home foreclosures, higher-than -normal inflation, rising unemployment and pullbacks in consumer spending. Add to that the meltdown of the national financial system." What the Herald fails to report, in its ramped up coverage to catch up, is how the local financial system is melting down: Friday's Herald reported of one owner of Venetia condo still using the property gym while refusing to pay either his mortgage or maintenance fees.

But what readers need to know is that abandonment of mortgages by developers and property owners is rampant, today: developers and property owners are simply ignoring contracts. Period. The scale of voided contracts has not occurred in any of our lifetimes. (click on 'read more', to read the full post)

The abandonment of debt is happening not just at the level of consumers; but at all levels of mortgage finance. Many months ago, Eyeonmiami wrote about and speculated what the massive backlog of foreclosures at county court represented: we wondered how in the world could the court system cope with the volume of distressed debt that was manifesting in banks buying back and holding title to foreclosures in the flood overwhelming the system.

It is now clear, but you won't read it in the mainstream press: despite the $700 billion, banks are desperately holding onto whatever real cash they can get their hands on, to maintain their capital ratios and avoid having to shut their doors because so many mortgages obligations are being ignored.

The banking system is designed for success. Who knew it has no capacity to deal with failure.

That is what the Herald should be asking Cesar Alvarez to comment on, because surely Alvarez has as good a picture as anyone of the carnage that is laying waste to banks and to people and to paper hundred-millionaires. Why? Because lawyers in commercial real estate an securities litigation practices must be swamped. The entire chain of debt tied to real estate has broken down. What is a financial derivative on real estate worth these days, formerly rated AAA by ratings agencies: it is anyone's guess.

The problem is not just that the banks and lending institutions are frozen.

Saavy investors, at least those who still have a little cash laying around, are making deals with banks by buying back loans they are failing to pay on, in the once-in-a-century meltdown of fiduciary responsibility to shareholders.

Developers are "re-negotiating" their loans on the back of envelopes or scraps of paper, and for the most part, the banks are happy to get whatever they can as their assets "de-leverage" because the US Department of Treasury (read: you and me) has promised to make good on the bank's losses. Why isn't the Herald reporting this story?

As readers of this blog know, I am plenty angry at the performance of the mainstream media and the so-called "sand in your shoes" captains of Florida industry and the politics of growth that have deformed the Florida landscape: but this rant is about something much more important: the chance that the un-stated policy of the federal government and of wealthy insiders is to allow inflation to "solve" the mispricing of real estate assets.

The government's economic officials have been misleading the public on inflation for decades, but its claim that we are living through deflation, and not inflation, is leaving millions of Americans ignorant of the immediate threats to the American way of life.

While it is true that the price of commodities is plummeting and that the US dollar has recently turned into a devalued safe haven of its former self; I cannot understand why any nation with surplus currency reserves (instead of debt, like the US) would invest long-term in the US dollar when the destruction of the banking system as I've described it, is proceeding like a forest fire. America desperately needs leadership.

I give credit to the Herald for its endorsement of Obama today, and also, for the opinion page ombudsman report that calls out the right-wing spin machine on its coordinated attacks of the Herald for its coverage it contrives to call unbalanced.

We are living in dangerous times; that the Herald (and most of the mainstream media) missed the run-up to the worst economic crisis in a hundred years should indicate to editors and management that it is time to regain readers trust by illuminating the depth and extent of the meltdown of contracts between banks and mortgage-holders, some of whom are major developers.

The bottom line is that the banking system today is exceedingly vulnerable to insiders who are gaming the system. I'm not sure how this is all going to play out, but I would guess that a fair percentage of the $700 billion the Bush White House just committed us to paying-- which is really on the order of $2 trillion by now, adding up all the commitments made to bailouts-- is not just a de facto socialization but also an opportunity for corruption.

But people won't know it is happening if the press will not report it, and giving pillars of the dis-credited development community the chance to be quoted in the Sunday paper as if they were just rubbernecking at a car crash is not going to cut it.