Another blast from the past... by gimleteye

ORIGINALLY POSTED 2/28/2007. The index feature "housing crash" contains many posts brought into fine relief by today's financial crisis. Don't hold your breath for any politician-- not from our lowliest members of the unreformable majority of the county commission to President Bush, to acknowledge that embracing speculators who profit on the public interest has been the de facto standard of political conduct for a very long time (ie. see the post below on the corporate sponsors of Biscayne National Park's 40th anniversary).

"The story that the mainstream media has missed, nearly entirely, over the past six years is how the fabric of economic growth in this country and elsewhere has been based on property speculation.

Our example—Exhibit A—the case of WCI Communities, Inc., a publicly traded company named America’s Best Builder in 2004 by the National Association of Home Builders.

The fact that speculation was the heart of the company’s fortunes never registered on a mainstream media radar, or, any consideration of its profound consequences. Certainly, advertising revenue from WCI and its production home builder allies sedated many newspapers around the nation. The creation of vast wealth was validated by political influence and power.

WCI Chairman Al Hoffman served as finance chair of Jeb Bush’s 1998 and 2002 gubernatorial campaigns. He was also head of the influential Council of 100 business advisory group that set the stage for Florida building boom through many builder-friendly laws passed by Florida’s acquiescent legislature and supported by Governor Jeb Bush. In 2001 and in 2003 Hoffman was Republican National Committee Chair. All on the wings of speculation."

In 2005, Hoffman was appointed by President Bush to be Ambassador to Portugal—a plum reward for service. (The fruits of land speculation have been a bipartisan provider: former DNC chair Terry McAuliffe’s fortune is tied to Florida land development and mortgage banking as are numerous other big donors to causes of both political parties.)

But all good things come to an end, even if the principals will handily weather a recession.

The Miami Herald reports today that WCI Communities “saw its profit for 2006 drop 95 percent compared to the previous year.” Last Monday, WCI announced it hired Goldman Sachs to help it review “strategic alternatives” including the possible sale of the company.

What has knit global markets during the past decade—and to the most extreme degree in China—is the fantastic growth of liquidity from credit creation.

Yesterday’s stock market blood bath was triggered by just the kind of external shock—in China’s vastly overheated equity market—that many worried about.

But news of even greater importance has been the unfolding slow-motion drama of the cratering market for subprime mortgages.

The reason that subprime mortgage debt markets have collapsed is that lending practices of US banks were allowed to spin into exotic debt instruments that have immensely increased risk. “Exploding” adjustable rate mortgages may doing just that to individual consumers, but the potential for damage from derivatives is on a scale that can scarcely be imagined.

What is now at risk is much greater than the stock prices of production home builders, or, whether shareholders at companies like WCI can be protected from vultures.

In retrospect, Americans will wonder how in the world could we have followed their lead.

The underpinning of the multi-trillion dollar markets for collateral mortgage obligations is at risk.

Moreover, we think the Federal Reserve has spent its ammunition in the cause of using interest rates to defibrilate the US economy: on a certain level, the American consumer is exhausted by the debt the piled on during the speculative fever.

For American families, there is enough stress and pressure just meeting the demands of taxes and insurance and, now, the likelihood that for many the dream of homeownership is a bad dream when you are overleveraged in a declining market.

For the Fed, lowering interest rates is not going to bring new buyers into this bear trap. Freddie Mac and Fannie Mae may be rushing to tighten lending standards, but too little, too late. But production home builders like Lennar and Toll Brothers are burning through cash at a fearsome rate.

The Wall Street Journal writes, “It seems that the Federal Reserve and member banks have been outsourcing the job of credit creation to Wall Street firms for years now. These kindly firms securitize the mortgage debt and pass it off to yield-starved investors along with default and interest rate insurance in the form of derivative products from friendly hedge funds. The debt then vanishes from the books of the original lenders who are free to originate more no money down mortgages to people with bad credit, and when this process is repeated a few million times, you've got yourself one heck of a housing boom and a whole lot of wealth creation."

And wealth destruction.

The problem with the CMO market was recently rued in the Wall Street Journal by the guy who invented the market for them, Lewis Ranieri. As Mr. Ranieri explained, the trillion dollar market for CMO’s is based on investors’ confidence that smoke and mirrors is a legitimate way to maintain equity and value. There will be a cascade of effects.

As the housing markets crater, orders for durable goods follow. That is the piece of yesterday’s news that really rattled domestic markets—after the trigger of the China market slide. The New York Times writes today, “The nation’s manufacturing sector managed to slip into a recession almost nobody seeming to notice. Well, until yesterday.”

But in the long run, which economies will be hurt most from the explosion of speculative bubbles? We think it is the United States. China and low-cost labor nations have taken our bread and butter.

No economist has explained adequately, yet, how the loss of manufacturing jobs in America can still provide the impetus for long-term, sustainable growth.

“There’s no power on earth that can stop it!” was vintage advice by WCI Communities chairman Al Hoffman on development’s encroachment on the Florida Everglades.

“It’s an inevitable tidal wave!” he crowed to the Washington Post. What is true, is that the mainstream media mostly remarked on Hoffman’s advice without comment or tincture of doubt.

In 2003, Naples Daily News reporter Cathy Zollo reported the devastating consequences to Florida’s environment in Southwest Florida, from the building boom cheered on by politics and wealth of companies like WCI. In 2005 and 2006, St. Pete Times writer Craig Pittman wrote at great length about the vast lost of wetlands during the building boom. But important stories like these were always written with an eye careful not to offend lest caterwauling advertisers storm the offices of their publishers.

While water managers and federal bureaucrats looked the other way and shrugged, issuing permit after permit, to developers like WCI while pollution piled into rivers, estuaries, bays, and the Everglades.

Don't bite the hand that feeds.

It may be true that PT Barnum, the famous circus impresario, never said, “there’s a sucker born every minute”, but it is a saying that certainly comes to mind, today.

Some attribute to Barnum another saying, equally valid in today's context: “every crowd has a silver lining”.

To wealthy builders like Al Hoffman, whose developments dot the area of Southwest Florida where PT Barnum called home, it was a message taken to heart and to the bank.

The tidal wave Hoffman crowed about and represented all the way to the White House is having a backlash of an entirely different sort.

This tidal wave will wash over Florida and other states where the leavings of the housing crash will wreak personal devastation, a landscape of irreplaceable natural beauty washed over by the remains of sprawl.