Another Post For Idiots To Ignore

As I have noted elsewhere (and many other elsewheres too), I started blowing the whistle on the real estate bubble in December 2005.  The market was too hot, there was obvious fraud, mortgage rates were going up, etc.  I didn't know when the bubble would pop because I had not yet identified the forces driving it, but I figured it had to be soon, say in the next year or so.  Frankly it should have, and I guess I'll relate that tale whilst I am at it.

Thanksgiving 2006 Wells Fargo and JP Morgan Chase froze a pile of business lines of credit and converted them to straight loans with 60-month amortizations.  When I contacted Chase, not one but two EVP/AGCs informed me Chase had done this pursuant to a clause in the LOC agreement that had been fully disclosed.  While the clause did exist, the allegation it had been in any way disclosed was patently false.  I then knew something strange was going on, but I did not yet know what.  It took me awhile to dig up the puzzle pieces and fit them together.  What was happening was that the levels of fraud in the mortgage market had become so obvious it was no longer politically feasible to continue ignoring them, and so the regulators had been awakened from their previously mandated slumbers and were now on the move.  Wells, Chase, Goldman Sachs, and all the other players needed to spread some chicken feed to keep the regulators distracted while they got on with the business of lining up a nice collection of marks (AIG, Bear Stearns, Lehman Bros., pension funds, and mortal schmucks who believed the rating agencies were playing a straight game) to take the garbage off their books.  The regulators pounced on the chicken feed in Spring 2007, which gave the players enough time to keep playing.  And then in 2008 everything conveniently hit the fan.  Wells got a seat at the big-boy table via taking over Wachovia, Chase got a new lease on life via its sandbag takeover of Washington Mutual and its sweetheart takeover of Bear (I imagine Barclays wishes it had gotten a deal like that for Lehman,), those with cash (And in spite of, or more likely because of, all the illiquidity, certain players had piles of cash.) snapped up piles of assets on the cheap (Because after all the purpose of bubbles is to pop them to allow further asset concentration in the hands of Those Who Matter.), and we hit the reset button for the next bubble.  So the evidence indicates the bubble pop was delayed by over a year to protect certain players that had created the bubble in the first place.

Anyway.  In the middle of all this, August 2006 to be precise, Peter Schiff concluded the real estate party was over and things were heading down.  In December he noted the market had peaked the prior December (Now when was it again that I called my shot?) and would crash in 2007.  It's apparent he was just looking at market fundamentals (as was I) and thought the market would behave according to those fundamentals (as did I), having no real knowledge of the market manipulation going on that would stall the inevitable for over a year (knowledge I did not have either).  But unlike me, Schiff became a major talking head and got lots of influence and money.  But I'm not bitter.  At least not much.  Because I can point to Schiff as an example of how even a broken clock is right twice a day.

Because since then he has a record of being spectacularly wrong.  He thinks Medicare should be slashed, demonstrating a fundamental ignorance of how Medicare works, how it could work if expanded, and how it would be better than our current system of no one seeking medical care and when they do they have to file bankruptcy.  He thinks we should replace the current income tax system with either a sales tax (which would be regressive and hit hardest those least able to afford it) or a flat tax (which would be little better).  And in a doozy of pretzel logic, the US went from being a creditor nation to a debtor nation in the 1970s because people stopped saving.  Yes, that must be it.  Let's ignore the October 1973 OPEC embargo that ended the US's energy price advantage that had kept its products competitive around the world.  Let's ignore the resulting recession that destroyed millions of jobs.  Let's ignore that most people had no options allowing them to adapt to this new normal because our entire society was based on urban sprawl and the automobile.  Let's ignore that productivity kept increasing, but instead of any of that gain going to wages, it was all syphoned off to pad corporate profits.  Let's ignore that in spite of the recession, expenses were still going up even though wages weren't.  Let's ignore that families had to get second, third, and fourth incomes to try and make ends meet.  Let's ignore that that didn't work any better then than it does now.  And let's ignore that people stopped saving simply because there was nothing left over to save.  Schiff's positions are designed to keep moving public and private money from all of us to the 1%.  He ought to change his name from "Schiff" to "Shill".

But he must be getting desperate, because with his latest move, he has outdone himself.  He has teamed up with none other than Jim Rickards.  I've noted the credibility, or lack of same, of Rickards's "financial advice" elsewhere.  Now they've partnered up and doubled down.  And what they're selling is no better than ever.  As I've said more times than I care to count, just because you've seen somebody on TV or YouTube doesn't mean you should listen to them.

New Bankruptcies

So Murray Energy has filed a Chapter 11.  A few points here.  First, anyone connected to the Crandall Canyon Mine Disaster knows that Robert Murray shouldn't be in bankruptcy court, he should be in prison.  That place was one, big, deliberate safety violation, and nine people died.  Second, for anyone who has a lick of sense, this ought to put the lie once and for all to Trump's promise to bring the coal industry back, which is no surprise at all to those of us who have spent the last four decades or so following how well Trump has kept his "promises".  Third, watch out for another big load dumped on taxpayers.  Perhaps the biggest reason corporations file Chapter 11 is to shed pension plans and foist them on the Pension Benefit Guarantee Corporation.  Ordinarily, PBGC can refuse to take over an underfunded pension, but that authority is overcome by a confirmed Chapter 11 plan.  So the PBGC ends up with yet another underfunded pension, and one of two things happens: 1) PBGC cuts benefits down to the funds available, leaving the pensioners impoverished and compelled to seek public assistance, or 2) PBGC gets a special bail-out from Congress.  Either way, the bankrupt company shifts its private debt onto the general public.

Also filing Chapter 11 is EP Energy, one of the biggest players in the Eagle Ford Shale (Full disclosure: I represented EP Energy in the III Exploration II, LP bankruptcy.).  I think it is apparent that everyone in the oil shale play is hurting and the hot money that has been propping it up is cooling.  So is this why gas prices just bumped up?  Doubt it.  EP filed a month ago, and it was already common knowledge then there was trouble in Oil Shale City, so all that should have been factored into prices some time ago.  No, I think it's far more likely, as I've commented before, that gas prices just jumped for no other reason than that they can.  Don't expect gas prices to be affected by anything that happens in that place called Reality.

Bankruptcy Attorneys

If you watch late-night infomercials and rely on other such sources, you might believe filing bankruptcy is a simple thing.  As with most things presented as simple on such programs, such as real estate investing, the only simple thing is the mind of anyone who buys the sales pitch.  It simply isn't that simple.

First, the Bankruptcy Code is complex.  It isn't just convoluted; at points it's internally contradictory because, well, Congress.  I think the BAPCPA, the big revision in 2005, was actually written by chimps pounding on typewriters with mislabeled keys.  Then there are the Bankruptcy Rules, which ostensibly implement the Code but frequently leave you going, ""Wait, what?"  Then there are the local rules, which change frequently and are notorious for the messes they leave behind.  And on top of it all, there is "local practice", the aggregated quirks of the judges, clerks, and trustees in each court.  Many of these were first crafted to deal with a particular problem and have since been conflated into a "one-size-fits-all" approach.  And in many of these situations, I'm left quoting Eleanor of Aquitaine in The Lion in Winter, "You're clever, but I wonder if you're right."

If you find yourself up against a financial wall, don't try digging through the wall yourself; it's likely to collapse on you.  Go to the professionals and get real advice.  It's worth it.

But Retail's Fine, Just Read Forbes

So in spite of the original notice that indicated it would stay open, the Radio Shack at 700 South and State here in SLC is closing (i.e. it's worse than they originally announced).  2017 retail bankruptcies already outnumber 2016.  The distressed retailer list is growing rapidly.  But Forbes thinks things are fine.  There are good reasons for this.  First, Paula Rosenblum is the sort of member of my age group that gives my age group a bad name.  The way she poo-poos the effect of on-line shopping is both condescending and absurd.  A nonscientific sampling consisting of my four kids finds a unanimous preference for shopping online, and one of them is in retail.  Nonscientific, but they're also among the least tech-oriented of their peers.  That's Trouble with a capital T, and Forbes gets a capital F for ignoring it.  Then Rosenblum doubles down with all the glorious things retailers are doing to bring shoppers back, including the mall redesigns.  Earth to Paula: First tell me how this fits the financing models for these enterprises (It doesn't.), then tell me how it gets past the fact that it is aimed at a clientele that is dying (It doesn't.).

There is an even bigger reason Forbes is taking this position: Steve Forbes is taking this position.  Why?  Well, he's part of that dying off generation that thinks mall shopping is cool (or in his case that sending a servant to do mall shopping for you is cool).  But also, he can't see any of it.  As fewer people are able to consume, retail becomes increasingly dominated by custom-made products sold in controlled-access locations or even privately.  This is the world Steve Forbes knows, it's working just fine for him, and so no problem.  But if you consider dead real estate and vanishing jobs a problem, then you might have to differ with him.  I do.

Bankruptcy Uptick

Most bankruptcy filings are down due to yet more easy financing allowing everyone to extend and pretend, but there is one area facing a big increase: oil and gas, including its myriad support industries.  Financing in this area is already hitting the wall, and when it does, the party's over.

New Posting on Credit Slips

New discussion on Credit Slips with yours truly commenting.  Topic is the brouhaha over whether Chase Bank is actually a secured creditor in the GM Chapter 11.

International Bankruptcy?

The Argentine bond default mess and the endless litigation over Argentina's efforts to negotiate some sort of settlement has led a lot of people to renew discussions over creating an international law for sovereign bankruptcy.  In her recent article, Elaine Moore states that a desire for a more orderly process is at the heart of these discussions.  Maybe.  I think it is more likely that a lot of people are looking at the extent to which US courts are being used to apply US law to allow creditors to dictate policy decisions to sovereigns, and they would like an alternative.

But I Want More Stuff!

It never ceases to amaze me how many of my bankruptcy clients ask, "How soon can I get a credit card/car loan/mortgage."  Geez, kids, cool your jets.  First, one of your problems coming out of bankruptcy will be that you'll start receiving credit card offers right away because they know you're stuck with the bankruptcy waiting period and can't stiff them any time soon.  Are you really so eager to feed the vultures?  Second, incurring debt you couldn't service is what brought you to my office in the first place.  You may think you're flush, but you're still just one job loss or medical emergency from being back in the tank.  Try this thing called "saving" for awhile.  Ask your grandparents; they can probably tell you all about it.


Look, we all want things.  I want a new car and house, too, but here's a news flash: Tomorrow will come, and if you spent it all today, tomorrow is going to hurt.  Badly.  So I maintain my cars (Memo to me: Get that front end looked at.), and I keep renting.  When we moved from Washington to Utah seven years ago, My Dear Wife wanted to buy another house.  I said, "No dear, this market is whack."  She was incensed that I would do something so un-American as fail to incur consumer debt.  But guess what?  I was right.  And we'll keep renting, too, much to her chagrin, because in less than 10 years, we'll have an empty nest, so why do I want to go buy extra bedrooms and baths?


It's called "thinking," people.  Do it or pay the price.

Some Recovery

Things have slowed down in bankruptcy world, and now I have an idea why: People are too broke to care.  The latest census report shows that nearly half the population is either "in poverty" or "low income".  In other words, half the country either can't afford to file or has so little worth that filing is pointless.  When exactly was it the recession ended?


Of course the Heritage Foundation (The only "heritage" that foundation has is shilling for the 1%.  Just saying.) trots out its "poverty expert" Robert Rector (Oh, it's such a strain not to do naughty puns on his name.) to say that they're not really poor (by Mumbai standards), that we do enough for them already (Look at all the taxes rich people have to pay.), and that we just need to teach them how to be "self-sufficient."  Of course, this toady has been shoveling this line for decades.  Don't believe me?  Google him.  Or look at this article from 11 years ago where he's claiming the gap between rich and poor isn't so bad because of all the poverty programs the rich have to pay for (First, note how he conflates "income gap", which is bad enough, with "wealth gap", which is more accurate and is absolutely obscene.  Second, note that the gap has only gotten worse, due in large part to policies the Heritage Foundation promotes.  Don't believe me?  I'll let those Commies over at Forbes lay it out for you.  And while I'm over at Forbes, took a look at this article on 1% wheels.  Don't you love that remark by the Bugatti CEO, "The crisis cannot keep a Bugatti buyer away from buying a car for financial reasons”?).  Or this article, in which he claims the poor don't need more food because so many are already overweight (conflating "underfed" and "undernourished").  Or how about his remarks to the New York Times saying all but a very few people are merely "constrained" in the type of food they buy, so there is no hunger problem.  Just to show you you what level of dinkage this guy operates on, he's also the Heritage Foundation's "expert" on abstinence-only sex "education".  News flash:  That's the kind of sex education we had when I was a kid and on before that, and ignorance really wasn't a terribly effective contraceptive.  The difference is that, back then, a 17-year-old could get a job that could support the girl and baby.  Those jobs are gone, and the Heritage Foundation led the charge to destroy them.



OK, rant over.  The bottom line is that things are not improving.  If unemployment figures are going down, it's because people have dropped out of the work force or are holding jobs that barely qualify as jobs.  People are hungry and cold and desperate, regardless what the paid shills say.  And it's getting worse, not better.

Small Business Is In Great Shape

Just ask the Wall Street Journal and the Chamber of Commerce. According to an article this week in the Journal, business bankruptcies are down, so things must be improving for small businesses. The Chamber of Commerce chimes in with this line, with the C of C VP for small business offering the usual pap about small businesses being better positioned to recover than the big boys because they are more nimble.

First, let me say that anyone who uses the word "nimble" in a business context should be punched in the face, preferably by someone wearing a chain mail glove. It is a noxious, marketing buzzword from Dot Com Daze, when investors deliberately checked their brains at the door so they could avoid noticing the hucksters were making their sales pitch with a shovel. I was there, I remember. There was a poster that consisted of a picture of a blow dryer, an arrow pointing at the ON switch, and the caption, "Press here for marketing presentation." Unless you're talking about cutting horses and herding dogs, there is no place for "nimble."

The Journal and the C of C can allege all they want that the bankruptcy drop shows a small business recovery. I would submit it shows something else: Small businesses are finding some financing. Oh, not enough to make a difference. Not enough to restructure, right the ship, and set a new course. No, money like that is reserved for the big boys. The C of C conveniently ignores that, if you own the game, you don't need "nimble." If a small business owner tries to raise meaningful capital, he inevitably violates a securities law, and the federal and state regulators swoop down, shut him down, take everything, and still make him do the perp walk. That's what they spend 99% of their time doing. Meanwhile, the big boys can raise billions through outright fraud, squander it through more outright fraud, and get no more than a slap on the wrist (I'll blog about the Friday night dismissal of all charges against Angelo Mozilo later.). So no, folks, I do not believe prosperity is just around the corner in small business world. Quite the contrary.

What I do see is small businesses getting just enough financing or payment deferrals to play kick-the-can. The business owners who are coming to me are no longer talking about recovering, turning things around, or riding out the downturn. They're talking about "surviving until." Until the last kid graduates next year so they can permanently downsize. Until they qualify for Medicare and Social Security in two or three years. Until the paperwork on their visas goes through and they can dump what's left of their lives and move away (Yes, it's gotten to that point.). They're at the ends of their tethers, and they're hoping to kick that can far enough down the road to salvage something, for their kids if not for themselves.

They know bankruptcy can't help them. Another inconvenient truth the C of C isn't letting on is that Lloyd Blankfein doesn't have to personally guarantee GoldSacks' loans; small business owners have to personally guarantee everything. It doesn't do any good to put the business in bankruptcy; the creditors will go after them personally. If they file personally, the business is cooked anyway, and it's over. It's hard to be "nimble" when the bank has sunk your feet in a tub of concrete.

So they try to stretch it out. Until. That's the state of the American Dream.

Bankuptcy is an option, but...

Bankruptcy is hot in Utah right now.  Filings for the first half of 2009 were up 62% over the first half of 2008.  Given the way the economy is, this is no great shock, but what's a little more surprising is that Utah rates so high in its filing rates (e.g. 9th in Chapter 13 filings).  A pair of professors at BYU, Lars Lefgren and Frank McIntyre, seem to have figured out why: Filing rates are higher in states that have less protection for debtors, especially protection from wage garnishment.  Makes sense.  If creditors are grabbing your paycheck, you need to do something about it, and if bankruptcy is all you can do about it, that's what you do.

That doesn't mean a head-long rush to the bankruptcy court is a good idea, though.  I've seen too many cases where the debtor waited until the roof was falling in before seeking counsel and then insisted on the attorney filing the petition immediately if not sooner.  Such cases seldom end well.  For a lot of reasons.

First, if you're a consumer debtor, you can't just jump into bankruptcy.  You have to take a debt counseling class to get through the door.  Then there's also a detailed analysis of your income, expenses, assets, liabilities, and such.  These things simply take time.  If you're a business debtor, you don't have to take the class, but believe me that the extra analysis of your business affairs required more than makes up for any time gained there.

So what can happen if you rush things?  Well, if there were 100 things that could go wrong, you could think of maybe 50 of them.  And there are a lot more than 100 things that can go wrong.  And you don't need anywhere near 50 to create a disaster.  Most problems consist of numbers that don't add up and need corrected, resulting in increased expense and delay, and coming under the trustee's whithering glare that can burn a hole in battleship plate.  Sometimes the consequences get more exotic and severe.  For example, in the Mount Holly Club bankruptcy, a major creditor is moving to dismiss because it alleges the company didn't get proper, member approval to file.  Oops, did someone miss a step?  We'll see.

Just remember, in bankruptcy as in business as in life in general: Proper Planning Prevents Poor Performance.

Bankruptcies Build Up

Bankruptcies went up 47% in Utah in 2008.  That's still just half what they were before Congress granted the credit card industry its wish and locked the courthouse doors to most people, but given the new barriers for filing, it's a graphic representation of the dismal state of affairs.  It doesn't promise to improve soon, either.  Where the traditional cause of a bankruptcy filing used to be a specific event (divorce, job loss, hospital stay), it now seems to be systemic.  Households and businesses alike have simply accumulated so much debt over time that it's crushing them.  And the triggering element in that debt load is more frequently real estate, with debt service going through the roof and value going through the floor, be it personal residence or investment property.

And what if you're one of the millions being crushed.  Bankruptcy is not the end of the line; it's a new beginning, at least if you get smart about your finances.  I took a construction company into Chapter 11 bankruptcy (used for reorganizing businesses) in Fall 2007.  Normally you have to file a plan in Chapter 11 explaining how you're going to reorganize and operate the company.  We didn't need to get that far.  We negotiated away a few problem debts, and were able to dismiss the case.  The company emerged stronger, and today, in spite of the construction climate, the company is still making its way.

Know When to Say "When"

The trustee in the MILA bankruptcy in Seattle is suing Layne Sapp, the former CEO, for pulling millions out of the company while it was going down. He had a plane and a yacht and was receiving millions in dividends while he was Trying to get Deutsche Bank Securities to float a fraudulent private placement. I can't resist: What a Sapp!

I'm shocked, shocked to find that looting has been going on at these mortgage companies. The next thing they'll be telling me is that the Earth goes around the Sun, or some such.

People, if your company is in trouble, fix it. If you can't fix it, close it. Don't blame a conspiracy of little green men. And don't loot it. Creditors have a lot of ways to come back to bite you.

The Cookie Crumbles

Mrs. Fields couldn't restructure its debt and is now in bankruptcy. For those of you panicking about your cookie fix, all those stores out there are franchises and shouldn't be affected. It makes me wonder, though, if they didn't have new store overhead, where did the debt come from? All those mansions they built? Keep it simple, people. Chances are you don't need a private jet and a landing strip for it in your back yard.

By the way, total bankruptcies in Utah for the first half of 2008 were up 42% over the first half of 2007. Consumer bankruptcies nationwide for the periods were up 30%.

Correction

Well, now the Trib is reporting that PC Club is back in business, having been bought by an outfit called NAOC Holdings. I can tell you that the stores here in Utah are open again, but I can't tell you anything else, including whether PC Laptops is actually willing to take on PC Club customers. If I were a PC Club customer, though, I'd be inquiring, because something here smells like last week's diapers. I can tell you for a fact that if you file bankruptcy, you won't get to sell out within 48 hours (If anyone has definitive word on the bankruptcy filing, I'd like to hear it. Apparently the media couldn't be bothered to check it when they reported it.). Also, it is my considered opinion that, if you're about to sell your business, you don't hang a sign in your door reading, "Sorry, we've filed Chapter 7," and you don't have your website go dark with only a "Thanks for X years of business" message.

PC Club Is Gone

PC Club, a computer sales and repair company with three locations here in Utah, slammed the doors shut and filed Chapter 7 bankruptcy yesterday. Chapter 7 is liquidation, i.e. "throw your empty wallet on the table and let your creditors fight over it." PC Club will not be back.

PC Laptops, as it has done for several other computer companies, has agreed to take over the warranty work on PC Club machines. Another savvy move by Dan Young; he adds another block of customers to his base.

If you have equipment at PC Club, though, you have a problem because your gear is locked up where no one's answering the phone. Get to work on this RIGHT NOW. PC Club's attorney is Robert Hsu in Pasadena, 624-584-7055, robert@rhsulaw.com. You'll probably have more success as a united front, and I'm willing to help you get in contact with one another if you contact me here or at KARife@RifeLegal.com.

Another Retailer Spinning In

Watch for Linens 'n Things to file Chapter 11 this week. Retailer restructurings and bankruptcies seem to be picking up steam, which is a bad sign for owners of retail space, especially since we just keep building more. There is some debate over why all these stores are going dark. Some say it is just part of the general mall restructuring; stores are closing in traditional malls and opening in new, open-air malls. The numbers don't add up, though. There are more closings than openings. It also ignores the fact that strip malls, especially the newer ones, are effectively open-air, but they're hating life. And it ignores the reality of consumer confidence. The American consumer is tapped, people, and simply can't afford to buy stuff.

Watch for more dark boxes.