“Soft despotism is a term coined by Alexis de Tocqueville describing the state into which a country overrun by "a network of small complicated rules" might degrade. Soft despotism is different from despotism (also called 'hard despotism') in the sense that it is not obvious to the people."

Wednesday, December 05, 2007

Can Falling Property Values Be Stopped?

The US and the world got a surprise over the Iranian nuclear program. According to the POTUS, he just received the NIE report a week ago. As difficult at that is to believe, just suppose that it is true. (It can't be but let's pretend.) That would mean that the very person in charge of US security, with war making capability, was in the dark over a threat and non-threat, when underlings had superior knowledge of the real situation. Can that level of material ignorance exist in other areas of government?

For some human reason, due to breeding, or DNA, experience or history, we as a species, put trust in our leaders. Some cultures are more prone to do so than others. Americans seem to be split on the propensity to believe. Presently more people have confidence in the ability of the Federal Reserve to protect the economy and money system than do not. That is a very good thing, because if that gets shaken, we have a real problem.

It is also becoming very obvious to many and hopefully to the Fed that the world is not facing an inflation problem. The problem is deflation.

The ultimate store of human wealth is in the real property that they own and live in. When that value falls, the ability to maintain other values weakens. It can spread quickly and violently. The consequences to world stability and chaos are not calculable.

Let's hope that this is an isolated case. (It isn't):

Florida Fund's Debt Has `Indeterminate Value,' BlackRock Says

By Darrell Preston and David Evans

Dec. 5 (Bloomberg) -- Much of the debt held by a $14 billion Florida investment fund for schools and local governments is worth less than face value and the rest is so troubled that its value can't be determined, according to an official at the Wall Street firm hired to turn around the fund.

``I don't think there are very many securities in this market we can liquidate at par,'' or 100 cents on the dollar, Chris Stavrakos, co-managing head of cash management for New York-based BlackRock Inc., said in an interview yesterday.

The more than $2 billion of the worst securities that state officials agreed yesterday to spin off into a second investment pool have an ``indeterminate value,'' he said. Of that, about $867 million is in default, or 6 percent.

Coleman Stipanovich, the executive director of the agency that oversees the fund, resigned yesterday and BlackRock, which invests more than $1.3 trillion in fixed-income and other assets, was named interim manager.

Stipanovich's resignation came after more than $13 billion was pulled from the fund as the extent of the assets in trouble came to light. Investors have been cut off from their funds since Nov. 29, when the State Board of Administration froze withdrawals amid a run on the pool, which was the largest of its kind in the U.S. at $27 billion.

Local governments, school districts and other participants in the pool, a type of money-market fund, will have to wait to find out when and how much they will recover. The investors will temporarily lose access to 14 percent of their cash under BlackRock's plan.

Access to Money

The plan allows for local governments to take out the greater of 15 percent of their holdings or $2 million without penalty. BlackRock executives estimated the fund, called the Local Government Investment Pool, may reopen as soon as tomorrow.

``The plan BlackRock submitted is very responsible,'' Governor Charlie Crist, a Republican, said in an interview after a Cabinet meeting in Tallahassee. ``For those who need money, we can accommodate them.''

Crist, state Chief Financial Officer Alex Sink and Attorney General Bill McCollum are the state board's trustees. BlackRock, hired by the state Nov. 30 to review the fund, had at least six bankers going through its holdings last weekend to develop the plan presented yesterday, Stavrakos said.

The fund owns $175 million of debt issued by Axon Financial, a structured investment vehicle that has defaulted. It also holds $180 million of debt sold by Ottimo Funding, an SIV that had its credit rating slashed to D from C by Standard & Poor's on Nov. 9.

`Nobody Will Buy'

``Nobody will buy that paper,'' Stavrakos said. The fund owns $168 million of short-term debt issued by KKR Atlantic Funding Trust and $356 million from KKR Pacific Funding Trust, securities whose values aren't ``transparent,'' he said.

KKR Atlantic's ratings were cut to D from B by Fitch Ratings on Oct. 8, while KKR Pacific was lowered to D from B on Oct. 2. Fitch said the reduction to default on the debt reflected non-payment under the original terms. The debt was restructured to extend the maturities to February and March, and interest payments are continuing.

State officials have said that under existing law they are unable to guarantee repayment of the funds local governments and schools invested in the pool, according to Bill Montford, chief executive officer of the Florida Association of District School Superintendents. Crist and other state officials didn't discuss the issue yesterday even after investors asked for a guarantee in a document presented at the meeting.

``It isn't going to fly without a guarantee,'' said Wayne Blanton, executive director of the Florida School Boards Association.

To contact the reporters on this story: Darrell Preston in Tallahassee at ; David Evans in Los Angeles at .


  1. ebb and flow...

    investments dont ONLY go up...

    you cannot expect real estate to rise at 18=45 percent per year and not contract at a certain point...

    just watch the tv/boob tube...

    when nitwits slap a coat of paint on homes and make 100k and "flip" them and get tv shows showing it, then those assets deserve to adjusted.

    i remember the same discussion about price earnings ratio's a few years ago... i like to invest in stocks with pe's of no more than 11....

    remember pe's of 12,000?

  2. It is also becoming very obvious to many and hopefully to the Fed that the world is not facing an inflation problem. The problem is deflation.

    There's no problem. During the run up to the current sub-prime meltdown, lenders were offering No Income, No Job or Assets (NINJA) home loans to people that couldn't get a charge card at Sears in the 1990s. These loans promised $800 dollar house payments for the first two years, and there was a hand wave and assurances they could refinance their loans before they reset and went to $1600 a month. So all these folks came into the housing market and ran the values up through the roof. It even worked for a while, because in the broad rise of values, they had enough equity to entice lenders to do one re-fi. Then values reached a plateau, and they could not build up enough equity to roll their ARMs over again, so the resets kicked it, and they couldn't make their payments. Each foreclosure put a house on the market and depressed home values a little. Now it's snowballing. Same with the fall of the dollar correcting the trade deficity. Reality always trumps a scam, given enough time.

  3. Good argument against sovereign funds, this article.

    .gov seizes money from taxpayers to play in the market and gets stung by the "financial engineers' and their vapor investments.

    Bad enough when people do it to themselves.

    Think of what a meltdown like this would look like on a federal level.

  4. Is it just me, or do we seem rather eager to latch onto any effing suggestion of absolute crisis?

  5. You were asleep through the days of wine and roses.

  6. We knew when property values continued to skyrocket in our area that the abatement was coming. All of the poor suckers who took on ARMs did so in spite of abundant, nay ubiquitous, warnings not to. I think in California near the end it was something like half of all new homebuyers.

    Brings back to mind the S and L crunch and the horrendous real estate mess of 87.

  7. End of the world, though. No.

  8. They never were. But I do love Mancini.

  9. Brother D-Day said...

    Good argument against sovereign funds, this article.

    .gov seizes money from taxpayers to play in the market and gets stung by the "financial engineers' and their vapor investments.

    Bad enough when people do it to themselves.

    Think of what a meltdown like this would look like on a federal level."

    Now extend that argument to privatized Social Security.


    If the subprime mess was confined to just the housing market, well, things wouldn't be too bad. As Trish and many others have argued the market was bound to correct and it'll adapt. The problem is magnified by how those loans were then securitized thus making the financial problem more then just a housing market thing. Sitting here just north of the border there seems to be some terrific deals on propety - a devalued US dollar coupled to property fire sales spell deal. Trying to guage the bottom is a challenge though - my guess is there will some better deals in few months. I've seen tons of properties in upstate New York (multiple acres of land with houses on them) for less then 100k -- 100k US!. How low will she go?