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Monday, September 29, 2008

Confidence

Confidence in the financial markets makes my job possible. A developer takes a piece of raw or previously developed land and adds value. The developer takes money from investors or banks (essentially taking on debt) to build the project. The developer, if not the original landowner, has a contract with the current landowner to purchase the property once the entitlement process is done or purchases the property outright. If the developer decides not to build the project he/she takes a loss on the development. If you take a look at the builder losses it is mostly due to writing off these costs of land in the development process. This is hopefully a short term problem. The developer takes the loss and once the market hits the bottom the developer starts the process over again. The problem comes when the builder can't win the confidence of the investors and banks to fund the process.

Today I think that banks are not willing to fund this and based on the vote of the House of Representatives vote today, I can't blame them. The Government is being given the chance to buy debt for $0.20 on the dollar. Since most of the debt is mortgages the Government is essentially telling us, the American people, that we don't have confidence in you to repay this debt. Sure some of the debt will go in default, but I don't think that 80% of the mortgages will default. 

I think we have to remember why this debt is being priced so low. It is because investors are unwilling to purchase it. Think back to high school economics and you should remember that when demand goes down, the price usually goes down. So essentially the financial markets are in a downward spiral. A bank can't effectively price the debt because it is hard to value how much they can get for the debt. If one bank sells the debt at a low price, the other banks have to reprice the debt on their own debt. Once the debt is marked down the bank has to have more assets to keep it's balance sheet within the limits set by the Government. If the company is unable to raise new capital it is declared insolvent and taken over by the Government. A recent example of this is the takeover of Washington Mutual. The Government got lucky, as well as us the taxpayers, in that they where able to get another bank to take over the bank without it being liquidated by the Government. A portion of Washington Mutual's problem was depositors removing their deposits (losing confidence in the bank), making raising capital even more important.

Today the Government had the chance to say they had confidence in the American people to pay back the debt and provide liquidity to the market to provide new loans. I'm not saying that it would immediately restore confidence, but it sure would have helped save some banks from closing. We'll see if Congress goes on breaks and lets the financial system hit bottom, or stay in session and try to create a floor above the bottom to save the American people from more hurt in the parts of the country that have been hurt the most. For instance if you live in Riverside County, an area especially hit by this downturn, you want a bank willing to loan to someone to live in the empty foreclosed home next to yours.

Hopefully this is just a small bump in the process and the users of Civil 3D who are out of work because of the downturn can get back to work helping to build the infrastructure needed to house and transport the people of America for today and tomorrow.

1 comment:

Anonymous said...

Chris, This is a well thought through analysis of the current financial situation. Once we get past this problem, hopefully we can start spending the money we need to improve the nation's infrastructure. Best wishes, Jim in Armona

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