Dealmaking or Operations

Of course, the push back on government financial regulation over trading businesses isn't surprising. The people who run the big financial firms and who dole out massive political campaign contributions have had a good thing going--massive compensation with little downside risk to their personal fortunes no matter the recent credit market meltdown. Who wouldn't want that game, supported when necessary by bailouts and cheap Federal borrowing rates, to continue. Sure some big shots--Lewis, Thain, Fuld, Grasso-- have been washed out with damaged reputations. But on the Wall Street scorecard--how much money you make--these guys are still well ahead of the game.

Real estate players don't want to see big changes either--they want the Wall Street firms to rebound and fill up office space especially in New York and other major markets. And most of all they want the CMBS market to revive to float transaction volumes again. Deals mean fees and promotes and big compensation numbers.

But all this activity is about brokering and trading, not creating anything. Our economy and the real estate business can't sustain itself off dealmaking.  We learned the recent value gains from ramped up transaction volumes were a mirage. Office rents in many markets are back to 1980s levels and most of our jobs gains over the last decade have been wiped out.

The next five years climbing out of the current debacle will be about whether real estate backslides into a transaction-fixated business or orients more to operations and development. If the government implements only lackadaisical reforms and allows unrestrained capital to flood the financial system, transaction markets will come back in full force and middlemen will be back in business. But more regulation would restrict debt capital from higher risk plays and tamp down on transactions. Real estate investors would go back to earning profits off of down-and-dirty asset management, leasing and development strategies, not so much ephemeral financial structuring and trading. It will be a more boring business and less lucrative, but with less risk to the system.

The traders argue bringing back their business will create more jobs to fill buildings and their high incomes will fill tax coffers and support the consumer economy. It's the transaction business, they say, that made the good times so good for many people in our business.

But it's the transaction dominated business that has precipitated such bad times today and taken the banking system to the brink. Asset values haven't been enhanced, we haven't produced anything lasting that advances the world or the economy. The only leftover gains come from transaction fees and promotes, extracted from the deals.  America can't sustain itself going back to this. Neither can the real estate industry.   

Comments

[aupanner]

FWIW, I agree for the most part. But to me, it's misleading to say the US doesn't make anything of "value" to the world. I mean, what truly has value in the world? What does the rest of the world produce that we're missing? If the point is that the US needs to have a better broader base/foundation to its economy rooted in manufacturing and production of goods - then I'm asking what goods really have value?

The problem is still going to be the risk of over leveraging and the cycles of capital. This time, the system was just so over-leveraged that the down cycle is that much more painful.

But at the end of the day, economies are just complex ponzi schemes built on the need for societies to maintain (and continuously 'improve') a quality of life. It's apparently human nature to want more this more that, better this better that. But it isn't real. Let's envision a catastrophic collapse of the "financial system" - fast forward to Mad Max scenarios. What really has value in those scenarios? Food, water, shelter, fire/energy, clothing, health (maybe). So, economies built on things in excess of those basic needs is temporary and non-essential by definition.

I know I'm out there with this post, but I think it is legit.

[stank]

This is getting deep. Almost all mass manufactured goods are crap and are designed to quickly expire. then they fill our landfills for thousands of years.

Stocks and bonds are just paper; their value is purely symbolic, that is illusory. Going back to crafts and craftsmen is not going to work for a nation of 300,000,000 plus. We need a new way that no one has yet thought of. We're screwed.

[aupanner]

true, going back to crafts and craftsmen won't work. we are screwed, pretty much.

but the point i am making is that this need for a broader economic base of 'making stuff' is as illusory as anything else. case in point: how is china's system doing with it's "broad" economic base as the world's manufacturer? the problem is over leveraging, over exposure to a particular risk, etc.

personally, i see a solution to the world's energy issue as the next necessary breakthrough to get things going in any meaningful way (like nuclear). in the meantime, we're looking at decades of negative growth and a settlement at the no-growth level where people adjust their lifestyles to doing without the luxuries of the past generation. Not everyone needs a fancy stroller for their infant.

With a new source of (cheaper and abundant) energy, the rules change. However, it's a nice dream and I realize in the meantime we have to live in reality.

But growth in any other sector is just another bubble.