Debits and Credits

A valuable warning from the Times; Ben Stein's not all bad; The Economist malls it in

Editor’s note: This Debits and Credits holiday edition reviews the business press from the past two weeks

Two days before Christmas The New York Times unwrapped an excellent examination of how broadly the housing bust’s fallout is being felt in hard-hit areas.
Take a look at the havoc unfolding in Lee County in Southwest Florida:

In the county, a tidal wave of foreclosures is turning some neighborhoods into veritable ghost towns. The county school district recently scrapped plans to build seven new schools over the next two years. Real estate agents and construction workers are scrambling for other lines of work, and abandoning the area. As houses are relinquished to red ink and the elements, break-ins are skyrocketing, yet law enforcement is resigned to making do with existing staff.

The macroeconomic impact of the mortgage mess has proven difficult to predict. Will the economy tip into recession? While consumers nationwide are reining in their spending a bit, it’s in freefall in Lee County, Florida, and its economy is sinking. With foreclosures up fourfold from a year ago in the county, sales-tax receipts are down 14 percent and government and business spending is slowing. One in four houses in the county sits empty, and the unemployment rate has nearly doubled in a year. Burglaries are up more than 33 percent.

As the Times’ headline puts it, “This Is the Sound of a Bubble Bursting”:

Scanlon Auto Group, a luxury car dealer, says it has seen its sales dip significantly — the first time that’s happened in 25 years. Rumrunners, a popular Cape Coral restaurant with tables gazing out on a marina, says its business is down by a third, compared with last year.

Furniture dealers are folding. Hardware stores are suffering. At Taco Ardiente in Lehigh Acres, business is down by more than three-fourths, complains the owner, Hugo Lopez. His tables were once full of the Hispanic immigrants who filled the ranks of the construction trade. The work is gone, and so are the workers.

In Cape Coral, city hall is paying landscapers to mow the overgrown lawns of abandoned houses. One realtor has stopped printing lists of foreclosed and other troubled properties because “it’s too long.” Homeowners who cashed in their newfound equity now are under water on their loans and losing their homes.

“It was here that housing prices multiplied first and most exuberantly, and here that the deterioration has unfolded most rapidly. As troubles spill from real estate and construction into other areas of life, this region offers what may be a foretaste of the economic pain awaiting other parts of the country

If the Times’s supposition proves correct, look out below.

Also on the 23rd, the Times ran a Ben Stein column
on capitalism and trust. You can’t have the former without the latter, he notes, pointing out how major scandals have shaken market confidence from the junk-bond frauds in the ‘80s to the technology analysts’ cynical hype in the ‘90s. He addresses the latest case of breached trust:

The biggest of the big names were among the most aggressive in betraying their clients’ trust, as I see it. Some of the biggest names were selling securities that they — apparently — barely understood themselves. In so doing, they exposed their buyers, and their stockholders, to immense losses. (Think Merrill Lynch, Bear Stearns, Lehman Brothers and many others.) Other major players, including Goldman Sachs, were aggressively shorting the very same sort of products they were underwriting.

Now, Stein has come under attack lately, not always reasonably. Portfolio’s Felix Salmon validly but with some unneeded heat points out these investment banks have no fiduciary duty to people buying these securities unless they manage their money.

If an investment bank underwrites a sale of securities, then the bank’s client in that transaction is the issuer, not the investors. In an IPO, for instance, the issuer often pays the underwriter 7 percent of the proceeds. The investors, meanwhile, make their own decisions as to whether they think the stock is a good buy at the IPO price. If you want to get a good idea of who a bank is working for, just look to see who’s paying them.

It is true: Stein employs words like “fiduciary” and “client” carelessly. We wish he’d shape up because he’s got some valuable things to say.

The broader point is this: Investors trust that Goldman Sachs isn’t going to underwrite just any old trash, and yet, it did, didn’t it? That’s Stein’s essential point, and while not elegantly put, it’s clear enough. Stein believes Goldman’s short position is evidence that it knew the product was bad when it sold it, a position some have attacked as naive, foolish, even preposterous. In fact, it’s none of those things.

Now, Goldman can spin this as “risk management” and insist that it was doing it to protect its stockholders. (Remember, though, that Goldman’s lushly compensated traders and executives get a far larger share of the pie than we pitiful stockholders do.) But selling short the same securities or very similar ones that they were peddling to the clients is extremely hard to reconcile with basic fairness.

The erosion of fiduciary duties is one thing, but here he’s just talking about basic business integrity. It’s a good point and a simple one. Maybe too simple for some.

We also like how Stein traces the erosion of trust to Drexel’s rise in the early 1980s. So, markets weren’t always this way, after all, and booms and busts are not acts of nature that cannot be mitigated. Reading economics blogs, you’d never know it.

We would add that Drexel didn’t rise in a vacuum. Stein’s timeline of the decline in trust coincides with the ascendance of financial deregulation. Stein’s memory supports our view: Well-functioning markets can not only withstand oversight; they require it.

Come this time of year the press is tempted like most people to phone it in. In this edition, The Economist dials up an old stand-by real estate story:
the death of the mall.

America now has some 1,100 enclosed shopping malls, according to the International Council of Shopping Centres. Clones have appeared from Chennai to Martinique. Yet the mall’s story is far from triumphal. Invented by a European socialist who hated cars and came to deride his own creation, it has a murky future. While malls continue to multiply outside America, they are gradually dying in the country that pioneered them.

We’ve seen this formula for years, most famously on a 1998 cover of Time. An upstart rival has emerged. Americans’ shopping preferences have changed. Crime is up at the malls.

In the Time article the mall-slayer was to be the Internet. Since the day that article was published, mall stocks’ have returned 309 percent (including dividends) to investors, according to SNL Financial. During the same time the S&P 500’s total return is a meager 45 percent. And Yahoo, the company in the lede? It’s returned 95 percent.

In the Economist’s version on December 19, the bogeyman is the lifestyle center, which is essentially a smaller mall turned inside out—with street-facing retail instead of the indoor loop and a heavier emphasis on restaurants and entertainment.

Add one scoop of mall history, (“Southdale’s creator arrived in America as a refugee from Nazi-occupied Vienna. Victor Gruen was a Jewish bohemian who began to design shops for fellow immigrants in New York after failing in cabaret theatre.”), and a pinch of a pop-culture review of mall-centered movies (“Dawn of the Dead,” “Mallrats,” etc.), and there’s your bloody dying-malls story, old sod.

Mr Caruso doesn’t think he builds malls. The industry term is “lifestyle centres”; he calls his creations simply “streets”. Nor can he claim to have invented the outdoor shopping centre. Before Gruen’s revolutionary designs, all shopping centres were open to the sky. But Mr. Caruso has brought the open-air mall to a pitch of ersatz perfection. It is partly thanks to him, and particularly the Grove, that every new shopping centre built in America next year will be roofless (and several traditional shopping malls will tear off their roofs). Open-air centres will appear not just in temperate places like southern California but also in muggy Houston and frigid Massachusetts.

Saying these centers “will” appear in places across the country is like saying presidential candidates “will” be campaigning. That ship has sailed. In the last decade or so, more than 150 lifestyle centers have been built. And if Caruso doesn’t think his centers are malls, most of his shoppers do. The Grove has the movie theater, the Nordstrom and the Abercrombie & Fitch along with the other usual chain suspects in high-end malls around the country.

As the Economist points out, it’s true that few enclosed malls are being built and that dead malls dot the American landscape, but that’s largely because it’s near impossible to get one approved and built these days and because the industry overbuilt in the 1980s and 1990s.

Meanwhile, mall giant Simon Property Group is in the process of major expansions to more than 20 of its malls. General Growth Properties is expanding 13. And the Sacramento Business Journal reported
just last week that Westfield Corp, Inc., is looking for a site for a new mall in that area.

The mall is, like, so not over. Would that it were.


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Anna Bahney is a Fellow and staff writer for The Audit