If there’s any positive aspect to a downturn, it’s this: It tends to expose and wash away the frauds, the poseurs, the incompetents, the reckless gamblers, the poorly capitalized, the perpetually optimistic, the managerially indifferent….
True, get a recession nasty enough and it will wipe out everything in its path, even those who had done some saving and planning and were not operating under the notion that markets never go down.
But if recessions tend to indiscriminately punish, economic booms tend to indiscriminately reward ventures and behaviors no matter how irresponsible they are.
The Puget Sound region has seen some spectacular meltdowns triggered and exposed by the recession. Onetime self-styled financier Darren Berg found himself in jail, charged by the feds with running “elaborate Ponzi schemes” with losses estimated at about $100 million.
That amount paled in comparison to the bankruptcy case of real estate developer Michael Mastro, with an estimated $325 million owed to unsecured creditors.
That total might be eclipsed by the bankruptcy case involving Pierce County-based real estate developer/investor Prium Development Company. The News Tribune in Tacoma, which did extensive reporting on the case recently, says Prium’s debts could total $350 million.
And even that shiver-producing sum might be considered a rounding error compared to the billions of dollars in shareholder wealth, not to mention jobs, destroyed by Washington Mutual’s demise.
Some common threads in these aforementioned cases: All once basked in publicity and acclaim for their seeming success and acumen in matters financial, and all were revealed to be, at the very least, ill prepared to deal with economic calamity.
Oh, yeah. And all had some connection to real estate and real estate finance, sectors blamed (with considerable justification) for creating that calamity.
The growth in those sectors was based on compounding assumptions that proved false. Was there really a market for all the houses and condos that developers were building? Were banks smart to weigh so much of their lending portfolios toward real estate? Was there really a call for the creation of so many new banks?
We now have the answer in the form of failed banks (more than a dozen in this state), projects never completed and foreclosures that will weigh like an anchor on balance sheets, property values and the home resale market for years to come.
But we should hardly pelt the bankers and developers with rotting produce without saving a few overripe tomatoes for, well, for everyone. It’s not as though we haven’t seen this movie before. Barely a decade ago, the region was reeling from the dot-com bust, the unsurprising result of far too much hype and money chasing companies with no real revenues, business plans or hopes for profitability.
We learned from that, or so we told ourselves. And, true, it wasn’t the tech sector that got us this time. Instead, we reverted to banking and real estate, sectors responsible for repeated local and national economic setbacks, and which will be setting themselves and us up for another as soon as they recover from this one.
Yes, it will happen. Even before the rubble left by the current recession is swept away, construction will start on new, rickety financial structures. The ominous hints are already there in the frothy valuations awarded to IPOs and acquisitions of social networking, gaming and similar online and mobile-communication ventures.
It’s possible that one’s purpose in life is simply “to serve as a warning to others” says the epigram attributed to author and cartoonist Ashleigh Brilliant, but that’s true only if others are capable of or interested in paying attention. History, usually a reliable barometer of such things, suggests they won’t. Everyone looks like a genius when times are good. It’s not until the downturn that inevitably follows that we find out what was real and what was a sham. We’ve seen this over and over again—not that we ever seem to learn.
Bill Virgin is the founder and editor of the Washington Manufacturing Alert and the Pacific Northwest Rail News.