Stiffing the Professional Classes

Listening to a Bloomberg reporter interview Yale professor and housing guru Robert Shiller, I couldn't help detecting a certain anguish in her voice as she described the plight of jumbo mortgage borrowers, left out of the current version of the Obama administration's housing rescue package. Reading a Bloomberg article on soaring default rates among jumbo borrowers reinforced my sense that the interviewer actually knew, from personal exposure, something about the issue (not that she's personally in the situation, but her socio-economic cohort sure is). Sort of like the difference between living through a hurricane and watching the event on national televison.

There are going to be a lot of upside down homeowners with six figure incomes, seven figure real estate exposure, sufficient assets outside their homes and retirement accounts, etc. who are about to be awfully surprised the first time a major life event compelling recognition of a real estate loss occurs. I'm talking job loss, divorce, corporate relocation, retirement, etc.

Plowing through Obama's version of a bildingsroman (novel of a young man coming of age), I don't think he's going to personally have much sympathy for that group. Of course, others in his adminstration will, since it is the class to which they belong.

This promises cultural and social consequences as well as having economic implications. It may have political repercussions, as well, though it's going to take a while for the innate conservatism of those who believe themselves winners on the basis of merit to be punctured.

Consumer Spending Collapse

This is annectdotal to the point of personal.

Since the first of the year, my personal consumer spending has completely collapsed. Ignoring services for the moment, in the last six weeks I have personally spent more on maintenance and repair of existing possessions than I have spent acquiring new stuff. By maintenance and repair I mean tuning a piano, clothing alterations, replacing the broken glass in a picture frame. Most of the money I have spent on clothing represented cashing in a gift card received at Christmas.

This is neither me going broke in a cash since nor the traditional post holiday lull in consumption reflected satiation after the consumption excess of the holidays. We had a very light Christmas, and, though we're suffering with everyone else, we're not in a cash bind. No, as far as I can tell, I'm buying nothing because I'm simply not in the mood to spend. If I go shopping, its to buy groceries. If I go to Home Depot, it's for light bulbs. I am not tempted by the late winter pre-Season discounts on the propane grills. I have enough clothes and other crap to last me for the rest of the year, and then some.

Two slight qualifications. Obviously, we're still buying groceries, paying the utility bills, etc. And, the rest of my family is not quite as retrenched as I am. I think their psychological outlook is not quite so bleak, dark and forboding. I hope they are correct and I'm just over-reacting.

But the reaction is undeniable, and startling.

The casino, the cruise line and the utility company

Going into this financial crisis, the financial services sector has become one part casino, one part cruise line and one part utility, all unfortunately jumbled up and intertwined. The situation was dressed up and described in complimentary terms as the 'financial supermarket' model of the future. Citicorp was the exemplar.

Well into the mess, using summer 2007 and the time when innocence ended, we can now see that rolling those three kinds of activities into single entities, and, in effect, cross collateralizing the liabilities associated with each was, not to put too fine a point on it, insane.

The crying need de jour is to somewho unsort the jumble. Shut down the casino, leaving the players to bear (and bare) their losses. Let the cruise line sail away, to thrive or sink on the skills of its crew and the public's demand for asset management and investment advisory services. And nationalize the utility, so that deposits can be gathered, credit extended, transactions cleared, and so on, for the smooth functioning of the general economy.

Easier said than done.

Night of the Long Knives

for major law firms.

I suppose it is fair enough. The Wall Street and Beltway lawyers were the shock troops of financial deregulation, and to this day in the pay and under the thumb of their clients who prospered in the recent economic episode now ending in tears and terror for all involved.

But, if you're enough of a street fightin' man, when the times change, your ability to belt out the leider inevitably ends in the gurgle of a slit throat.

Law firms are interesting animals. Full of sophisticated people, they are themselves quite primitive. They tend to have one big long term liability--their real estate leases--and one big short term asset--their accounts receivable. They don't have any capital to speak of--in a partnership the capital accounts are kept minimal and in an LLC the shareholders equity is de minimus for a combination of tax and practical business reasons.

On top of that, the quarter to half of the attorneys who are the proprietors--the partners--tend to view their incomes, not as the firm's profits, but rather as their salaries/draws for their own law practices. So, in effect, the firms have Godawful operating leverage, even if they don't have much financial leverage (and even less of an equity cushion).

In a truly bad year, not an off year, a bad year, the firm's profits disappear. That means the partners have no incomes. In a horrible year, with losses, not only do the partners have no incomes, the firm has no equity cushion to absorb the losses.

Major law firms are a post WWII phenomena. The major firms of earlier eras were fundamentally different creatures. Most of the partners of those versions of today's power houses could go a year or so without income from the firm. I'm not sure that is still the case.

My guess is that you'll be seeing some chaos in the legal profession.