Author: David S. White

Just think: if California could seek the protection of the Bankruptcy Court, let’s assume that states can actually do this for a moment, a Bankruptcy Judge could then oversee the knawing, energy-sapping, Gordian Knot of a $42Billion deficit, crushing contractual and pension obligations, and the imminent lack of financing opportunities facing this state as our credit rating plummets. What could a Bankruptcy Judge do that our Legislature and Governor cannot?

For one thing, if California could file a Petition in Bankruptcy under Chapter 9, Title 11 of the United States Code, a chapter of the United States Bankruptcy Code available only to “municipalities,” it might rescue our state from financial oblivion when we have simply run out of options to restructure our debts. That is the essence of why our federal Constitution provides for Bankruptcy as a remedy in the first place – to give the Debtor another chance.

Citicorp had a big week last week. Robert Rubin, former Treasury Secretary and member of Obama’s Transition Economic Team, bowed out of his Director and Senior Advisor role at Citi. Also, Citi withdrew its opposition to restoring Bankruptcy Judges’ power to modify home mortgages – a power taken away from Bankruptcy Judges via recent Bankruptcy law amendments a few short years ago in a frothy economy a world away from the sorry, beached whale the Media agonizes over today.

Some wondered how long Robert Rubin could remain untouched by Citi’s debacle (me, anyway) which he, according to some, had a major hand in creating. It is always fascinating to watch the rise and fall of media stars having their proverbial ’15 minutes of fame.’ For years, the Wall St. Journal would feature some rising economic star in the center column portrait piece, promising the moon, the stars and the sky for whoever they profiled, only to re-visit the same character some years later, this time on the way down amid scandals and ruination. It is reminiscent of the old saying: “Be nice to those you meet on the way up because you may well meet them again on the way back down.”

I defer to the many writers on F&HD who know far more than I do about California politics and the impending financial crisis when this state shortly runs out of money. I make my living in the courts, mostly in the Los Angeles Superior Court (“LASC”) system, which once boasted that it had more sitting judges than in all of Great Britain, and I have done so through four down economies in my 32 years as a civil trial lawyer – this being the fifth, and by far, the worst I have ever seen or dared to imagine. My point here is to illustrate what will happen to our civil state court system when California shortly goes broke.

Criminal cases have absolute preference over any civil cases due to the Speedy Trial Act, by which a criminal defendant accused of a crime, if he or she wishes, can force the prosecution to go to trial in a matter of months, ready or not, or the case must be dismissed. For this reason, big city civil litigators often bemoan how hard it sometimes is to get a full civil jury panel when the criminal courts get first pick and may not leave enough left over for a full panel to do voir dire, the jury selection process to pick the 12 who will sit in the box. That is the situation in good times.

Of all the grim economic statistics produced in the debacle of 2008, one really nailed me as I reviewed the news of the first day of 2009: “The World Federation of Exchanges, which tracks stock markets in 53 developed and emerging economies, said that some $30 trillion in market value evaporated through the end of November.” ((Wednesday 31 December 2008, Kim Coghill and Claudia Parsons, Reuters). And that doesn’t even include December!

“Evaporated” is the key word here. It was not lost in the sense that somebody came and took it away or buried it in a box in the desert and forgot where – it evaporated from the world’s balance sheets via stock markets around the globe, like the morning dew on your front lawn when the sun first comes up. Up in smoke. If my math is correct, that means $44, plus a few dimes and pennies, each, theoretically evaporated from the pockets of every man, woman and child on earth – all 6 ¾ Billion on them – in 2008. To put this into some perspective, according to World Bank statistics from 2003, half the world’s population – some 2.8 billion people — live on less than $2 (U.S.) per day, with 1.7 billion of those getting by (somehow) on less than $1 per day.

(Dateline Dec. 27, 2008, aboard the Carnival Pride, somewhere off Baja, 100 nautical miles north of Cabo) My wife and I booked this cruise for us and our grown son and daughter as a family, over-the-year-end-holidays vacation to the Mexican Riviera, last August, before all the dramatic economic events unfolded this past Fall.

As the date approached and the economic news grew dimmer and more like a B-movie film script, I truly had mixed feelings about the Marie Antionette-ish aspects of going on a family cruise while what may yet prove to be the next Great Depression was ravaging the world’s economies. But, the date came, I badly needed a break from the current gloom and doom of the commercial real estate world, so, a’cruisin’ we went anyway.

We are on our last day at sea. Overnight, we went from the calm, balmy, humid tropical mid-80’s, to the 40’s and 50’s with a 20 mph headwind, moving at a very fast 22 knots, bouncing wildly, and even skipping at times, across the dark, white-capped waves, all 88,500 tons, 2200 passengers and 950 crew of us, with many bundled up now with peeling tans, some huddled in their rooms with a bucket close by. For those who need it, this is an All-The-Bonine-You-Can-Gulp day at sea – too windy for the upper sundecks where even SnowBird passengers from the MidWest, Canada and other snowy places now fear to tread.

I gave a homeless man $10 at a freeway exit yesterday – he looked like he needed it more than me. The greatest panhandlers of our time are not homeless. I seriously question the wisdom of Congress giving yet another $350 Billion away in what has so far been the game of: “So You Wanna Be a Billionaire?” – without much to show for it.

The recipients of the first $350 Billion of the BailOut will not account for what they did with the money; why then is the drumbeat getting louder to give them another $350 Billion? They first need to tell us how they spent, or did not spend but instead hoarded, the first $350 Billion? Bernanke, Paulsen & Co. told us back just a few months ago that the skies would fall, the world, as we know it would end, and that the credit markets had seized up.

Never mind that this same group made Lehman Bros walk the plank and it will take years to unwind the Lehman Bankruptcy and its nearly ¾ of a Trillion dollar debt – that alone just might have caused credit markets to seize up and have a financial stroke. The mass giveaway, without strings or accountability, of some $350 Billion has not thawed the credit markets at all now at year-end.

Donald Trump is trying to finish building his massive Chicago International Hotel and Tower along the Chicago River, but his consortium of commercial lenders has pulled the plug. The lenders sued Trump and Trump sued them back for refusing to finish providing the loan funds previously agreed upon, necessary to finish the huge project which should change Chicago’s skyline.

The lenders, led by Deutsche Bank, sued Trump for $40 Million on his own personal guarantee (payable in ‘The Donald-Dollars’), his individual promise to pay his own money – chump change by today’s TARP BailOut standards. But, as anybody in real estate development will tell you, there is a world of difference when the money is coming from a source other than OPM (Other People’s Money), like out of your own pocket perhaps.

He was once the President of NASDAQ. The list of his clients is an ultra-world class cross section of truly impressive charities, banks, entertainment and other celebrities, university endowments and more (See the NYT website). The SEC even examined his books not long ago and gave him a financial clean bill of health.

How then did 70-year old Bernard L. Madoff, Pillar of Wall Street respectability, make off with $50 Billion? What does this mean for the already pitifully low level of public confidence in our thoroughly beaten-up financial system? And, for God’s sake, why on earth did he do it?

Bernard L. Madoff Investment Securities slipped passed the event horizon and disappeared into a financial Black Hole last week when the FBI turned up to arrest Madoff and seize everything that wasn’t nailed down. Madoff apparently kept several sets of books and various phoney documents and had a long history of lying to regulators about what he was doing.

It really happened here. Tuesday, the Federal Reserve’s closely watched, overnight federal funds rate dropped from its already historic 1% to a level not seen since Japan’s “Los Decade” of the ‘90’s – a rate between zero and 0.25%! The reality is that we’ve already been there even with the 1% nominal rate, as foreshadowed by the recent sales of 4-week T-Bills at 0%, just so investors worldwide can feel that their money is in a safe place.

With the scandals of late, including the record-busting Madoff (still-unfolding) $50 Billion plus mess which has cleaned the clocks of many rich individuals, entities and even charities, a flight to safety is looking increasingly like a reasonable alternative, even if it pays nothing – the under-the-mattress rate, if you will, because that is what you get if you hide your cash there – now the same as the Fed!

So the real fear now is Deflation and there is no more speculation about it. Milton Friedman (1912- 2006) a Nobel Prize winning economist, is credited with creation (or, at least the modern revival) of the economic theory of Monetarism, which, greatly oversimplified, is the belief that excessive expansion of the money supply is inherently inflationary, and that monetary authorities must devote themselves to maintain price stability, almost at all cost.