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A debit to Business Week and its business-celebrity interviewer Maria Bartiromo, for looking the other way in an interview with Richard Perle, an architect of the Iraq war and former director of Hollinger International Inc., the media company looted by former Chairman and Chief Executive Conrad Black (a friend of Perle’s).
This interview yields nothing of news value.
Bartiromo: What is the most important issue in the election?
Perle: It’s almost always the economy. But there is a much more difficult-to-define issue, and that is leadership.
Beyond begging the question of what it takes to be discredited in American public life, the journalism problem is that the story provides less than the minimum amount of required context in its introduction and is laughably circumspect with its celebrity guest. It attributes to “critics,” for instance, that which is plainly and simply a fact.
Critics have pilloried Perle as a leader of the neocons who took America into a disastrous war in Iraq.
The interview fails to ask obviously pertinent questions about Perle’s role in the Iraq war or, if that’s too much for a business publication, at least about his failure to protect Hollinger shareholders from a criminal fraud.
A 2004 investigation by a special board committee found that Perle’s “abject failure” as a director helped enable the “corporate kleptocracy,” the “self-righteous and aggressive looting” going on under his nose. Here is the relevant passage from a special board committee that investigated Hollinger:
Perle repeatedly breached his fiduciary duties as a member of the Executive Committee of the Board. Perle repeatedly signed Unanimous Written Consents without evaluating (or even reading) them, including several that “authorized” many of the unfair related-party transactions discussed in this Report in a manner that enabled Black and [former Chief Operating Officer F. David] Radler to evade full (or any) disclosure to the Audit Committee or the Board….Those transactions alone have to date resulted in well over $10 million in losses to Hollinger. Perle’s abject failure to fulfill his fiduciary duties as an Executive Committee member subjects him to personal liability for breaching his duty of good faith.
BW says merely that Perle “took a hit to his reputation.”
But when I talked with Perle, he was waxing optimistic from his vacation home in Provence.
BW is already reaching in using Perle, this “faithless fiduciary,” according to the report, for its “face time” business-celebrity feature. Then it goes overboard to provide a friendly forum, a bad habit among business publications dealing with conservative political figures, and in doing so, fails to meet its obligations to readers.
Portfolio’s Jesse Eisinger smartly reminds readers that there’s a whole other real estate bubble out there—this one in commercial property. And he says this one’s going to get messy, too.
Calling it “Wall Street’s Next Crisis,” Eisinger presents a compelling case for how the commercial real estate industry got itself into trouble.
Lending standards fell, starkly… it used to be that banks made loans for no more than 80 percent of the value of a property to ensure a healthy cushion of protection, but by the early part of 2007, loans were sometimes made for 120 percent of a property’s value.
We didn’t know that. And, it seems, Wall Street firms have been playing the same game of pass-the-bag-of-doo-doo with commercial-mortgage securities as they did with residential ones. In this case, large pools of securities are backed by just a handful of buildings; a couple of defaults will reverberate far and wide.
Some developers got stuck holding the bag before it could passed on to investors, as The New York Times points out in a timely profile of New York office landlord Harry Macklowe who bought seven Manhattan office towers in February as part of the deal Blackstone Group made for office goliath Equity Office Properties—a purchase now seen as the peak of the commercial real-estate cycle. Macklowe hasn’t been able to refinance the buildings since.
Mr. Macklowe’s predicament marks the denouement of an unprecedented four-year period in which developers threw gobs of money at real estate as prices for office towers, especially in Manhattan, doubled and tripled almost as fast as sales could be recorded. Investment banks avidly underwrote the binge, often basing loans not on existing rents but on projections of rental income well into the future.
All of this worked swimmingly so long as the economy hummed along and banks could pool the loans and sell them to investors. Now, the economy is showing signs of stress, and Wall Street’s repackaging machine is sputtering.
How bad will it get? Eisinger offers one pro’s analysis (C.M.B.S. stands for “commercial-mortgage backed securities”):
A few weeks ago, a hedge fund manager emailed me a PowerPoint presentation on the commercial real-estate market. It opened with a typically dry title: “2008 C.M.B.S. Forecast.”
I clicked through to the first page, ‘Capital Markets.’ It had a picture of a derailed train. The next page, ‘Credit Fundamentals,’ included a photo of a bridge collapsing in a hurricane. Next came ‘Property Values,’ featuring an imploding skyscraper. The fourth page was ‘Economic Outlook’—a ship run aground on the rocks.
And the slide titled ‘Conclusion’? A photo of the exploding Hindenburg.
Bill Gross is an important figure unknown to many casual business-press readers. He runs investments at a big money-management firm, Pacific Investment Management Co., Pimco, that specializes in bonds. For years, he’s been more or less the king of bonds.
We just saw this readable (and dire) analysis of the credit crisis that appeared in Fortune five weeks ago, but we think it’s a must-read:
What we are witnessing is essentially the breakdown of our modern-day banking system… My Pimco colleague Paul McCulley has labeled it the ‘shadow banking system’ because it has lain hidden for years, untouched by regulation, yet free to magically and mystically create and then package subprime loans into a host of three-letter conduits that only Wall Street wizards could explain.
His analysis suggests a need for stronger financial regulation. However, he’s a money man so his remedy is to buy euros and yen.
The Wall Street Journal investigative ambulance arrives too late to a story about Ameriquest Mortgage Co. and other lending companies giving millions in campaign contributions in a bid to relax tougher lending laws.
Data from federal and state campaign-finance records, Internal Revenue Service filings, and the National Institute on Money in State Politics show that from 2002 through 2006, Ameriquest, its executives and their spouses and business associates donated at least $20.5 million to state and federal political groups. In comparison, over the same time period, Countrywide Financial, another large subprime lender, gave about $2 million in campaign gifts, and spent an additional $6.7 million lobbying in Washington, records indicate.
The dates speak for themselves: 2002 to 2006. Check your watches: it’s 2008.
The San Francisco Chronicle was on this back in August 2005 before the scandal unfolded:
A giant Orange County mortgage company accused of duping low-income homeowners has pumped more than $7 million into California politics since 2002, including contributions to Republican Gov. Arnold Schwarzenegger, Democratic Attorney General Bill Lockyer and dozens of other state legislators, members of Congress and political committees.
The Los Angeles Times followed in December 2005:
A booming industry that makes home loans to people with fragile credit is lobbying Congress for nationwide rules that regulators and consumer advocates warn would roll back tougher state protections.
The debate comes as millions of Americans have taken out loans with higher fees and interest rates than the mortgages granted to people with solid credit. As these “sub-prime” loans have proliferated, so have complaints from borrowers who say they’ve been slammed by surprise fees and high-pressure salespeople.
More than two dozen states, led by North Carolina, have moved into a vacuum created by weak federal regulation, imposing their own laws targeting abusive practices.
Ameriquest was founded by Roland Arnall, appointed U.S. ambassador to the Netherlands in 2006, the same year his firm agreed to settle allegations of deceptive trade practices with forty-nine states.
The Journal story does show how these efforts resulted in the rolling back of state laws in Georgia and New Jersey that might have protected borrowers.
As a sidelight, the piece includes damning information on how a rating agency played enforcer for its lender/clients. At key moments, Standard & Poor’s, owned by McGraw-Hill Cos., threatened to stop rating securities written in states where lawmakers added legal protections for borrowers. The move would have shut down the subprime market altogether and branded the states as anti-business outliers.
It is becoming clear that rating agencies’ utter abandonment of basic business integrity may ultimately rival that of accounting firms’ behavior pre-Enron. We would suggest that the full measure of raters’ culpability in the mortgage crisis has yet to be plumbed.
And, yes, it is better to do the Arnall/Ameriquest story now rather than not at all. But must that be our only choice?
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