Where Is the Equity and Where Is the Morality?
Within the past couple of years, I wrote a column bemoaning the fact that bankruptcy practice had slowed to a crawl. Very few cases were being filed, mostly because of the enactments by BAPCPA. But, business was good, home equity was on the rise, the stock market was climbing, and oil was about to increase, although nobody expected oil to reach $140 a barrel.
In the short period of the past 6 to 8 months, bankruptcies have risen to all time highs, banks are not lending, businesses cannot get credit either to sustain themselves or grow, home equities are down the tubes, equities in property and real estate development are down the tubes. Nothing is selling. Nobody is buying. Then, there’s a man by the name of Bernard L. Madoff, former NASDAQ Chairman, who was the mastermind behind one of the largest Ponzi schemes in American history.
Bubbles come and go, especially bubbles based upon greed and the yearning to make a profit. The lesson to be learned in bubbles appears to be watch the bubbles- they always come down. But nobody ever expected banks to stop lending, and Congress to give away money with very few strings attached. While the giveaway may have strengthened some banks’ balance sheets, they still are not lending money. Bankers are not taking any risks perhaps because the regulators who wish to reclassify loans are real estate related? Somehow the log jam has to open, money needs to start flowing, and consumer confidence needs to grow.
Because consumers are the main driving force of the gross national product, we must put money into their hands either by tax credits, creating new jobs, and other matters which hopefully will be included in President Obama’s proposals.
For real estate developers and builders, when nothing is moving and there is no money coming in, interest continues and project expenses continue to rise. There is nothing the developer or builder can do other than go to the bank and say, âHere it is. I can’t do anything with it. Banks are hesitant to take the asset back because they cannot do much with it. Any purchaser is going to be a bottom fisher, and will want to buy at the very lowest figure possible, which in turn prompts banks to accept that low price simply to restore capital.
Recessions may be understandable and bubbles may be understandable. But, the unwillingness to lend is hard to fathom. When you add to all of that Bernard L. Madoff, it makes one sick in the stomach.
I talked to a good friend of mine who counsels debtors in Chapter 11 reorganization cases. He states that he feels like an oncologist, somebody dealing with a cancer patient, that cannot be saved. He goes home depressed at night about the state of affairs. The hope is that there will be a turnaround – people say there always is. The issue is how long is it going to take, and how many more people will be hurt by it?
But nothing could have forseen a Bernard Madoff, the largest alleged Ponzi schemer in the history of America. Madoff is alleged to have swindled investors out of over $50 billion. Many of his victims were well-known investors and business powerhouses, including two owners of the New York Mets. What has happened is that dozens of public interest legal organizations have been hit financially by the collapse of Bernard Madoff’s Ponzi scheme and are scrambling to make up for the shortfalls.
There will be lawsuits in abundance and attorneys will make a handsome profit. But, the losses are immense- losses in both money as well as America’s faith in honesty, integrity and doing the right thing. Bernard Madoff allegedly was not doing the right thing. He confessed, but how does a man operate a business and take money from people when he knows that he has an inability to repay it?
The harm extends beyond the entities that have lost money and the people who have lost money. The real harm is to the public psyche. Under Ponzi schemes, recoveries are available by going after individuals or entities who received funds to share that recovery with others who did not receive funds. There must be an equalization of the harm in a Ponzi scheme.
We understand harm in a recession. It is hard to fathom a Bernard L. Madoff. The thing that bothers me perhaps the most is that every picture I see of him he is smiling.