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Consulted and edited timely Opinion Editorial in the Los Angeles Business Journal.


  • 1. September 29, 2008Californias Diverse Economy Well Positioned For RecoveryThese are the times that try our souls and test our resolve. However, given that we have already enduredthe initial shock of the Countrywide and IndyMac Bank debacles, the diverse Los Angeles economy is nowwell positioned to emerge from the current challenges stronger than ever. More about that later, but first letsexamine how we got here.For the real estate industry, these are unprecedented times.Institutional real estate transaction volume is estimated to be down more than 70 percent from last yearsaverage, and huge discrepancies between the bid and asking price of assets--combined with a lack ofpurchase or sale velocity--make it nearly impossible to establish "fair market" values.As a result, a seller in the market is generally motivated by distressed circumstances or some otherwiseadverse condition such as the breach of financial covenants or the maturity of short-term bridge financing.Knowing this, savvy purchasers have decided to bide their time with the expectation that their best deal willlikely be made after the underlying lien holder exercises its rights in default- e.g., foreclosure.Alternatively--on the rare occasion when there is a meeting of the minds with regard to value--there is little orno available debt financing. The overwhelming majority of permanent loans have been funded recently byconduit lenders. In order to maximize loan proceeds at attractive interest rates, however, conduit lendersmust rely upon the clearing mechanism offered by commercial mortgage-backed securities, or CMBS.In short, CMBS underwriters issue bonds that are collateralized by the cash flow resulting from theunderlying pool of associated commercial mortgages. Given concerns about mortgage underwritingguidelines and anticipated rates of default, investors no longer believe that CMBS bonds offer an attractiverisk-adjusted return, and underwriters have been forced to carry the bonds on their balance sheets and tohold them in portfolio. Consequently, a majority of transactions that are successfully executed in the currentenvironment are now modest in size and financed by either the seller or regional commercial banks.Moreover, abundant inventories of supply, rising labor and construction costs, near-record unemploymentand a further weakening global economy indicate that any new development will be out of favor for theforeseeable future.During this extended period of uncertainty, real estate industry participants struggle to protect the value oftheir assets and to reconstitute themselves for a brighter future ahead.Better days?Not to fear, the cavalry is on the way.By assessing economic indicators on a historical basis, the Federal Reserve is essentially driving whilelooking in the rear-view mirror. Financial markets, on the other hand, are much more efficient andanticipatory. For example, homebuilder share prices began to decline long before residential constructionstarts or housing prices fell.Recent turmoil in our countrys financial markets foreshadows current or impending recession. Ourgovernments quick action to bail out Fannie Mac, Freddie Mac and AIG sought to mitigate collateraldamage and to ensure that this recession will be short-lived. Similarly, resurrecting the Resolution TrustCorp. would bolster confidence and provide a clearinghouse mechanism to resolve the underlying liquiditycrisis. By providing a secondary market for these assets, new life will be breathed into an otherwise stagnanteconomy, and significant capital may be redeployed for more productive purposes.

2. John Carrick, Studley, Los Angeles Business Journal, 9/08Ultimately, the practical effect of these actions will likely be an environment of:* Increased regulation, oversight and transparency* Dramatically less leverage* Decreased structural complexity* More appropriate alignment of interests and sharing of risk* Restoration of available capital and creditIn many ways, Los Angeles is now much better suited to weather this storm than it was during the recessionof the early 1990s. At that time, dependence upon the defense and aerospace industries made the localeconomy exceptionally vulnerable and magnified any recessionary effects.Today, in contrast, the robust diversification and vibrant resilience of the Los Angeles business communityshould allow us to recover more quickly and with fewer scars. I am not suggesting that the solution will bequick or painless. Ido believe, however, that the interim growth of the entertainment business, legal and professional services,and health care and technology industries--combined with the busiest port in America- should afford LosAngeles the pole position in our nations race to recovery.Markets hate uncertainty regarding economics and politics more than anything.., given the foregoing, andthe November presidential election, we will soon have greater clarity in both respects.John Carrick is managing director of the Structured Finance Group at the Los Angeles office ofStudley, an international real estate advisory firm. He served as senior attorney for the ResolutionTrust Corp., vice president at Nomura Asset Capital and senior vice president of CountrywidesMortgage-Backed Securities practice.