It’s a different picture on Main Street. A growing number of people are in serious trouble and, unless you happen to be a capitalist in the financial sector, little of the suffering is likely to be relieved by the government. Analysts are now recommending that ordinary people should have enough savings on hand to get by for nine months to a year.

And that particular advice would appear to fall squarely in the category of being “too little and too late.” The general public, in fact, may be among the last to be informed of the seriousness of the economic contraction.

Those corporations that are in the country’s vital industries seem to have been forewarned well in advance. For example, every one of the top five companies in the oil, defense and pharmaceutical industries, without exception, managed to amass a record amount of cash and cash equivalents on hand by the time the turndown commenced.

In addition, our key politicians appear to have been forewarned. How else to explain the seemingly unnecessary, yet unprecedented, executive and legislative moves to protect the country against civil unrest? These defensive actions included the authority to suspend basic rights, legislation to overturn the protective covenant known as the Posse Comitatus Act which, for 130 years stood as a silent barrier against governmental abuse of power, and the construction of new federal detention facilities, many of which are still awaiting unknown future occupants.

And, as for the public at large – well, we’re just now being told that a recession actually started 12 months ago and that we’d better have plenty of savings available. Somehow, this whole situation just doesn’t smell right.

In any event, we are definitely in a recession, and what makes it unique in a very bad way, is that, in addition to being global in scope, it is accompanied by two other developments – a financial crisis featuring a historic credit crunch – and a real estate collapse, the extent of which has not been seen since at least the Great Depression.

These two additional elements are exactly the reason for the current alarm, because without a functioning financial sector and a surging real estate market, the economy is lacking its traditional lifelines.

In every one of the ten previous recessions since World War II, the normal drop in interest rates associated with the turndowns fueled the financial and real estate portions of the economy, which enabled them to pull the economy back into a recovery mode.

Today, you can look at these sectors as you would at a patient whose heart has stopped beating. The paramedics – the Treasury, the Federal Reserve, Congress and the present and future administrations – are all on the scene. And CPR is being applied in the form of an unprecedented infusion of funds.

But, so far the body is unresponsive. Naturally, time is of the essence and this is reflected in the frantic nature of the resuscitation attempts. If there continues to be no response, death will follow and rigor mortis will set in – a general condition that will be called a depression, and one that we are hearing more about, by the day.

Depressions are rare. The National Bureau of Economic Research, which belatedly declared the recession last Monday, has no parameters to determine if and when a depression might start or end. Officially, it doesn’t even know when the Great Depression began or ended.

The general definition of a depression describes it as an extended period of falling prices, or deflation, accompanied by increasing unemployment and a reduction in the production of goods and services. It is the economic equivalent of “shock and awe.”

The current fear of this scenario is based on the fact that the limited history of these types of events indicates that a depression is an extremely difficult cycle to reverse.

As prices fall in a period of deflation, businesses trim their inventories which are losing value on the shelves. Consumers, at the same time, begin to postpone their purchases in anticipation of cheaper prices down the road. As a result of the foregoing, businesses further reduce production and lay off more employees, which results in a continuing deterioration in consumer spending – and the vicious cycle is off and running.

Those who do have an idea as to the timing of the Great Depression say that it took World War II to finally pull the nation out of it. And it was 25 years before the Dow Jones Industrial Average returned to its 1929 level.

This is why you could realistically say that the current effort to stimulate business activity is on a war footing. The U.S. government has now committed $8.5 trillion to the cause of reviving the economy, of which $3.2 trillion has been spent so far.

The efforts to date, however, have seemed somewhat clumsy and inconsistent. Little restraint appears to have been attached to bailing out financial institutions such as AIG, which has seen its commitment from the government increase from $80 billion to, now, $150 billion, with no oversight involved.

Yet, the CEO’s of the three big domestic auto companies have been raked over the coals by Congress on two occasions lately, in their unsuccessful quest for $25 billion initially, and their most recent unresolved pitch for $34 billion. In the process, the CEO’s have agreed to work for $1 per year and the union has offered some relief from the auto workers as well, conditions that have not been imposed on financial institutions, incidentally.

Sure, there are reasons to dislike the auto executives, but the companies they represent directly employ 395,000 workers, and Bloomberg News reported today that one tenth of all the jobs in the nation are in some way related to the domestic auto industry.

It is strange, therefore, that as of now, with one or more of these companies on the verge of bankruptcy, Congress has not yet been able to get off the dime and make a decision.

Nevertheless, Herculean efforts are indeed being made to get the banks to start issuing credit, but, here again, it seems that no discernable success has been achieved so far. Lack of funds from their banks is, in fact, the reason for the auto industry’s sudden perils.

Even the State of California cannot get its banks to come up with the operating funds it needs and it is now considering the use of depression-era IOU’s. Ironically, this will transfer the problem to the state’s payees who, in all likelihood, will find that the banks won’t honor the IOU’s either.

Due in large part to the government’s unprecedented rescue efforts, the national debt rose by over $1 trillion in the 2008 fiscal year which ended on September 30.  October then recorded the largest monthly deficit in history – over $400 billion – and the deficit is now expected to reach $1 trillion for fiscal 2009.

And yet, not only is the problem in the financial community totally unresolved, the problem in the real estate sector hasn’t even been effectively addressed. Currently, 10% of all mortgages in the country are delinquent or in default, and foreclosures are occurring at the rate of nearly 10,000 per weekday, a figure that translates into more than 700,000 men, women and children losing their homes each month.

Difficult as it might be, it is absolutely essential that the problem be treated as if it was a contagious disease and quarantined. The high rate of foreclosure activity must be terminated at all costs, for only then can the balance of the real estate sector, in conjunction with a reawakened financial community, begin to revive the body economic.

President-elect Obama will hit the ground running immediately after his inauguration in six weeks, and he is promising a stimulus package aimed at creating 2.5 million jobs. With job losses totaling 1.25 million in just the last three months this will be a much needed program, but is it, in reality, little more than a band aid?

10 million Americans are now reported to be unemployed and millions more are working at jobs below their level of proficiency. Let’s hope that Obama’s program succeeds to a greater extent than what we have seen so far.

Much of what occurs in the business world is dependent on confidence, however, so the president-elect’s most important contribution may just turn out to be that he brings enough of that with him to make a difference.

Dave McGill, News Correspondent

Dave’s column, “The Contrarian,” generally published every Friday, to Gather Essential News will sometimes present a contrary view to various aspects of the news, or an alternate take on the conventional wisdom of the day, and will often appear on other days of the week

Dave has been a senior officer of an eastern insurance company, involved in economic projections and investment strategy, president of a Midwestern mortgage banking company, and a financial consultant in Southern California, serving clients in the field of commercial real estate development.

In addition, notice how credit card debt rebounded 7.1%. Thanks Mr. Stimulus Package!!!! You truly were worthless.  Let’s not be judgmental yet. Wait until all the disbursements are sent before you prove just how worthless you really are.

Most investors and books will tell you that real estate is a pretty safe asset class to invest in. This is certainly the case if you are buying core buildings or if you are employing a reasonable buy and hold strategy. Sadly, many investors hear safe investment and assume that opportunistic investing is just as safe.

If an investor is solely a real estate flipper, he/she is taking more risk than investing in the stock market. That might be a surprise to some, but consider the returns. On average the stock market returns 9-13%, while flippers should expect 15-20% returns on their capital investment.

This higher return is certainly accompanied by more risk. First, consider the fact that in the stock market your downside risk is typically capped at 20-30%. Very rarely does the stock market lose more than 10% in a given year. Additionally, a single blue chip stock is not likely to even have that kind of a loss. In contrast, a flipper has a very real chance of losing all of the money invested in a deal. The odds of this are even higher for a novice flipper.

Another aspect of real estate investing is the sweat equity or opportunity cost of the investors time. I can go into my E*Trade account in about two minute, buy a Dow Jones ETF (exchange traded fund), and essentially guarantee myself a 9-13% return on that money for 20 years. However, if I decide to flip property I either have to hire a property manager or I have to act as general contractor, organizing the work to be done. Either way, investors will still spend a tremendous amount of time working on site or dong something with the investment.

Taking this logic one step further, if I have a job granting me a salary of $100,000, I probably have to give that up to flip houses. If I don’t give that up, I have to hire a manager that would cost $10,000 per job (on the low end). As these costs rise the return from flipping must also rise. Many investors never consider the cost of their time when calculating their return on investment. This is a huge mistake. Investors should add a salary cost line for themselves to compensate for the time they spend on the job.

I am not going through this exercise to discourage flippers, but rather to encourage investors to seek the right returns. If your upside after all costs are calculated is only 10% (or less!), you need to think hard about the deal you are about to do. Most entry level flippers get anxious for deals and take investments that do not offer a reasonable return. In a good market many flippers get away with this; however, as the market turns (like now) these same flippers find themselves losing a lot of money.

Finally, don’t let getting burned once keep you out of the business. If you are in a business where the returns are 20-30%, there will have to be deals that result in huge losses. Understand this, learn from this, and get back in game.

-Michael Cook, theFlipBoard.com

 All news should be taken with a grain of salt, but sometimes, the news reports you see are notifying you of behaviors or trends that have been occurring without the majority of the population’s knowledge.  This is no exception. Watch this video for example.  –> CNBC Video

The Federal Reserve and the U.S. government swiftly approved the all-stock buyout, showing the urgency of completing the deal before world markets opened. The Fed also essentially made the takeover risk-free by saying it would guarantee up to $30 billion of the troubled mortgage and other assets that got the nation’s fifth-largest investment bank into trouble.

“This is going to go down in very historic terms,” said Peter Dunay, chief investment strategist for New York-based Meridian Equity Partners. “This is about credit being overextended, and how bad it is for major financial institutions and for individuals. This is why we’re probably heading into a recession.”

JPMorgan Chase & Co. said it will guarantee all business — such as trading and investment banking — until Bear Stearns’ shareholders approve the deal, which is expected to be completed during the second quarter. The acquisition includes Bear Stearns’ midtown Manhattan headquarters.

JPMorgan Chief Financial Officer Michael Cavanagh did not say what would happen to Bear Stearns’ 14,000 employees worldwide or whether the 85-year-old Bear Stearns name would live on after surviving the Great Depression, two World Wars and a slew of recessions. He told analysts and investors on a conference call that JPMorgan was most interested in buying Bear Stearns’ prime brokerage business, which completes trades for big investors such as hedge funds.

Some analysts expected it to be a brutal day for global stocks, nevertheless. Shortly after the news broke, Japan’s benchmark Nikkei stock index plunged more than 3 percent in morning trading.

A bankruptcy protection filing of Bear Stearns could have heightened anxiety in world financial markets amid a deepening credit crunch. So far, global banks have written down some $200 billion worth of securities slammed amid the credit crisis — more write-downs could come. Last week, a bond fund controlled by private equity firm Carlyle Group faltered near collapse because of investments linked to mortgage-backed securities.

JPMorgan’s acquisition of Bear Stearns represents roughly 1 percent of what the investment bank was worth just 16 days ago. It marked a 93.3 percent discount to Bear Stearns’ market capitalization as of Friday, and roughly a 98.8 percent discount to its book value as of Feb. 29.

“The past week has been an incredibly difficult time for Bear Stearns,” Schwartz said in a statement. “This represents the best outcome for all of our constituencies based upon the current circumstances.”

Wall Street analysts say the bid to rescue Bear Stearns was more than just saving one of the world’s largest investments banks — it was a prop for the U.S. economy and the global financial system. An outright failure would cause huge losses for banks, hedge funds and other investors to which Bear Stearns is connected.

After days of denials that it had liquidity problems, Bear was forced into a JPMorgan-led, government-backed bailout on Friday. The arrangement, the first of its kind since the 1930s, resulted in Bear getting a 28-day loan from JPMorgan with the government’s guarantee that JPMorgan would not suffer any losses on the deal.

This is not the first time Bear Stearns has earned a place in Wall Street history. A decade ago, Bear Stearns refused to help bail out a hedge fund that was deemed “too big to fail.” On Friday, the tables had turned, with the now-struggling investment bank in need of the same kind of aid.

Bear Stearns was founded in 1923 and in recent years was best known for its aggressive investing in mortgage-backed securities — and what was once a cash cow turned into the investment bank’s undoing.

In June, two Bear-managed hedge funds worth billions of dollars collapsed. The funds were heavily invested in securities backed by subprime mortgages. Until that point, subprime mortgage-backed securities were immensely popular with investors because of their profitability. 

 ”Having taking Bear Stearns out of the problem category, and the strong action by the Federal Reserve, we would anticipate the market will behave quite differently on Monday than it was Thursday or Friday,” Cavanagh said.

The move, announced after the closing bell, represents a 20% cut in the value of mortgages held by Citi as of December, the most recent period detailed by the bank.

Citi Group, Inc., which also will consolidate three different U.S. mortgage subsidiaries into a single division, said its quick pullback from the market will allow it to lower expenses by $200 million during the next year.

“This end-to-end realignment will create a simplified and streamlined organization that is more sharply focused on clients and able to direct resources to the business lines and customer segments with the highest growth potential,” Bill Beckmann, president of the company’s mortgage unit, said in a statement.

As part of the reorganization, Citi by the third quarter intends to run about 90% of its mortgage business under its CitiMortgage unit, up from 65% previously. That unit will take over loans that were held by the Citi Home Equity and Citi Residential Lending units.

“These changes will enable us to manage the business unit’s capital for enhanced returns,” Beckmann said.

Analysts have estimated that Citi could see a first-quarter loss of at least $14 billion from debt tied to subprime mortgages. The bank still had $43 billion in exposure to leveraged loans and $20 billion in commercial real estate loans at the end of the fourth quarter.

On Wednesday, Citigroup CEO Vikram Pandit attempted to allay investor concerns about the bank’s future exposure to securities-related losses. He said the company had a new approach to risk management under the leadership of Brian Leach, newly appointed as chief risk officer.

In a possible hint of signs that the bank would cut back its mortgage operations, Pandit said in an internal memo that it would continue to divest itself of “peripheral businesses.” He said the bank would also focus on raising capital.

“We are well capitalized and extremely focused on the strength of our balance sheet,” Pandit said.

“We remain concerned about loss-provision potential, the direction of long-term strategy and weak markets for the capital-markets businesses,” analysts Guy Moszkowski and M. Patrick Davitt of Merrill wrote in a research note.

(Keep reading if you want my Attorney’s take on this article!)

“What does this mean?  The markets are finally starting to readjust and bring prices down. However, the cost of getting loans done will go up (they always do from what I heard). This means that you absolutely MUST have a rock-solid plan in place when you are acquiring properties.  I am experiencing some slowness in the market now. But, make sure your financing will not bankrupt you while you wait to either flip your property or get good tenants in the place.”

-JA

Enjoy!

 1. Success in one area does not guarantee success in another.

Just because you made a lot of money in “dot coms” doesn’t mean RE development will be a snap.  Be humble in your new endeavor.

 2. You  can always learn something new.

Again, be humble and surround yourself with experts in your new endeavor. You rarely have to be the smartest person in the room in order to be the richest person in the room!

 3. Perseverance is critical to your success.

Don’t give up! The aboslute worst thing Jim Clark and Tom Jermoluk can do now is quit.  Simply rethink their strategy. They have a $110 million construction loan to pay off and the property is no longer worth that. Hmm… Could they get it re-zoned as commercial?  Or, sell the entire project to someone else like Me or Donald Trump?