6 March 2009
Hotel Lawyer with a few questions on the cost of the bailout and what lies ahead
As many recent articles referenced below recount, and as we all know from the headlines, we are in “interesting times”. We talk about the $700 billion bailout bill and the possibility of doubling the amount to get out of the scary situation we are in. But is that really the cost, and is it going to do the job?
Here are some interesting facts and a few thoughts.
How much have we committed to get out the problem?
We all know that Congress has signed a $700 billion bailout. Most of us also recognize that there’s a lot of talk about possibly doubling that amount to an unthinkable $1.5 trillion. But is that really the number?
Our current commitment is truly staggering . . . $20 trillion?
Depending upon who you believe, the amount of our commitment to the bailout is somewhere between $8.8 trillion and $20 trillion! Yes, I said “trillion.”
The relatively liberal New York Times put the amount of our financial commitment to the bailout on February 4, 2009 at $8.8 trillion. The relatively conservative Fox News, Bill O’Reilly, said last night that the number is $20 trillion. I don’t trust either source, but that suggests to me that the number is somewhere in the middle. It certainly is not $700 billion nor even $1.5 trillion
Who’s hiding the salami?
But if Congress has only approved a $700 billion bailout, how could our commitment to the financial mess be somewhere between $8 and $20 trillion? The answer is: “THE FED”.
In other words, this is worse than the shadow banking system — the situation that created the mess were in… trillions of dollars of debt in the “market” that were not recorded on the books of any bank or financial institution.
In addition to the debt that is being funded by Congress, THE FED is using its checkbook “off the books” and this number is staggering!
What does the New York Times say?
According to the New York Times on February 4, 2009, there is a lot of money committed and spent ($2 trillion has been spent) that isn’t being counted… at the present time. What does this include? It includes investments in Fannie Mae, Freddie Mac, Ginny Mae, an extension of overnight lending to banks, commercial paper guarantees, money market fund guarantees, support of AIG, and other “reserves”.
Maybe I don’t have all the categories right, but this is certainly an accurate summary of the numbers reported by the New York Times. You do the math.
You don’t have to be a radical conservative to think that Bill O’Reilly and Fox News may have at least a piece of the truth. So this number may be much higher than the $8.8 trillion reported by the New York Times.
Are we really bankrupt?
I don’t note the answer to this question. I hope we are not bankrupt.
President Obama is calling for the urgent reduction of the deficit, and we have talked at length about the problems of funding the American debt. But these discussions have generally concerned the funding of a relatively “modest” $700 billion — or possibly an extraordinary $1.5 trillion — package. Numbers reaching into the $8 trillion-$20 trillion range are completely beyond comprehension . . . and the reach of bringing under control.
How bad could it get? Dr. doom predicts an “L-shaped” depression — a huge decline that continues for a very long time.
Okay. I am an optimist. I want to believe that the financial stimulus will get people back to work, spending money, and doing business. I want to believe that we will create financial liquidity for new transactions, and break up the backlog of financial constipation.
The optimists are now saying that this won’t happen until the latter half of 2010. The pessimists predict “recovery” anywhere from 2011 to 2014 or beyond. I do believe that when the recovery comes, although it will not be an “V.-shaped” recovery, it could be relatively quick. Nonetheless, there are strong and respectable contrary views will scare the pants off you.
Yesterday, I saw an article in Forbes online. The column was written by “Dr. Doom” — a well respected financial analyst named Nouriel Roubini. He says: “There is, in fact, a rising risk of a global L-shaped depression that would be even worse than the current, painful U-shaped global recession.”
Where does this go?
The staggering amount of debt we are taking on is extremely worrisome. President Obama acknowledges the seriousness of the problem, but rhetoric will not cut back the numbers. In our new administration of “transparency, we need to have realistic numbers and realistic programs.
I continue to be optimistic that the programs will work, but I’m very concerned about the numbers. If we are wrong, this is potentially a fatal financial error.
Let’s hope we get it right.
Other articles on the Global Financial Crisis & Recovery and Outlook & Trends
For other articles about the Global Financial Crisis and where this all takes us, here are some recent articles and links. You can also go to Global Financial Crisis & Recovery and Outlook & Trends on www.HotelLawBlog.com
- Hotel Lawyer: Stimulate this! The lighter side of political commentary from the centuries
- Hotel Lawyer: What lies ahead? What’s the bailout cost $700 billion? $3 trillion? $20 trillion? What does Dr. Doom mean by an L-shaped Depression?
- Hotel Lawyer: Stimulus Bill and financial recovery — summary of selected tax provisions
- Hotel bankruptcies, workouts and turnarounds: Hotel Lawyers on the TARP, the TALF, and the ugly. What does it mean to hotel owners and lenders?
- Hotel Lawyer: Uh Oh! Now they are using the D word
- Hotel Lawyer: New hotel data and revised predictions for 2009. Increased hotel loan stress, falling NOI and slumping values. It’s going to get worse before it gets better.
- Hotel Attorneys with the latest “updates from the field”
- Hotel Lawyers: How do we pay for this? And what happens next?
- Distressed hotel assets find no fast relief in bailout plan. Up to $1 trillion “bad bank” to take toxic assets. No critical details yet.
- Troubled Hotel Loans: Turning point or just another ledge on the cliff before we go over the edge? Bad bank rescue and RTC-2 ahead?
This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We’ve done more than $87 billion of hotel transactions and more than 100 hotel mixed-used deals in the last 5 years alone. Who’s your hotel lawyer?
________________________
Our Perspective. We represent developers, owners and lenders. We have helped our clients as business and legal advisors on more than $125 billion of hotel transactions, involving more than 4,700 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or 310.201.3526.
Jim Butler is one of the top hospitality attorneys in the world. GOOGLE “hotel lawyer” or “hotel mixed-use” or “condo hotel lawyer” and you will see why.
Jim devotes 100% of his practice to hospitality, representing hotel owners, developers and lenders. Jim leads JMBM’s Global Hospitality Group® — a team of 50 seasoned professionals with more than $87 billion of hotel transactional experience, involving more than 3,900 properties located around the globe. In the last 5 years alone, Jim and his team have assisted clients with more than 100 hotel mixed-use projects — frequently integrated with energizing lifestyle elements.
Jim and his team are more than “just” great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.
Contact him at jbutler@jmbm.com or 310.201.3526. For his views on current industry issues, visit www.HotelLawBlog.com.