RUMORS & LIES: Fair And Balanced In The Hamptons

RUMORS & LIES…

In an attempt to plug the budget gap in a deteriorating economy and keep the cash flowing the “terror level” has been raised in order to keep the citizenry docile. With no attacks by Al Qaeda, the prospect of maintaining a high alert (it requires cash, after all) becomes a little thin. Suffolk County is not exactly the first target on the mind of Bin Laden. Of course, the real 1000 lb. gorilla in this case is known as Derivatives. 

But, it wasn’t simply loans that were pushed by mortgage brokers on anyone breathing (under threat by Wall Street boiler rooms) – in order to satisfy the boys at Lehman, IndyMac, Bear Sterns, Citibank, Merrill Lynch and Goldman Sachs. It wasn’t just the lawyers, accountants, appraisers or title companies that greased the wheels of this leveraged game perpetrated by Wall Street. And, it wasn’t even those thirty-something guys who ran the boiler rooms themselves, which created securities out of mortgage notes before the ink was even dry and then sold them off to China and Iceland. In those cases, the leverage was “only” 30 or 40 to one. The $20 million dollar bonuses, which continued even in the face of merger agreements (as Merrill Lynch did to Bank of America), were not even a speck on the real tip of the iceberg.

What few people understand is that the systemic problem emanating from Wall Street operations predate all of this. And that is/was -- the derivatives market. The size of that market, the credit-default swaps that encompass mortgages, corporate debt obligations, bonds, insurance and a variety of other esoteric “bets” which include credit cards -- all add up to mind-numbing number somewhere between seven hundred and a thousand Trillion dollars. That’s roughly One Quadrillion dollars—that’s a one followed by fifteen zeroes, folks. To simplify this and understand it better, understand that the entire U.S. stock market is valued at about $15 Trillion, all of the real estate in this country is valued at about $25 Trillion, and the value of all of the stock markets in the entire world is about $50 Trillion. Compare that to $1000 Trillion dollars. It is more than all of the cash and assets contained in the world. Meaning, of course, that it can never be paid or settled. It has to be dealt with. But, up to this point, the way of dealing with it is to either pretend it doesn’t exist or sweep it under the rug.

It was this market, which Warren Buffet warned us about a few years back, which has begun to unravel along with the world economy, and which threatens us all. Why? Because, there never was the ability to pay off these debts. It was only a bet strategy based upon a belief that a large number of defaults of any kind would never occur at once. Until it did occur.

While little understood, derivatives are hedged bets such as credit-default swaps, which require at least two parties (known as counterparties) to complete. A bondholder, for example, buys insurance to protect against a default. A fee is paid to insure against that default and, presumably, the seller of the insurance will pay off the debt if that should occur. Except, what if the seller of this insurance has sold off that obligation after collecting the fee? Or, what if the seller goes out of business? Or, does not have the reserves to pay off that debt—having simply pocketed the money for selling the insurance in the first place?

Once defaults start to occur or if the counterparty becomes insolvent, the system starts to implode and rolling defaults build upon themselves. That’s why we are propping up AIG and why Lehman was so important. But, of course, the Washington guys never get the needle in the eye.

The mortgage market was only a small fraction of this, but the fun continues. While all of the major banks give lip service to helping property owners modify loans, after beating mortgage brokers to death to find “product,” nothing could be further from the truth. IndyMac Bank, for example, became insolvent after cooking the books with the help of a Treasury Department official who was working on its takeover process. While no charges were filed against the official for that, the bank was backdating memos and filing phony documents to make IndyMac’s balance sheet look better.

After being taken over by the government and sanitized, the bank was purchased by a group of investors who have generated mailings offering homeowners the opportunity to modify their loans. Interest rates were to be lowered and arrears were to be put on the back end of the loan. Phone contacts made to IndyMac have turned up the fact that the offers were computer-generated and had no basis in reality—or support from the clerks handling the actual loan modifications. Numerous inquiries have determined that, once again, this is simply another hoax perpetrated upon those in financial distress. It was merely done to get that first check in the mail while the file was to be “reviewed.” A quick hit of cash for the new investors. 

Local Political Notes.

Election rumors in the Town of Southampton are heating up. 

This year’s contests in Southampton include the Supervisor’s post, Town Board slots, Town Clerk and Town Highway Superintendent. Nuzzi is running again for a slot on the board and, surprisingly, while a Brookhaven transplant and a Heaney protégé, he’s managed to come out on the right side of several issues. Political activists are starting to rethink Nuzzi's capabilities in a positive light. 

But the hot contests are for Town Supervisor and Highway Superintendent.

Alex Gregor is rumored to be considering a run for William Masterson’s position as Highway Superintendent -- a position that has been a strong Republican political mainstay. This is not the first time that Masterson and Gregor would be squaring off against each other. However, the previous race was marred by dirty tricks and a lot of local voters remember the bad taste in their mouths over that campaign. Gregor can win this contest and it would be a major vote for good government.

The Kabot/Throne-Holst Supervisor race is a bit different. Kabot was a much needed change. But, the animosity between Kabot and the Republicans was palpable and there is still conflict, according to insiders. 

And, clearly, while Anna Throne-Holst has had minor missteps in the service of improving the environment, she is an outspoken reformer. The Town now has an opportunity to make a fresh political start in a resort area that will now be severely challenged by world economic events.

A recent entry into the mix has been the candidacy of Conservative Party Chairman Jim Malone of Westhampton Beach, who is also a former ADA. Since there are rumors that Linda Kabot is "under siege" and that there have been some very credible rumors that the Republicans might not renominate her, this is a hard one to call. 

Pope, the incumbent Democrat, is being challenged by Fleming -- from her own party. Fleming is described by some as a "shark." 

With the Democrats having seriously improved their membership after the last election, that party may soon come into its own after many years of ineffectiveness.

The interests of New Yorkers have not always been met by this Town -- but, with the right Supervisor that could finally change.

The little understood financial realities that have trickled down from the derivative disaster—which has caused everything from corporate defaults, to bond defaults, to the evaporation of credit—is something that the new Supervisor must cope with as well. The financial turmoil that is going on in the Town, the prospects of a severely reduced budget, and the realities of the tax base drying up, will all be challenging.