I am not an expert on any of the things I am about to write about. I am just a relatively thoughtful guy who sat back on the train this morning, closed his eyes, and tried to sort through some of the broader consequences, broader implications, of this entire mess on the Gulf Coast. I think that this has the potential to wreak havoc far beyond the state borders down there.
First, these cities have municipal bonds. They have to pay interest on these bonds. They issue the bonds to pay for things like sewage projects and canal work and convention centers and all sorts of either infrastructure stuff or for projects that they calculate will throw off big revenues. The bonds are usually serviced by taxes or fees. Fees are paid by the users, like with a sewage project. Taxes are paid by everyone. Taxes are generated as a consequence of economic activity -- sales tax, for example. Where is the revenue going to come from now that the city is a dead man crawling? I know that there are reserves, up to about a year, socked away to continue interest payments, but do you really think that money isn't somehow going to get sucked into something else? What are the consequences when these cities seek bankruptcy protection or just plain default on the debts? Are they going to be able to go to the markets again to raise money? What happens to the people who hold that debt? It isn't enough to say that the bonds are insured because, at the end of the day, someone will bear that cost. Someone sitting in their dry and comfy home in a state far, far away is going to take a hit on their portfolio. Oh, and by the way, who hold munis in the first place? Those on a fixed income -- the elderly.
Second, the national mortgage market will take a hit, I think. Mortgages today are not as they once were. Once upon a time, your local bank lent you money, held your note, serviced your loan, and collected on it or foreclosed if it had to. Today, mortgages are the first step in an exotic financial market where they get converted into pool and tranches and debt is diced and sliced and sold off all over the place. This is a mighty big business, no two ways about it. You, the homeowner may not think about it like that as you write your check, but it is. Rarely do banks lend for their own portfolios anymore. What happens now when there is a national market in the mortgage debt and people have no reason or no ability if they have a reason to continue making payments on a house that doesn't exist anymore and for which insurance may not cover any of the loss. What are the implications for the national market as portions, large portions, of two states default on their mortgage debt? And what the heck do you foreclose on? How do you even find the land now that the river has reclaimed it in places? What will happen to interest rates? Beats the shit out of me. I just assume that there will be a problem.
Third, who is going to repopulate New Orleans? Those who are the most mobile, the best educated, those with the most portable skills, they are going to establish lives elsewhere. I was on the phone yesterday with my kids' nursery school and the director told me that she just got off the phone with a woman from New Orleans who is relocating up to Connecticut. She was calling from a hotel room in Houston. Once these kids get into new schools and the smart and aggressive types get new jobs, are they going to go back? I am skeptical. Highly skeptical. They will wonder whether anything in New Orleans can ever change and they won't take the risk of putting their families back there. So what happens to the city when you have this huge brain drain? You cannot populate the city with the Ninth Ward, those who may lack the skills and the resources to re-establish themselves elsewhere. Not to be a doom sayer, but I am deeply worried about the total eradication of the middle and upper middle class in New Orleans. You can't have a city without these people, at least, not a city people would want to live in.
Fourth, what the hell are the people who have a livelihood tied to the area going to do for money now? Let's take the lawyers for a moment. Law in Louisiana is based on the Napoleonic Code. It is the only place in the country with this kind of law. Lawyers admitted in Louisiana may not be able to really practice anywhere else. And even if they were, where are their clients? Who is going to pay them? What about real estate brokers? They sell local real estate. Well, I'm kind of thinking that market may be a little moribund for awhile. Or. . . Well, take any service provider in a local economy. They are all screwed. Are they all going to go from upper middle class to welfare in three easy steps? Consequences there are huge. First, a new and great strain on a cruddy social welfare system to begin with. Can the system even handle these new people? (Actually, one consequence might be a reform of the system if you suddenly get a lot of well educated people as "clients" of it). Second, where are the taxes going to come from to pay the welfare? If the high earners are not earning, they ain't paying taxes. Enough said, right?
The above is just a start. It is deeply depressing and I kind of have to stop now.
Except for this. Kathy (who I love) has written, in the midst of an excellent post about the anarchy in New Orleans, about the losses suffered by her brother's new car dealership in New Orleans. My heart goes out to them. However, I think Kathy is focusing on the wrong thing. It isn't whether the cars are a total writeoff or whether the dealership building has been damaged. No, the question is: who will be able to afford to buy the cars? What if no one in the economy has any money or jobs to justify credit to buy the cars? If that happens, we as a nation may be facing much greater trouble than we all think.
I hope I'm wrong about all of this. I really do. *sigh*
U P D A T E
Well, so much for being wrong. I read the following things on the Times Picayune Blog this afternoon:
Mortgage Loan Relief Available
Fannie Mae has mortgage relief provisions in place for borrowers in Mississippi, Louisiana, Alabama, Florida and other states facing hardships as a result of widespread damage caused by Hurricane Katrina.
With Fannie Mae's disaster relief provisions, lenders help borrowers in several ways, including suspending mortgage payments for up to three months, reducing the payments for up to 18 months, or in more severe cases, creating longer loan payback plans. Such assistance is provided on a case-by-case basis, and is designed to meet the individual needs of borrowers.
For information on mortgage relief, homeowners who have experienced hardships should contact the lender to whom they send their monthly mortgage payment.
Ford Offers Payment Deferrals
Ford Motor Credit Company is offering customers affected by Hurricane Katrina the opportunity to defer up to two vehicle payments.
Under the Disaster Relief Program, customers have the opportunity to defer these monthly payments without paying extension fees. The program is open to customers living in counties that FEMA has declared federal disaster areas as a result of the storm.
Ford Motor Credit customers who are eligible for the Disaster Relief Program should receive letters next week with instructions on how to register. Customers must register within 60 days to qualify. Deferred payments are due at the end of the contract term.
Looks like some of the big lenders are concerned that if they don't permit some form of deferral of payment, the debtors are going to tell them to go f*ck themselves.
What do you think that would do to Ford's stock? Not to mention Ford's corporate bonds?
This is just going to get more and more ugly.Posted by Random Penseur at September 2, 2005 10:25 AM | TrackBack