If you have seen the classic movie, Other People’s Money with Danny DeVito, then you will know what I mean.
It has been a poor few years for investing in property, especially commercial real estate. We have had a string of disasters and upheavals: the Japanese nuclear fiasco, the Arab Spring, the European Union and it’s employment and budgetary problems, the ongoing Credit Crisis, the inability of Central Bankers and governments to come to terms with the profligacy of the past decade, to name but a few. But these are not the real culprits as other manmade disasters have contributed to a far greater extent.
Problems in the commercial real estate markets have been exacerbated by the lack of commercial funding at rates acceptable to buyers due to excessive risk premiums being charged by banks. One of the main culprits in this equation is the banks and their senior management. Traditionally, and still to some degree today, bankers are paid according to performance. This is all well and good when they are investing their own money in ventures and lending to commercial real estate projects that are being developed on a speculative basis. However, this just does not work when they are managing deposits of small business men and others that want to keep their monies safe.
Speculative commercial real estate developments, something that banks have invested in and lent money to are just that, a speculation or a bet. Like a casino if you were, when you go in and change your money, you know that at the roulette table the best odds are still a gamble and you could lose everything. Imagine going to work every morning and having to gamble with other people’s money and get paid for it. Imagine again, if you will, that you are working for a company that asks you to do this on a daily basis and they will pay you a salary, often a fantastic salary, and allow you to have a benefits package to match any available in the market.
They will pay your pension and give you a company credit card for entertainment purposes and a telephone with which to promote your bets on commercial real estate. Now you are getting the message. But hold on, it doesn’t end there. You are allowed to make bets on the property market by deciding which project you should lend to so as to make the balance sheet of the bank look good.
The balance sheet needs to look good because then the senior management can say they made a great deal of money betting other people’s money and they then award themselves a large, and according to them, well deserved bonus, a policy which filters down to the lower staff as well, to ease the feeling of complicity and give each other mutual pats on backs.
It’s a vicious circle and the sufferer in this orgy of gambling has been the taxpayer. We are only coming to this realisation in recent times with the never ending series of bailouts that seem to have occurred throughout the world during the past three years and the excesses of bankers exposed.