Now before you jump down my throat, schedule an intervention or sign me up for diversity training, please let me explain.  I am not prejudiced against any of the “protected classes”.  In fact, I consider myself a social liberal so I have no bias based on race, ethnicity, religion, color, national origin, age, sex (I have always thought that category should be titled “gender”), family status, sexual orientation or disability.

I may have some slight bias, although it is situational, against very large people (say 300+ pounds) and people with poor hygiene, but that is only when they are sitting next to me in confined spaces such as an airplane.

My prejudice, and it is becoming more severe as I get older, is against stupidity (not ignorance which can be corrected with education) and rudeness. 

Although I have tried, I have no solution for rudeness.  And with the current challenging economy and stress levels universally on the rise, I find that rudeness and a lack of basic civility are continuously increasing.  Perhaps I am being too hard on myself.  I still hold the door open for almost everyone and no longer find it as annoying when the anticipated “thank you” does not materialize. And it seems that I less frequently find it necessary to “salute” the drivers who cut me off or lean on their horns when my speed is not to their satisfaction.  Maybe I am learning to live with rudeness.

I have tried to become more tolerant with my second prejudice, and I have noticed some improvement recently, but that is only in the case of “minor” stupidity, not “major” stupidity. 

One definition of stupidity is: “lacking or marked by lack of intellectual acuity”, another is: “a poor ability to understand or to profit from experience”.

My definition of “minor” stupidity is that while it is annoying, no one gets hurt.  Major stupidity is something entirely different.

Case in fact, I no longer want to scream when I regularly encounter the following situation at a fast food restaurant. Having placed my order the total charge is always some odd amount, say $7.45.  I then pull out a twenty dollar bill (that’s what you get from the ATM machines) while I search my pocket for the correct change.  I have an issue with change brought about by my frequent flyer status – I always try to get rid of it.  The cashier has already entered the purchase and the register has calculated my change based on the twenty dollar bill that I placed on the counter so that when I hand over the extra 45 cents the immediate reaction is for the cashier to become paralyzed.  After fifteen to twenty seconds animation returns and the result is usually one of the following two scenarios – either I receive a ten dollar bill, two singles and one dollar in change or I receive a ten dollar bill, three singles and 55 cents in change. 

And to be fair, this inability to count and make change is not limited to fast food restaurants, it just occurs far more frequently there.  I regularly receive the wrong amount of change in all types of places of business.  Usually I will try and correct the mistake (always when it is in my favor), and am amazed that often I will encounter resistance (as the register is now closed) or will be thanked for my honesty (which is a sad commentary on today’s society).

And now we come to “major” stupidity, especially as it manifests itself in the homebuilding business.                                                      

One of my clients called me several years ago and asked my advice on purchasing a parcel of land in a somewhat remote suburban area but one in which he had enjoyed reasonable success with a prior development.  After examining the property and analyzing the market, and without burdening you with the details, I explained that the times had changed, that the market had changed (both from the supply and demand sides), that the properties, while somewhat proximate, were not similar and I strongly recommended against the purchase.  For those of you who know me, you are aware that my voice is sometimes quite loud and cannot possibly be confused with the whisper of the “Whos” (see previous blog).  In fact, I believe that the executive summary section of that report contained only the following text in 36 point type:  “Do Not Buy This Land!”   

This past Fall I received another call from this same client asking me to take on a new assignment to look at one of his developments that was not selling and create a marketing and sales strategy to improve his results.  After a little probing I learned that this development was that same remote property that I had analyzed for him several years ago but now it was a fully developed single family community, not a vacant parcel of ground. 

When my shock wore off I first declined the assignment as, having kept  abreast of his market, I knew that it would be a waste of his money and my time as the only solution that existed was to dramatically lower the price and lose money and I knew that he would find that unacceptable.  And then I asked him what did he not understand about “Do Not Buy this Land”.

In my mind the stupidity was in ignoring the facts (not the report, as such, for I certainly am not infallible, but the underlying facts contained therein) and proceeding merely on “gut instinct”. The original report’s conclusions were not what my client wanted to hear so the entire report had no value to him.  My client did not authorize a second study by someone else, nor did he bother to analyze the market himself.  He did what he wanted to do, without “intellectual acuity”. While I applaud the entrepreneurial spirit which is essential for a developer’s success, I have to believe that his was not the smartest business decision. 

And in a similar vein, I recently completed an analysis of an existing resort community in which I recommended to a client that it is now necessary to reduce prices by 46% in order to make sales. The resort market has certainly suffered far worse in the last few years than the overall housing industry, due to the overall economy, the discretionary nature of the purchase, the effective demise of the investor and speculator markets, the dramatic revisions in FNMA mortgage regulations for condominiums, and perhaps more importantly, the historic pricing escalation that exceeded any possible relationship to reality.  So I was not surprised when the analysis determined that a dramatic price reduction was required.  Needless to say, my report was not greeted with rampant enthusiasm as the new pricing will force them to sell below cost (but I believe the recommendations will be implemented).

Back to the theme of this blog, I had prepared a study for the same client on this proposed development three years ago, in much better market conditions.  At that time I concluded that the market would only accept pricing that was, in fact, very close to what I had just suggested as the level to which they now had to reduce. But when they then performed their cost analysis of construction, they discovered that they could not build at a price low enough to sell at the recommended pricing and, rather than either redesign or stop the development, they decided to proceed anyway, once again ignoring the facts.  And two and one-half years ago, still prior to starting construction, they again asked my opinion and my response was a very loud “NO! DO NOT START THE BUILDING”.  So once again a business decision was made that ignored the facts. 

And here’s what I believe to be one of the worst examples of recent stupidity.  On April 2, 2009 the FASB (Financial Accounting Standards Board), responding to pressure from the Federal Government (the “we’re here to help you” folks) and the financial institutions (the banks and Wall Street, the geniuses who have guided the economy to its present wonderful condition), eased the “Mark-to-Market” rules. This change still requires financial institutions to mark transactions to market prices but more so in a “steady” market and less when the market is “inactive”.

Mark-to-market accounting rules, when enforced by the SEC and FASB, require a company to value (or “mark”) assets on its books based on the price they would bring if they were sold today.  Obviously with the meltdown in real estate values, especially the underlying present values of residential developments, this would have required the banks to take substantial write-downs and, for those institutions that had made poor lending decisions, could have resulted in their demise.  While proponents of easing the rule argued that this would remove the unnecessary “perpetual feedback loop” that can result in a deeply weakened economy, the reality is that we have decided to become ostriches and put our heads in the sand in the face of difficulties.

The best article I have seen recently on the “Mark to Market” rule was a March 17th commentary by Jonathan Weil (jweil6@bloomberg.net) in Bloomberg (http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_weil&sid=aJFrPa3rqhHw).  Written before the FASB relaxation of the rule, Mr. Weil says “Don’t Blame Mark-to-Market for (the) Banks’ Problems”.  He goes on to suggest that the financial executives plea, “If only we didn’t know how badly off the banks are, then maybe we could save the financial system as we used to know it” couldn’t be more wrong and proceeds to provide an excellent argument debunking the myths.  

In my opinion, the matter is even simpler.  With the banks no longer pressured to dispose of those assets they can now hold them for the long-term, waiting for the “recovery”, and then plan a proper course of action.  But the reality is that these banks are ill equipped to effectively take on the role of the developer, a role they would need to assume to maximize the value of these holdings.  They do not have the personnel or the experience, they certainly are not creative and, more importantly, they lack the entrepreneurial drive needed to be successful.  They are, by their very nature, risk averse and risk is what that business is all about.

Does anyone besides myself remember the 1980’s and the “S&L Crisis”? Back in those days the government had relaxed the rules for the savings and loan industry and they were allowed to expand their role from “lender” to effectively become “developers”.  The end result was first FADA (Federal Asset Disposition Association), then the RTC (Resolution Trust Corporation) and, finally, billions of dollars in losses to the taxpayers.  Is there even a remote possibility that the banks will do better than the Savings and Loans?  I don’t think so!  Is this not a perfect example of the second definition of stupidity – “a poor ability to understand or to profit from experience”?

If the government is intent on leading the way to universal stupidity, perhaps it is time to hang out a sign reading “Will Consult For Food”.

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