Following a recent heated discussion about the economy and our recovery, my friend and colleague Mark Pearl agreed to put his thoughts in writing for my readers to consider. Let me introduce Mark, and you can draw your own conclusions.

 

Mark J. Pearl is a graduate of the Boalt Hall School of Law and the Hass School of Business Administration at the University of California, Berkeley, where he received a JD and an MBA, and the University of California at Los Angeles, where he received a BA in Economics. He practices corporate and real estate law with the Los Angeles law firm of Fredman Lieberman LLP, and is a member of the Board of Governors of the Beverly Hills Bar Association.

 

Beginning of Contributor Comments:

 

To date most of the financial recovery plans for the banking system, like the Troubled Asset Recovery Program (TARP), have focused on replacing lost capital with Federal equity or subordinated debt. The theory goes something like this, (a) if the banking system fails a depression may be unavoidable, (b) some banks are so large that their failure will have broader repercussions, perhaps failure of the entire financial system, (c) we need banks to start lending to ease the credit crunch, and (d) weak banks can't lend. Based upon this type of theory, Billions of dollars have been injected into major and regional banks.  

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Imagine sitting around a conference table with world class experts in economics, finance, credit, bonds and the markets. That discussion happened last week and it was recapped by my good friend Jeffrey F. Sax. Jeff has been practicing law since 1983 in the areas of business litigation, real estate litigation, business and real estate transaction work (contract negotiation, drafting, and long term planning issues), and estate planning. Read carefully. The outcome may surprise you.

 

Beginning of Contributor Comments:

 

The question of the day: When Will the Real Estate Market Hit Bottom?

 

I opened the discussion by saying I had no clue and I was man enough to admit it. After listening to many intelligent and thoughtful answers which made sense at the time, I have to admit that I still have no clue. It dawned on me that all the answers focused on symptoms, not causes or cures. I will highlight and summarize what I considered to be the best answers to make my point. There were only five, articulated in various ways:

 

1. The market will hit bottom when the psychology of the country (or a relevant market group under discussion) becomes positive, optimism abounds, and people are willing to stick their toes into the water again. But how and when does that occur? It is not by magic. Answers 2-5 seem to be the leading indicators. 

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In the history of the United States and quite possibly in the history of the world, a transfer of wealth may never occur as substantial as the one that's in front of us right now. At this particular moment, real estate (which is extremely depressed in many parts of the country) is being taken over by banks and lending institutions. These properties are being acquired by savvy investors who know how to take advantage of the distress in our system.

 

If there was ever a time that you wanted to be involved in the acquisition of real estate or real estate paper, now is the time to do that. The people who have cash are the ones who are going to acquire the pools of distressed assets and benefit from the equalization that will occur in the near future.

 

The old rule says that "cash is king" but the truth is that "pools of cash are really the end of the rainbow." The goal that you have to shoot for is to acquire pools of cash. There are several reasons why this is important. Here are 5 key points to consider:

 

1. Credit crunch. We are in a desperate credit crunch at this time. There is a lock on capital due largely to lack of confidence which is preventing cash from being dispersed into the market place. Consequently, enormous sums of money are sitting on the sidelines. A savvy promoter or syndicator will be able to show investors that the money parked on the sidelines would be better utilized in assets that are purchased for a low price which can certainly be resold at a higher price shortly in the future. 

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