Better To Be Late, Amid Credit Crises: Thomas Barrack, Jr.

Thomas J. Barrack Jr.Thomas J. Barrack Jr., billionaire and Founder of Colony Capital, which controls $39-billion in real estate assets, in his recent newsletter, "Is the world going to an [Extinction Level Event?" provides his assessment of the state of the markets, and shares the following:

Why the Banks Have Most Likely Not Hit Bottom
- Corporate earnings from most sectors will be weak and capex programs will be slashed.
- Hedge funds will continue to be tortured by redemptions and their interplay with banks was
- The effect of hedge funds pulling out of the market will chill many sources of corporate
finance - Redemptions are massive.
- Counterparty risk in the CDS market will remain a bit of a mystery.
> CDS was equally as bad at the plate as equity and debt players
> The governments infusion of equity collapsed the CDS spreads
- CDS payments and failures at levels that are unfathomable - watch Lehman reconciliations on
Tuesday, Oct. 21st.
- The housing market will remain anemic.
- Insurance companies, automakers, airlines and shippers are all in trouble.
- State and municipalities are also Fed borrowers.
- Corporate refinancings at $150 billion a quarter with no one to refinance.
- Massive margin calls on the titans of America which will cause collapse in the corporate
equities they own.
- Forced liquidations.
- LBO restructurings and covenant violations.
- No DIP financing for bankruptcies, only liquidations.

Long-term Consequences

The good news is that all we care about at the moment is SURVIVAL. We need to fight every day to monitor and steward the best deals we can find -- the ones we own. However, eventually we will need to examine the long-term effects of our triage.

- Huge inflationary pressures. Inevitable higher interest rates and taxes.
- Massive national debt and budget deficits.
- Are we deferring the pain like Japan did?
- $11.3 trillion national debt is really $55 trillion due to OBL (off balance-sheet liabilities).
- Implications of investment losses for pension funds and endowments?

Bottom Line

The game is afoot and not over. Don't panic and don't be euphoric. The discoveries will be constant and unsettling. Fortunately, the world powers have committed to win it. Now we all have to figure out what exactly that means. Based upon our past experience at implementing bank takeovers and "distressed asset" management and dispositions, we suggest that we all buckle our seatbelts for a longer ride with lots of ups and downs before we arrive to safety.

From Bloomberg, October 10, 2008:

"For once, it will be better to be late rather than early,'' Barrack said in a four-page letter to investors on Oct. 8, a copy of which was obtained by Bloomberg News. "There is no bottom because no one believes the messenger.'

"As all markets come to the realization that we are now in a worldwide systemic recession -- not just a credit crunch -- things may get worse,'' the Los Angeles-based Barrack, 61, wrote in the letter, titled "In God We Trust -- But Not Counterparties.''

"The massive restructurings, refinancings and re-pricings that will now take place, cascading from the financial world to the industrial world, will be legend. The complexities, repercussions and consequences to all parties are indeterminate.''

From Donald Trump's Blog, the Donald quotes his good friend's (Thomas Barrack Jr.) newsletter:

Why Can’t Anybody Find the Bottom?

It all boils down to trust! The mantra of the country is “In God We Trust--but not counterparties.” No buyer trusts any seller, banker, insurer or intermediary. No investor trusts any depository, insurer, broker-dealer or advisor. No Main Street citizen trusts Wall Street, and neither Main Street or Wall Street trusts the government. No counterparty in any transaction has confidence in the other. Values at every level have been artificially adjusted and when the air comes out of the “speculative hope certificates” everyone is pointing fingers at each other for fault and retribution.

The Worst is in Front of Us

Counterparties are renegotiating, borrowers are violating covenants, banks are finding any excuse not to fund existing commitments, insurers are negating liability, and renegotiations of  responsibility and liability are being conducted at every level of the capital structure across the spectrum of companies.

There is no bottom because no one believes the messenger. With trillions of dollars of re-pricing occurring in these markets there is no hurry to catch the falling knife. There will be ample time once that last “dead cat bounce” has bounced and the government launches a coherent and consistent program. For once it will be better to be late rather than early.

Bottom Line: This is Not the Bottom.

Thomas J. Barrack Jr., "Is the World Going To ELE?", October 14, 2008

Source:, Colony Capital

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