Riske Business September 2007

He nervously rested his hand on his fingertips. He didn’t want the sweat from his palms on his baby seal briefcase. He had several briefcases, but this one was special because it was made from a rare and illegal skin; it sported solid brass fittings and a big brass and leather crest with his initials. He was Mortimer S. Gage (pronounced gedj with a hard g). Everyone called him “Mort” but the t was silent. His best friend was nicknamed Mort too, but with the t pronounced. While having a drink at the clubhouse they laughed together when they found out that “mort” was the French word for death.

Mort was still trembling and sweaty after vomiting in the men’s bathroom. His mind had a fuzz to it, a deadening with a tinnitus whistling. It was unreal. It couldn’t be happening. It couldn’t be happening to him. Didn’t the universe know who he was and how important he was?

He was in his banker’s office and he was about to find out how badly things had gone. On the way over, none of his credit cards would let him pay for the $130 it would take to fill his Cadillac Escalade plus the customary deluxe $25 car wash, so he pulled a twenty from his pocket for enough gas to make it all the way downtown.

The last time Mort had been here, he was refinancing two of his 14 houses and condos. That time, his banker encouraged him to take advantage of a two year 1 per cent ARM with a 20 per cent equity “kicker” in case he needed to make any improvements on the properties. Mort didn’t tell him that he never improved properties; he just held them for a year and when he was lucky, even less than a year. He netted $175,000 on that deal. Only four of his homes were occupied, but Mort preferred it that way because renting was a hassle. Sometimes renters trashed a place and he didn’t need the cash flow anyway because he could sell them when he wanted to.

Mort had been an insurance agent who began dabbling at buying and selling homes in ‘02. By ‘03 the Fed had lowered interest rates to 1 percent, Greenspan said “take out the low interest, adjustable rate loans” and the Florida housing market began to boil. Mort was making so much money he quit selling insurance and annuities to go into real estate full time.

It was so easy. Mort began to ask his friends, “Why work for a living?”

With so little to do, Mort and his wife began to travel in earnest. Sure, there were the luxury hotels and the exotic rental cars, but the real fun was gambling and soothing breaks in fabulous spas.

In addition to the credit cards, which he would trade off every six months or so for the next 0 percent deal, Mort also borrowed Japanese yen. The yen rate of interest was zero for a long time, then slowly shuffled to 1/2 percent. With the yen loan, he bought New Zealand bonds, which were paying 8 percent for a net gain of 7.5 percent. Nice work if you can get it, and anyone could, you just had to show a substantial balance sheet. Today, though, Mort was going to have to tell his banker the yen “carry trade” was over because currency volatility since June had knocked the carry trade off its perch and the gains had been wiped out.

They say bad news travels in packs. Like his mom used to say, “When it rains it pours.” Mort used to be able to count on his stock holdings when there was a temporary dry spell. Mort had forgotten that in the ‘70s the Dow Jones Industrial Average declined 20 percent several times. There had been no downturn of more than 10 percent since ‘03. But in early August the 8 percent dip in stocks brought margin calls like he’d never seen before and it wiped him out with all the forced selling.

It all happened so fast. His friends and neighbors had struggled mightily to keep up with the Gages and now Mort and his wife were moving to a tiny apartment because their 6,000-square foot waterfront country club home was being foreclosed on.

It wouldn’t have had to be this way, he ruefully remembered. Back in ‘05 Bruce and Bob Toll began to sell shares in their residential construction company called Toll Bros. (TOL). He’d had a feeling he should be following suit. But sales were great and he wanted to squeeze in two more years of home sales so he could slide into a financial finish line that would bring daily golf at his country club and four foreign trips per year. So instead he loaded up with a few mid-million-dollar homes along with the usual $600,000 to $1,000,000 homes. It was a stretch, but things had gone really well so far.

Mort also remembered watching politicians as they campaigned for office. Those who promised the most money got his vote. Once, his friend Mort-with-a-t asked him if it didn’t bother him that Federal spending without a budget might leave too much debt for America’s young. Mort replied, “Why should I do anything for posterity? What has posterity ever done for me?”

Mort was learning the hard way that the debt-laden, inflationary U.S. government, with its floods of printed money, along with easy credit, tempts men to spend the day speculating rather than producing product. As Ludwig von Mises (www.mises.org) taught decades ago, bubble economies bust more violently than producer economies, which grow at a slow but much more solid 4-6 percent per year. Mort didn’t know that inflation was the inevitable result of President Richard Nixon’s closing the gold window at Fort Knox, thereby releasing inflation from the restraint of the tether to gold.

While Mort has suffered financial ruin in these inflationary times, he must still accept responsibility for what he has done. And even if he doesn’t accept responsibility for his decisions it won’t matter because he’s in the poorhouse now. He’s the guy who’s puking.

It’s still a world of “caveat emptor,” and the Federal government acting as nanny can only protect the greedy and reckless for so long before it falls into an ashen abyss itself.

Riske Business: My son John tells me it takes 4 years to get a patent on high tech and software technology. Value added manufacturing is the lifeblood of the American economy. The faster we analyze and approve valid patents, the better.

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