Most of us accept the fact that the current crisis and the "insider" political system is a direct consequence of the deregulation of the financial industry that was started by Ronald Reagan. Human greed, disrespect for others lead to the fraudulent "financial ponzi" scheme which in 2008 imploded at huge global cost.



(For the unaware: try Ferguson's documentary "Inside Job" for a sensationalized recap)



I already have the sequel well understood and wish to share:



How the capitalist political democracy failed because of uncontrolled government spending, including, but not limited to, outrageous civil service pension payouts and unsustainable future commitments. This led to the taxation to death of businesses, employees and entrepreneurs thereby effectively removing the "capital" needed for the growth and creation of our businesses.



Government attempts to stimulate the economy rather than slash expenditure effectively transformed the system into a Centrally Planned Economy, not entirely unlike the various previously failed centrally planned communist economic systems. The lack of investment and private venture capital gets replaced by corrupt and ineffective government stimulus, grants, subsidy and growth schemes. As politicians don't know how to create value inside businesses, they instead create giant ponzi schemes in order to show benefits. Thier advisors, mainly bankers, lawyers and academic advisors make millions in fees. These politically motivated funds are created by "investing" citizen's tax contributions, pensions and savings funds, many of which are already technically broke.



Many examples of such "ponzi" schemes abound. A good example is the recent Sarkozy FEMA 3 Billion Euro slush fund of which 1 Billion comes from the national pension fund and the rest is disguised industrial tax credits. The fund is "needed" to prop up the failing automotive parts manufacturers, who lack reinvestment capital, largely because they are taxed to death by social security, sales tax, corporate tax, etc. Simply put, after paying a major French bank a fortune in fees, the FEMA will stick money into these companies, group them together and in 5 years put them on the Paris stock exchange.... to be bought by whom ? You guessed it! The National Pension fund and the other "simulus" funds, naturally at the inflated price of a publicly listed company!



Given the appalling track record of government run business, one can only conclude that the value created by these government chosen "investments" will once again be ZERO, fees to banks millions and another bail out or worse. Consequently we can expect the current generation of 40 - 60 year olds being forced to live with their grown up children as their saving effectively disappeared.



The economy ends up being driven by politicians and their sponsors, whether that be, financial, military or trade union the fact remains that the capitalist system that created the developed countries economic wealth (albeit at the time socially and ecologically imperfect), is dead !



Who carries the bag? Ordinary and often uninformed citizens, many preferring to benefit from unsustainable handouts rather than bite the bullet, lower taxes and vote the rascals out of office!



In some countries such as France over 40% of the adult working population is paid directly or indirectly by the government, many with unsustainable benefits. As this grows to over 50% of the voting population, only a minority will be left to vote responsibly... and lose.



Now, who would like to write the next chapter... ?

Now in a lot of European countries laying off personnel is either a prohibitively expensive undertaking or can be done more cheaply if it can be proven that it is for reasons of "economic survival".

In some countries company management actually has to appear in court beforehand and in others they have to appear only as a result of legal action of employees or trade unions after being sacked or made redundant.

Either way, what I would like to explore is whether in the current crisis the accountants who have for years struggle with "window dressing" the year-end accounts will actually do a double whammy and clear out the accumulated "mayonnaise" of the accounts along with the deadwood personnel by publishing worse figures ? Call it an "accounting undressing" if you please!

For those unfamiliar with the window dressing concept this process can be readily explained in three steps: (1) How to we play with the figures in order to show our results in the best light; (2) What changes need to be done and are they legal; (3) Re-manipulation in order to provide a plausible path from last years "window dressed" figures to the current ones.

As this process builds year-after-year step (3) becomes increasingly challenging so a "crisis", merger or re-structuring is always taken as a welcome opportunity to level the playing field from time to time and sweep the slate clean. Usually under a headings such as "miscellaneous /extraordinary one-off operating costs" or similar.

I hereby declare open season for spotting corporate candidates of such a travesty....

Looking around at the massive scramble by investors, incubators, VC funds, home offices to sell off their leaking assets in the name of the crisis I began to wonder if "the crisis" wasn't just a good excuse to dump poor investments and not get fired for it ?

Logically this would break down into two reasons for termination:

(1) The initial investment decision was based upon poor judgement or (2) The investment was poorly managed

So what better way to get out of a sticky situation and save face than blaming it on "the crisis"?

With this thought in mind I decided to substantially increase the IQ applied to my initial question by talking to some of my illuminated friends like Ricard de Querol in order to shed some light.

The part of the conversation I actually understood went something like this: "ahhh, yes, yes, lets see. If the crisis was due to the default of sub-prime loans then 200-300 billion would suffice to plug the whole. The fact that the loans were re-packaged and further loans were extended in order to purchase these by now leveraged parcels effectively created a pyramid effect and so the several trillion required to fill the gap could be right.".

"But would that explain the crisis and the sell off of so many investment assets?", I asked.

"errrmmm, no it wouldn't but then who said the crisis was due to the sub-prime disaster in the first place? What about the effect of the heated Chinese economy, the rocketing oil and rice prices, ......, ....."

I decided to return to my pew to think about the by now several "businesses for sale" files sitting on my desk.................... then those I know struggling, desperately ............ and a few that are still doing well......

Some of them are clearly struggling because sales plummeted but mostly they will survive to see another day. As for the rest they would have died anyway because at least 1 or more of "Clem's golden conditions" did not exist: (1) Right product; (2) Right time; (3) Right place; (4) Right team.

So I conclude by asking you the same question:

Is the crisis just an accelerator and a very convenient excuse for not having to admit failure?

Now that the year has closed out and the bean counters are busy dressing up the figures business owners tremble. Not really, more like spending their last line of credit on a ski week-end! So, what's in a blog if you don't stick your neck out and be predictive ?

By March the financial closing should be over and the reality of the situation hits the fan. Expect lots of shop and business closures by May. The Spanish housing crisis (not sub-prime) continues to trickle down through the economy and local rumour has hotel booking down by 30% and car dealerships ready to close doors.

On the business front, corporates are selling off non-core business assests and typical home office and small venture funds are busy liquidating their assets in order to preserve or generate cash, all of which only adds to the general economic misery.

So is there any good news? Yes, providing you have cash or access to credit! Never have company and small business valuations been lower! Companies who now spent a few million of investor's money developing product or business are on offer at a 20 to 50 times discount !

Wow! Providing the money was well spent and the business model is sound this means that for 50,000 you can pick up a company whose intrinsic value is worth a couple of millions ! In two or three years we will be out of the crisis and providing the business survives you'll effectively have banked the millions of the previous investors who didn't stand by their guns and defend their investment decisions. Sounds too easy ? Maybe, but not too difficult or impossible either...

Hot topics for the next 6 months? Low profile astute acquisitions by those who were smart enough to pile the cash in good times and receivership administration, crisis management and asset disposals for the rest...

Given the recent virtual collapse of the housing market in Madrid and Barcelona I can only comment that this bubble was 8 years in the making before it went pop! After all, what did anyone expect ? Already 8 years ago if you took the net rental income of a flat in Barcelona and divided it by the going purchase price it gave between 0,5% - 1,5% return on investment! My benchmark for a healthy minimum has always been 5% and ok, I could swallow 3% but this was ridiculous. The Economist was raving about this bubble for years and it kept on growing!

Clem's pearl: "If (Monthly rental x 10) / (purchase cost) < 5% then property is overvalued or something else is seriously F. up"

So now what !? Well for a start we now have banks in Spain that are collecting foreclosed property at an alarming pace and in order to rid themselves of the assets they are bundling 5 - 10 flats together and selling them off at a 50% discount to the rich and wealthy!

You might not pity the poor fellows who have lost their home but the problem does not stop there, on the contrary, the real hit will be felt by those who have paid their mortgages and effectively are in negative equity to the tune of 50% !!

No real acceptable way to change or sell the property until the real value slowly creeps up to the original purchase price. This could take 10 years or more, look at Germany or the UK where this has happened before but with relatively modest 15% negative equity! In practice it places a huge number of properties outside the resale market and effectively kills transactional liquidity.

At stake is the stagnation of a whole chunk of the economy as real estate sales (and constructions) grind to a halt as these "linked in a chain" transactions fail to execute for lack of transactional volume.

So who to blame ?

Well, we could start with the irresponsible bankers who 5 years ago were still dishing out 110%, 50 year mortgages ! Looking from a buyers perspective this was a no-brainer! Bank pays its clients to enter into the property speculation cycle and if after 5 or 10 years it comes a cropper they simply walk away! On a 50 year loan the personal equity accumulation is near zero for at least the first 15 years - hence the buyer has nothing to lose!

Predictions for 2009? The Spanish banks for the large part may have escaped hanging themselves with the American sub-prime noose but lets see if they don't drown under the flood of negative equity property as home owners simply walk away from these "life term" sentences...

United States citizens having been accustomed to the highest living standards in the world based on a mature industrial economy refused to adjust their standard of living to the new economic reality: a large part of the US industry left town and headed overseas.

Treacherous materialistic values and a perceived necessity of "keeping up with the jones's" led to a society to become accustomed to living of consumer credit and financed possessions. Unable to pay for their luxuries and toys the Americans sought after new sources of finance and this is where greed and market demand crossed. The offer of cash on a re-financed house during a housing price bubble on the rise was simply too tempting to resist... a price fall was unthinkable, never (!) - after all, we are talking about a "bricks and mortar" business.... ;-)

The almost daily flow of "we made it hugely rich", news of the extremely young IT entrepreneurs and the house purchasing spree which followed the IPO burst in the US and Europe which in the late 90's and early 2000's led to high salaries and cash payouts did only fuel the frenzy.

Sitting near the top of the corporate banking pyramid, Fi had already read the signs "never since WWII has the American consumer taken out so much credit, the line is off the charts!". This was at the end of 2005!

More to come, watch this space...