Feel the Music
We have all seen a sax player completely immersed in his playing; lost in the music. One of my favorite things is to watch singer-songwriter-musicians while their own songs are being performed. They close their eyes and start moving with the music. Since I have almost no musical talent, I am left to imagine what they are seeing with their eyes closed. I imagine in that moment they are becoming one with the rich tapestry of sound and feeling that they created. (For Star Trek buffs, think of the Traveler from Tau Alpha C; http://bit.ly/qpf9la) Their art is so ephemeral that they need to close their eyes to see it.
The “art” of what we all do is often just as short-lived and transient. There is always going to be time to worry about money, and what the competition is doing, and how to find and keep good people, and how to find your next client. But, whether it is your own personal work, or a small project group, or leading an organization, sometimes you need to let go and just feel the music. You can’t lead when you are looking over your shoulder at the problems. You need to trust where you feel the music is taking you and go there.
By What Are We Seeing In The Economy?
The talking heads in the media make conflicting predictions. Corporate profits are up, but unemployment is still at 9.2%. Foreclosures have slowed, but home prices are still falling. Are things looking up? Heading for a double dip? Or mired in a decade of the status quo?
I will first run through some of the facts that inform my opinions, then discuss how those facts are shaping the economy today, and finally offer some thoughts about how we’ll know when things are set to improve.
I. The Facts
Here are some of the facts that I think are important for understanding the economy today. First, consider that for all of the economic distress that we have experienced since 2008, there was a massive amount of commercial lending done in 2007 with a five year maturity. Those loans do not mature until 2012. Take a look at the links in one of my blog posts from last year for more details: http://bit.ly/aBLVVl. Another fact that goes hand-in-hand with this is that many lenders still are seeing the amount of their bad loans increase. The Nashville Post covered this nicely in late May 2011: http://bit.ly/kPvXyE (subscription required). Third, more of our local community banks seem to be getting in deeper trouble lately. Just in the last month, we have heard about one bank “relieving” its CEO, and another receiving aggressive regulatory scrutiny.
These first three facts address business lending. On the consumer front, the relevant facts include unemployment that has edged back up to 9.2%, and home prices that continue to slip - albeit at a slower rate than a few years ago. Also, it is worth being aware of the percent of disposable income that Americans save. Without getting into the exact numbers, from immediately after World War II through at least the early 1980s, Americans saved money at pretty consistent rates. By 2000 through 2005, though, our savings rate cratered as we gorged on easy credit. Now that the cheap consumer credit is gone, savings rates are climbing, but still are much lower than the preceding era.
Finally, while more anecdotal, it is relevant to talk about what Nashville’s business bankruptcy lawyers are experiencing. Through the course of this downturn, there have been far fewer Ch. 11 reorganizations filed than one might have predicted when the stock market was crashing in October 2008. At our office, out of court workouts have outpaced bankruptcy filings by at least a dozen to one.
(Before writing this piece, I pulled the statistics on business bankruptcy filings going back to before the recession of the early 1980s. There is no question that business bankruptcies are lower in this downturn compared to other soft economies. But, it is hard to make an apples-to-apples comparison due to the fact that the bankruptcy code has had major overhauls between the various bad economies. So, while business bankruptcy filings are definitely lower, I can’t parse out how much of that is due to the current unique times as compared to Congress changing the bankruptcy code in 2005.)
II. How Are These Facts Influencing The Economy Now?
My most basic lens for viewing this down economy is that the U.S. spent about 15 years worth of money that had historically gone into savings on other things. That money both artificially inflated the perceived value of hard assets like real estate, and artificially inflated the services sector. Remember, we not only used the cheap credit to fully leverage our houses, but we also often used the loan proceeds to buy things with no lasting value (think vacations). No matter what the government does, the economy has to deal with the loss of the money formerly supplied by cheap credit. Let me use hypothetical numbers to make the point. If for 15 years Americans spent money at a rate equal to 98% (or more) of their disposable income, and then suddenly could only spend 94% of their disposable income (because of the loss of cheap credit), then the economy would have permanently lost an amount of spending equal to that 4% difference.
I am not going to get into the policy question of whether the right solution is for the government to print money to make up the shortfall of cash in the economy (at the risk of intense long term debt and inflation), or for the government to cut taxes and spending (at the risk of devolving into a cash-hoarding barter economy). Under either scenario, the theory is that government action will hopefully spur the growth necessary to make up for the massive and sudden contraction of the economy.
Where we stand now is that all of the facts I describe above tell us that we are not at the end of the crisis. Three years in, my sense is that we are no better than mid-way through it. The unemployment numbers pretty conclusively demonstrate that consumer spending will remain soft. That, in turn, should mean that retail rents and occupancy are not ready to recover fully. That, in turn, means that there is no magic potion to make pre-crisis loans that have not matured suddenly perform well. All of this indicates that there are more hard times to come before the economy can grow soundly.
III. How Will We Know When Things Are Improving?
Before real strength is achieved, the economy needs to complete its slide. When the slide is over, several things should happen. For example, perhaps counter-intuitively, Ch. 11 business filings should increase when the economy is ready to turn. For the last few years, with poor consumer spending, very tight credit, and uncertainty about whether asset values are still declining, it has been difficult to map out a good Ch. 11 exit strategy for most businesses. When the lending market begins to have competition again, and appraisers can agree on the value of things, businesses will have more options to re-work their balance sheets. The result should be more Ch. 11 business cases.
Another thing to look for is bank consolidation. It is widely believed that there will be a rush of transactions involving banks of all sizes at some point. (As an aside, and again anecdotally, some insolvency lawyers believe that there are banks that are currently more interested in massaging their balance sheets for possible transactions than actually working out troubled loans.) Once the talked about bank mergers start happening, my guess is that the acquiring banks will want to work through their new bad loan portfolios efficiently. That should help the economy in getting to its lowest point (and, therefore, to real growth) more quickly.
Note that there is a hard balance here. If the government and banks took the hit on all the under-secured and under-performing loans all at once, it might crush the economy. So, patience in working through bad loans is prudent. The flip side is that the longer the economy takes to deflate the bubble, the longer the bad times will last.
One last thing to keep your eye on is what happens nationally with the foreclosure crisis. There is a high stakes game playing out about whether large institutions owning mortgage-backed securities will get the benefit of foreclosures despite rampant lack of loan documentation. At question is whether the value of many homes will go to the putative mortgage holder, or to other creditors. This open issue has to be resolved before the current backlog of home foreclosures can be resolved (which in turn is necessary to help us get to the bottom on home prices).
In summary, the facts indicate that the economy is not ready to experience consistent, broad-based growth yet. The best case scenario is that policy makers, lenders and business interests can work together well enough so that real growth can begin in 2012 or 2013.
Restrictive Covenant Lawsuit Dismissed for Lack of Personal Jurisdiction
AmSurg Corporation sued a former division president, Frank Principati, in U.S. District Court in Nashville for allegedly violating a non-solicitation agreement with AmSurg. Judge Haynes dismissed the case without prejudice due to a lack of personal jurisdiction over the defendant. The case is Amsurg Corp. v. Principati, 2011 WL 780676 (M.D. Tenn. Feb. 28, 2011).
The Implied Duty of Good Faith and Fair Dealing in Tennessee
In Cavanaugh v. Avalon Golf Properties, LLC, 2011 WL 662961 (Ct. App. Tenn., Feb. 24, 2011), the Tennessee Court of Appeals reminded us of the scope of the implied duty of good faith and fair dealing in Tennessee.
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