Colony Capital, LLC - Chairman's Corner

New Year's Baby Steps
Dec 31, 2009
by Tom Barrack
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Fortunately, we are at the end of this year and the beginning of the next! The laments of the past will be overshadowed by the hopes of the future and we are all scurrying for momentous resolutions. It is clear that we cannot choose the vessel we sail on or the weather we sail in, but we at one time believed we had the power to manage the helm and set the sails. Today, we need a GPS to find the boat!

Our frustration with politicians, bankers, income taxes, and an embarrassing and inadequate health and educational system is derived from our innate belief that people in charge may possess a different agenda and appear to capriciously change the rules of the game every moment. What are the rules, who is making and changing them and for what purpose? For sure there is work to be done - the consideration of term limits for all politicians, Glass-Steagall reenactment for banks (separate commercial and investment banking functions), legislative limits on deficit spending for States and Fed, a health care and educational system worthy of the brand "American," and a tax system which rewards hard work and risk takers and penalizes those who are merely working the system.

I believe I found a quicker re-entry trajectory than the massive repositioning of our political and financial system. While reflecting upon the events of the last couple years, I became inspired to share with you some simple rules that have worked for me over the years. The following could bring about baby steps of change in the current course of frighteningly bad conduct and get us back to integrity.

Learn like you are going to live forever; live like your going to die tomorrow.
Punctuality is the courtesy of kings.
If you are a fisherman don't give your children fish, teach them how to fish.
The young man knows the rules but the old man knows the exceptions.
Be careful what you set your heart upon for it will surely be yours.
Spend time with your mother; she is cooler than you think.
Nothing good ever happens after 3:00am.
Keep your word - reputations are won in inches and lost in miles.
When you are going through hell just keep on going.
On matters of style, swim with the current and on matters of principal, stand like a rock.
Courage is not the lack of fear it is acting in spite of it.
Hide not your talents. They for use were made. What's a sundial in the shade?
Courtesy is as much a mark of a gentleman as courage.
When you greet a person look them straight in the eyes and shake their hand firmly and solidly.
Remember first names.
Be like a duck - remain calm on the surface and paddle like hell underneath.
Don't screen phone calls.
Write thank you notes.
Hold doors, pull out chairs and easy on the swears.
Don't confuse efforts with results.
If you are a thoroughbred don't train with donkeys.
Practice random acts of kindness and compassion often.
Upsets are usually caused by unfulfilled expectations - be clear with everyone on your and their expectations.
You will find fulfillment by "pushing through comfort barriers" and obliterating the status quo.
"Imua"- Hawaiian chant that means whether you know where you are going or not - go and go hard!

Imua and we wish you all a happy, healthy and prosperous 2010!

Just Show Up
Dec 21, 2009
by Tom Barrack
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I have surprised most of you by maintaining my silence and not waxing poetic on the parade of inconsistencies in our markets over the past few months. During the fundraising of our public REIT, I was bound and gagged to keep my mouth shut and my pen dry. Now I am unleashed and re-engaged in the financial version of "The World of Warcraft."

The holiday season has stirred me to reflect upon qualitative matters rather than our usual quantitative expositions. Forecasts, analysis, theories, reviews and hypotheses are all equally unpredictable and frustrating in markets captured by volatility and intervention. Complaints, criticism, skepticism, disenchantment, cynicism and discontent are all futile exercises in easing unfulfilled expectations. Most of us try to decide if we want to spend our time and resources lamenting the past or creating new expectations of the future. In these confusing times, neither is extremely useful. It is better to simply "be here now." The key to this "of the moment" attitude, however, takes a shift in context rather than endless sorting and sifting of content. There seem to be three distinct contexts at the moment; optimism, pessimism or "just show up." My vote for greatest near-term probability of success is "just show up."

Context
First, let's take a quick look at the economic landscape in which we find ourselves today. No matter what your point of view, we all must agree that we have escaped the vortex of a life-threatening and cataclysmic event. In hindsight, any cynical criticism of the emergency events of the past 24 months should be preceded by a hearty thank you and a sigh of relief.

In retrospect, the government is accused by some of having done some things wrong, but it also did a lot right, especially in light of the exigent circumstances with which they were confronted:

Optimists

Through November, equities returned 30%, gold (35%) high-yield bonds (58%), commodities (37%), high-grade corporate bonds (23%) and government debt (8%).
Banks that were rescued by TARP are rushing to repay the government sooner than expected as their equity values are up 130% (it is not simply to pay themselves bonuses).
The unemployment rate stabilized in November at a breathtaking 10%.
Hank Paulson pressed for the unpopular Troubled Asset Relief Program that helped soothe our financial system. He, more than any other Treasury Secretary in history, was well equipped to make the tough decisions with regard to Bear, Lehman, Merrill and AIG. He came to government at the top of his game on Wall Street, already vastly wealthy, accomplished and with little or no personal agenda other than to do the right thing.
The Fed, under Chairman Ben Bernanke, slashed short-term rates to near zero and instituted new interbank lending practices that kept credit flowing when traditional means broke down. A summary reading of Bernanke's breeding will assure even the most casual observer that the man was prepared for the task at hand.
The administration forced a $787 billion stimulus package through Congress.
Consumers reacted quickly by cutting spending and increasing savings.
The FDIC under Sheila Bair took strong and decisive action in the resolution of over 150 failing banks and insuring the continuing viability of our insured banking system. There can be no doubt that Chairman Bair is the best-equipped and politically savvy FDIC Chairman in history.

Rather than criticizing the actions of those who were delegated the "rescue" task, attention might be better focused on those who caused the tumultuous meltdown. All of us - government, Main Street and Wall Street - participated equally.

Complaining now about how much air was wasted inflating the life raft that safely got us to shore is definitely a useless context. Our leaders made the best decisions they could based on the information that they had at the time and provided us with the luxury of being economically alive to complain about the rescue.

What else is better than it was?

Company earnings in the US are projected to increase nearly 10% through 2010, and expectations for Europe and Asia are even greater.
US firms are planning a 1.5% increase in capital spending. Although not sufficient for a robust recovery, it is the first time it has turned positive in over a year.
The US Equity market is up over 55% since March.
European markets followed suit with a 30% increase.
In Asia, all signs of economic growth are positive.
The Financial sector equity values are up 130% from lows.
Credit spreads have retracted and are continuing to tighten across all debt markets.
The world is hoping these are all signs of a "V" recovery.

However, pessimists perceive a "W"

The two key issues that continue to plague the recovery in the Western economies are elevated unemployment and limited credit.
Administration policies are under fire on all fronts.
Bank profits have been privatized and publicly subsidized and bank losses socialized.
Underemployment is at 17% and one out of eight Americans is utilizing food stamps.
States are out of money and their only recourse is fewer services and increased taxes.
Corporations have tightened their belts on costs, expenses and inventories and are still in search of revenues.
Zombie banks still engaged in "extend and pretend" mentality and loan loss reserves are unrealistic.
Mark-to-myth has replaced "mark-to-market" in regulatory circles and bank equity capitalizations are still too low.
Capital markets have provided an escape for many corporate balance sheets but revenues continue downward.
The dollar has been clobbered.
Banks are printing money by borrowing at near zero, investing in government securities and engaging in the dollar carry trade as our currency deteriorates.
Commodity prices up as gold defies all logic.
Commercial real estate and commercial loans in limbo.
Home foreclosures and defaults continue to accelerate.
Wages down 5% from beginning of the year.
The consumer is continuing to slow consumption.
Household debt-to-GDP near 100%.
European countries beginning to incur national debt crises.
A mutual financial strangle hold between China and the US.
The fear of inflation and rising interest rates around every corner.
165 banks have been closed over the past two years with the threat of hundreds more on any given Friday.
Demand driven recession with demand continuing to drop.
Populist unrest continues to swirl around financial sector practices, compensation and misunderstood policies.
Higher taxes, fewer services and increased public debt are a certainty.

Regardless of your context - some of the content is undisputable
Lack of visibility or transparency continues to be the greatest challenge. A long-term business plan for most companies has become 24 hours. Markets are peripatetic and equity markets are being driven by excess liquidity created by stimulus, which is being managed by equity managers who are focused on "relative returns." (I have never understood how you can "eat" a relative return). Anyone who was possessed of a short bent was whipped into compliance from the flood of liquidity into the market by managers who could not afford to be humbled by the market index at the end of December.

On the other hand, the anticipated bandwidth for distress assets has remained narrowly gauged. There was plenty of stress but very little distress due to the fact that most of the debt holders engaged in a folly of "extend and pretend" rather than deal with the write-offs and regulatory capital implications of a true mark-to-market. Government subsidies in the form of TARP and TALF provided a synthetic distortion to market forces which prevented the normal re-pricing of these assets to free market levels. For sure, this probably beat the free market option of melt down. In a zero interest rate environment, borrowers were able to hang on for one more "ride" and hope for the option of something good to happen in the future. Thus, the money on the sidelines has by and large remained there as a result of little product or opportunities being forced through the system at scalable levels.

Paulson, Bernanke, Geithner and Sheila Bair have all displayed extraordinary courage at a time when nothing was clear and all was perilous. Even the unlikeable Ken Lewis is owed acknowledgement for acquiring Merrill Lynch in a post-Lehman downward spiral that might have otherwise been infinite.

Bottom line - it feels as though things are not getting worse although most businesses are confused about when and what makes things better. Everyone everywhere is cautious and apprehensive and the low interest rate environment, unprecedented deficits and profound liquidity do not feel to the normal citizen as though it is trickling down.

Concentrate on what we can control and disregard what we cannot control
As frightening and unique as these moments appear to be, they are repetitive and cyclical. We now find ourselves simply in a cycle like all other cycles, not a paradigm shift and this like all others will end and rebound in upward exuberance - when is the unanswered question.

With all the confusion and chaos around us, we need to get back to basics of dealing with cyclicality. It is time to shake the pain of our assets being worth half of what they were in the bubble height. The main lesson is to not even attempt to time the market and secondly, you must maintain an equal and opposite offense to parallel your ferocious defensive instincts.

As a firm, we have not changed our viewpoint - focus on the things that we can control and let those things we cannot control run their course. As a country, we are in the midst of two wars, our reputation is being challenged worldwide and there is an internal rift between citizens on Wall Street and Main Street (the average person still does not believe that what is good for Wall Street is good for Main Street). For the first time in my adult life I am feeling the beginnings of a strange kind of "social unrest." People are fed up with policies that they don't understand, with subsidies to institutions which appear to have caused the tumult, with outsized compensation through institutions who rightly or wrongly appear to have reaped the windfall of their own mess, with politicians who pander to daily changing whims and caprices, to program after program which is not understandable and which does not ease the pain or instill the hope of the average person on Main Street who is simply concerned about feeding and caring for his or her family.

The answer is to stop worrying about those things that we cannot influence. We need to return to the American entrepreneurial spirit of focusing on what is in front of us, and working longer, harder, smarter and patiently on the things that we do control. The politicians will not help us, there are not enough bailouts, and whoever screwed up in the past will not be accountable for our pain in the future. Only we can bail ourselves out.

Woody Allen has the Secret - Show Up
I'm sure you've heard the Woody Allen quote that "80% of success is showing up." Most people quit when the goal line gets murky, or the path to it gets muddy, cruddy and painful. Why bother when you are unsure of the outcome? Instead of showing up, it is easier to complain about what happened, render excuses of why you can't or give into the fear of an unclear future. Although merely showing up to work, to a meeting, to a bank negotiation, to a lease negotiation, to a deal presentation, to a workout, or just to dinner after work with your significant other won't guarantee success, it's certainly a prerequisite. The elixir is the consistency of being there.

My youngest son's water polo coach, Glenn, has mastered the art of "Show Up." Glenn's philosophy with these hormone raged boys-to-men is simple - "Show up, again and again and again, and it will happen." These boys engage in intense conditioning twice a day, swimming at 6am for one hour and practice in the evening from 6 to 8pm. Weekends entail three games a day on both Saturdays and Sundays. Success and stature of each individual player on the team is not measured by goals scored or assists made, but by who continually shows up and completes every practice, workout and game. The success of the group is based upon all of them simply "showing up." If each individual tries to show up earlier, stay longer, work harder, respond quicker or worry less about their own goals and more about being there for the others - the team will dominate.

Glenn has bred one great team after another built on this process. In turn, the success of the team has built one great young man after another. The concept is so simple that even I could not screw it up. "Show Up!!!!!" Don"t worry about changed conditions, long-term goals or breeding individual superstars. Just get in the flow and stay there with a great attitude and the physical stamina to keep going and push through all "comfort barriers" that are convincing you to go home. For once put aside your personal aspirations of being the superstar. Be selfless for your team by being there and ready without a specific agenda. Wait for the competition to make a mistake and be there to take advantage of it. Play defense until you clearly see the opportunity for offense.

In our business today the key to success is the same. Show up and participate. This requires that your body be in first class shape: Weight, endurance, strength, focus and a flexible, open mind. Eat better, drink less, and work out harder!!!!!! There is very little visibility on what is happening in the financial and real estate markets and transparency is difficult to extract. However, rather than worrying about what is happening or fretting about what has happened, it is important to be involved and to make sure everyone is aware of your involvement. The answer is to be more disciplined than ever. Show up earlier, stay later, work harder, return all phone calls instantly, attend every meeting, auction, negotiation or internal gathering - do it all and do it now. Survive and let the reckless, tired and wounded drop from the race. If you are trustworthy, reliable, disciplined and focused, success today will be mostly driven by showing up. Heroes become frustrated when they are not exalted as heroes and failures many times choose to exit rather than use those lessons and compete again. Those that escape either of those categories are usually trapped in "paralysis by analysis" and choose to sit on the sidelines and wait for better information.

"Showing up" is definable, controllable, is not dependent on choosing the right option, and does not require a macro or micro viewpoint. We are entering the era of "showing up" not "showing off"

How do we keep our head when all around us are losing theirs
Lastly, during this holiday season I was trying to find an appropriate present for all my kids that would strengthen and nurture their spirits. I quickly discarded Guitar Hero, DJ Hero, Xbox 360, Call of Duty, and Wii. The most meaningful gift that I could give them in these challenging times is a poem by Rudyard Kipling. I thought would also be an appropriate gift for all of us to gain the right frame of mind for the challenging New Year.

If
If you can keep your head when all about you
Are losing theirs and blaming it on you;
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
If you can wait and not be tired by waiting,
Or, being lied about, don't deal in lies,
Or, being hated, don't give way to hating,
And yet don't look too good, nor talk too wise;

If you can dream - and not make dreams your master;
If you can think - and not make thoughts your aim;
If you can meet with triumph and disaster
And treat those two imposters just the same;
If you can bear to hear the truth you've spoken
Twisted by knaves to make a trap for fools,
Or watch the things you gave your life to broken,
And stoop and build 'em up with wornout tools;

If you can make one heap of all your winnings
And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breathe a word about your loss;
If you can force your heart and nerve and sinew
To serve your turn long after they are gone,
And so hold on when there is nothing in you
Except the Will which says to them: "Hold on";

If you can talk with crowds and keep your virtue,
Or walk with kings - nor lose the common touch;
If neither foes nor loving friends can hurt you;
If all men count with you, but none too much;
If you can fill the unforgiving minute
With sixty seconds' worth of distance run -
Yours is the Earth and everything that's in it,
And - which is more - you'll be a Man my son!

Happy Holidays and Merry Christmas from all of us at Colony.