The film "Bugsy," with Warren Beatty in the title role, shows that the notorious mobster was also a real estate developer.He decides to purchase a huge piece of property in Nevada and develop it into the gambling community of Las Vegas. It is in the middle of the desert and, although it connects to a highway, it is nevertheless far away from the gamblers and the entertainment crowd. But he reckons they will flood the place once a huge complex of night spots, hotels and casinos is built.
Actually, he hits upon a good idea and, notwithstanding the fact that Bugsy is a well-known mobster, the banks agree to start financing his gaming place, which he calls the Flamingo.
The heyday of the 1920s
This was in the heyday period of the late 1920s, when capitalist prosperity seemed like it would go on forever. Venture capital was almost unlimited. But in reality, the banks' lending power was stretched to the limit.
Once Bugsy gets started on his great project, he keeps adding more and more to it. The banks graciously keep extending him credit. What was a $300,000 to $400,000 project grows to a million, three million, even four million dollars. The banks, having been drawn in, can't stop.
Real estate speculation had reached unprecedented proportions. This in turn was propelled by a capitalist prosperity cycle which seemed endless, as it always does in the eyes of the capitalist class.
But then the bubble burst. The real estate market collapsed. What was more basic, capitalist production as a whole plummeted. An unforeseen devastation, economically and socially, took over. Soon the banks would foreclose on the Flamingo.
In real life, Bugsy Siegel took his own life. In the movie, he is killed, presumably by another mobster. The movie alternates between love and brutality, with Warren Beatty, as always, somehow being lovable.
The Flamingo still stands today, having gone through several receiverships. It could be a useful project--a school, university, nursing home or whatever. But as things stand now, this spectacular real estate development is venerated as a brothel.
The Reichmann brothers
The Reichmann brothers of Toronto--Paul, Albert and Ralph--may be utterly unlike the mobster portrayed by Warren Beatty. However, like him they decided to purchase a huge tract of land. This one is on the outskirts of London on the river Thames and is known as Canary Wharf. Through their development company, Olympia & York, they decided to build there what some call a third London business district to rival the West End and the City (the financial district).
The Wharf, a 71-acre, 11-million-square-feet project, is now half-built. Nobody knows exactly how much money has been invested in it, but a few years ago it was described as a $6-billion project in Forbes magazine. The Wharf, like Bugsy's Flamingo, kept growing larger and larger, drawing more and more upon unwilling banks to support it with financing.
Like the Flamingo, it is short on customers. While 50 percent of the project is built, only half the buildings have tenants. Like the Flamingo, it has another huge problem: transportation. Originally, the Reichmanns thought the banks would lend them something like $670 million to finance a tunnel from London proper. It hasn't happened.
Canary Wharf has lined up tenants for only about 60 percent of the approximately 4.5 million square feet of available office space. It still has no adequate road or rail system.
Far-flung real estate empire
Just a little while ago, the Reichmanns were said to have been worth between 12 and 18 billion dollars, according to Forbes and Fortune magazines. They were proposing to build a $250 million, 60-story office tower in downtown Moscow and were bidding with a consortium of Japanese banks to design office buildings on 15 million square feet in Tokyo.
But now J.P. Morgan & Co., the epitome of the old-time illustrious financier, has refused them a loan of $240 million--a mere pittance to a multi-billion dollar outfit. And that has caused the most powerful, biggest and richest real estate developer in the world to finally file for bankruptcy in Canada and the United States.
The filing was done in such a way as to batter the hundreds if not thousands of creditors worldwide, who will either lose their money altogether or get a dime for each dollar owed them.
This comes on the heels of the collapse of Robert Maxwell's empire. Alexander's department store chain, which had seemed to be recovering from its slump, filed for bankruptcy on the same day as Olympia & York. Alexander's is in the retail business, where consumer confidence is supposed to have risen.
While different in form, in essence they show this: that during the period of capitalist prosperity, every kind of deceit, every fraud seems to go by the board. But once the bubble breaks, the heads of these individual empires, be they paragons of virtue or downright crooks, are subject to the same laws of inevitable capitalist overproduction.
These huge firms have collapsed at a time when the bourgeois press has been loudly proclaiming that a recovery is on the way. But the first sign of a recovery would be the emergence of new credit from the banks to the big companies to, as they put it, restore them to good health. Letting them sink, however, is a sign of continuing or worsening economic crisis.
It will be quite impossible for the capitalist economists to sustain their claim that this is a recovery period, even one that is slow and halting. For J.P. Morgan & Co. to let the giant of the world's real estate market come crashing down for want of a miserable $240 million, when billions are involved, indicates that the crisis is far more serious than they are willing to admit.
Foreclosures left and right
There are literally thousands of Bugsy-type entrepreneurs throughout the country. And more are coming. All have lost their properties through bank foreclosures due to their inability to make a going concern out of their real estate businesses. The glut in real estate as of today shows that the economy may be entering a double dip--that is, another recession or depression on top of the one we have been experiencing.
An acute characteristic of this period is that unemployment among architects is so steep that it merited a special article in the Sunday New York Times real estate section (May 17).
When real estate values run up to extraordinary heights, the giant manufacturing companies--steel, chemical, aluminum or even auto--begin to buy real estate as a hedge against a downturn in their industries. A well-known example was the purchase by the Ford Motor Co. of a prime piece of real estate on Manhattan's West Side in the 1970s. They bought it as a hedge against a downturn in auto production, thereby contributing to the enormous rise in real estate values. Later, when the downturn in auto came, they sold the property in order to conserve cash, thereby contributing to a downturn in real estate values.
Likewise, the Reichmann brothers bought Gulf Canada (oil and gas), Abitibi (lumber and newsprint), and Hiram Walker (distilling and energy).
Capital flows from industry to industry, wherever the profits are highest. Real estate is one of the most volatile.
You would think that if a bank takes over real estate properties from their owners, that would strengthen the bank. It might appear to be a continuation of the trend begun in the last decade of the 19th century, when banking capital first began to exercise supremacy over industrial capital.
But in reality the banks, having advanced large sums of money, find that after foreclosure the market value of the projects is worth less than the sums advanced to the developers. This in turn has weakened the banks.
First affected are the many thousands of small banks whose reserves and capital structure--that is, the money the bankers themselves have invested in the bank as distinguished from the deposits--have been thinned out in real estate operations. This is what has forced the regulators to close so many banks. At the same time, the government has had to support rapid withdrawal by depositors who fear losing their money, notwithstanding government guarantees.
The banks, having thus become weakened, appeal to the capitalist state, to the government, to support them with what is called a bailout. The government graciously responds, thereby adding tremendously not only to the government deficit but to the inflationary pressure on U.S. currency.
The real estate developers historically fall prey to the banks, which then appear victorious. But that too is an illusion. One has only to consider the last few years of the Reagan and Bush administrations, which have witnessed what the bourgeois press calls the scandals of the savings and loan banks. Putting it in such moralistic terms, bemoaning the deceit and corruption, merely focuses on a peripheral issue that is a byproduct of the objective economic process.
What the entire process reveals is that real estate construction is an aspect of general capitalist overproduction, which has not fully abated, notwithstanding its protracted character.
Infusion of government funds
The capitalist government in the U.S. came to the aid of the banks and the Bugsy-type entrepreneurs. It seemed to have partially liquidated the problem with massive infusions of government funds, beginning what the bourgeois economists told us was a process of recovery.
And then along came the Reichmann brothers, the world's biggest developers, with the biggest bankruptcy ever. It is enough to mention that New York's World Financial Center and some 22 other huge, modern buildings throughout the country are involved. The Reichmanns, as of two years ago, owned 50 million square feet of prime real estate in North America alone.
The biggest U.S. banks, such as Citicorp, Manufacturers Hanover and Chemical (now absorbed by Manny Hanny), have all been deeply involved in advancing loans and credits for the building of Canary Wharf, in the same way that the banks financed the Flamingo project. They are unable to stop the process except by resorting to state capitalist intervention.
And what form does that take? The form of supranational bankruptcy, where Olympia & York files for bankruptcy in two countries at once, showing the magnitude of its operations and the scale of its assets.
The collapse of this world-class real estate giant has shaken the financial capitals. It is especially important because it comes at a time when the Bush administration had presumably stabilized the real estate market to some extent and had begun heralding a general capitalist recovery.
Bush even gave an optimistic speech May 18 predicting the resurgence of the housing market. The very next day it was announced that housing starts had fallen significantly in the previous month.
Big real estate developers of this kind, as opposed to landlords who merely rent space, are in effect industrial capitalists. These industrial magnates called real estate developers exploit the labor of hundreds of thousands of construction workers. The developers take what we call the surplus value from the workers in the form of profit, which they then share with the banks. The banks historically stand as parasitic finance capital in relation to the industrial capitalists.
Superficially, the Bugsys or Reichmanns seem to entice the banks to support their ever-expanding projects with capital. Actually, the process is one of mutual seduction. Neither one is capable of terminating the borrowing and lending process, until one or the other collapses.
This is an objective process. It demonstrates that the capitalists are not the masters of the system; rather, the capitalist system dominates them, acting as an independent force that overrides their wills.