The Coles affair: Unsustainability is now

Once again, the Wall Street Journal goes to Phoenix to report on the most pathological aspects of our economic troubles. It does the in-depth, sophisticated and contextual story on the suicide of Scott Coles and the collapse of his Mortgages Ltd. that the local press will not allow its reporters the time and expertise to do. And remember, the Republic's in-house diktat is, "say something positive about the community" (and use streaming video!!).

The personal story of Coles is the stuff of a tragic novel, albeit for our tawdry era. He was 48 when he wrote a goodbye note, donned a tuxedo, climbed into bed, and apparently committed suicide. His company was in trouble, and with it some of the highest-profile projects in "the Valley." His 20-year-younger second wife, whom he had met in Las Vegas, wanted a trial separation. The darkness he must have felt merits our compassion and prayers.

But the business story must also be told, for it illustrates not only how Phoenix got into its worst downturn in perhaps decades, but also the peril of Ponzi Scheme Nation.

Mortgages Ltd., the Journal reports, was one of the largest private lenders during the Arizona real-estate boom. But this was not the kind of institution we might imagine, with conservative, humorless bankers dotting every i:

It specialized in short-term, high-interest-rate loans to commercial developers -- builders of malls, office parks, condominiums and other projects -- who either had bad credit or a need for quick cash with no red tape. But he overreached, and the debacle that has devastated the U.S. housing market the past year is now squeezing Mortgages Ltd.

To keep growing and outrun the problems, Mr. Coles leaned increasingly on loans -- totaling roughly $200 million -- from an obscure company, Radical Bunny LLC, run by his accountant. He also sought to raise new money on terms that undermined his existing investors. These moves triggered the departure of several senior managers at the firm in recent months.

Radical Bunny LCC. Run by his accountant. Now Mortgages Ltd. faces a slew of lawsuits alleging "fraud, racketeering and breach of fiduciary duty, among other things." The company denies wrongdoing. The reporter quotes the ubiquitous Elliott Pollack:

"Scott got overly optimistic and thought the good times would go on forever," says Elliott Pollack, a prominent Scottsdale, Ariz., economist and real-estate consultant who invested in Mortgages Ltd. "The world changed, and it's going to crush a lot of other lenders in the country."

It says much about the Phoenix economy -- and appetite for reality -- that an economist who is supposed to offer a hands-off, sober assessment of conditions himself invested in the mess. Pollack is also a developer.

Alas, as any real conservative would know, the world didn't change. The world has always eventually punished the idea that one can get something for nothing, and with it the purveyors of perpetual motion machines, patent medicines and land schemes in the West. It's too bad so many people, and communities, have to get hurt, too.

When people talk about "sustainability" or "unsustainability," it seems like an esoteric, arugula-bedded platitude. But Phoenix's unsustainability is on display right now. It's the biggest city in the country where real estate was the driver of the economy, not a consequence of the economy. Things were being built based on the expectation of continued large gains in population, not on the actual strength of the real, non-real estate economy. For years that had not been producing the kinds of industries or high-paid jobs to sustain such an expansion of development. It was covered for awhile by a huge credit bubble, risky ventures and Ponzi schemes.

This huge building spree, largely in suburban sprawl, also brought huge embedded costs to the public that will not go away. For example, private developers profited from building in now depression-laden Pinal County far from employment centers and even shopping. Now taxpayers are stuck with the bill for building some kind of transportation system and other infrastructure. This spree was lent money with abandon even though Arizona does not have the water to permit this level of population or development. Nor did the enablers (lenders and political "leaders") account for the costs of global warming and rising energy prices, which will be considerable for a migropolis of some 4 million people utterly dependent on everything brought in from elsewhere, to an environment where a loss of air conditioning in the ever-longer high summer will prove catastrophic.

In other words, unsustainable is not a future concept. It is now. It will get worse.

It also must be noted that the Journal described the "flamboyant" Coles' this way:

Mr. Coles cut a larger-than-life profile. He owned several homes, including two adjacent mansions in Phoenix's exclusive Biltmore area, and a nearby estate with its own private 18-hole pitch-and-putt golf course. A regular on the Arizona charity circuit, he contributed to some 100 organizations and socialized with members of the Phoenix Suns basketball team, some of whom were his investors. His funeral drew a standing-room-only crowd of 700 people.

In other words, he was typical of the Scottsdale-Phoenix elite of today. Our larger-than-life figures of the past worked for the common-good projects that allow Phoenix to exist at all -- Phoenix is running on the fumes of their work and sacrifice. Not so now. I never ran across Coles in the probably hundreds of meetings I attended, including with the highest movers and shakers, to discuss addressing Arizona's pressing problems. Maybe he was quietly working behind the scenes. But this elite in general are takers in a community they consider disposable. They have the power to decisively address Arizona's perils. They refuse. To do so, in their minds, would kill their businesses. Thus they listened for years to the hucksters who told them what they wanted to hear. Most of them will be fine -- they're gone for the summer and live behind their walls. But there's a price to be paid.

Comments

[Deb]

When I first read your novel "Arizona Dreams," I thought it was kind of fanciful. Now I think maybe you didn't go far enough in how greed and lies will destroy this once wonderful place! Life imitates art.

[Curt]

Phoenix has been gang-raped by the real estate developers, but now she's in the ER and everyone has stopped to see if she'll regain consciousness. She won't. Now it's just a matter of time before the the sound of the flatline. The only sliver of justice we might hope for that maybe some of the late-comers will catch her STDs.

[Matt]

Are you sure Elliot Pollack is developer? I know Michael Pollack is, and I believe it the financial behind various large strip projects in Chandler and Mesa.

[francine hardaway]

I knew Scott. He operated in the charitable community, but not the economic development community. He didn't really have the "polish" for that.

I felt very sorry for him when he died, because he was desperate to prove himself. And I think the WSJ reporter did a kick ass job. I posted on my own blog about Scott's death, and got so many negative comments when I said it was a suicide that I had to close comments.

It's a dream that some Arizona real estate people live in, and it refuses to die. Myself, I am In San Francisco.

[Rogue Columnist]

Yes, Elliott has been a developer.

[cheap checks]

I agree with your idea but, there are different school of thoughts producing different ideas that has to brought into consideration.