There's Now No Question: Region Is Not Recession-Proof

Chevy Chase, the last big truly local bank firm, was bought by Capital One.
Chevy Chase, the last big truly local bank firm, was bought by Capital One. (By Bill O'leary -- The Washington Post)
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By Steven Pearlstein
Friday, March 6, 2009

If you really want to get depressed, grab a copy of the latest Post 200 and run your eyes down our annual list of the region's largest public and private companies.

With the occasional exception of a government contractor or a health-care company here and there, it reads like a list of wounded giants. Only a year or two ago, almost all were fast-growing industry leaders with well-respected managements, great franchises, healthy profits, rock-solid balance sheets and share prices near record highs. Today, they're hunkered down and cutting back, their balance sheets under stress and their stock prices hammered.

In finance, there are the mortgage twins, Fannie and Freddie, now nationalized, and Sallie, which just recently had the rug pulled out from under it by the Obama administration, which thinks the government can do a better job making student loans.

Allied Capital, the granddaddy of business development companies, may no longer be a going concern because of the decline in the value of its loans and investments, and its younger cousin, American Capital, may not be far behind. And the venerable Chevy Chase Bank, the last of the big independent regional banks, got in so much trouble with bad home loans in California that it was driven into the arms of Capital One, which has its own problem with rising credit card delinquencies.

Meanwhile, things are so bad at Friedman Billings, Ramsey that the investment house announced last week that it was changing its name to Arlington Asset Investment -- after having spent millions of dollars to promote the old name through sponsorship of a PGA golf tournament. Its shares are now trading at 12 cents.

Even the princes of the private-equity realm at the Carlyle Group have had to pull up the drawbridge while they try to nurse some of their over-leveraged portfolio companies back to health.

Surely the most dramatic story, however, involves Joe Robert, one of Washington's most beloved and generous philanthropists, who was already struggling to save his real estate investment trust when he was diagnosed with brain tumors earlier this year. Robert made his fortune buying up unwanted loans and real estate during the last banking crisis but now finds his portfolio stuffed with commercial-mortgage-backed securities that the market values at pennies on the dollar. With his JER Investment Trust now facing the prospect of a cash crunch, Robert this week announced a bold secondary stock offering that would stiff current shareholders while raising $150 million from a new crop of investors.

Washington's problems, however, go well beyond its financial sector.

Travel and tourism have always been a driver of the Washington economy, and right now they're running on only two cylinders. With the inauguration behind us and the new convention center only lightly booked for the coming year, local hotels are already starting to cut back on their staffing. All those big hotel companies that have their headquarters in the Washington area -- Marriott, Host, Choice, Interstate, LaSalle and Robert Johnson's RLJ -- are also pulling in their horns.

Washington would not be Washington without its lawyers. During past downturns, a law firm might quietly pull back on its recruiting or nudge an aging and unproductive partner out the door. But these days, even the largest and most prestigious global firms are rescinding offers to third-year law students, laying off associates and support staff, freezing pay, and taking a scalpel to their partners lists. And while many firms have unapologetically announced increases in their official hourly rates, the reality is that there is deep and widespread discounting going on.

It's much the same story in consulting, where the Corporate Executive Board recently announced that it was laying off 15 percent of its young and well-educated staff and warned of further declines in revenue and profit. And there is plenty of hand-wringing in the world of associations and nonprofit groups, where budgets are being slashed in response to declining membership, reduced donations and the declining value of endowments.

New housing construction has been on the decline for two years, but now commercial development has also virtually ground to a halt. It should tell you everything that Clark Enterprises, parent to the giant, privately owned Clark Construction, simply walked away from the project to develop the east bank of the Anacostia River late last year after a hard-fought competition for the development rights. And given the lack of financing and the overhang in the market, my guess is that it will be years before work will proceed on most of the other big projects now on the drawing board: the old convention center site in the District, Forest City's Konterra Town Center project in northern Prince George's County, Bob Kettler's Harbor Station project in Prince William County and the long-awaited urban makeover for Tysons Corner.

Washington has also become something of a media capital in recent years, but the news there isn't much better. Traditional news organizations like The Washington Post, the Discovery Channel and Gannett have been hit with the double whammy of an economic downturn and a migration of advertising dollars to the Internet. Even after its long-awaited merger with Sirius, XM Satellite Radio still needed a bailout last month from John Malone's Liberty Media.

And then there is biotech, that perennial contender for growth industry of the future. At a speech last week to the Maryland Tech Council in Bethesda, David Mott, former chief executive of MedImmune, who is now a venture capitalist, predicted that only one in three biotech firms would survive the coming shakeout.

With all this weighing down the local economy, is it possible that the expected surge in federal spending will be enough to keep Washington out of recession? That looks to me like wishful thinking. The Obama administration has signaled its intent to reduce spending for defense and homeland security contracting, which is already reflected in the recent decline in share prices for Lockheed Martin, General Dynamics and some other of the bigger government contractors. And while federal employment will expand, even substantially, much of that will be offset by the decline in the payrolls of state and local governments that have grown smartly in recent years.

Washington may have turned up late and well-fortified to this recession, but there's no doubt now that it has arrived.

Steven Pearlstein is moderator of a new Web site, On Leadership, at http://washingtonpost.com. He can be reached at pearlsteins@washpost.com.


© 2009 The Washington Post Company

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