You're now on the archive server. Commenting has been disabled.
Kanjorski Admits There Is A "Growing Bubble In Commercial Real Estate" As S&P Observes Recognition Of CRE Losses Could Wipe Out Banking System
In a note released earlier, Congressmen Paul Kanjorski and Ken Calvert stated that they are launching an "Effort Urging Federal Regulators to Address Growing Commercial Real Estate Market Concerns" which will focus on the economic implications of the "deteriorating conditions in the commercial real estate." Luckily, Kanjorski bypasses the spin cycle and calls the repeat CRE bubble by its proper name:
"The growing
bubble in the commercial real estate industry has the potential to infect our
economy and slow a recovery," said Chairman Kanjorski. "In order to safeguard the businesses
operating on Main Street and protect the millions of jobs depending on
commercial real estate, the Treasury and the Federal Reserve now must take
needed and urgent action to stave off a potentially devastating wave of
commercial real estate foreclosures and bank losses."
Wait? What's that? CRE valuations are fair? Isn't that what Merrill Lynch pounds the table on in each and every REIT research report. Maybe, just maybe, bubble and fair value are synonymous - we are not sure.
Luckily, to provide the correct answer, S&P picks today to release their extended industry report titled: The Worst May Still Be Yet To Come For U.S. Commercial Real Estate Loans. From the summary, S&P notes the following:
Standard & Poor's Ratings Services believes that U.S. banks'
real estate exposures may trigger substantial losses on the financial
system during the current economic cycle. Each real estate cycle is
different, and this one is likely to be different from the one during
1990-1993. In our view, however, that does not mean that this cycle
should be any less severe. Although the causes of this cycle, and the
players, are different, the sector nevertheless is likely to suffer the
same degree of supply and demand imbalances and price declines that
historically devalued the collateral backing real estate loans,
resulting in severe losses for lenders. The severity of commercial real
estate (CRE) cycles has always caused us to view CRE lending as one of
the riskiest loan categories for banks. Therefore our risk-adjusted
capital (RAC) methodology assigns a higher risk weighting for these
loans than for most other asset classes. As a result, banks with high
CRE exposure were generally rated lower than banks without this
exposure.
In addition, elevated CRE exposure has driven many bank
downgrades in the past two years, particularly of regional banks or
finance companies with outsize exposures. Even though most highly
exposed banks with weaker balance sheets are already rated below
investment grade, more downgrades are possible; indeed, approximately
75% of the rated banks with the largest exposure to CRE carry negative
outlooks. On a more positive note from a ratings perspective, even
though many of the rated banks could suffer heavy losses, we believe
that their capital is in most instances sufficient for them to pull
through, as long as the losses are realized over a few years rather
than taken at once, and as long as liquidity can be maintained. CRE
exposure generally tends to represent a higher proportion of smaller,
largely unrated community banks' exposures. Therefore, there is a
greater proportion of risks in the unrated banking sector.
So there you go: even S&P confirms that should all losses be recognized all at once, without the aid of accounting and regulatory gimmicks, the financial system is likely entirely underwater, and this is only on account of CRE exposure, which as most pundits have been noting should not be a concern for anyone, as it is all under control. Right. One wonders how many of the other "manageable" risk factors are sufficient to destroy banking as we know it should mark-to-myth be replaced with some representation of reality.
To elaborate on its point, S&P provides the following color:
As we look at the fundamentals across the various sectors of CRE, we see that the homebuilding sectors were hit the earliest and the hardest. About 40% of rated banks' CRE loans are made for construction, acquisition, and development purposes, of which 22% (or 8% of total CRE loans) are for residential construction, a sector that has been particularly hard hit by a severe (79% from the peak) plunge in homebuilding that began in late 2007. As a result, builders have defaulted with greater frequency and undeveloped land has fallen in value, causing nonperforming loans in the homebuilding sector to rise to 18% as of Sept. 30, 2009. Homebuilder-related net charge-offs rose steeply to an annualized run rate of 4.8% for third-quarter 2009. More recently, commercial construction loans have gone sour as the fundamentals in those markets deteriorated.
Supply and demand imbalances are visible in all segments of mortgage lending as well. National vacancy rates in the office, retail, multifamily and hotel sectors are now in the neighborhood of 1991 levels. For example, office vacancies reached 17.3% as of third-quarter 2009, and C.B. Richard Elllis (CBRE) estimates they will go to 19.5% in 2010, higher than the peak of 18.9% in 1991. Likewise, retail vacancies, currently at 12.3%, are headed to 12.9% per CBRE estimates, versus 11.3% in 1991. Multifamily vacancies are at 7.4%, versus 7.0% in 1991. Nationally, rents for offices are down substantially more than in 1991--by 15.7% versus 9.4%. This time around, a particular trouble spot is the hotel sector, especially the casino hotel sector, where overbuilding has been a factor. The occupancy rate for this asset class is a low 60.9%, a level last seen after Sept. 11, 2001. Nationally, rents for offices are down substantially more than in 1991--by 15.7% versus 9.4%. RevPAR (revenue per room) for hotels nationally is down 20%. Real estate cycles generally lag the economic cycle, so vacancies could deteriorate further even as the economy recovers. This is due to the buildup of "shadow" vacancies of empty space still under lease but unutilized by strong companies able to make lease payments.
In addition to whole loans, S&P sees pain for those banks which have extended exposure in the form of CMBS. This is the rating agency's projection for those who have the greatest CMBS holdings:
Furthermore, the report indicates that Bank of America Merrill Lynch (surprise) has over $7 billion in equity interest in CRE. One wonders why the bank is so bullish on CRE in all of its forms.
S&P's conclusion, which hopefully will be considered by Kanjorski and Congress:
The fallout from CRE exposures for banks has yet to run its course, in our opinion. Although many of the problems are already evident in the homebuilding sector, and are well underway in commercial construction, these are the smaller sectors. We believe the problems in the larger mortgage and multifamily sectors are yet to be felt because fornow low interest rates and still-adequate cash flows make debt servicing possible. As rates rise and rent rolls decline further, we believe that delinquencies will rise in this sector as well, and prices will fall further, complicating the refinancing of these portfolios.
So you have the truth. And then you have ML REIT upgrades. In the meantime complacency is wonderful. It worked for so long, well, with one or two hiccups, why should it stop working now. We have a jobless recovery- when does it end: when unemployment is 100%? Think of all the SG&A savings! We also have a CRE industry that would not be able to refi at 100% interest rate should its true state be left exposed. And now that all systemic risk is borne by US taxpayers, why, you would be stupid to believe there is such a thing known as risk left in any investment decision.
»
- 25229 reads
- Printer-friendly version
- Send to friend
Similar Articles You Might Enjoy:
- Merrill's Former REIT Analyst Steve Sakwa Dispenses Some Unexpected CRE Pessimism
- RealPoint Downgrades Hundreds of CMBS Classes, CRE Deterioration Accelerates
- RealPoint Downgrades Hundreds of CMBS Classes, CRE Deterioration Accelerates
- Coxe On The Power Of Zero
- Green Street Advisors On CRE "Nothing Is Trading; Prices Are Likely Down 35-40%"
Another bunch of guys that don't want to take their loss.
The same bunch of guys who have never taken the losses...
I've lost track. Are we on developer protection plan 194 or 195?
why would they want to take a loss? why should they have to? nobody else has.
in this context, loss is what the U.S.taxpayer bends over for.
The thing is, I don't see why it would be such a bad thing to see the collapse of "banking as we know it."
Of course "Mad Max" wouldnt. =)
But I agree.
ZH should announce a Mad Max Now campaign! Why stop at half-measures like Fed audit??
Like this proposal???
http://vipers-n-thieves.blogspot.com/
Not being a US citizen, I can only say I was surprised how Americans are still capable of fighting back while in Europe everyone is just whining and demanding that Papa Government fixes everything.
Here is one:
www.medinafortexas.com
or at least the establishment would have you believe that her winning
would bring us to a Mad Max scenario.
Luckily there are trillions in derivatives cushioning us from any CRE downturn.
Too damn funny! Yes, about what, $300 trillion of notational, but Ben and Timmy don't talk about this wonderful insurance???!
The goose that laid the golden egg
has been eviscerated
and thoroughly searched
for Gold
none to be found.
Bank ETFs May Soon Take A Hit As Commercial Real Estate Has Started To Go Bust
http://etfdailynews.com/blog/?p=8979
Comrealestate to be the last leg down before QE 2. Rally this week for no reason other than the bleeding of the Doelarr (and the other fiat bitches). Then, Com Real Estate goes. It will shock the markets, but the Jobs program will be getting going (QE Dos) and should "cushion". DJ 9,500, gold $1040 by March 6th. This will be the last put before the HYPE sets in. Then, gold to the moon. Boombaclaude 'mon.
Why is the fed hesitating to take on it's book all the outstanding cmbs in the world ? Seems odd that they would hesitate.
Kanjorski is a FED shill... competely bought and paid for just like 99% of them.
Heard him on youtube trying to debate Peter Schiff the other day... that was funny.
I cannot wait until CRE blows up. SPX 666 here we come.
Hendrix,
You are correct sir - timing is everything. Does anybody else have a watch with the right hour?
Why, sir, the time is 2:22 PM.
please considerfor posting or edit if too long:
Hjalmar Schacht [1877-1970] led Germany out of hyperinflation in the 1920s. He was born in part of Denmark that later became part of Germany. He resigned from Hitler's government before WWII and was cleared of war-crimes at Nurenberg.
From Account Settled, Hjalmar Schacht 1949 [all emphasis mine]
. . . By the autumn of 1923 the unrestricted depreciation of the currency had reached such a pitch that it threatened to break up the whole structure of Germany’s national life. Wage-earners’ wives were in despair. Whenever they went out to buy food they were involved in a hopeless struggle against the depreciation of the Mark. The wages of their menfolk ran through their fingers like water even when, as was finally the case, they were paid daily, In this extraordinarily difficult situation the authorities called upon me to put a stop to the depreciation of the mark and stabilize the currency. . . .
. . . Oddly enough, for the average citizen there is something very mysterious and incomprehensible about finance. The only thing about it which is quite clear to everyone is its importance. The obvious essential is that money should retain its purchasing power. Above all, it must allow people the chance to save, to put aside wealth for future use. It must therefore maintain its value in relation to all other commodities. The great the number of people who, in the course of historical development, are excluded from the possession of landed property, the more important it is that the value of money should remain stable, because only then can they store up the product of their labours and preserve the property they have acquired. Money, in short, must retain its value ; it must be sterling.
That money is sometimes cheap and sometimes dear ; that it is worth more in our youth than in later years ; that the relation between the value of money and the value of commodities changes constantly—these are problems which are difficult for the average man to understand, and he cannot protect himself without help against his ignorance. During the terrible period of inflation after the first world war the Reichsbank was overwhelmed with thousands of suggestions, plans and schemes for stabilizing the currency. . . . For some reason or other the arithmetical nature of finance seems to inspire the mathematically-minded, and their efforts always tend in the one direction, towards the creation of an automatically functioning solution operating according to fixed mathematical rules. But the currency problem is not a problem which can be solved according to fixed rules. If it were, then perhaps a capable professor of mathematics would be the best financier after all. Monetary policy is not an exact science but an art. As such it is a sphere which will always remain mysterious to the man who is not capable of mastering that art, while appearing simplicity itself to the man who is. The art of monetary policy consists in keeping the relationship between the value of money and the value of the other commodities as steady as possible. Part of this art consists in constantly observing and correctly judging not only the movements of money but also the production and consumption of other commodities. Therefore it is essential that the financier should have a wide knowledge of national and international economic affairs. This is all the more necessary because economic conditions, costs of production, etc., are constantly being changed by technical inventions and new organizational measures.
The fact that I, of all people, who have always been regarded as a representative of the individualistic economic conception, should have been called in to assist a Social-Democratic Government, was entirely due to the broadmindedness and enlightenment of Fritz Ebert, who was at that time Reich’s President. When I reminded him before my appointment that I was not a Socialist, he replied with a smile: “That’s quite beside the point. The question is: do you think you can solve the problem?” He was right: that was all that mattered. I replied in the affirmative, and I am happy to say that under Ebert’s ægis the Social Democratic Government of the day gave me a completely free hand to carry through my stabilization policy. In later years, unfortunately, it seriously interfered with my plans.
German social Democracy had enjoyed its heyday in the nineties . . . The much-praised talent of the Germans for organization, which was naturally shared by the Social Democratic Party, has one great disadvantage, a tendency towards excessive bureaucracy . . . The original drive and vigour of German Social Democracy was weakened by this flaw.
But everything depends on initiative, on the ability to seize an opportunity, on vigorous action. All those currency projects which embody new ideas and suggestions for establishing automatically functioning principles are fruitless. It is not a question of the percentage of gold or bills behind the notes in circulation, or of note control, or the discount rate, but simply and solely a matter of the temperature and the pulse of economic life. In monetary policy, just as in medical therapy, correct diagnosis is the secret of successful treatment. All that is required after that is vigour and determination in carrying out the recovery plan.
In the inflation of 1923 there were three main measures which were decisive to the stabilization of the mark. They were the abolition of private paper currency ; the diminution of the volume of legal means of payment ; and the credit bar.
As the volume of bank-notes officially issued by the Reichsbank proved unable to keep pace with the rapid rate of currency depreciation, and a shortage of notes developed everywhere, both municipal administrations and large-scale industrial undertakings began to print their own paper money, which nominally had the same value as the notes officially issued by the Reichsbank. Naturally, this unofficial paper money depreciated at the same rate as the official notes printed by the Reichsbank, and the printing of such paper money thus proved a very profitable business, since when it was issued its value was considerably higher than when it was later redeemed. This unofficial paper money was, of course, not legal tender, but if economic life was not to break down altogether then the banks, including the Reichsbank itself, had to accept it in just the same way as they accepted the official notes. Some firms ruthlessly exploited the situation by paying in the biggest possible sums of the money they had themselves printed to one branch of the Reichsbank whilst drawing out an equivalent sum at a neighbouring branch in official bank-notes, which were, of course, the only legal tender and could therefore be used abroad, or, at least, could be used abroad more readily than the unofficially printed paper money. . .
My first measure as Reich’s Currency Controller was to issue instructions that no more of this emergency currency was to be accepted by the Reichsbank. This undermined the entire basis of the private issue of currency. Notes which the Reichsbank refused to accept were valueless. This first measure was quite sufficient to make me very unpopular both with the municipalities and with the large-scale industrial undertakings. For the latter the fact that the blow was delivered by a man whom they regarded as one of themselves, the Director of a big bank, added insult to injury. I was practically mobbed. They threatened me ; they pleaded with me ; they painted the probable consequences in the most violent colours. But I remained adamant. I was determined at all costs to put an end to the misery of the great masses of Germany’s working people and to guarantee them a stable wage once more.
My second measure was directed against speculation in foreign exchange. On November 20th, 1923, the Reichsbank had let the exchange rate of the United States dollar climb to 4.2 billion Marks with the firm intention of maintaining it at that level. However, private speculators continued to buy dollars at an even higher rate. The groups who indulged in this speculation did not believe that I would succeed in keeping the exchange rate at its official level, and so they merrily went on buying foreign exchange on a rising market, paying up to 12 billion Marks ‘per Termin’, which meant that at the end of the month the Dollars had to be paid for with legal tender, that is to say, with Reichsbank notes. When settlement day came round at the end of the month the dollar purchasers needed Marks from the Reichsbank to meet their commitments, but the Reichsbank refused to give them Reichsbank notes and handed out Rentenbank notes instead. This Rentenbank had been established as an auxiliary institution to assist in the stabilization of the Mark, and the notes it issued did not have the character of official bank-notes. In short, they were not normal legal tender. But naturally, the foreign groups who had sold the Dollars demanded payment in money which was legal tender, and the German dollar purchasers were now unable to comply. Nothing remained for them but to sell their stores of foreign currency to the Reichsbank which now secured dollars which had been bought speculatively for as much as 12 billion Marks at the official rate of 4.2 billion Marks. Speculators lost many millions on this unprofitable transaction. Naturally, my unpopularity was greatly increased, but the well-being of the great mass of the German people meant more to me than the troubles of individual speculators. The dollar rate of exchange, officially fixed by the Reichsbank at 4.2 billion marks, had to be maintained at all costs. I was not prepared to allow private speculation to drive it up again. It was, in fact, held.
The third of the decisive measures adopted to put an end to inflation came into operation at the beginning of April, 1924. Big business interests had once again used the excessive credits they had asked for and obtained to start hoarding foreign exchange. In order to make them realize once and for all that they must subordinate their operations to the monetary policy of the Reichsbank, I suddenly barred all further credit against bills. In normal times these bills were the usual means of obtaining credit from the Reichsbank. It was unprecedented that the Reichsbank should refuse to discount good commercial bills. When its credit was called on to an excessive degree, that is to say, when too many bills were presented, the Reichsbank would merely raise the discount rate, and continue to raise it, until the deduction was more than the bill holders cared to pay and they preferred to do without the credit. However, in times of currency depreciation such as we had just experienced, this discount screw necessarily failed to operate effectively. It did not matter in the least whether the presenter of a bill had to pay 10 or 15 per cent discount when within a few weeks, or even within a few days, money itself would depreciate by 50 per cent and even more. This was the reason why I did not have recourse to the usual method of raising the discount rate, but adopted instead the harsh but only really effective means of blocking all credit. The measure was immediately successful. To the extent that business interests needed money they had to surrender their hoarded sums of foreign exchange to the Reichsbank, and within the space of two months equilibrium had been restored so successfully that throughout my whole subsequent period of office the mark remained stable. . . .
All in all, this struggle with the speculators over the rate of exchange lasted eight months. It was waged with vigour and determination, and private interests were ruthlessly ignored in the interests of the community as a whole. My victory did not make me popular . . . Even the experts did not always grasp my methods, which contradicted every classical theory, and the great mass of the people naturally failed to understand the significance of what was taking place. . . It was in this period that the press first dubbed me a ‘Financial Wizard’, because in money matters in particular the simple and the natural is the most difficult to grasp.
( Abrechung mit Hitler, Hjalmar Schacht
Rowohltverlag, Hamburg 1948. )
Translated by Edward Fitzgerald
London : Weidenfel & Nicolson, 1949, pages 8 - 15.
Schacht, Hjalmar Horace Greeley, 1877-1970. Uniform Title [ Abrechnung mit Hitler. English.] Title Account settled. Translated by Edward Fitzgerald. Publisher London, G. Weidenfeld & Nicolson [1949] Description 327 p. port. 22 cm. Language English Note "Translated from Abrechnung mit Hitler."
Remarks on this 2010 post:
Without Schacht's integrity, a regulator's intentions would be subject to purchase. The above measures depend on the regulator's personal integrity. What is a "regulator" without integrity?
Vital also is "Monetary policy is not an exact science but an art. As such it is a sphere which will always remain mysterious to the man who is not capable of mastering that art, while appearing simplicity itself to the man who is. The art of monetary policy consists in keeping the relationship between the value of money and the value of the other commodities as steady as possible. Part of this art consists in constantly observing and correctly judging not only the movements of money but also the production and consumption of other commodities. Therefore it is essential that the financier should have a wide knowledge of national and international economic affairs."
Each of the 3 measures, abolition of private paper currency ; the diminution of the volume of legal means of payment ; and the credit bar, have bearing on current financial fraud such as Credit Default Swaps...where such involve deceit, the Federal court system can refuse to recognize validity of such "contracts". Ditto for SIVs, etc.
The creators [masters of risk-adjusted securities] of the tricky and incomprehensible CDSs, SIVs, etc certainly knew of the primary risk that regulators could declare the contracts invalid. Thus the creators depended on using too-big-to-fail to bypass the debacle that was sure to come. The swindlers took their profits up-front, immediately upon a client signing, and without personal risk...at worst, only their corporate employer would fail and that was Other-Peoples'-Money.
Note that Schacht's success depended on integrity, his own and his government employers. How does one test for integrity? The only test I know of, is a demonstrated track-record. No-track-record simply means worthy only of low-risk trust. A long track-record could merit high-trust. Only with transparency can track-record and risk be evaluated.
+10
Didn't know Schacht's story but had wondered why inflation had been so bad in conservative Germany. The stage for the problem was set by the WW1 costs and reparations following the war. England and France set harsh conditions for exhausted Germany in the peace agreement. Both had very profitable arrangements raw material exchange for manufactured goods in place when after unification in 1870, along came Germany with their high quality machinery, selling into their previously exclusive markets. The treaties (ignoring Wilson's preferences for rebuilding) very effectively removed Germany from the competition for the decade after the war.
Our situation now is not the same but certainly has echos in the effects of financial policy and to a certain extent in human behavior.
I have a feeling that, before this is over, GS management isn't going to like the developments any more than I will.
Let me see a gallon of gasoline in Afghanistan costs 400 bucks. The movement and flow of money is not trackable because the system has too many people running around doing whatever the hell they want and the people involved in the money system don't know whats going on and don't want to be told lest they be liable for that knowledge. Speaking about regulating and controlling something that has massive and I mean MASSIVE unregulated spending is rediculous.
gee, what else would you like Treserve to do Mr. Kanjorksi?
Let's see, quickly:
We've already got FASB 157 set up so CRE loans can be marked any old way that lenders want to mark them. got a strip mall or office bldg worth 25 million with a loan balance of 50 million? no problem, mark it at 49-50 million and everything's okey dokey smokey.
Several weeks ago the Fed put out the notice that lenders can refinance these properties at greater than 100% LTV and they won't be called on the carpet for it. this is especially "prudent" given the fact that there is lots of fdic insured money on the line. brilliant.
you've got the major banks pumping and upgrading reits and each other with the majority on each sell side analyst's "super duper CONviction must buy or you will die in 2010 from painful terminal cancer" list.
what else Mr. Kanjorski? perhaps have the Fed just buy all the malls? hell, we know they own at least one in Oklahoma.....
Then there's the issue of cash flow: you might be able to hide the lender's "capital" problem created by the "mark to fantasy" debt to fmv ratio, but you can't hide the inability to service the debt. I suppose, all things being equal, and given that we are in a depressive recession, that one might be forgiven for relaxing the valuation rules (provided full disclosure is in place, so persons buying securities in the entities marking up the value of these assets can be forewarned) as long as the debt service is being paid. I'll grant that if the policy implications stopped there, I even "get it." Policy could be to extend and pretend, as concerns valuations, as long as there is some reasonable expectation that the problem is temporary - a real question mark - but such a policy stops working when cash flow is in trouble, or clearly headed in that direction.
Enter Ponzification, which seeks not merely to hold on and wait out those temporary dislocations in the market, but to use the fog created by the extend and pretend policy to offload the problem to someone else, as a form of confidence game. Hence the efforts to pump up the REITS etc. In that context the policy of extend and pretend aids and abets Ponzification. Might as well call it "extend, mislead and offload," courtesy of a government-inspected seal of approval. Regrettably, with FDIC insuring the assets of the regional banks holding these loans, the taxpayer, in the form of required bailouts for the FDIC fund, will end up picking up the tab at the end of the road if "extend and pretend" fails. Or does it go on the Chinese credit card, as Ponzification might suggest.
Then there's the issue of cash flow: you might be able to hide the lender's "capital" problem created by the "mark to fantasy" debt to fmv ratio, but you can't hide the inability to service the debt.
Exactly, Ned Zeppelin.
I also note my favorite overpriced financial WFC at the top of the list.
Well said, extremely well said Ned.
Agree with you John on WFC. Of all the banks, I trust them the least. That said, someone is keeping a bid under them big time. I'm waiting for the the possibility that GS throws 'em on their CONviction buy list...it would only be appropriate after the recent STI move.
Though I criticize the David Bianco thundering herd bulls at ML for their usual sell side nonsense, I checked again today and ML still has WFC under long term review and that has been the case for months. I find that notable.
Funny coincidence.
Calvert's up to his eyeballs in CRE gone sour in SoCal. Dude for years had a lucky habit of buying up cheap land near intended major roadways with his connected partners. Named one of the top 10 corrupt CongressCritters in '08. No small feat given the competition. Guess he needs a bail from Uncle Sugar, too......backdoor drop off .
Dying to know how long a " few years " of extend/pretend really is in the world of these S&P wizards. "Few" means 3 to most people. Maybe they really meant 3 decades.....??
But this really is becoming a waste of time; for one day amalgamate all banks with CRloans, screw confidentiality, set aside all CRloans in a special ring-fenced bracket, handled by a Govt. agency. Then call anyone with a derivitive contract out to call in.. it should be a zero-sum market.. form a new instrument in the repayment of the contracts if neccessary; and if it isn't zero sum, take the difference and add it to the bank tax.
I mean, is there a frikkin problem?
Goldman backs out of Manhattan mega mega real estate deal (for now). See ya.
http://abcnews.go.com/Business/wireStory?id=9719002
Don't you think Kanjorski's and S&P are a little late to the party? The damage has already been done. The only reason we haven't collapsed due to CRE is the banks have been able to hide the damage. The patient is and has been screaming, but no one can hear them since they are locked in the dungeon of soured loans.
Interestingly enough, many of the Regional and Community Banks that too much CRE exposure got "corrective action" letters from the regulators last year. The ones who were caught way too exposed and were detected too late by the Fed/OCC/FDIC had to take some pretty hard writedowns after the FDIC took over.
The huge risk here, in my opinion, is CMBS. I know, big surprise. And it appears that those TBTFs who have already been bailed out under RMBS will position themselves to receive a heaping 2nd helping, probably in the form of continued Fed MBS purchase activity.
More bailouts-- backdoor or not-- will become a big political problem. The nation is just too fed up with endless bailouts, especially when the beneficiaries are the same targets.
One can only hope than Kanjorski enjoys his next career move as a VP for the Goldman Squidmen.
Geithner was not kidding when he told Congress in August 2009 that the budget deficit would be 19.5 trillion. They could either deal with it now or deal with it later. Congress chose to deal with it later; they allowed the losses to be taken off the books until the roll-overs were to be denied.
The 19.5 includes the unemployment liability of the states.
There are two ways to deal with this problem. Hand Taiwan over to the Chinese in exchange for China's purchase of 5.5 trillion more US debt that would be forgiven, or, remove the liquidity requirements of all banks and charge the CRMBS off all at once.
That Taiwan/Chinese exchange would work to keep our main creditor happy.
But, alas, Team Obama is in the process of selling Taiwan $6 Billion in various weapons systems.
China no happy.
i got the funny feeling that China will own those systems in a few years.
i noticed that we held back on the F 16s.......
What are the odds of a conflict started in the Middle East before summer?
I'm thinking it will happen right around February 11. http://www.presstv.ir/detail.aspx?id=117545§ionid=351020101
If not sooner.
With most states facing bankruptcy CREs have got to be a secondary priority...
Are you kidding me?
After all these MBS purchases, the Federal government hasn't raised a finger to help California. And they provide the Feds more in tax receipts than outlays.
States don't have the power. Banks have the power. And if the banks have a problem with their own toxic CMBS, you have sleazeballs like Kanjorski willing to threaten financial armageddon all over again before we get the next bailout.
We've entered the bizarro world, my friend... where more debt is "good" and less debt is "bad".
I'm not sure this administration can hold itself together if states start defaulting. I hardly believe they will just sit back and watch it happen. They will however time the bailouts for the November elections. No use wasting the political cache on short memory morts.
S&P is as dumb at the bottom ("US banks insolvent on CRE losses") as they were at the top ("this subprime is AAA!").
Almost no senior debt on significant CRE assets have taken loss hits. I have been involved in dozens of CRE restructurings where sub-debt took over equity and was happy to keep paying senior. Often, sub-debt was taken over at a premium. (And these were the worst deals, done in 2005,06, 07 in the worst markets).
CRE senior debt is up 50-100% in price since last year (as a result of the data and low realized losses). But you guys can believe whatever you want.
Ok, so what is the end game? CRE, Residential, corporates...all assets are marked to model. World central banks print to infinity. Bonuses for Wall Street get bigger on false profits. US govt budgets continue in the trillions. Computer trading algos pump/prop up markets on minimal volume. How much more does it take? Interesting times we live in.
Maybe the answer is multiple choice .
a....sovereign debt crisis
b....failed long bond auction(s)
c....State default(s)
d....catastrophic global confrontation
e....fiat currency collapse(s)
f....all of the above
The answer is "g - As long as I am long SRS, nothing will happen"
JTS
I have a question. What the hell are the regulators going to do about the problems in CRS/CMBS? WTF, Mr. Kanjorski!
Oh snap!
Here comes another emergency FED 'lending facility' which won't require congressional appropriation. Of course, Ben isn't really popular right now and taking this stuff onto the Fed's balance sheet could kill the dollar, right? On to Plan 'B' - Fed CMBS SIV, anyone? OR Plan 'C', maybe the Fed will start issuing its own bonds and use the $$ to buy some of this stuff at a 10% discount to par value :-). Thank goodness they are not between a rock and a hard place because that would really suck!
Merrill Lynch is an endless fountain of FAIL.
Tyler, it doesn't end when unemployment is 100%, because unemployment is going to zero percent as everyone is eventually unemployed and has given up looking for work for more than 4 weeks.
This is serious shit....
If J P Morgan / Chase and Citi go under what will we do....?
If Bank of America and Goldman Sucks go bankrupt my my...?
Who needs these guys... anyway...
What the hell does a congressman from Wilkes-Barre (the 11th District of Pennsylvania) know about commercial real estate?
Another shock like this, if it happens will certainly send the government printing presses into afterburner. Desperate times call for desperate measures.
Legalize and tax various illegal drugs. This would reduce their street prices dramatically. And largely eliminating the profit provide a business like solution to a problem the war on drugs is unable to deal with. Result, huge amounts of money saved. Foreign exchange balances improved. But wait, there is more. Without the cash from selling illegal drugs, the Taliban would lose their ability to attract new terrorists. Result, troops withdraw from Afghanistan without adding to risk from terrorism. Again, huge annual outlay saved. It would be interesting to see a realistic estimate of the combined saving from withdrawing completely from Afghanistan, and shutting down war on drugs.
Eventually nothing is off the table....drugs, prostitution, gambling, you name it....lets face it we are going to need every available vice just to make it through the day when this finally all comes apart.
I have never, ever understood why Wells Fargo has a higher credit rating than USB. After this article, I am even more confused.