Roughly a year ago, I explained to those who subscribe to BoomBustBlog that NYC real estate ever finished correcting. As a matter of fact, it has some ways to go, as does DC real estate. The reason why NYC and DC markets levitated was because the Fed pumped trillions into Wall Street to reflate the bubble which was (and still is) the zombie banking system. DC saw federal spending attempt to replicate organic economic growth. Are any of these methodologies sustainable or practical. Do bulldogs have pleasant breath?
Bloomberg reports The Riskiest Bank on the Street [20]and it goes a little something like this:Morgan Stanley Said to Limit Cash Bonuses, Increase Deferrals [21]
Morgan Stanley (MS) [22], owner of the world’s biggest brokerage, is capping immediate cash bonuses at $125,000 as the firm curtails pay and defers more compensation for senior executives, according to a person briefed on the plans.
Members of the company’s operating committee, led by Chief Executive Officer James Gorman [23], 53, won’t get any immediate cash, said the person, who declined to be identified because the plan hasn’t been made public. Mark Lake, a spokesman for the New York-based bank, declined to comment.
The decision comes after a fourth quarter that some analysts predicted was the worst for trading and investment- banking revenue since the financial crisis. Increased salaries and previous moves toward deferring more pay have limited investment banks’ flexibility to cut compensation costs, analysts including Atlantic Equities’ Richard Staite have said.
Morgan Stanley’s decision will increase the average amount of pay deferred to about 75 percent, the person said. The firm deferred an average of 60 percent in 2010 and 40 percent in 2009. Deferred cash for 2011 performance will be paid out in two equal installments in the final month of 2012 and 2013, a change from the previous deferral plan that paid out in thirds over 18 months, the person said
Apart from whether said bonuses were ever really deserved in the first place.... Yes, I'll go back thee again, seeWall Street Real Estate Funds Lose Between 61% to 98% for Their Investors as They Rake in Fees! [24]":
Last year I felt compelled to comment on Wall Street private fund fees after getting into a debate with a Morgan Stanley employee about the performance of the CRE funds. He had the nerve to brag about the fact that MS made money despite the fact they lost about 2/3rds of their clients money. I though to myself, "Damn, now that's some bold, hubristics@$t". [25]So, I decided to attempt to lay it out for everybody in the blog, see "
The example below illustrates the impact of change in the value of real estate investments on the returns of the various stakeholders - lenders, investors (LPs) and fund sponsor (GP), for a real estate fund with an initial investment of $9 billion, 60% leverage and a life of 6 years. The model used to generate this example is freely available for download to prospective Reggie Middleton, LLC clients and BoomBustBlog subscribers by clicking here:Real estate fund illustration [26]. All are invited to run your own scenario analysis using your individual circumstances and metrics....
... Under the base case assumptions, the steep price declines not only wipes out the positive returns from the operating cash flows but also shaves off a portion of invested capital resulting in negative cumulated total returns earned for the real estate fund over the life of six years. However, owing to 60% leverage, the capital losses are magnified for the equity investors leading to massive erosion of equity capital. However, it is noteworthy that the returns vary substantially for LPs (contributing 90% of equity) and GP (contributing 10% of equity). It can be observed that the money collected in the form of management fees and acquisition fees more than compensates for the lost capital of the GP, eventually emerging with a net positive cash flow. On the other hand, steep declines in the value of real estate investments strip the LPs (investors) of their capital. The huge difference between the returns of GP and LPs and the factors behind this disconnect reinforces the conflict of interest between the fund managers and the investors in the fund.
[27]re_fund_returns.pngre_fund_returns.png
[28]re_fund_returns_tables.pngre_fund_returns_tables.png
Under the base case assumptions, the cumulated return of the fund and LPs is -6.75% and -55.86, respectively while the GP manages a positive return of 17.64%. Under a relatively optimistic case where some mild recovery is assumed in the later years (3% annual increase in year 5 and year 6), LP still loses a over a quarter of its capital invested while GP earns a phenomenal return. Under a relatively adverse case with 10% annual decline in year 5 and year 6, the LP loses most of its capital while GP still manages to breakeven by recovering most of the capital losses from the management and acquisition fees..
Now, that we're on the topic of Morgan Stanlely, real estate, and bonuses, keep in mind that there is never just one roach. If Morgan Stanley is slashing bonuses to this extent, so are the other big banks. Remember, I have warned extensively on Goldman Sachs, the big bank that can't trade...
Reggie Middleton Explains the Travails of the F.I.R.E. Sector on CNBC
Here are some links that you are unlikely to find anywhere else...
Just As I Predicted Last Quarter, The World's First FDIC Insured Hedge Fund Takes A Fat Trading Loss [29]
 [30]I'm Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & Introduction |
I'm Hunting Big Game Today: The Squid On A Spear Tip
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 [31]Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored? |
Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored? [31]Welcome to part two of my series on Hunting the Squid, the overvaluation and under-appreciation of the risks that is Goldman Sachs. Since this highly analytical, but poignant diatribe covers a lot of material, it's imperative that those who have not done so review part 1 of this series, I'm Hunting Big Game Today:The Squid On The Spear Tip, Part... |
 [32]Reggie Middleton Serves Up Fried Calamari From Raw Squid: Goldman Sachs and Market Perception of Real Risks! |
Hunting the Squid Part 3: Reggie Middleton Serves Up Fried Calamari From Raw Squid [32]For those who don't subscribe to BoomBustblog, or haven't read I'm Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & Introduction and Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?, not only have you missed out on some unique artwork, you've potentially missed out on 300%... |
 [33]Hunting the Squid, part 4: So, What Else Can Go Wrong With The Squid? Plenty!!! |
Hunting the Squid, part 4: So, What Else Can Go Wrong With Goldman Sachs? Plenty! [33]Yes, this more of the hardest hitting investment banking research available focusing on Goldman Sachs (the Squid), but before you go on, be sure you have read parts 1.2. and 3: I'm Hunting Big Game Today:The Squid On A Spear Tip, Part 1 & Introduction Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To... |
- Hunting the Squid, Part 5: Sometimes Your Local Superhero Doesn't Look Like What They Show You In The Movies [34]
- What Was That I Heard About Squids Raising Capital Because They Can't Trade? [35]
- Reggie Middleton vs the Squid That Can't Trade! [36]
About a year ago I penned a piece called...
Dr. Benjamin Shalom Bernanke, AKA Dr. FrankenFinance, Has Successfully Caused NYC Condo Prices To Be The ONLY Major Condo Market To Rise In Price
As excerpted...
Yesterday, I illustrated how NYC is pulling away from all of the other major condo markets - see "Why Is NYC The Only Major Condo Market Increasing In Price? [37]". According to the S&P Case Shiller Condo index, is the only major US condo market that not only has firming prices but is actually increasing in price. Chatter and anecdotal evidence from the ground confirms this as developers and speculators are once again bidding up development land, lots and potential conversion properties.
[38]
In the afore-linked piece, I gave what I consider to be the cause of this "newfound", yet hard to come by value. The answer??? Dr. Benjamin Shalom Bernanke. You see, Dr. Bernanke has taken over the helm of the "Great Global Macro Experiment [39]” from Alan Greenspan and has supercharged it to the nth degree - all primarily to save our insolvent banking system. Where is the nexus of banking and finance in this country? Answer, right where you see that little positive blip in a chart of otherwise sharply downward trending assets. Trust me, it is not as if there is any dearth of condo unit supply in our dear city, as can be seen in “Who are ya gonna believe, the pundits or your lying eyes?” [40]. As excerpted from yesterday's post, here is that same area about a year and a half later...
Now, to remind all exactly how much capital and resources Dr. Bernanke pumped into the NYC area, be aware that this industry was literally on the verge of collapse in 2008 (with two of the five biggest banks literally collapsing and the balance getting bailed out by the government right before they collapsed), yet paid out record bonuses on record earnings less than 8 quarters later. This is even more amazing considering the only fundamental change in to the Frankenstein Monster assets that contributed to these banks [near] demise is that they have further PLUNGED IN VALUE! Yes, I do mean Frankenstein assets. I implore you to delve in further - "Welcome to the World of Dr. FrankenFinance!" [41]andFinancial Innovation vs Financial Fraud [42].
Let's revisit the charts from yesterday's The Latest Case Shiller Index – Housing Continues Freefall In Aggressive Search For Equilibrium [43], with a few modifications to make the obvious more,,, well, obvious...
[44]
Remember, as bearish as this chart looks,it is actually overly optimistic [45], markedly so. Far be it for me to beggar the obvious, but why in the hell would an environment that causes the worlds largest banks to collapse like anorexics in a Weight Watchers convention, suddenly get A LOT worse, yet spawn such a surge in the banking industry? Well my dear BoomBustBlogger, its one part regulatory capture (More on Lehman Brothers Dies While Getting Away with Murder: Introducing Regulatory Capture [46]), two parts helicopter stunt man (Great Global Macro Experiment [39]).
On the Regulatory Capture front, let’s revisit the FASB tale: About the Politically Malleable FASB, Paid for Politicians, and Mark to Myth Accounting Rules [47]. Remember, the change of these rules to the status of straight silliness that kicked off one of the greatest bear market rallies in the history of US publicly traded stocks. Now, nearly everything financial (as it relates to M2M) is overvalued.
[47]
I declared insolvency throughout the banking system, and it looked as if I was wrong for some time, then the truth’s ugly head started peaking out. See The Financial Times Vindicates BoomBustBlog’s Stance On Goldman Sachs – Once Again! [48]
As excerpted fromDid Bernanke Permanently Cripple the Butterfly That Is US Housing? The Answer Is More Obvious Than Many Want To Believe [49]
This near cessation of foreclosure activity has materially dropped the shadow inventory numbers, but has done so in a way that is quite misleading. Those foreclosures either will happen and become REOs or distressed property sales that are currently averaging a discount of ~25% to conventional retail sales (thus further pressuring sales prices), or will result in the properties being put directly on the market at steep discount (again, further pressuring sale prices). Basically, the foreclosure backlog is simply accumulating in the background and will print a very sharp spike upwards one way or another once the foreclosure and fraud issues of the banks are sorted out – even if they are sorted out to the detriment of the banks. Despite this reprieve in foreclosures, the ratio of shadow inventory to home sales is not decreasing. This is a double negative, for shadow inventory is decreasing (albeit for very artificial and temporary reasons). The reason for the lack of movement in this very key figure is that housing sales are actually declining both on a seasonally adjusted and non-adjusted basis – and if these figures were to be adjusted for “true” inflation, would look much worse. This leaves the ratio of delinquent and foreclosure activity to sales relatively static. One can surmise what happens when the foreclosure backlog that was caused by the bank’s myriad legal issues clear up.
The most valuable chart in the study just released to subscribers,
Shadow Inventory Update [50]-- March 2011 shows how quickly one can expect the shadow inventory to be consumed by the sale of homes. To make a long story short, we still have quite a ways to go before we reach the pre-bubble levels, and that is without taking into consideration the foreclosure moratoriums. Keep in mind that these numbers do not include the pent up shadow inventory that is being hidden by the foreclosure crisis. That additional inventory on top of a slowing housing sales metric can easily tack one to 4 years onto the inventory numbers.
[51]
As you can see, the credit (delinquency measures) metrics are actually moderating slightly over the last few quarters, but have increased over the last two. This is a negative sign considering all of the efforts that have been made by the government and the banks to reduce that figure. The foreclosure inventory, although lulled somewhat, is still slightly on the rise. This lull is synthetic and temporary, a by-product of congressional pressure and legal issues pressing the banks to undergo voluntary and involuntary moratoriums on foreclosure activity. The consequent movement to be expected as these moratoriums are lifted, the banks work out their legal issues, and the properties move one way or the other will cause a very dramatic spike in the shadow inventory numbers. This spike will occur on top of slowing housing sales, dramatically reduced housing prices metrics and potentially deteriorating credit metrics (if the most recent trend continues). If that is not enough good news for you, the Goldilocks scenario of the perfect interest rate environment for real estate needs to (and probably will in the near to medium term) come to an end. SeeThe True Cause Of The 2008 Market Crash Looks Like It’s About To Rear Its Ugly Head Again, With A Vengeance [52]Friday, March 11th, 2011. Our calculations available ot subscribers show a very bleak outlook for housing. It is not as if there is no precedence for such. Take a look at the Japanese situation, and this is not taking into consideration the recent issues of the earthquake, tsunami and radiation poisoning and nuclear meltdown. Few things are as detrimental to property values as radiation poisoning!
[53]
A lesson to be learned: Beware for when a true black swan event occurs...
Further reading:
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- Reggie Middleton ON CNBC’s Fast Money Discussing Hopium in Real Estate [54]Friday, February 25th, 2011
- In Case You Didn’t Get The Memo, The US Is In a Real Estate Depression That Is About To Get Much Worse [55]Wednesday, February 23rd, 2011
- Further Proof Of The Worsening Of The Real Estate Depression [56]Thursday, February 24th, 2011
- You’ve Been Had! You’ve Been Took! Hoodwinked! Bamboozled! Led Astray! Run Amok! This Is What They Do! [57]Monday, February 28th, 2011
- FASB Appears to Have Bent Over For The Final Time & Accuracy In Financial Reporting Dies An Ignominious Death!!! [58]Wednesday, February 9th, 2011
- The Latest Case Shiller Index – Housing Continues Freefall In Aggressive Search For Equilibrium [43]Monday, February 7th, 2011