You don't put out a fire with gasoline. You don't cure a hangover with vodka. You don't end a headache by banging your head against the wall. Apparently, at least in Washington, you do address a sick banking system by keeping more sick banks open. It's as if I'm in the Twilight Zone...
All one really needs to do is to take a look a housing from a bird's eye view, whether adjusted for inflation or not, and it is quite obvious that not only are we still in a housing bubble, but we have a while to go before we reach equilibrium. Those insurer's, lenders, and investors highly levered to residential and commercial real estate had better be prepared for another 30% or so drop.
At least a few MDs at Morgan Stanley DO read my blog, but it is obvious that the guys in the real estate division don't. Early in 2008 I named Morgan Stanley the "The Riskiest Bank on the Street". The following is one of the reasons why.
There are many comments surrounding the return of TARP. I think one of the most important points are being missed. Most of these banks swore that they didn't need TARP. Despite this, in order to return it, they must go back out to the capital markets. Why do you have to hit the market to return a loan that you said you didn't need, unless you needed it? This obvious lie has went unchallenged.
Regulatory capture has allowed what was just a bunch of stinky bank balance sheets to literally threaten the economy. Here is another shining (or stinking, depending on your perspective) example.
REITs have ascended too far from their fundamentals -DJ US Real Estate Index has outpaced S&P 500 index by more than 50% during a time when their macro and fundamental outlook pale compared to that of the broad market. There is no "deal" to be had here! What you are witnessing is momentum trading, not fundamental value.
Ackman from Pershing Square fame has released a very bullish CRE presentation. I stand diametrically opposed to both the conclusions and the analysis in general, thus have created my own comprehensive CRE outlook for 2010 and beyond. Here you have it: A bulls vs bears debate in the CRE space - both of which are quite well documented and allow for rich reading.
While the recent Goldman announcement may sound good to some, it entirely misses the point of the outrage of the many who actually realize what is going on. Further, it fails to go far enough. What Goldman needs to do is to go back to its partnership days where it was their capital at risk (all of it) and not the shareholders.
Innovation, in and of itself, is a very good thing. The issue currently at hand is that it was not financial innovation that got us into this mess. It was fraud! Financial engineers attempted to create methods of circumventing regulations, laws, prudent risk management, common sense and mean market returns. This lying, in turn, was labeled "innovation", which it absolutely was not, and the moniker has been carried on in the media ever since.
Just a quick perusal of news (and an analytical fact or two) in the CRE space that makes one wonder why Goldman Sachs thinks that anyone would believe them. Then again, looking at the ($19 billion) bonus pool, much of which was just nearly halved by the UK government, it appears as if enough people believe them. Let's see what we can to do alleviate that...
I don't want anyone to think this is a Goldman bashing exercise. I actually admire their prowess. Not for operational excellence (as many mistakenly consider them to have when not adjusting accounting returns for risk), but for the way they seem to get away with murder, time after time. You gotta give it to them. I want readers to take time to go through the anecdotal evidence here and decide if it is more profitable to invest with Goldman, or actually attempt to put your bid in to get a slice of that $19 billion, middle class taxpayer funded, regulator protected bonus pool.
The magnifying glass has been wiped clean and is re-focused on the under-appreciated, sell side manipulated train wreck that is the commercial real estate space. Goldman has just upgraded the sector and is currently peddling CMBS to to clients who obviously don't believe a thing that I say. I am now provided a peak into a large CRE REIT, down to the property level and will follow up with a look into the CMBS that hold the mortgages behind these properties. Next up, Reggie vs. Goldman, a head to head CRE confrontation...
I don't know if it has been officially declared here or not, so I will say it explicitly. Since Wall Street DOES NOT charge for their research, it is essentially a loss leader for sales. We all know this, yet we pretend that it does not happen. Well, it does. It's pervasive. It's explicit. It's now! The goal of Wall Street research is not to enrich the retail or institutional brokerage client, but to pave the way for the underwriting, sales and trading departments. Go ahead. Prove me wrong. I dare 'ya.
