August 10, 2009
Will It Or Won't It, You Make The Call On A Commercial Backed Crisis
"Commercial property is “certainly going to be a significant drag” on growth, said Dean Maki, a former Fed researcher who is now chief U.S. economist in New York at Barclays Capital Inc., the investment-banking division of London-based Barclays Plc. “The bigger risk from it would be if it causes unexpected losses to financial firms that lead to another financial crisis.”"
First Published: August 10, 2009 8:00 AM
Comments from "Plugged In" Readers
a humorous quote, hard to interpret.
We all expect significant losses in the CRE space. So I'd hate to see what "unexpected losses to financial firms" looks like.
I've been pondering this for some time now, and CRE will go down differently than RRE- which is both better and worse.
CRE is concentrated in the smaller and mid sized banks, and the regionals. Those banks are not protected under the foolish "too big to fail" policy that our govt has enacted. Thus, it is highly likely that the CRE debacle will cause quite a lot of pain in the small/medium/regional banks, and likely quite a bit of failures. (we're all waiting for Corus and Gauranty to fail spectacularly as example)
also, CRE "owners" view their properties very differently than RRE "owners" do. they are more likely to default if under water. thus, it's hard to imagine a situation where the smaller banks don't get clobbered.
which is all the better for the Too Big To Failers. They can then swoop in with federal guarantees and pick up their smaller rivals becoming even MORE too big to fail.
that's exactly what we need. Larger too big to fail banks with federal gaurantees making big bets that are backstopped by the taxpayer.
the problems posed by the CRE issue:
1) the FDIC doesn't have enough money to take over the bad banks. (just Corus and Gauranty alone I think will put it into insolvency). thus soon we'll need an FDIC bailout. (it's one of the reasons the FDIC is dragging its heels on those two banks)
2) CRE may put enough pressure on the Too Big To Failers that they need another taxpayer infusion. Not sure how that would fly politically.
3) CRE will dampen the "green shoots!" meme we've been hearing lately.
4) CRE will come in conjunction with the Option ARM/Alt A resets as well as student loan and credit card defaults.
5) not sure how an FDIC bailout (by Treasury of course) will be viewed in general.
Posted by: ex SF-er at August 10, 2009 8:39 AM
We've really just set ourselves up for the most politically palatable solution: a Japanese style decades-long asset deflation. If housing prices lose 50% in a year, people stop paying, but if they lose 5% a year for 9 years, people will keep paying, at least for a longer time.
That translates into housing prices that decline more slowly than they would otherwise, meaning houses prices, while declining for the next decade, will nevertheless remain above the point at which businesses can pay workers to afford such houses, and so unemployment will remain "stubbornly" high (ha ha - as if it has a mind of its own and isn't being manipulated for the benefit of the banks). As a result, commercial real estate will suffer along with high unemployment.
If housing prices were $1, we'd have full employment because businesses could afford to hire people to do work being done in India at a wage that would be very low, but allow everyone to live like kings. If the average home cost $1Billion, no business could afford to hire anyone: no one could live on what businesses could pay and so everything possible would be outsourced.
So housing prices are a component that drives employment (along with health care costs, which will also depress employment if TPTB get their way), and there is an equilibrium point that allows an acceptable level of unemployment while keeping property prices high.
We're going to stay above that equilibrium point on prices to protect the banks, so employment will suffer, along with commercial real estate. Banks hold commercial mortgages too, however, so housing prices will be allowed to sink, they can't be held up forever or every commercial mortgage will default, but housing prices will be allowed to sink more slowly than they otherwise will to reach the equilibrium point.
Everything is intertwined: if health care passes, that will mean fewer jobs, driving house prices lower and commercial real estate will suffer too. If the hit is too great to the banks, they'll kill the health care plan altogether. If they feel that the effects can be mitigated by robbing the rich to give to the rich to buy cars and houses to boost the number of jobs (thereby keeping the rich from revolting because who else buys cars and houses) maybe the health care plan passes anyway.
Posted by: tipster at August 10, 2009 8:45 AM
I should add one thing.
there are 3 major problem banks right now
Corus (around $7 b assets)
Guaranty (around $16b assets I think)
Colonial. (around $25B assets)
last I checked, the three had nearly $45 billion in deposits insured by the FDIC (Very gross guestimate) and the FDIC fund only has $12 billion in its fund. (less since there have been a fair number of recent failures)
of course the FDIC wouldn't lose all $45 B on those three... however when BankUnited failed it had $12.8 billion in assets and the tab to the FDIC was $5B. (40% loss)
if these three fail with anywhere near that loss severity it'd be $45 x 0.4 = $18b.
I'm not sure how these three can survive. Corus and Guarnaty have NEGATIVE core capital ratios (supposedly should never happen), and Colonial just got raided.
Posted by: ex SF-er at August 10, 2009 9:11 AM
as I'm sure you know, xsfr, the FDIC has a rather large 'line of credit' open with the Treasury:
I think in the final bill it ended up $100 billion, but it may be as large as $500 billion.
Regardless, the FDIC wants to foot as little fo the bill asd possible, thus the three zombified banks you mentioned will remain that way for some time, or at least until the FDIC is allowed to start a good bank bad bank model.
Posted by: polip at August 10, 2009 9:58 AM
From Calculated Risk Blog
Maguire Properties Warns of Loan Defaults
Maguire Properties Inc., one of the largest office-building owners in Southern California, is planning to hand over control of seven buildings with some $1.06 billion in debt to creditors ...
Maguire ... notified the buildings' mortgage holders Friday that it expected "imminent default" on the loans.
Posted by: badlydrawnbear at August 10, 2009 10:29 AM
oh yes I know.
I just have a feeling that even the "green shoots!" crowd will have a hard time explaining the fact that the FDIC is technically insolvent. it is not "priced in". (not saying that they can't "green shoots!" it, just that it'll be hard to do).
Plus, the largest 10 banks with Cease and Desist letters have assets >$100B alone. the top 50 banks with Cease and Desist letters have assets >$200B. So it looks like they might need that $500B.
rhetorical question: where is the Treasury going to get that $100B-$500B?
Can the Treasury/Fed continue to support
-the various lending facilities
-the MBS market
-the Treasury Market
-the TBTF banks
-Cash for Clunkers
lastly, I'm not sure how much longer the FDIC can sit and pray for Corus/Guaranty/Colonial. I know they're trying really hard. But these 3 banks' financials are crazy bad, and worsening by the month. or day.
I agree that that a good/bad bank model is highly likely. nobody in their right minds would buy Corus. Especially after what they saw happen to Ken Lewis from BofA
Posted by: ex SF-er at August 10, 2009 10:40 AM
... And for a local angle, you can't get more blue chip than Saulsalito, right?
Casa Madrona Hotel & Spa, Sausalito's largest hotel situated in the heart of the city, will be up for grabs at a foreclosure auction Tuesday morning on the steps of San Rafael City Hall after owners defaulted on their loan... The 63-room hotel, which fronts Bridgeway and Bulkley Avenue, supplies about 40 percent of the city's total hotel tax, which has generated about $1 million a year for the past three years... Francis said the feds became involved when halted mortgage payments on the loan caused Georgia-based Integrity Bank to fail and set the impending foreclosure in motion.
It appears the solvency of the FDIC is now dependent on people's desire to have hot rocks placed on their backs...
Posted by: EBGuy at August 10, 2009 10:46 AM
Amazing that a bank could be brought down by the non-performance of a single loan.
In the spirit of drive-by economics, I had noticed several months ago that there weren't many room lights turned on at night. Seems to be busier this summer though. Poggio (the restaurant) seems to be busy, although not as crowded as I've noticed in past years.
The link to the article you quoted:
Posted by: SausalitoRes at August 10, 2009 2:30 PM