Number 1 buys bankrupt Number 2, and Wall Street is pleased!
It will be very interesting to see, given the massive oversupply in the commercial real estate market, whether this was a good buy, or the first step towards good bye, by Simon, the nation’s biggest owner of retail property space.
Gorilla thinks: “The spoons may be found in the outlet mall at a deep discount!”
Prices of commercial real estate in New York City are plummeting, now 40% below 2007 and predicted to reach 58%.
There are currently 920 football fields and 180 buildings worth of trouble.
Paul Krugman has a very good real estate chart:
And this story is being repeated around the country. As with autos, as with the unemployed, as with residential real estate, there’s a huge oversupply and little or no demand.
Gorilla asks: “Is this wave two or wave three? We all seem to be at sea!”
Commercial real estate default rates are now at a 16 year high, and rising.
And guess who’s holding the bag? Why, banks, of course, who hold more than 80% of CRE loans coming due in the next 2 years.
They’ve tried to hide this on the balance sheet, either their own or the Fed’s, but the combination of high unemployment and low economic growth mean the inevitable wave of further foreclosures and defaults is coming.
Gorilla thinks: “Surf’s up, best to be a shark!”
The banks, that is, in coming clean about the losses on their balance sheets, according to the IMF.
And of course this is a Goingbackwardville problem that no one in Movingforwardville wants to acknowledge.
The banks at the moment are simply hoarding cash, in hopes that they can get through the coming tsunami of CRE defaults.
Kicking the can down the road remains the only financial services policy being pursued seriously by the Administration.
Increasing capital requirements is a good idea, but it should be remembered that Lehman Brothers was considered adequately capitalized by regulators.
The requirements themselves aren’t nearly high enough to prevent another credit-based disaster.
And the dollar carry trade looks like becoming the next bubble, once CRE has burst its banks.
Gorilla asks: “An agency to protect consumers is a fine idea, but which agency is going to protect the bankers from themselves?”
A vast CRE disaster: $4.4 billion worth of default in the Big Apple!
Seems Peter Cooper Village and Stuyvesant town are only worth $2 billion, but these boys paid over $5 billion, the biggest CRE deal ever!!!
Their partnership will run out of money by February if they don’t get some new financing, and guess what? Shock, horror, the banks are no longer keen!!!
Gorilla chimes in: “For that kind of money, they could have bought up all of Detroit and gotten Chrysler thrown in!!!”
Where do banks really make their money?
Charging fees when consumers exceed their debit card limit!
Of course, they’re losing money hand over fist in things like commercial real estate and exotic mortgages, but who needs credit when debit will pay?
Gorilla checks his balance: “Polonious need to catch up with Movingforwardville: Neither a debiter nor a debtor be!!!”
He’s right, except:
1) Many major banks, and far more minor ones with commercial real estate portfolios, are effectively insolvent, so they’re hoarding every bit of capital they can. Once they mark down their remaining worthless, toxic assets, to the tune of several hundred billion, all the capital hoarded in the world may not be enough to save them. Our Treasury Secretary is hoping that the economy will recover before that shoe drops, so as to validate his “kick the can” philosophy.
2) The Fed’s holding trillions more of these assets, having effectively swapped its independence for the high honor of being a Structured Investment Vehicle of the US Treasury. Having become a long-term investor, Ben Bernanke will channel Keynes: as dead as dead can be.
Gorilla liked the juxtaposition with this article: “In Pastiche We Trust! Bing Crosby sang it best: When the euro at night meets the gold price today, no one waits for thee!”
The Congressional bank bailout oversight panel issued a report that is troubling.
Smaller banks face the possibility of “whole loan” defaults on commercial real estate loans and are undercapitalised to the tune of $21 billion. These banks, with assets between $600 million and $100 billion, may not have the ability to raise such capital, and are not covered by TARP.
Meanwhile, the bigger banks continue to be secure, except for their insecurity. The stress tests of the spring were certainly not pessimistic enough in their assumptions. A more pessimistic scenario envisioned by the report estimates losses approaching $600 billion in the next two years.
The problem of course is the toxic assets tied to real estate and the lack of a market for them. The banks have been putting off reporting on their balance sheets as long as possible, but the impending collapse of the commercial real estate bubble makes this strategy less viable.
Meanwhile, in GoingbackwardsMovingforwardville, the government has been playing kick the can down the road since last fall, in hopes that something resembling economic recovery will bail everyone out. Good luck with that!!!
Gorilla concludes: “Keep an eye on Timmy and Ben under the TARP this fall, there’ll be lots of scrambling at Camp Runamuck!”
This after all is the guy who totally missed the housing bubble, tried to help Republicans by not raising rates in 2006, and generally will be lucky to win Miss Hide The Spoons, much less reappointment, in 2010.
You have been warned (again).
The next big shoe to drop in the US economy is commercial real estate. It’s going to be as bad or worse than residential, and many of the same suckers/bankers/taxpayers will be on the hook big time.
And of course Treasury is working on it, so we better hide the spoons…
About the only good news to come out of the G-8 summit is the certainty that most of the assembled leaders’ bodies will be 2 degrees centigrade or more colder by 2050.
