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Monday, April 27, 2009

The FED made a huge mess -Commercial loans are the new hot spot for bank trouble ahead

Commercial loans who are 22% of all loans on books although with a higher concentration on smaller banks balance sheets are the nuke exploding now. After the bankruptcy of GGP (second biggest mall owner). That's the huge systematic problem for banks that every part of their balance sheets are imploding. The zero financing of the FED can not stop that and unfortunately things will get worse as the jobless rate will rise and that will have an impact on all area's of the economy. The mantra which was implemented into all western countries economies was to borrow money and consume or buyback your own stocks - both is insane and any kid can figure out that such a behaviour is doomed to fail. The FED plays a severe role in this misconcept as it came up with its pathetic and weird Fed -model declaring stocks at expensive levels as cheap because of corresponding low interest rates. Those rates were relatively low because the FED created a phony new calculation equation for inflation under Greenspan and taught that to other countries ( the introduction of the EURO is probably one of the biggest crimes in history as they created a new inflation basket at the same time and lied to the people who were outraged about sudden rises in costs). Inflation and growth of economies are 2 parts of the same equation the moment you underestimate the inflation part you automatically overestimate the growth (GDP). That's one of the evil things which president Clinton with Greenspan ( that happens when you make a lobbyist to a FED chairman) did besides deregulating the banks. Greenspan was a big cheerleader of the FED model and was taken up by all investment banks to promote the bull campaign and to develop strategies like getting all CEO' to buy back their own stocks at the highs. Those CEO's were very fond of those idea's since they owned big chunks of stock options ( which they also loved to backdate to coincidentally the lowest prices available). The whole system got to a huge bonanza for executives and too a very expensive for regular stock owners now. Outrages is that all this irresponsible CEO's are still sitting in their chairs and in cases they do not they got away with fat undeserved perks.

Excerpt

Commercial break

Apr 23rd 2009
From The Economist print edition

Disaster looms in yet another asset class

GENERAL GROWTH PROPERTIES (GGP) and the Great Basin Bank do not have a lot in common. One is America’s second-largest mall owner, the other a small bank in Elko, Nevada. But both shut their doors within a day of each other this month because of their exposure to commercial property, the most threatening in a line-up of suspect asset classes.

GGP filed for Chapter 11 bankruptcy protection on April 16th. Its assets, which include the Fashion Show Mall in Las Vegas (pictured) and South Street Seaport in New York, are high-quality and continue to generate decent income. Its financing structure is what got it into trouble. GGP found that it simply could not roll over its debts because of a lack of liquidity.

The second shock wave is that GGP’s bankruptcy underlines a pervasive refinancing risk for the industry. Foresight Analytics, a research firm, reckons that $594 billion of commercial mortgages will mature in America alone between 2009 and 2011. Many of these borrowers will have a big problem when their loans mature. Just as in residential property, the financing terms that were available to property and construction firms got ever laxer as the bubble inflated. Loan-to-value ratios of 85-95% were common in 2006 and 2007. These have now tightened to 60-65% and below for new lending.

That would be bad enough if prices were static. They are not. Commercial-property prices have fallen by 35% or so in America. Richard Parkus, of Deutsche Bank, thinks that 70% of all CMBS issued recently in America will not be able to refinance without a big increase in the capital that borrowers stump up. It is likely to be a similar story with bank lending. Many banks are extending loan terms, hoping that the problem will go away. It will not. A growing overhang of debt will only make it harder for the market to recover. And the full effects of the bust are only just beginning to be felt. Losses on commercial property tend to lag behind rises in the unemployment rate by a year or so, largely because lease terms protect landlords from immediate falls in rental income. (An exception is the hotel industry, where leases are, in effect, renewed daily). The pain is now arriving. Office vacancies in America’s city centres increased to 12.5% in the first quarter, up from 9.9% a year earlier. Delinquencies are spiralling. Write-offs on bank-held commercial-property loans rose sevenfold in 2008.

The potential for further damage to the banks is especially worrying. Morgan Stanley’s first-quarter results on April 22nd included a $1 billion loss on its real-estate investments. But the loan books are where the real concerns lie. Commercial-property loans, including construction and development, account for 22% of American bank loans, up from an average of 14% in the 1980s and 1990s.

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