Since 2007, if not earlier, all the attention has been focused on the residential real estate troubles. But now the commercial real estate problems are about to come front and center.
In a research note today, Citigroup analysts estimated that "more than $75 billion of CMBS market capitalization has been lost" since the S&P request for comment on changes to their U.S. CMBS rating methodology was issued two days ago.S&P noted:
Our preliminary findings indicate that approximately 25%, 60%, and 90% of the most senior tranches (by count) within the 2005, 2006, and 2007 vintages, respectively, may be downgraded.
60% and 90% writedowns are HUGE! That will involve hundreds of billions of dollars and the losses will be spread throughout the securities market. It could forced dozens of banks into insolvency.
Citi also noted that this will impact the CMBS legacy TALF announced last week by the Fed. According to Citi the "S&P changes could impact nearly 40% of the triple-A TALF eligible universe" and they expect the Fed to change their criteria.
The Fed won't buy non-AAA rated securities. Thus the banks won't be able to pass along the losses to the taxpayer...unless the Fed decides to buy worthless securities as well.
downgrades vs. writedowns
While this is beyond horrific news and it looks like commercial real estate is quickly imploding like someone put a neutron bomb in the middle of it, is a downgrade of CMBS and I'll assume these are some sort of CDO package like the MBS type of CDOs....is a downgrade equal to a write down?
I've got quotes on commercial real estate defaults from 1.67% up to 6% by the end of the year (which is a disaster).
Commercial LL are in a bad position
Not only are stores and businesses closing , but the ones that remain are negotiating rent reductions creating more revenue loss.
major adjustment
but unfortunately a lot of costs, in spite of the aggregate deflation are not moving and as New Deal Democrat has noted, oil and their pumping up on the price of oil is at it again.
We had so many posts on speculation, manipulation of oil/gas markets when it was at an all time high and then it crashed and hence all of the congressional hearings,discussion, analysis, investigations stopped.
Mainly because we had a new crisis with the financial implosion.
I think it's a good idea to revisit gas/oil again.
off the post subject, but ...
what i found MORE interesting about last years gas/oil prices was how fast they dropped. Sure, maybe there was a piling on of short positions that drove prices sky high ... at the same time prices dropped from $147 to $38 barrel (-350%) and no new supply came on line ... none, zero.
so maybe there was paper manipulation not only to the up side by the downside as well.
Absolutely, and excellent point!
Indeed, they've got hedges against increases AND decreases, and if one checks back, it will be noted that during the time Georgia assaulted South Ossetia, and BP shut down three of its gas pipelines/oil pipelines going from the Caspian inland, there was no observable fluctuation in prices - as there should have been in a NON-speculative market.
With the InterContinental Exchange - and its various subsidiaries and sister outfits - going full tilt, and with Goldman Sachs having utilized those TARP funds in buy more speculator companies - it is highly problable the banksters are still highly involved with all speculation!
CBMS financial crisis 2.0
New Deal Democrat has a post on the main EIs (economic indicators) and I started thinking about the correlation to this black swan event. In other words, when to the main EIs fail if they have ever failed, as a group?
Anyone want to tackle that analysis? I was thinking events like 9/11, WWII might be good data points.
downgrade of 90% of tranches
downgrade of 90% of tranches is not the same as 90% writedown of the tranche, especially when done by the count. apples and oranges.
Given that most of these will by now be probably lvl3 accounting (mark-to-myth), the imminent downgrade is probably a non-event too.
Distressed commercial assets and the private dollar...
The bottom of the commercial real estate market will be when properties are sold at a discount, either by private investors willing to take the hicky or banks needing to purge their books of distressed assets. With the percentage of non-recourse loans on the books, our focus must remain on the banks. As long as we continue with tweaking the definition of 'distressed asset' and sending billions to these defunct institutions, we're delaying the inevitable. Inevitably a deluge of private investment dollars will be required to pull us out of this mess, and the private dollar is not buying at 2007 values. The banks must be big boys and take their losses, and quietly selling paper is not the answer.
In some cities
In some cities that's been happening since January (yes, I linked the entire sentence)
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Maximum jobs, not maximum profits.
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Maximum jobs, not maximum profits.