Friday, November 21, 2008

Clueless bankers

Chairman Bernanke three days ago:
There are some signs that credit markets, while still quite strained, are improving.

Improving? What planet is he on?

Vice Chairman Kohn two days ago:
The current situation is so severe that it calls for careful review of how such a crisis evolved and how we can prevent a similar situation from happening again.

How can we prevent another? How about first fixing this?

The whole world now belatedly recognizes that sub-prime loans blew up, because homeowners could not refinance homes prices quit appreciating. But that spread to Alt-A, HELOC and prime mortgages. Why doesn't the whole world now recognize that commercial real estate is going to crash?

Let's start first with the "sub-prime" commercial real estate. This real estate that I label "sub-prime" is those properties that expected higher rents and revenues from the expertise of the developers, or just corporate real estate "liar loans" where they lied about future projections. And corporate real estate defaults is in the same place that sub-prime was. These problems, as any good banker will tell you, are "contained."

Mortgages on offices, shopping malls and hotels that were based on projections of soaring income during the real estate boom are roiling the bond market.

Mortgages on offices, shopping malls and hotels that were based on projections of soaring income during the real estate boom are roiling the bond market.

A $209 million loan made by JPMorgan Chase & Co. to finance the Westin La Paloma Resort & Spa in Tucson, Arizona, and the Westin Hilton Head Island Resort & Spa in South Carolina, is near default after cancellations sapped revenue, according to Standard & Poor’s. In southern California, the owner of the Promenade Shops at Dos Lagos missed two payments, according to analysts at Deutsche Bank AG.

Both loans were given to borrowers based on estimates that rents and hotel revenue would rise, and then were packaged with similar debt into a $1.16 billion bond sold by JPMorgan to investors. So-called pro-forma loans outstanding total more than $40 billion, according to Barclays Capital, all of which were put into securities. Concern that the Westin Portfolio and Promenade debt may be the first of many of those loans to default sent yields on commercial-mortgage backed securities to record highs relative to benchmark interest rates.

“These kinds of loans written during the height of the real estate boom could be the first to have problems,” said Christopher Sullivan, who oversees $1.3 billion as chief investment officer at United Nations Federal Credit Union in New York. “They were underwritten with outlandish expectations on rents and property appreciation that will turn out to be fiction

The stock market already recognizes that the buyers of corporate real estate are gone. Look at the prices of the insurance company stocks who have gobbled up this real estate. They are already stuffed more than a Thanksgiving turkey. Who is going to roll-over their paper?

And that's what the market is saying about the "Fortress 5" banks that got the big money from the Fed.

Why else do you think these government officials are finally going to offer the homeowner some foreclosure relief?

Because these institutions need to start begging for money again, and they want to throw the taxpayer a sop, so they acquiesce another sop from Uncle Sam to these "healthy institutions."

Healthy institutions? They are already in a hospice!

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