"the dollar is basically being re-rated ... in much the same way many U.S. credit derivative securities have been re-rated.
...
The collapse in demand for complex securities has reduced overall foreign demand for US financial assets. There was a time when serious observers - including observers at places like the IMF -- argued that the United States comparative advantage at creating complex financial "products" would assure demand for US dollars and the financing of the US current account. That forecast hasn't been born out. Foreign demand for US equities has emerged, but that demand hinges on getting those assets at a sale price."
First to the CRE confessional will be HSBC which is expected to announce a $16 b write down today. They were early with a write down whe subprime hit too. Now they are back. HSBC also increased their dividend, which a couple of other UK banks did last week, and which has a "move along, nothing to see here" smell to it IMHO.
Also, the article points out that the silver lining is "...excesses that overtook the U.S. housing market aren't as prevalent in commercial real estate. Overbuilding of shopping malls, office parks and other commercial property hasn't been rampant..."
However I would argue that there was already too much. Doesn't the US have the greatest per capital retail square footage in the world. So, if people all over the US snap shut their wallets and stop shopping, the fact that there wasn't as much overbuilding recently won't provide the cushion they hope for.
That's the point that Rob Dawg was making a few days back, that we were already well beyond sustainability before the boom. Ugly doesn't begin to describe what's in store for retail CRE.
Its funny... I flipflop on the severity... CR and others makes sense... The opposition does too... This might be the first non-consensus discussion here... It will be interesting, albeit some what morbidly, either way....
My writeup on the rapidly deteriorating condition of Newcastle Investment Corporation's multibillion CRE portfolio and smaller but still $1 billion+ residential subprime portfolio is here:
From Brad Setzer's blog: "As a result of this intervention, the dollar isn't uniformly weak. It unremains(sic) fairly strong against many emerging currencies."
I know that I, for one, am gonna sleep a lot better knowing that our currency is stronger than Zimbabwe's.
Yeah right: If Goldman writes about these massive expected losses on CRE, what might be the reasoning behind it? Revaluation of Whitehall, definitely not. Okay then let's take a look at the CMBX... Hmm, strange development last week, no? 50 bps up. Oh, I forgot about to tell you about the ankle-high chinese walls at Goldman.
That Goldman report was written by their banking analyst (not CRE or CMBS people), and they have since recanted some of the statements. Some of their conclusions are correct, but having read it, their methodology is off the mark - to put it nicely.
Its great that it keeps getting circulated given the obvious mistakes that were made.
I disagree with most comment writers on this blog...
A better solution might be to have the government guarantee the top managements of the US banks a nice, healthy salary, benefits, private plane access, a pension etc... as long as they don't go back into banking.
A better solution might be to have the government guarantee the top managements of the US banks a nice, healthy salary, benefits, private plane access, a pension etc... as long as they don't go back into banking.
Right. Maybe they could reinvent themselves as granite countertop salespeople.
Charlatan writes:
That Goldman report was written by their banking analyst (not CRE or CMBS people), and they have since recanted some of the statements.
:Exactly. That's why I was mentioning the ankle-high Chinese Walls at GS.
"That Goldman report was written by their banking analyst (not CRE or CMBS people), and they have since recanted some of the statements."
Yeah, this report is at least a month old. The reaction of our sales coverage at GS (we are big HY CRE debt buyers) when we brought the article to their attention was priceless to say the least.
Sterlingirl, the HSBC $16bn. has very little to do with US CRE (they have a negligible presence in the space) and almost everything to do with consumer finance products in the context of the US market.
Also, there likely is overbuilding, but nothing compared to the overbuilding that was prevalent in the last large CRE driven crisis (late 80's early 90's). Trailing 3 year deliveries in almost all product types were 3-4 times what the were for the trailing 3 this time in terms of square footage/units. I have no idea how that scales as a % of GDP (but I know it's higher for the former) which is probably a better measure apples to apples.
Hey Bob, the mistakes are numerous, but to pick just one: they used a 5-year cumulative default rate on 10-year CMBS balloon loans.
There are several rebuttals out there that detail the numerous mistakes. Some of the conclusions are correct, but it was an accident that they arrived at them. The loss levels are way to high for any CMBS market, and even the pessimists at places such as Moody's disagree.
The bit that they're banking analysts is the key. The primary sector in CMBS is not your LBO related CRE loan, or your Macklowe buying EOP's Manhattan Office portfolio, or construction and development loans. These analysts think that all CRE loans are C&D loans, where your typical CMBS Conduit is a 10-year balloon on a stabilized property, with long-term leases, etc. You honestly can't get past the very first sentence of the powerpoint without gasping in horror over the fact they don't know what they're talking about.
It may be garbage, but have you seen the charts in that report? It's hard to argue with a really attractive-looking chart, and that thing is full of them.
I read the words...and I try to understand, but my eye just keeps going to the charts.
dc1000, maybe that's not the kind of horror I had in mind, but I hate it when that happens. My gasp was a little more along the lines of embarrassment for those poor analysts.
I have been having the dry heaves for weeks. you get used to it after a while. Every day another bomb explodes. I have to put my son through college. Student loans are even hard to get now. They cant be securitized. Our country is going to hell. At least it seems that way. I cant even watch the news anymore. It seither Hillary, Obama or the economy. 3 things I rather not listen to.
First
Excellent article by Brad Setser today:
Worth less, not worthless
"the dollar is basically being re-rated ... in much the same way many U.S. credit derivative securities have been re-rated.
...
The collapse in demand for complex securities has reduced overall foreign demand for US financial assets. There was a time when serious observers - including observers at places like the IMF -- argued that the United States comparative advantage at creating complex financial "products" would assure demand for US dollars and the financing of the US current account. That forecast hasn't been born out. Foreign demand for US equities has emerged, but that demand hinges on getting those assets at a sale price."
First to the CRE confessional will be HSBC which is expected to announce a $16 b write down today. They were early with a write down whe subprime hit too. Now they are back. HSBC also increased their dividend, which a couple of other UK banks did last week, and which has a "move along, nothing to see here" smell to it IMHO.
HSBC to hike dividend as crunch bites - Telegraph
Also, the article points out that the silver lining is "...excesses that overtook the U.S. housing market aren't as prevalent in commercial real estate. Overbuilding of shopping malls, office parks and other commercial property hasn't been rampant..."
However I would argue that there was already too much. Doesn't the US have the greatest per capital retail square footage in the world. So, if people all over the US snap shut their wallets and stop shopping, the fact that there wasn't as much overbuilding recently won't provide the cushion they hope for.
sterlingerl,
That's the point that Rob Dawg was making a few days back, that we were already well beyond sustainability before the boom. Ugly doesn't begin to describe what's in store for retail CRE.
Its funny... I flipflop on the severity... CR and others makes sense... The opposition does too... This might be the first non-consensus discussion here... It will be interesting, albeit some what morbidly, either way....
So how many shoes does that make that have dropped? How many more to go? Is anybody keeping track? I think it's time for a chronological review.
My writeup on the rapidly deteriorating condition of Newcastle Investment Corporation's multibillion CRE portfolio and smaller but still $1 billion+ residential subprime portfolio is here:
Newcastle, one of the USA’s biggest commercial RE investors, posts gigantic loss and decline in book value « Greg’s Law & Economics Blog
From Brad Setzer's blog: "As a result of this intervention, the dollar isn't uniformly weak. It unremains(sic) fairly strong against many emerging currencies."
I know that I, for one, am gonna sleep a lot better knowing that our currency is stronger than Zimbabwe's.
This article makes it sound like the financial institutions are going to be hurt worse than the CRE companies themselves.
Yeah right: If Goldman writes about these massive expected losses on CRE, what might be the reasoning behind it? Revaluation of Whitehall, definitely not. Okay then let's take a look at the CMBX... Hmm, strange development last week, no? 50 bps up. Oh, I forgot about to tell you about the ankle-high chinese walls at Goldman.
That Goldman report was written by their banking analyst (not CRE or CMBS people), and they have since recanted some of the statements. Some of their conclusions are correct, but having read it, their methodology is off the mark - to put it nicely.
Its great that it keeps getting circulated given the obvious mistakes that were made.
I disagree with most comment writers on this blog...
A better solution might be to have the government guarantee the top managements of the US banks a nice, healthy salary, benefits, private plane access, a pension etc... as long as they don't go back into banking.
Right. Maybe they could reinvent themselves as granite countertop salespeople.
Charlatan,
What were the obvious mistakes?
Didn't GS buy a big building in Manhattan from some Middle-East fund just a month or two ago?
That would tie in with Charlatan's take that GS's own CRE people aren't thinking the same way.
Charlatan writes:
That Goldman report was written by their banking analyst (not CRE or CMBS people), and they have since recanted some of the statements.
:Exactly. That's why I was mentioning the ankle-high Chinese Walls at GS.
"That Goldman report was written by their banking analyst (not CRE or CMBS people), and they have since recanted some of the statements."
Yeah, this report is at least a month old. The reaction of our sales coverage at GS (we are big HY CRE debt buyers) when we brought the article to their attention was priceless to say the least.
Sterlingirl, the HSBC $16bn. has very little to do with US CRE (they have a negligible presence in the space) and almost everything to do with consumer finance products in the context of the US market.
Also, there likely is overbuilding, but nothing compared to the overbuilding that was prevalent in the last large CRE driven crisis (late 80's early 90's). Trailing 3 year deliveries in almost all product types were 3-4 times what the were for the trailing 3 this time in terms of square footage/units. I have no idea how that scales as a % of GDP (but I know it's higher for the former) which is probably a better measure apples to apples.
Hey Bob, the mistakes are numerous, but to pick just one: they used a 5-year cumulative default rate on 10-year CMBS balloon loans.
There are several rebuttals out there that detail the numerous mistakes. Some of the conclusions are correct, but it was an accident that they arrived at them. The loss levels are way to high for any CMBS market, and even the pessimists at places such as Moody's disagree.
The bit that they're banking analysts is the key. The primary sector in CMBS is not your LBO related CRE loan, or your Macklowe buying EOP's Manhattan Office portfolio, or construction and development loans. These analysts think that all CRE loans are C&D loans, where your typical CMBS Conduit is a 10-year balloon on a stabilized property, with long-term leases, etc. You honestly can't get past the very first sentence of the powerpoint without gasping in horror over the fact they don't know what they're talking about.
phew
i almost threw up in my mouth a little
It may be garbage, but have you seen the charts in that report? It's hard to argue with a really attractive-looking chart, and that thing is full of them.
I read the words...and I try to understand, but my eye just keeps going to the charts.
dc1000, maybe that's not the kind of horror I had in mind, but I hate it when that happens. My gasp was a little more along the lines of embarrassment for those poor analysts.
dc100
I have been having the dry heaves for weeks. you get used to it after a while. Every day another bomb explodes. I have to put my son through college. Student loans are even hard to get now. They cant be securitized. Our country is going to hell. At least it seems that way. I cant even watch the news anymore. It seither Hillary, Obama or the economy. 3 things I rather not listen to.
yeah i was kidding but you got my point
i'm used to the dry heaves plenty
but i stopped doing that lately for some reason
its just the way things are i guess
So how many shoes does that make that have dropped? How many more to go?
Think of Imelda Marcos's closet in the middle of a 7.5 earthquake.
21-26% for cre?
Shiller says -30% for resi...cre was a mere shadow of resi this time around.