Taxpayers Sacrificed Again

banks, credit, denninger, ethics, FDIC, Fed, Government, law, moral hazard, morality Tagged with: Bank, Business, Commercial property, FDIC, Federal Deposit Insurance Corporation, Federal Reserve System, Office of the Comptroller of the Currency, Real estate

Oct 312009

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It is probably hard for the trusting public to believe what is being done to them by their government. Most of us were raised to think that government was “of the people, by the people and for the people.” It was there to help us, not exploit us. Some still believe that, and it is for them that this piece is provided.

Recently I have posted numerous times on how the banking system is filled with toxic assets that regulators and banks are jointly covering up. Other posts have dealt with the policies that led to taxpayers “investing” (losing) substantial hundreds of billions in the takeovers of FNM and Freddie. These policies have been reinstated and now the FHA rushes toward the same fate. New bailouts for these mortgage agencies are probably inevitable and will likely dwarf any that we have seen thus far.

To better understand why things are going to get worse (hard to believe?), the following post by Karl Denninger is offered. As is obvious, regulatory shenanigans continue. Regardless of how one feels regarding free markets versus regulation, it is difficult to believe that regulation can be effective when the regulators are not allowed to regulate. (Economists have long studied this problem under the rubric of “regulatory capture,” where the regulators begin to serve the industry they are supposed to regulate. The current problem where political bosses order the regulators to ignore their regulatory duties is less known or studied.)

Here is just another example of government intentions to try to “bluff” their way through the economic mess. It cannot be done! At best, some additional time is bought, but so is a bigger implosion. This “pretend and extend” strategy has been apparent for some time. Unfortunately, while it might be considered a viable (the only) political strategy, it is disastrous economic policy and will only exacerbate the inevitable collapse.

Taxpayers have once again been thrown into the fire, whether they know it or not. We have reached the point where the wounded and cornered animal will do anything to survive. Be careful, there is a very large and dangerous predator on the loose.

Posted by Karl Denninger in Regulatory at 10:03

You Can’t Possibly Be Serious (CRE)

I am speaking of the notion that went up the flagpole on allowing banks to refinance commercial real estate loans at more than 100% LTV – and having this “overlooked” by regulators.

Oh, but they are!

Regulators, in a significant step, also said they won’t penalize banks for performing loans where the value of the underlying property is now worth less than the loan balance.

Who did this?

The guidelines, released on Friday by agencies including the Federal Deposit Insurance Corp., the Federal Reserve and the Office of the Comptroller of the Currency, provide guidance for bank examiners and financial institutions working with commercial property owners who are “experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in selling or renting commercial properties.”

Their comment?

“Financial institutions that implement prudent [commercial real estate] loan workout arrangements after performing a comprehensive review of a borrower’s financial condition will not be subject to criticism for engaging in these efforts,” the agencies said in a policy statement.

One of the definitions of “prudent lending” is not to lend beyond the current value of a given asset, with any such “excess amount” requiring a dollar-for-dollar reserve of the bank’s own capital.

Of course the others are knowing that the borrower can pay, which they appear to be covering.

But just as in residential real estate when you lend in commercial real estate beyond asset value you’re doomed, because it is not possible to have a reasonable expectation that the borrower will continue to perform!

Why?

Primarily because demanded rents cannot be maintained.

Take two strip malls across the street from one another. Both started with a “value” of $10 million. Both now have a “present value” of $5 million. Both are identical – in the same location, on opposite sides of the same road, both have the same square footage and amenities.

One loan is foreclosed and the property sold – for $5 million. That buyer finances the $5 million purchase.

The second is “worked out” instead of demanding that the borrower either be foreclosed or pony up the other $5m (which he doesn’t have), and the bank rolls the note at a negative equity position of $5m.

What happens?

Tenants start to go out of business. As space opens in the $5m note mall, those in the $10m note mall see the open space. So do potential new tenants.

Is the rent in the $5m note property going to be higher or lower than the rent in the $10m note property?

How many of the $10m note property spaces will be rented one, two, three or five years from now, compared to the $5m property?

What is going to happen to that $10m loan?

This is an out-and-out scam that is simply going to end up costing the FDIC even more money, because the banks will be even further underwater when the note on that “worked out” property inevitably blows up.

Every time I see the government come up with some hair-brained scheme that will (1) never work and (2) will explode in the taxpayer’s face, I maintain that I’ve seen the dumbest thing yet.