The Long Crisis

Posts Tagged ‘economic crisis’

Boston’s Hancock Tower is a sad tale of how one commercial real estate complex ate over one billion dollars in a very short time frame.

But that’s exactly what happened with the 62-story building, as ownership changed hands four times in six years. In January 2009, an aggressive young commercial real estate operator defaulted on a portion of the building’s $1.3 billion mortgage just 24 months after buying it. In March, two firms that had purchased chunks of the tower’s second mortgage for pennies on the dollar assumed control, essentially rendering up to $400 million of debt worthless. The Hancock’s market value is now about $700 million. That is only about half of what it appraised for less than two years ago.

The story of Boston’s Hancock Tower is hardly unique as the recession/depression finally spilled over into the commercial real estate market in 2008. With the national average vacancy rate now averaging 15% and climbing conditions are set to become disastrously worse. Many existing tenants are requesting reductions in rents and threaten to move out if building owners do not comply while others default on rent payments and eventually close their businesses.

Those investors who think that the worse is over for the nations economy should consider the following:

The nation’s banks have about $1.5 trillion of commercial real estate loans on their books. According to the Federal Deposit Insurance Corp., whose troubled bank list has expanded to 416 from 90 in March 2008, the value of real estate loans on which borrowers were more than 90 days or more past due spiked to $67.3 billion in the first quarter of 2009 from about $13 billion in the second quarter of 2007. In the coming months, the recovering banking industry will probably report billions of dollars in losses tied to commercial real estate loans.

During the boom times of 2006 – 2008 commercial real estate mortgages were securitized much like the subprime residential mortgages. Therefore the infection of mortgages gone bad is not limited to only the banks and lenders that originated the mortgages. Just as with the subprime mortgages there are plenty of hedge funds, insurance companies, regional banks, and private investors who have exposure to these commercial toxic assets.

We are only in a bounce moment of a more serious depression to come. The next down phase could well be triggered by a crisis in commercial real estate. If you live in a major city just look around you. The number of “for rent” and “space available” signs is probably valid advertising for the soon to come crisis.

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Have you been thinking about all those “green shoots” of economic recovery recently touted in the not so free press and on cable TV by self proclaimed experts? Do you believe that a “V” green shoots turn out of recession is underway?

Well, you may want to reexamine the evidence beyond that being carefully managed by the government. Fannie Mae, the largest provider of funding for U.S. home mortgages, reported on Friday that it lost $23.2 billion in the first quarter, sending it to the Treasury for a second time for capital to keep it afloat.

In other words Fannie Mae is insolvent and is on a government sponsored life support system. You have to be dreaming when you think that the housing market is bottoming out when the largest provider of funding for U.S. home mortgages is underwater in a big way.

Americans understandability so just don’t want to believe that the present economic woes are a depression, not a garden variety recession that we can work our way out of withing a couple of years. The United States of American has become the not so united Dream States of Denial.

Unless the US government faces up to the problems and honestly communicates with the America people as to how painful a restructuring of the economy will be a total disaster is going to descend upon the USA like a black plague. Problems that are not recognized and confronted can not be solved. So far the government has been on the dead end path of trying to bring the old debt based consumer economy back.

Not even President Obama and all of the President’s men and women can bring back what is unsustainable and quite dead. New ideas are needed and needed fast. Playing accounting games, like marking bad assets to model instead of to market are not going to be helpful other than to kick the growing problems a bit further down the road.

Fannie Mae is a train wreck that has already happened. We need to stop thinking that there are short term fixes at hand. The odds are high that the next three years will bring a huge amount of pain and suffering to the average American citizen. For those who are already over the economic cliff of foreclosure and excessive debt or anywhere near the edge the future looks to be grim.

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President Obama came to office on the back of change. Now as his policies are emerging it is fair to ask change to what? His team of brilliant cabinet members and advisers seem intent to bring the nation back to what it once was.

The Obama team effort seems to be to restore to the world in its full past glory a nation of consumers and paper shufflers who thought that they were becoming rich by exchanging real estate and exotic derivative financial instruments that no one really understood among themselves. This is clearly an impossible task.

Sometime in 2006 or 2007 the United States reached a limitation of rapid growth threshold, a growth based more on foolishness than sound economic principals. We can not roll back the present state of affairs and reinstate the past period of misguided growth. Once through the threshold there is no way to reenter the world that you have left. We have reached and exceeded the tipping point.

Our online friend James Howard Kunstler has a way of expressing how the Obama economic team is trying to sustain the unsustainable that much like a good horror movie is both entertaining as well as frightening. A sample of his writing follows:
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People of good intentions and progressive predilection are scratching their heads wondering just how President Barack Obama managed to turn himself into George W. Bush Lite with sugar-on-top just twelve weeks after that fateful walk down the US Capitol’s east stairway to the waiting helicopter. I’m hardly the first observer to note that Mr. Obama’s actions in the face of an epochal finance fiasco and economic collapse are a mere extension of the pre-January-20 policies, carried out by much the same cast of characters.

The assumption up until now was something about the reassuring value of continuity — if we could just prop up an ailing set of banks for a little while, the US public could resume a revolving credit way-of-life within an economy dedicated to building more suburban houses and selling all the needed accessories from supersized “family” cars to cappuccino machines. This would keep everyone employed at the jobs they were qualified for — finish carpenters, Realtors, pool installers, mortgage brokers, advertising account executives, Williams-Sonoma product demonstrators, showroom sales agents, doctors of liposuction, and so on.

This was a dumb strategy for such a supposedly bright group of people surrounding Mr. Obama. That old economy was dead on arrival January 20th. Even the kindest physicians don’t put corpses on life support.
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What Obama and team are doing is to waste valuable finite resources in an attempt to recapture pre crash America. Without a doubt this will make matters worse as little effort will be expended upon setting a new course. The puzzle in all of this is that Obama and his brilliant team seem to be unable to process new information. All of their efforts seem to try and capture the evil genie, the one that wrecked our economy and much of the world’s economy as well, and to stuff him back into the old bottle.

Not even team Obama, as brilliant as they may be, will be able to complete that task. Meantime time is a wasting and the mood of the public will turn very ugly as unemployment soars well above 10% and the Dow hits new lows.

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