CRE Under Pressure Due to Sharp Erosion in Fundamentals, Grubb & Ellis Economist Bach Less Bearish on Sector Outlook
Two officials from the U.S. Federal Reserve issued strong signals this week that the central bank is very concerned over the banking industry's exposure to commercial real estate loans and considers it to be a major stumbling block to the road to economic recovery.
In a speech Monday assessing the state of the U.S. economic recovery, Federal Reserve Bank of New York President and CEO William Dudley said he expects that "more pain lies ahead" for the commercial real estate sector and for banks with heavy exposure to CRE loans.
"The commercial real estate sector is under particular pressure because the fundamentals of the sector have deteriorated sharply and because the sector is highly dependent upon bank lending," Dudley said in the speech at the Fordham Corporate Law Center in New York.
Unemployment remains much too high and "it seems the recovery will be less robust than desired," with "significant excess slack" in the economy, Dudley said. Also, in something of a departure from recent Fed pronouncements, Dudley said the economy faces "meaningful downside risks to inflation over the next year or two."
Additionally, on Wednesday, The Wall Street Journal reported that a Fed official told banking industry regulators in a Sept. 29 presentation that "banks will be slow to recognize the severity of the loss" from commercial real estate loans, "just as they were in residential."
The presentation by K.C. Conroy, an Atlanta Fed official who is reportedly part of the central bank's "rapid response" program to spread information about looming economic problem areas to federal and state bank examiners, indicated that slumping property values and rising vacancy rates have exceeded those seen in the early 1990s recession and CRE losses would reach about 45% next year. Further, a WSJ analysis of regulatory filings found that banks with heavy exposure to CRE loans set aside just 38 cents in reserves during the second quarter for every $1 in bad loans -- a sharp decline from $1.58 in reserves for every $1 in bad loans from the beginning of 2007.
Grubb & Ellis Chief Economist Robert Bach told CoStar that, although he's far from optimistic about the market, he doesn't share the Fed's high level of pessimism, either.
"One reason I'm not as pessimistic is that I don't think that it's comparable to the residential crisis," Bach said. "Banks will have to declare more losses, but is it the type of crisis that will re-threaten the global financial architecture? I don't think so."
Bach notes that about $3.4 trillion in commercial mortgage loans are outstanding -- about one-third of the $10-$11 trillion in outstanding residential mortgages. A lot of the CRE loans losses will be concentrated in regional banks, and the FDIC has a time-tested procedure for shutting down, stabilizing and reopening such institutions with "a minimum of drama."
When the residential and subprime asset-backed securities market crumbled more than two years ago, the collapse threatened the major "too big to fail" institutions and caught everyone by surprise, sending the Treasury, the Fed and the world's other central banks scrambling for a plan to deal with the emergency, Bach said.
"Now, we know what to do. It's not going to be pleasant, it will be slogging through more losses" for two or three more years, he said.
In his remarks Monday, Dudley noted that financial markets are performing better and the economy is now recovering, if not at the rate regulators would like. He cited three forces restraining the pace of the recovery. Household net worth hasn't yet recovered from the housing price decline. Second, the fiscal stimulus that is currently providing support to economic activity is temporary rather than permanent and will abate over the next year.
Third, and perhaps most importantly, bank credit losses lag the business cycle and are still climbing, and the banking system has still not fully recovered. While banks’ access to the capital markets has sharply improved, institutions are still capital constrained and hesitant to expand their lending. Most significantly, significant classes of borrowers -- namely commercial real estate and small business -- are almost wholly dependent on the banking sector for funds that are not easily forthcoming, Dudley said.
Dudley said two main problems plague CRE fundamentals. First, capitalization rates had climbed sharply during the boom. At the peak, cap rates for prime properties were in the range of 5%. Today, the average cap rate appears to have risen to about 8%. Second, income generated by commercial property has generally been falling, Dudley noted. As the recession has pushed up the jobless rate, office demand has declined, and as the recession has led to a reduction in discretionary travel, hotel occupancy rates and room prices have declined. Retail sales have weakened, reducing demand for prime retail property.
Dudley said the decline in valuations has created a significant amount of rollover risk when loans and mortgages mature and need to be refinanced. The slump in valuations pushes up loan-to-value ratios, making lenders wary about extending new credit -- even in the case when these loans are performing on a cash-flow basis, the New York Fed president noted.
Friday, October 9, 2009
34 banks don't pay their quarterly TARP dividends
The U.S. taxpayers' investments in smaller banks are increasingly at risk.
In a sign that more banks are under great pressure from the recession, 34 financial institutions did not pay their quarterly dividends in August to the Treasury on funds obtained under the Troubled Asset Relief Fund (TARP). The number almost doubled from 19 in May when payments were last made, and also raised questions about Treasury's judgment in approving these banks as "healthy," a necessary step for them to get TARP funding.
"The banks are not paying their dividends because they are worried about preserving capital," says Eric Fitzwater, associate director of research at SNL Financial.
The Treasury Department says it cannot force an institution to pay dividends. "For some banks, it may be prudent to exercise their right not to pay dividends in a particular month, and we respect their right to do so," says Meg Reilly, a Treasury spokeswoman. "To draw any broader conclusions about the state of the banking sector from one month is highly premature and speculative."
However, a lot of smaller banks are already under stress. Weighed down by foreclosures and delinquencies, 98 banks have failed so far this year, vs. 25 for all of last year. Besides insurer American International Group and lender CIT Group, most of the other non-payers are smaller institutions that received $400 million or less in TARP funds.
Top Republican on the House Financial Services Committee, Rep. Spencer Bachus, R-Ala., says: "We must ensure taxpayers are repaid."
Some say Treasury might have been too hasty in approving some banks for TARP funds.
"Perhaps the Treasury made assumptions that were a little bit too rosy," says Walter Todd, who invests in banks at Greenwood Capital. "My question is also whether the Treasury is staffed adequately to handle this tremendous undertaking."
Treasury has given $365 billion to 700 institutions from TARP. AIG, to which the government has pledged $180 billion, has accumulated $1.6 billion in unpaid dividends. And CIT, which received $2.3 billion from TARP, said in a regulatory filing that it is restructuring its debt and seeking approval from bondholders for a pre-packaged bankruptcy. If that happened, it would wipe out the entire government investment.
By Pallavi Gogoi and Paul Wiseman, USA TODAY10,000 apply for 90 factory jobs
In the latest sign of weakness in Louisville-area employment, about 10,000 people applied over three days for 90 jobs building washing machines at General Electric for about $27,000 per year and hefty benefits.
The jobs dangle medical, eye care, prescription and dental benefit packages, as well as pension, disability, tuition assistance and more, said GE spokeswoman Kim Freeman. And despite the recession, no union workers have been laid off from Appliance Park since the company negotiated lower wages with workers in 2005.
With 10,000 vying for GE line jobs, “I am sure my application won’t even get looked at,” she added.
The rush of applicants came as no surprise to Carney, who noted that another recent GE advertisement for 13 maintenance workers, who are paid a union skilled trades rate of $23 hourly, drew 700 job seekers.
The jobs dangle medical, eye care, prescription and dental benefit packages, as well as pension, disability, tuition assistance and more, said GE spokeswoman Kim Freeman. And despite the recession, no union workers have been laid off from Appliance Park since the company negotiated lower wages with workers in 2005.
“There are no jobs out there paying these kinds of wages that also offer these kind of benefits,” said Jerry Carney, president of IUE-CWA Local 761 at Appliance Park.
Just four years ago, the same jobs paid $19 per hour. But that was before Local 761 approved wage cuts for new workers aimed at preventing the closure of Appliance Park.
“People still value these jobs,” Freeman said.
With the Jefferson County unemployment rate at 10.6 percent in August and more than 38,000 unemployed people looking for work, the opportunity for moderate pay and health care was an attractive lure.
“In this recession, there are lot of people who are just about to run out of unemployment benefits,” said Richard Hurd, a labor relations professor at Cornell University. The national average of time unemployment benefits collected now stands at 26 weeks, Indiana University Southeast Professor of Business Uric Dufrene said.
That’s about a third of the maximum that can currently be collected.
Larissa Roos, 38, never worked in a factory, but was one of the thousands who bid on jobs assembling appliances.
Until she was laid off from Bank of
With 10,000 vying for GE line jobs, “I am sure my application won’t even get looked at,” she added.
The rush of applicants came as no surprise to Carney, who noted that another recent GE advertisement for 13 maintenance workers, who are paid a union skilled trades rate of $23 hourly, drew 700 job seekers.
Carney credited GE’s reputation for union job security and blue chip benefits as a powerful lure.
GE announced the new jobs last week and started accepting applications through a website Monday. Wednesday was the deadline. The jobs are being added to a new second shift early next month to assemble Energy Star washing machines in Building 1 at the historic Louisville complex.
Roughly 80 percent of applicants report factory experience, Freeman said. That is not surprising, given the recession so far has slashed 8,000 manufacturing jobs from the region’s economy, Dufrene said.
“There is an abundance of potential employees with manufacturing-related skills,” Dufrene said.
The rough profile of applicants, most of them former factory workers, suggests many lack sufficient education to apply for more than minimum wage jobs in the current job market.
Half lacked a high school diploma. Just 5 percent of the applicants said they had a bachelor’s degree or higher. and
GE employs roughly 2,100 hourly and 2,000 white collar workers at Appliance Park. Now, about 440 workers labor on the first shift making washing machines in Building 1.
Applicant Shane Hopkins, 48, hopes his factory experience provides an edge.
Until mid-August, Brooks said he maintained presses at a plastics factory. Now, Hopkins said he picks up occasional work as a flooring contractor for a cousin.
He still pays $300 per month to keep health care benefits for himself and his wife, an independent contractor for a Ford Motor Co. parts supplier at the Louisville Assembly Plant. Brooks anticipates she’ll be out of work next year, when the plant closes for retooling.
A year from now, “her job ain’t going to be there,” Brooks said. “I am thinking seriously about going to McDonalds, just for the benefits if nothing else.”Banks 1, America 0
The plight of millions of unemployed US workers exposes the folly of trillion-dollar gifts for America's spendthrift banks
Last Friday's job report showed that most of the US is experiencing enormous economic pain, even if America's economy is now in a recovery. Overall unemployment rose to 9.8%, with the unemployment rate for men hitting a new post-depression high. The economy shed another 260,000 jobs in September and the previous figure for jobs lost in the recession was revised up by more than 800,000. The average workweek continues to shorten. With real wages falling, this ensures that most workers will be taking home shrinking wages.
For the vast majority of people in the country, who derive the vast majority of their income from working, the economy looks really awful. But the economy is not looking bad for everyone.
As we are constantly reminded, the financial crisis is behind us and the banks are back in their feet. In fact, they are more than just back on their feet. In many ways they are doing better than ever. The most recent data from the commerce department shows that the financial industry profits now account for more than 31.5% of all corporate profits. This is a higher share than at any point during the housing bubble years.
Of course, it is not that hard to make profits when you get to borrow money from the Fed at almost no interest and then lend it back to the government at 3.5% interest. Suppose the state of California was given the privilege of not only borrowing $1 trillion from the Fed at near zero interest but also using the money to buy Treasury bonds paying 3.5% interest. The $35bn in annual interest rate subsidies would take care of California's huge budget deficit pretty quickly.
But hey, California is just a big state. It's not a Wall Street bank. Congress is not going to tolerate special treatment for state governments.
The "save the banks" crew continues to peddle a seriously misleading story, mostly without challenge. They tell us that we had no choice. If we didn't give the banks trillions of dollars in their hour of desperate need, then the situation would be even worse.
There is no doubt that a complete collapse of the financial system would have complicated the recovery. However, handing the banks trillions, no questions asked, was not the only alternative.
Last year we faced a situation in which nearly every major bank faced bankruptcy: they could not pay their debts without the help of the government. Rather than just make below market loans, with few or no conditions, we could have made loans conditional on changing the way the banks did business. This would mean prohibiting them from dealing in complex derivative instruments, limiting leverage and seriously cutting executive compensation. (How does a $2m absolute cap – counting bonuses, stock options and other perks – sound?)
We could have done this because the US government held all the cards. If they didn't get money from us they would have been out of business. We could have told them to run around Wall Street naked, to walk on hot coals, to wear stupid looking hats, the choice was shutting down their banks and looking for new jobs.
Instead, we just handed them the cash, no questions asked. Now the banks are bigger and badder than ever and paying out big bonuses, just like before. As things stand, they will be an even bigger drain on the economy in the years ahead than they were in the years leading up to crash.
And, if anyone thinks that the banks have learned something about safe business practices, they have not been paying attention. What the banks have learned is that if you wreck your bank, and incidentally bring down the economy in the process, you can just send your lobbyists to Congress and the White House with empty bags and ask to have them filled up with money. The lesson is that Congress will say yes.
The politicians and the media can be counted on running to protect the banks in their hour of need. While tens of millions of people losing their jobs or their homes is just an unfortunate aspect of the modern economy, the collapse of Citigroup, Goldman Sachs, or Bank of America is a tragedy that our elites just can't fathom.
So, be prepared to endure many more years of high unemployment, under-employment and declining real wages. Upwards of two million people are likely to lose their homes in 2010 and 2011. But the good news is that the economy is recovering and the banks are alright.
by Dean BakerDylan Ratigan On Corporate Communism: "$24 Trillion Of National Capital Is Being Sucked Into A Broken Banking System At Our Expense"
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Another home run from Ratigan. We will complete the post later, but the clip is too important to wait until we had the time to do a write-up. So just enjoy. Runs 5 minutes. First 30 seconds are health care, then it's banking and the bail outs.
- "The beneficiaries of an ongoing $24 trillion taxpayer-funded bailout...$24 trillion dollars."
- "That is national capital that is being sucked into a broken banking system at the expense of the rest of our country. They continue to use "Too Big To Fail" as blackmail to the taxpayer in order to get us to provide capital to them."
- "It is a system that takes resources from the citizenry and redistributes it to a tiny elite."
- "A handful of weak, un-competitive, outdated companies and industries are purchasing control of the American political system in order to stay in business using their cronyism.
- "It is coming at the direct expense of the rest of us in this nation. And it's a total betrayal of everything that represents America."
Read Dylan's Accompanying Editorial: Corporate Communism Is Killing America
NEVER Dial 911
Anthony Arambula acted quickly on the evening of September 17, 2008 after an intruder broke into his house. After the invader crashed through a window in the family’s Phoenix home, Arambula grabbed his personal firearm and held him at gunpoint.
Then he made the nearly fatal mistake of dialing 911.
Three Phoenix PD officers were already in the neighborhood when the call went out. Outside the house, Arambula’s wife Lesley informed Sgt. Sean Coutts that her husband had already taken the intruder into custody and was holding him at gunpoint.
Either out of reflexive contempt for a mundane or criminal incompetence, Sgt. Coutts neglected — or refused — to pass along this vital information to his fellow tax-devourers. Before Mrs. Arambula could relay those important facts to the other officers, Officer Brian Lilly shot Anthony six times in the back — twice after he had hit the floor.
“You just killed the homeowner,” gasped Anthony as he bled into the floor of his house. “The bad guy is in there.”
“We f***d up,” Lilly reported to his dispatcher. Fear not, he and his fellow officers acted quickly to address the most pressing issue — no, not the threat to Anthony’s life, or that posed by the intruder, but rather the risk to the career of the police officer who shot the innocent man.
Displaying natural leadership ability, Sgt. Coutts quickly devised a cover story: In the official version, Anthony had pointed his gun at Officer Lilly, yet somehow managed to take six rounds in the back.
“That’s all right,” Coutts consoled Lilly as Anthony was bleeding to death in front of his children. “I got you back … we clear?”
The entire incident was captured on the 911 recording. The audiotape didn’t record what happened next, according to the family’s lawsuit:
“Tony made what he believed was a dying request to the officers; he did not want his young family to see him shot and bloodied. Officers callously ignored his request and painfully dragged Tony by his injured leg, through the home and out to his backyard patio, where they left him bloodied and shot right in front of Lesley, Matthew and Zachary.”
The officers later dragged the wounded man onto gravel, then shoved him on top of the hood of a cruiser and “drove the squad car down the street with Tony lying on top, writhing in pain.”
In order to preserve their cover story, the police insisted on treating Anthony like the suspect in a drug bust, forbidding family and friends to visit him in the hospital.
Not surprisingly, Anthony — who managed to survive being “protected and served” by Phoenix’s “Finest” — still suffers from chronic pain from his injuries, and most likely will for the rest of his life.
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