Commercial mortgage delinquencies continued to rise in November, as would be expected. The highest-rated CMBS are right now paying about a massive 12 percentage points more than Treasuries, compared with with just 0.82 in January:

Commercial mortgage delinquencies rose in November and will climb as the economy slows and unemployment grows, according to Barclays Plc.

Payments more than 60 days late on commercial real estate loans that were bundled together and sold as bonds increased to 0.69 percent last month, compared with 0.57 percent in October and 0.51 percent in September, Barclays data show.

The “relative spike” in delinquent loans marks the “beginning of a sustained, upward trend,” Barclays analysts led by Aaron Bryson in New York said in a report yesterday. “We have repeatedly stressed that CMBS delinquencies are a lagging indicator of performance and tend to lag changes in employment by close to a year.”

Waning demand for the bonds, which are backed by pools of commercial mortgages, caused sales to slump to $12.2 billion this year, compared with a record $237 billion in 2007, according to JPMorgan Chase & Co. estimates.

Delinquent Retailers

Retailers are leading the rise in commercial mortgage delinquencies, according to Barclays. Late payments on retail space rose to 0.58 percent in November, compared with 0.43 percent in October, the data show.

 “The depth and length of this economic downturn looks to be materially worse than many investors initially expected and worse than that experienced during the last recession,” the analysts wrote in a Nov. 26 report.

Looser Underwriting

Underwriting standards on commercial real estate mortgages taken out between 2005 and 2007 were looser than those on loans in prior years, which will contribute to more delinquencies, the JPMorgan analysts said.

The impending default of two commercial mortgages sent spreads soaring to record highs last month. A $209 million loan 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. In southern California, the owner of the Promenade Shops at Dos Lagos missed two payments on a $125 million loan.

The loans were among the largest in a $1.16 billion commercial mortgage debt offering sold by JPMorgan on April 30, Bloomberg data show.

Another hedge fund has frozen redemptions:

Fortress Investment Group LLC fell 25 percent to a record low after the private-equity and hedge-fund manager halted redemptions from its Drawbridge Global Macro fund, which had lost value this year.

Investors asked to withdraw $3.51 billion by year-end, including the $1.5 billion in redemption notices disclosed last month, the New York-based company said today in a filing with the U.S. Securities and Exchange Commission. Fortress spokeswoman Lilly Donohue declined to comment.

“The market essentially lost faith in Fortress as a franchise so that anything Fortress does is tainted by problems that it had in its private-equity portfolio,” said Jackson Turner, an analyst with Argus Research Co. in New York, who has a “sell” rating on the company.

More than 80 firms have liquidated funds, restricted redemptions or segregated assets following a stock-market decline and a credit freeze that started with a housing slump and rising defaults on U.S. subprime mortgages. Hedge funds have posted losses averaging 23 percent this year through Dec. 1, according to Chicago-based Hedge Fund Research Inc.’s HFRX Global Hedge Fund Index.

Fortress said in November its hedge-fund clients asked to pull more than $4.5 billion, or 25 percent of their money, as the company reported its first quarterly loss since going public. The Drawbridge fund had $8 billion as of Sept. 30, and the requested withdrawals amount to about 44 percent of the money pool, said Roger Smith, an analyst with Fox-Pitt Kelton Cochran Caronia Waller USA LLC in New York. Drawbridge lost 12 percent this year, he said.

The hedge-fund industry may shrink as much as 45 percent by the end of this month to $1.1 trillion from its peak of $1.9 trillion in June because of investor redemptions and market losses, Morgan Stanley analyst Huw van Steenis said in a Nov. 24 report.

Yields on speculative-grade bonds imply a default rate of 21 percent, which is higher than the record of the Great Depression. Moody’s forecasts the U.S. default rate to rise to 3.3 percent in October, to 4.9 percent in December 2008 and to 11.2 percent by November 2009. In other words, the US economy will face a period of consolidation and reorganisation, and the US economy of tomorrow will probably depend on exports and manufacturing to a far greater degree than the economy today does. In essence, we’re witnessing that much feared, and discussed, seldom understood unwinding of global imbalances: China is forced to shrink its export sector, as the US is forced to restrain its domestic spending habits. While in sum this is a healing process, the surgery is rather painful because the patient was a bit too late in seeking help for its illnesses:

The extra yield investors demand to own U.S. high-yield bonds was 19.19 percentage points on Dec. 1, according to Moody’s. Assuming a 20 percent recovery rate, the spread implies a default rate of 20.9 percent, John Lonski, chief economist at Moody’s Investors Service, said yesterday in a market commentary. That compares with a rate of 11 percent in January 2001, 12.1 percent in June 1991 and 15.4 percent in 1933.

Defaults and bankruptcies are accelerating as financing options for high-yield companies dwindle amid the longest U.S. economic recession in at least 26 years. The U.S. default rate rose to 3.3 percent in October, according to Moody’s, which forecasts the rate to increase to 4.9 percent in December and 11.2 percent by November 2009.

“The default rate is going to start rising quickly, soon enough it’s going to be breaking above 10 percent,” Lonski said in an interview. “Lack of access to financial capital is a very big problem for high-yield bonds.”

Hawaiian Telcom Communications Inc., a provider of local and long-distance telephone service, and Pilgrim’s Pride Corp., the largest U.S. chicken producer, sought bankruptcy protection on Dec. 1, as they struggled with too much debt taken on before the credit crisis.

Trump Entertainment

Trump Entertainment Resorts Inc., the casino company founded by Donald Trump, had its ratings cut by Moody’s on Dec. 1 after announcing last week it would forgo a $53 million interest payment to conserve cash. Moody’s lowered its probability of default rating to Ca from Caa2 and its rating on the company’s senior secured notes due 2015 to Ca from Caa2, with a negative outlook, suggesting the company is more likely to default.

Three companies have sold $2.7 billion of high-yield bonds this quarter, compared with $30 billion in the same period a year ago, according to data compiled by Bloomberg. Leveraged loans arranged this year total $301 billion, down more than a third from last year, Bloomberg data show.

“There’s a lot of forced selling of high-yield bonds by hedge funds owing to the need to de-lever as well as by mutual funds in response to redemptions,” Lonski said. “You’re looking at a market where the sellers well outnumber the buyers and the reluctance on the part of buyers makes sense if only because a bottom for economic activity is not yet in sight.”

High-yield, high-risk bonds are rated below Baa3 by Moody’s and BBB- by Standard & Poor’s.


As I have mentioned here before, the Tarp is not enough to resolve anything, and Paulson himself seems to have acknowledged this fact today. In a move that is prudent and proper, the Treasury has decided to use half of the authorized funds for bank rescues in buying securitized consumer loans, such as credit cards, auto loans, and others. Of course the causes that necessitated the use of those funds for the previous purposes have not evaporated, and  I believe that the Tarp will have to multiplied a number of times, before it is in any way able to alleviate any of the problems in the economy.

What we now see is really nothing other that the actualization of a process which I outlined in a series of articles right after the collapse of Lehman. The cascade effect of the collapse of the US economy will hit every nation in the world. Note that the implosion of the US consumer’s spending is only now beginning. It’s therefore a certainty that we’re going to see a lot more national and international bankruptcies in the coming year and beyond.

And finally, the dream of getting private buyers back to the  securitized credit markets, or having them assume some of the risks of the troubled mortgage paper is a dream, nothing more. It’s simply unthinkable than any investor will dip his feet into that inferno, and the speculators who had have already evaporated .

U.S. Treasury Secretary Henry Paulson plans to use the second half of the $700 billion financial rescue program to help relieve pressures on consumer credit, scrapping an effort to buy devalued mortgage assets.

“Illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards,” Paulson said today in a speech at the Treasury in Washington. “This is creating a heavy burden on the American people and reducing the number of jobs in our economy.”

Paulson’s remarks are an acknowledgement that the pitch he made to Congress for the bailout hasn’t delivered what was promised.

Treasury and Federal Reserve officials are exploring a new “facility” to bolster the market for securities backed by assets, Paulson said, adding that the program would be “significant in size.” Officials are considering using a portion of the bailout money to “encourage private investors to come back to this troubled market,” he said.

Private Capital

The Treasury chief said the department is also considering having companies that accept new taxpayer funding get matching private capital. Buying “illiquid” mortgage-related assets — the reason the program was established a month ago — is no longer being considered, he said.

Paulson has committed all but $60 billion of the initial $350 billion allocated by Congress to take equity stakes in banks and in insurer American International Group Inc. Lawmakers, who could reject Treasury requests for the remaining $350 billion, are pushing for aid to automakers including General Motors Corp. Paulson is resisting.

Paulson said he has no timeline for notifying Congress of his intent to use the remaining TARP funds, and reiterated that he’s “comfortable” that $700 billion is “what we need” to stabilize the financial system.

Paulson’s change in plans sent U.S. home-loan bonds without government backing down to new lows, credit default swap indexes suggest.

The ABX-HE-PENAAA 07-2 index of swaps tied to subprime-loan bonds rated AAA when created in the first half of 2007 dropped about 8 percent to a mid-price of 42, according to a note to clients today from Goldman Sachs Group Inc. The level suggests the bonds might fetch about 42 cents for each dollar of unpaid balances.

More on the credit card and auto-loan markets:

Currently, there is $356.3 billion in credit card asset- backed debt outstanding, with $256.3 billion in student-loan securities and $199 billion in auto loan borrowing,

`Broad Impact’

In the CPFF, which began last month and purchased $244.6 billion of the short-term debt through Nov. 5, the Fed set up a limited-liability company to buy the assets. The Fed is funding the facility at the target federal funds rate, currently 1 percent, and Treasury provided a $50 billion deposit. It is thought that the new facility will have a similar structure.

Seize Assets

Paulson said lending through the new consumer credit bailout  program would be on a non-recourse basis, meaning the government wouldn’t have rights to seize other assets should a borrower default.

The Fed’s program that lends to banks to buy asset-based commercial paper from money-market mutual funds had $85.1 billion in non-recourse loans outstanding as of Nov. 5.

Credit-card companies were shut out of the market for bonds backed by customer payments in October for the first time in more than 15 years, Wachovia Corp. data showed. Issuers sold $17.1 billion of the debt in October 2007. Top-rated credit card-backed securities maturing in three years traded at a premium of 500 basis points over Libor, last week, up 25 basis points over the previous week,. The debt was trading at 50 basis points more than Libor in January.

`Dramatic Fall’

I doubt that this is going to have a big offset to the really dramatic fall in consumer spending that we’re going to see over the coming year,” in part because of a $10 trillion slump in home values, Feldstein said of the new lending program.

Ford Motor Co., GMAC LLC and Chrysler LLC were shut out of the market for bonds backed by auto loans for the fifth straight month in October. Sales of auto bonds slumped to $500 million, compared with $9 billion in October 2007, according to Merrill Lynch & Co. data.

More Aid

House Financial Services Committee Chairman Barney Frank proposed giving $25 billion in additional aid to GM, Ford and Chrysler. He told reporters today that legislation is needed to authorize the Treasury to put money into the automakers.

Distressed sales of commerical real estate are going to increase dramatically, this article from Bloomberg says. Of course, 2006 and to a lesser extent 2007 were some of the laxest years of commercial real estate loan standards. What this means is that there will be a lot more writedowns for what remains of the US banking system:

Distressed sales of commercial real estate may rise in 2009 as about $36 billion in securitized loans written in 2006 and 2007 come due, an executive of Grubb & Ellis Co. said today.

That figure will grow to $55 billion of commercial mortgage- backed security debt due in 2012, triggering delinquencies, defaults and forced sales, said Glen Esnard, president of capital markets for the Santa Ana, California-based real estate services firm., citing research by JPMorgan Chase & Co.

“A lot of that debt is not refinanceable at its current level or current rate,” Esnard said at a briefing for reporters today in New York.

Sales of commercial properties in the U.S. have fallen 72 percent this year through October, Real Capital Analytics Inc., a property research firm, said last week, as the global credit crisis made financing for acquisitions scarce.

Loans made to be sold into the CMBS market were the predominant form of financing for commercial real estate buyers between 2004 and 2007, when U.S. commercial property prices rose almost 60 percent, according to the Moody’s/REAL Commercial Property Price Index. That index has fallen 13 percent since peaking in November 2007.

Qualcomm says it won’t hire anyone else:

Qualcomm Inc. Chief Executive Officer Paul Jacobs said he’s stopped hiring and is eliminating some research projects after a “dramatic” contraction in chip orders from mobile-phone makers.

“We have basically shut off our new hiring growth,” Jacobs said in an interview in New York today. “Before it was, `Let’s let a thousand flowers bloom,’ now we’re going to do a bit of pruning. We’ve shut down some projects.”

Jacobs, who heads the biggest maker of mobile-phone chips, said orders dropped off in October because handset manufacturers cut back on their stockpiles of unused parts, a reduction that will last for about two quarters. Consumer demand for mobile phones with Qualcomm chips is holding up, he said.

“The end-user market, while it’s slowing a little bit, isn’t that dramatic,” said Jacobs, 46. Still, there is “some uncertainty” in the company’s earnings projections.

Revenue this quarter may fall as much as 6 percent from a year earlier, the first decline in seven years, Qualcomm said last week. Annual sales increased 22 percent on average in the past six years as Qualcomm benefited from increasing use of its chips in mobile phones that provide high-speed Internet access.

Qualcomm, based in San Diego, fell $2.50, or 7.1 percent, to $32.57 at 4 p.m. New York time on the Nasdaq Stock Market. The stock has declined 17 percent this year.

While Jamie Dimon, head of JPMorgan says that the recession may be worse than the credit crisis:

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said the U.S. recession “could be worse” than the credit-market crisis that brought lending to a standstill.

Rising unemployment and the process of de-leveraging by financial companies may bring on a “deep” recession in the U.S., Dimon, 52, said today. “We are prepared for a difficult environment.”

JPMorgan, the largest U.S. bank by market value, will add about $2.4 billion in reserves to cover bad loans in the fourth quarter as losses on credit cards and home loans continue, Dimon said. The U.S. unemployment rate rose to 6.5 percent in October, the highest level since 1994, Auto sales plunged 32 percent, manufacturing contracted at its fastest pace in 26 years and consumer confidence fell by the most on record during the month.

Still, Dimon said there is reason for optimism about prospects for the economy. “We’re not running this company like we have a Great Depression,” he said. JPMorgan continues to invest in businesses that benefit clients, including advisory work and raising money for corporations, he said.

Shares Decline

Goldman Sachs Group Inc., where Paulson was CEO before joining the Bush administration, predicted the deepest economic contraction since 1982 for the fourth quarter. The New York- based firm said the jobless rate may jump to 8.5 percent by the end of next year.

Banks and securities firms worldwide have taken $929 billion in losses, writedowns and credit provisions since the beginning of 2007, according to Bloomberg data. Firms have raised $819 billion in capital to offset the losses.

“We think the economy could be worse than the capital- markets crisis,” Dimon said. “You really need to separate them because they have completely different effects on our businesses and on most businesses.”

Consumer Loans

Dimon said JPMorgan continues to lend money to consumers. Loans to some types of corporate clients and in the investment bank have increased by $8 billion since the end of the third quarter, he said. Loan balances across the business lines have climbed $24 billion.

The bank also expects to post a $500 million loss on private-equity investments during the quarter, Dimon said.

JPMorgan announced a plan last month to assist 400,000 families with $70 billion in troubled mortgages in the next two years. An additional 250,000 families with $40 billion in mortgages have already been helped under existing loan- modification programs.

JPMorgan is the third-largest mortgage originator in the country with 13.6 percent of the market as of Oct. 31, according to Inside Mortgage Finance data. The lender has reduced volume 17 percent compared with an industrywide contraction of 56 percent since the beginning of 2007.

Not even the so-called super-rich are immune anymore:

Exclusive ski and golf community Yellowstone Club, in Montana, has filed for bankruptcy protection, a sign that the financial crisis roiling the real estate and leisure industries is not limited to the low end of the market.

The club, in the pristine mountain area around Big Sky, Montana, not far from Yellowstone National Park, is part resort and part residential community for the super-rich.

It advertises housing lots on the sides of its ski slopes and golf course at prices ranging from $2 million to more than $6 million.

In a filing made in federal bankruptcy court in Montana on Monday, Yellowstone Mountain Club LLC filed for Chapter 11 bankruptcy protection, listing assets and liabilities in the range of $100 million to $500 million.


The news clips are from Bloomberg and Reuters



It is by now general wisdom that the commercial mortgage market is headed for massive defaults and shrinkage during next year and beyond, but if anyone needs confirmation, here’s the latest situation. What is most important is that 700 billion in Paulson’s TARP will almost certainly be about one-seventh to one tenth of what will eventually be needed to bail the financial system out, on the conservative assumption that the sorting out of this crisis will last a whole decade, and the greatest amount will be spent in the first two years, from now. This scenario is based on the comparatively less severe prognosis of the S&L crisis of the eighties. In any case, 700 billion is almost laughably small for this purpose. The Treasury has not even completed satisfying the increasing demands of institutions such as Morgan Stanley, Bank of America, AIG, etc  through its TARP, which are not even the most troubled firms that they have be to sorted out, by far (with the exception of AIG). The insurance industry is already clamoring for more public money.
Commercial real estate borrowers are running out of options as asset-backed markets dry up and alternative financing comes to an “abrupt halt,” RBS Greenwich Capital Markets Inc. analysts said.
Regional banks and insurance companies, which had become the primary source of financing since credit markets seized up, have stopped lending, the RBS analysts wrote in a report. Sales of CMBS slumped to $12.2 billion in 2008, compared with a record $237 billion last year, according to JPMorgan Chase & Co.

The government’s attempts to unlock credit markets is easing some borrowing costs in some markets, though won’t relieve the seizure in the commercial mortgage debt market, Pendergast said.

“The de-thawing of the shorter-term lending markets is a baby step and will have little effect on commercial real estate lending near term.”

Both regional banks and insurers are reigning in lending. The insurance industry is under review by ratings companies and may be downgraded, while not yet receiving permission to participate in the Treasury’s capital injection programs, she said. Regional banks remain “under significant pressure,” Pendergast said.

“Like life insurance companies, indications are that many of these banks have closed their books for the year and 2009 remains a big question mark,” Pendergast said.

Loans Coming Due

The dearth of financing options will make it challenging for borrowers with loans coming due in 2009. About $88 billion in commercial real estate loans will mature next year, RBS estimates. Between 2009 and 2011, $123 billion in loans that have been packaged into bonds will mature, which doesn’t include direct loans originated by banks or insurance companies, the analysts said.

Top-rated CMBS are trading at a record 633 basis points more than the benchmark swap rate, according to Bank of America Corp. data, compared with 318.8 basis points on Sept. 15, the day Lehman Brother Holdings Inc. filed for bankruptcy. The bonds were trading at about 70 basis points more than the benchmark a year ago, the data show.

Spreads on commercial mortgage-backed securities won’t narrow until late 2009 at the earliest, and more likely not until 2010, the analysts said.

Delinquencies on commercial real estate debt rose to 0.78 in October compared with 0.66 percent in September, RBS Greenwich data show.

Genworth the insurer, which is a recent spinoff of GM, will probably not survive this crisis without public money (I’m tempted to say “Paulson’s magic touch”, but he’s leaving soon.)

Genworth fell $2.03 to $2.67 at 4 p.m. in New York Stock Exchange composite trading, the lowest since the company first sold shares in 2004. It has lost $258 million in the third-quarter, equal to 60 cents a share, from a profit of $339 million a year earlier. The insurer is considering asset sales and may raise funds by selling private or public equity or debt.

Chief Executive Officer Michael Fraizer said during a conference call with analysts that Genworth is preparing for prolonged, deeper market disruptions and a “significant recession.” Fraizer also said that the company is participating in the Federal Reserve’s commercial paper program designed to unlock short-term credit markets. Genworth is eligible for about $223 million, he said.

The company was downgraded by Standard & Poor’s on concerns about “the company’s increased need for funding in mid-2009,” the ratings firm said in a statement today. The company has “limited access” to the capital markets.

The mortgage-insurance business of Genworth posted a $121 million deficit because of rising delinquencies and higher reserves.

CDS spreads on Genworth widened. Traders demanded 17.25 percentage points up front in addition to five percentage points a year, according to CMA Datavision. That means it would cost $1.73 million initially and $500,000 a year to protect $10 million of bonds from default for five years. Yesterday the up-front payment was 11 percent.

And finally, some good news from China. The government is going to spend about 600 billion dollars on infractructure investment as it tries to cushion the economy from the impact of the global crash. This will be good for the rest of the world, because China’s massive reserves, hopefully, will find some use in the process, although it is obvious that the financing will be through borrowing, not through the liquidation of the currency reserves. It would be much better if the Chinese had decided to tap their reserves. China is still a risky third world country, and throwing money around in such a heavy-handed manner, borrowing so much so early in this crisis  doesn’t appear to be the most prudent attitude in today’s circumstances. China’s immunity to speculative attacks and the resilience of its economy today is almost entirely dependent on its positive trade balance. However, given the attitude of the government, and its desire to increase domestic spending, while exports are curbed rapidly by falling global demand, means that the surplus is probably illusory, and much weaker fiscal and trade positions lie ahead. We’ll see if CCP’s gamble will pay off in the future.  

China pledged a 4 trillion yuan ($586 billion) stimulus plan to prop up growth in the fourth-largest economy as the world heads toward a recession. The funds, equivalent to almost a fifth of China’s gross domestic product last year, will be used by the end of 2010, the Beijing-based State Council said yesterday. Following a weekend meeting in Sao Paulo, finance ministers from the Group of 20 nations, of which China is a member, issued a joint statement saying they are ready to act “urgently” to tackle the economic slump.

“Over the past two months, the global financial crisis has been intensifying daily,” the State Council said in yesterday’s statement. “In expanding investment, we must be fast and heavy- handed,” it said, adding that the central bank will pursue a “moderately loose” monetary policy. The central bank has already cut interest rates three times in two months, reducing the one-year lending rate to 6.66 percent.

The stimulus package, of which 100 billion yuan is earmarked for this quarter, will go toward low-rent housing, infrastructure in rural areas, as well as roads, railways and airports, it said. The government will allow tax deductions for purchases of fixed assets such as machinery to stimulate investment, a move that will reduce companies’ costs by an estimated 120 billion yuan. In addition, grain purchase prices and subsidies for farmers will be raised, as will allowances for low-income urban households. The government also scrapped loan quotas to help boost lending to small businesses.

China accounted for 27 percent of global economic growth last year, more than any other nation, according to IMF estimates. Central bank Governor Zhou Xiaochuan said Nov. 8 that boosting spending at home is the best way China can help avert a prolonged world recession. UBS AG and Credit Suisse AG, before yesterday’s announcement, forecast GDP would rise no more than 7.5 percent next year, which would be the smallest increase in nearly two decades. Manufacturing contracted by the most since at least 2004 in October and export orders dropped to their lowest, according to CLSA Asia Pacific Markets. Home sales have plunged in major cities including Beijing and the stockpile of unsold new vehicles was at a four-year high in September.

“The golden years have shuddered to a dramatic halt,” said Stephen Green, head of China research at Standard Chartered Bank Plc in Shanghai.

Meanwhile, Taiwan, which counts China as its largest trading partner, late yesterday cut interest rates for the fourth time in two months after exports dropped in October by the most in three years.

All the news clips from Bloomberg.




Activity in the financial markets continues to contract:

Banks have reported $687 billion of credit losses and writedowns since the start of last year as the worst U.S. housing slump since the Great Depression battered credit markets.

JPMorgan Chase & Co., the largest U.S. bank by market value, will shut down a global proprietary trading desk and shed some of the unit’s employees as the firm braces for a recession, a person familiar with the matter said.

“It’s been a very difficult trading environment,” said Jeffery Harte, a financial analyst at Sandler O’Neill & Partners in Chicago. “In the wake of that, everyone on the street is probably reevaluating capital commitments in regards to trading operations.”

Credit Suisse Group AG, Switzerland’s second-biggest bank, lost 609 million francs ($523 million) from proprietary trading, the firm said Oct. 23. The money-losing trading books will be reduced “significantly,” the firm said. Deutsche Bank AG, Germany’s largest lender, said Oct. 30 it lost 386 million euros betting on equities for the firm’s account.

Swiss Reinsurance Co., the world’s second-biggest reinsurer, posted its first loss in almost six years and suspended a share buyback program after wrong-way bets on credit-default swaps.

The third-quarter loss was 304 million Swiss francs ($259 million) after net income of 1.47 billion francs a year earlier. Swiss Re booked 289 million francs of writedowns on CDS in the third quarter, bringing losses in the past year to 2.81 billion francs.

Today’s writedown is “only the tip of the iceberg,” said Fabrizio Croce, an analyst at Kepler Capital Markets in Zurich who has a “reduce” rating on the stock.

And the contraction in the commercial real estate market is only at its beginning stages. Commercial real estate is a business that is by definition highly leveraged, and there’s no reason to think that the losses here will be less severe than in auto loans, or credit cards. While CRE is not the same as subprime, the very lax lending standards caused errors here too:

New York City commercial real estate transactions plunged 61 percent in 2008 through October as the global credit crisis roiled lending and sidelined buyers.

About $17 billion of transactions have closed so far and the market is headed for its worst year since 2004, according to data from Real Capital Analytics Inc. of New York. Sellers have made 237 deals of $5 million or more, a four-year low in a market that posted a record $51 billion in sales in 2007.

“The banks are not lending, and most of them are saying we’re done for the year,” said Scott Latham, executive vice president for New York investment sales at Cushman & Wakefield Inc., the largest closely held commercial brokerage. “In all likelihood, you will see next to no transactions between now and the end of the year.”

The office market will likely get worse in 2009 and may not improve for at least another year, said Andrew Simon, a managing director for NAI Global, a network of 325 independent commercial property brokerages.

No Rosy Outlook

“I don’t think the first half of 2009 is going to be very rosy,” said Simon. “I believe you’re talking about a year from now before you see more movement toward normalcy.”

Buyers and sellers are looking for a bottom, he said. .

Vornado Realty Trust said today the credit crisis and the slowing economy may lower profit in future quarters, while reducing the volume of real estate sales and reducing property values.

“Our existing real estate portfolio may be affected by tenant bankruptcies, store closures, lower occupancy and effective rents,” which may cut net income, Vornado said. Circuit City Stores Inc., the electronics retailer that announced 155 store closings this week, leases 12 locations from Vornado and pays $8.1 million in annual rent, Vornado said in a regulatory filing.

Global commercial sales fell 57 percent this year through August, Real Capital said in an Oct. 9 report. In the third- quarter, they fell 64 percent from the same period a year ago, according to preliminary data from the company.

In the U.S., sales have declined 72 percent this year through October, the biggest drop since the firm’s recordkeeping began in 2001, Real Capital said. Starting in 2004, property investors, fueled by cheap and abundant debt, began an unprecedented run to $514 billion of U.S. deals in 2007, said Dan Fasulo, Real Capital’s director of market analysis.

“I think it will be a while before we get to that figure again,” Fasulo said. “We’re going to do less than half of that in 2008.”

Sales involving New York real estate investor Harry Macklowe accounted for more than two- fifths of New York’s year-to-date dollar figure through October.

Macklowe paid $6 billion last year for seven Midtown skyscrapers, primarily using short term debt. His lender, Deutsche Bank AG, took control of the towers in February and sold five of them for $2.83 billion. Macklowe also sold the General Motors Building and three other buildings for $3.97 billion to Mortimer Zuckerman’s Boston Properties Inc.

Second-quarter commercial and multifamily mortgage originations tumbled 63 percent in the second quarter from the same period a year earlier, according to the Mortgage Bankers Association in Washington.

Office property loans fell 65 percent, retail property loans fell 63 percent and industrial property loans slid 57 percent, the MBA said. Loans slated for the commercial mortgage- backed securities market declined 98 percent in the second quarter from a year earlier, the group said.

And Commercial real estate activity in New York seems to be especially hard hit:

Financing of deals by so-called portfolio lenders, companies like commercial banks and life insurers that originate loans and keep them on their books, was also down. Loans by banks fell 29 percent and 27 percent for insurers, the MBA said.

The few deals being made usually require sellers to either provide financing or allow buyers to take over their existing loans, said Howard Michaels, chairman of the New York-based Carlton Group LLC, a real estate investment banking firm, which arranged the recapitalization of the GM Building for Macklowe in 2004, and Chicago’s Sears Tower in 2007.

“Most people are waiting to see how 2009 shakes out. Until then, nobody’s putting any buildings on the market unless they have to,” he said. “I don’t think that anybody would voluntarily sell into this market right now.”

Two properties remain on the market five months after they went up for sale. They are Worldwide Plaza on Eighth Avenue, a 1.7 million square-foot tower, and 1540 Broadway in Times Square, the former Bertelsmann Building. The seller of both buildings: Harry Macklowe’s lender, Deutsche Bank.

Meanwhile Fed’s balance sheet continues to grow, as it adds commercial paper to its portfolio of stocks, CMBS, MBS, bonds, and others:

The Fed’s balance sheet may expand to $3 trillion by year’s end, reflecting growth of various liquidity measures supporting banking institutions, Dallas Fed chief Richard Fisher said. As of Oct. 29, the Fed’s balance sheet was $1.97 trillion.

Still, the U.S. faces “an epic challenge,” Fisher said. “We are navigating the mother of all financial storms.” A recovery in the U.S. economy “will take time,” Fisher said in response to an audience question. “I don’t see any economic growth in 2009. None.”

Labor Department figures are expected to show a drop of 200,000 jobs in October, according to a Bloomberg News survey of economists. A report showed Oct. 3 that payrolls fell by 159,000 in September, the biggest drop in five years. The unemployment rate held at 6.1 percent, up from 5 percent as recently as April.

Commercial paper rates are falling, for now, as the Fed’s intervention brings much needed temporary relief to the market:

Interest rates on U.S. commercial paper fell to the lowest in four today. Rates on the highest-ranked 30-day commercial paper fell 0.27 percentage point to 1.74 percent, the lowest since Sept. 22, 2004. Yields on 90-day paper fell 0.06 percentage point to a three-month low of 2.62 percent.

The Fed set the rate it’s willing to accept for 90-day commercial paper at 2.6 percent, down 0.01 percentage point, including a 1 percentage point unsecured credit surcharge. The 90-day secured asset-backed rate was set at 3.6 percent, according to Fed data compiled by Bloomberg. The rates are set under the Fed’s Commercial Paper Funding Facility and are available on CPFF.

The following companies are among those that have registered with the CPFF: American Express Co.; American International Group Inc.; Chrysler Financial Corp.; Ford Motor Credit Corp.; GMAC LLC; General Electric Co.; General Electric Capital Corp.; Harley-Davidson Inc.; Kookmin Bank; Korea Development Bank; Morgan Stanley; Prudential Financial Inc. and Torchmark Corp.

Australia reduced its main rate today, and Libor continues to retreat, although it’s still at phantastically high rates compared with where it was a short time ago:

Tocday  the Libor-OIS spread narrowed 13 basis points to 210 basis points today. That still compares with 87 basis points on Sept. 12, the last working day before Lehman Brothers Holdings Inc. collapsed.

Interbank rates have tumbled worldwide as central banks slashed borrowing costs and governments pledged as much as $3 trillion of emergency funds to kickstart lending.

Australian central bank Governor Glenn Stevens lowered the overnight cash rate target to 5.25 percent from 6 percent in Sydney today, adding to last month’s 1 percentage point reduction. Fifteen of 16 economists in a Bloomberg survey forecast a half-point cut and one expected a quarter-point drop.

The European Central Bank and Bank of England are forecast to cut rates when they meet on Nov. 6.

As bankers see ongoing deleveraging everywhere:

UBS agreed last month to a $59.2 billion aid package from the government and central bank that will split off risky assets. Switzerland’s largest bank is seeking to halt client redemptions, which amounted to 83.6 billion francs at its money-management units in the third quarter.

UBS plans to transfer as much as $60 billion of debt assets to a fund backed by the Swiss National Bank, leaving it with “essentially zero” risk related to U.S. subprime, Alt-A, prime, commercial real estate and mortgage-backed securities, as well as student loan-backed securities and reference-linked notes, CEO Marcel Rohner said last month.

Since the rescue plan was announced, there have been “encouraging signs” for net new money flows, UBS Chief Financial Officer John Cryan told reporters on a conference call today.

Even so, clients may keep removing funds for some time as part of a “general trend of deleveraging,” he said. “That manifests itself in clients effectively selling investments and withdrawing proceeds to pay down debt.”

“It’s too uncertain” to give a long-term profitability outlook for the bank, Cryan said in an interview. “I don’t think any bank can say what its cost of funds is because markets aren’t standalone yet. And in an economic downturn no one knows what the revenue is going to be.”

All the news clips are gathered from Bloomberg.

During the housing bubble, house prices appreciated by 60 percent above their long term trend. Those economists who expect house prices to fall by another 15 percent are basing their expectation on a return to this long term trend. But it is very possible that after such a wild swing toward the appreciation side, house prices will actually correct with a similar irrational swing to the depreciation side, falling actually below the long term trend, and if this happens, it is hard to see how hundreds of banks can avoid failure unless there’s meaningful government intervention.

Meanwhile, unemployment is rising, and it’s highly likely that we’ll see at least a fifty percent rise in the unemployment rate from today’s levels, which makes more credit card defaults, and more writedowns for all banks likely. Consumer defaults will eventually trigger defaults on commercial real estate, as the consumer is the main source of revenue for paying the debt back.

Commercial mortgage activity has been declining steadily this year – from 147 billion in the first 6 months of 2007, the amount of completed deals has already collapsed to 12 billion in January- June of this year. The disastrous state of the residential mortgage industry doesn’t require any further detailing, however, the 10 million homeowners who have negative equity in their homes do bear noting.

The momentum of the crisis is still snowballing. All these losses will eventually appear on bank balance sheets which are suffering from extreme distress. It’s well known that consumers who had limited success in extending home equity loans have been resorting to ever increasing credit card borrowing, and as this is fundamentally a consumer-recession, it’s not hard to see accelerating defaults further constraining balance sheets, leading banks to shrink their lending base, leading to more defaults by their customers, and so forth.

The greatest risk for the US and global economy is this feedback loop. Unfortunately, Central banks around the world seem to choose to stick their heads in the sand when confronted with this prospect. Mr. Bernanke’s insistence before the Congress that subprime losses would be limited to 100 billion dollars is common knowledge, and nowadays he seems to believe that the greatest risk of a severe recession has receded. On the other hand, the efficiency of uncoordinated central bank action is doubtful.

As more and more banks default, those that aren’t too big to fail are obviously the ones at greatest risk. A regional bank in Kansas or Florida is far less likely to obtain international or federal backing in the case of trouble or failure. As raising capital becomes more and more difficult, some of these regional banks with the greatest exposure to CMBS and mortgage defaults will face an impossible situation. On the other hand, according to Bloomberg, despite writing down billions of dollars Merril’s Thain still has the confidence of Temasek, and it’s not wise to bet against Asian nepotism, exporter cash or petrodollars.

Finally, according to, the top states with the highest foreclosure per household ratings are Nevada, California, Florida, Arizona, Ohio, Georgia, Michigan, Colorado, Utah and Virginia, in the same order. So far FDIC’s problem banks are scattered across the country, according to their own statements, but as the crisis intensifies, we’re likely to see a greater concentration in these states with highest mortgage default rates. We don’t have the FDIC’s own list, but here’s a possible list of the problem banks in these 10 states, compiled from the list of the lowest ranking banks at


Loss allowance ratio has fallen by 47 percent in california, which is the second highest in this list. Number of unprofitable institutions has risen by 42 percent in the past two quarters, and the speed of deterioration is very worrying.  

1st Centennial Bank CA
Affinity Bank CA
Community Bank of Southern California CA
County Bank
Desert Commercial Bank
Downey S&L, F.A.
First Federal Bank of California, FSB
First Private Bank & Trust
First Standard Bank
Gateway Bank, FSB
Imperial Capital Bank
Los Padres Bank
Palm Desert National Bank
PFF Bank & Trust
Seacoast Commerce Bank
Security Pacific Bank
Vineyard Bank, National Association


Florida is by far one of the worst states in terms of the health of its banks. Many failures are likely. There’s no sign of any improvement, as of June 30. 

The Bank of Bonifay
The Bank of Commerce
Bankunited, FSB
Bayside Savings Bank
Centerbank of Jacksonville, N.A.
Century Bank, A Federal Savings Bank
Citrus Bank, N.A.
Coastal Community Bank
Community Bank of Cape Coral
Community Bank of Manatee
Community National Bank of Sarasota County
Cornerstone Community Bank
Espirito Santo Bank
Federal Trust Bank
First Florida Bank
First Guarantee Bank and Trust Company of Jacksonville
First People’s Bank
First Priority Bank
First State Bank
Florida Capital Bank
Florida Community Bank
Freedom Bank
Freedom Bank of America
Great Eastern Bank of Florida
Integrity Bank
Key West Bank
Landmark Bank of Florida
Liberty Bank
Marco Community Bank
Marine Bank
Ocala Nation Bank
Ocean Bank
Old Harbor Bank
Partners Bank
People’s First Community Bank
Pilot Bank
Republic Federal Bank, N.A.
Riverside Bank of the Gulf Coast
Southbank, A Federal Savings Bank
Sunrise Bank
The Oculina Bank
The Bank
Vanguard Bank and Trust Company
Vision Bank


Nevada is one of the most troubled states.

First National Bank of Nevada
Great Basin Bank of Nevada
Nevada Basin and Trust Company
Nevada Commerce Bank
Silver State Bank
Washington Mutual Bank


Similar to California, Arizona’s banking sector is in great trouble, and is the slowest to recognise the severity of the situation in this list.

Credicard National Bank
First National Bank of Arizona
First State Bank
Parkway Bank
Valley First Community Bank


In general, Ohio is better than most other states in this list.

Bramble Savings Bank
Century Bank
The Community National Bank
The First National Bank of Germantown
The Guernsey Bank
Indiana Village Community Bank
National City Bank
Ohio Legacy Bank
The Ohio State Bank
People’s Community Bank


The number of unprofitable institutions has doubled in the past two quarters alone. Loss allowance to non current loans ratio has fallen by about thirty percent. Georgia is one of the worst states with respect to banking sector health.

Alpha Bank & Trust
American Southern Bank
American United Bank
Bank of Cometa
Bank of Ellday
The Buckhead Community Bank
Citizens & Merchants Bank
Community Bank of Rockmart
Community Bank of West Georgia
The Community Bank
Community Trust Bank
Crescent Bank and Trust Company
First Century Bank, National Association
First Choice Community Bank 1874
First Commerce Community Bank
First Covenant Bank
First Coweta Bank
First Georgia Community Bank
First National Bank of Gwinnett
First National Bank of the South
First Piedmont Bank
First Security National Bank
Firstbank Financial Services
Firtcity Bank
Freedom Bank of Georgia
Gainesville Bank & Trust
Georgia Banking Company
Georgia Heritage Bank
Haven Trust Bank
Heritage Bank
Hometown Bank of Villa Rica
Integrity Bank
McIntosh Commercial Bank
Mountain State Bank
Neighbourhood Community Bank
Northside Bank
Omni National Bank
The Park Avenue Bank
The Peach Tree Bank
The People’s Bank
The Private Bank
Quantum National Bank
Security Bank of Bibb County
Security Bank of Gwinnett County
Security Bank of Houston County
Security Bank of North Metro
Southern Community Bank
Sunrise Bank of Atlanta
The Tattnall Bank
United Americas Bank, National Association
United Bank & Trust Company
Unity National Bank


Starting from an already troubled base, Michigan’s banking sector health has been deteriorating continuously during the past two quarters, and before that. Bank failures are highly likely.

Citizens First Savings Bank
Citizens State Bank
Clarkstone Savings Bank
Community Central Bank
Crestmark Bank
Davison State Bank
Detroit Commerce Bank
Farmers State Bank of Munith
First Federal of Northern Michigan
Flagstar BAnk, FSB
Grand Haven Bank
Kent Commerce Bank
Lakeside Community Bank
Macombe Community Bank
Main Street Bank
Mainstreet Savings Bank, FSB
Mercantile Bank of Michigan
Michigan Heritage Bank
Muskegon Commerce Bank
Oakland Commerce Bank
Oxford Bank
Paragon Bank & Trust
Paramount Bank
People’s State Bank
Select Bank
Sterling Bank & Trust, FSB
West Michigan Community Bank


There’s a clear trend of deterioration in Colorado’s banking sector, but it hasn’t yet reached the levels of the worst states.

American National Bank
Colorado FSB
Colorado National Bank
Kit Carson State Bank
Premier Bank


The banks of Utah appear to be aggressive in loan loss provisioning, and this should bring better results than in other states. However, the deterioration in profitability is quick and worrying.

Centennial Bank
Magnet Bank


Virginia’s the strongest in this group. The overall data on its financial insitutions do not give the impression of a state in a banking crisis.

Alliance Bank Corporation
First State Bank
Greater Atlantic Bank
Imperial Saving and Loan Association
Virginia Savings Bank, FSB

No one knows which banks are going to default, but the list could provide some guidance. The highest numbers are in Georgia, Florida, Michigan, and California.