Thursday, 12 November 2009 00:00

I am still developing my REIT thesis

Thus, the first of the two reports for subscribers will probably be pushed off until next week. We had a problem sourcing market rents for some of the properties in the REIT's portfolios and I prefer to use actual numbers in lieu of assumptions so it took a little longer to populate the models as well.

I will discuss the rejects from the short list today, though. One aspect of crystallizing the thesis is dealing with the obvious manipulation that is occurring in the REIT space (see Here's a Big Company Bailout by the Taxpayer That Even the Taxpayer's Missed!) as well as government complicity in the purposeful opacity of the values of the mortgage assets (see the FDIC "Prudent Commercial Real Estate Loan Workouts" guidance issued Oct 30th, as reported by the WSJ: Banks Hasten to Adopt New Loan Rules and the new FDIC guidance that states performing loans "made to creditworthy borrowers" will not require write downs "solely because the value of the underlying collateral declined").

There is also the issue (as the previous link illustrates) of the sell side apparently hell bent on pumping this sector, which very well may succeed in further separating price from value, and fiction from fact. See Is Goldman Preparing To Upgrade The REIT Sector? It is quite possible that I may issue a direct challenge of research and opinion, comparing my work and thesis directly against the titans of Wall Street, eg. the (overly) esteemed Goldman Sachs. I will need very high volume (new) media outlets to counter their reach, but I believe I may be able to accomplish that. Stay tuned, this may very well get interesting!

The delay in the thesis development stems from my trying to surmise if the actual state (as in the explicit overvaluation, portrayed in a property by property fashion, rolled up to an entity level number) of the collateral properties in question were actually released into the public domain, would it cause an "everyman for themselves" dash for liquidation. The European bank that asked me all of those questions in 2008 about my GGP work - see "GGP and the type of investigative analysis you will not get from your brokerage house"- (which I never charged them for), should be VERY greatful they followed my heed and chose not to refinance those loans!

After all, prudent participants should realize that we are not going to see 2006-7 pricing anytime soon and kicking the can down the street in anticipation of such is bound to end worse than where said banks/lenders happen to stand right now. That is, unless they are trying to build up other revenue streams in anticipation of creating a cushion for the inevitable CRE hit. The problem with that thesis is the longer you wait, the bigger the CRE hit will be. With that being the case, those who snatch their crumbs off of the table first, get more crumbs to snatch. It is possible, if given the correct selfish incentive, capitalism may again rear its eclectic head.

Last modified on Thursday, 12 November 2009 00:00


  • Comment Link bigguy Thursday, 12 November 2009 16:04 posted by bigguy

    Heads up, Reggie. Beware the vampire squid's inevitable "offer you can't afford to refuse".

  • Comment Link Mark Hankins Thursday, 12 November 2009 14:04 posted by Mark Hankins

    Jamie Dimon seems to have Obama's ear and the admin is shot through with Goldman alums, so I'd say those two are sitting pretty, regardless of what they're sitting [i]on[/i].

    As for "son of RTC" I was thinking about it last March.

    And I wasn't thinking it looked workable, however I also wasn't thinking in terms of the trusts and banks selling "tapes" of dozens or even hundreds of homes, as is apparently now the case:

    Reggie I'm with you in that I think it's very unclear that the Wall Street/D.C. axis has anything workable. The question in my mind is what (if anything) will finally expose the emperor's nakedness in that regard?

  • Comment Link Reggie Middleton Thursday, 12 November 2009 10:04 posted by Reggie Middleton

    [quote]•David Rosenberg: 1) After the RTC was established in 1989 it took a year for the stock market to bottom, two years for the economy to bottom, and three years for the housing market to bottom. 2) After the Financial Supervisory Agency in Japan was unveiled in 1997 the stock market there didn’t bottom for another five years and it’s an open question as whether the economy ever did manage to stage a sustainable recovery. 3) In the Swedish case of the early 1990s, even with an effective government solution, the process of extinguishing the bad debts via government intervention was painful – the equity market incurred a 28-month long bear market that saw Sweden’s major index decline 45 per cent from peak to trough and the economy undergo a 20-month recession
    •PIMCO on differences: 1) Unlike the U.S., Japan is a creditor nation and does not rely on overseas financing, so its bad debt situation was an internal problem with little potential spillover; 2) Japan’s bad debt problem on a cumulative basis amounted to a whopping 25–30% of the nation’s GDP, whereas the subprime problem is an estimated 5–10% of U.S. GDP.[[b]This fails to take into consideration the myriad other forms of debt that are going bad. This never was about subprime, it was about imprudent underwriting which affects anything debt related[/b]] 3) Japan's bad debt problem stemmed from commercial real estate and excessive corporate debt--> in U.S. the debt structure is more complex and structured.
    •Unicredit: Lessons from past crises: "Ultimately, tax funded bailouts may be unavoidable: Governments often must set up companies, which – equipped with wide-ranging powers and an experienced management – assume, manage, and if necessary, completely liquidate non-performing assets." --> e.g. Resolution Trust Co. (RTC) in U.S. (1989), loss recognition and government bail-out package in Japan under Prompt Corrective Action Plan (1998); Sweden's very successful government-owned Asset Management Companies (AMC) created to manage the disposal of bad loans and real estate assets (1993/4)[/quote]

  • Comment Link Reggie Middleton Thursday, 12 November 2009 09:53 posted by Reggie Middleton

    [quote]Since the state now controls large swaths of the financial sector, I would expect it to attempt to enforce stability at the expense of allowing market forces to play out. In other words, the commitment is to follow the Japanese model of propping up zombie banks forever and a day in order to avoid a fundamental economic reordering.[/quote]

    I don't know about that policy's usefulness. To my knowledge, there is only one giant bank that remained intact after the lost decade in Japan [Nomura].

    U.S. Today Versus Japan's Lost Decade

    [b]•Japan financial minister Watanabe: "Unlike Japan's 1990s crisis, financial risk in the U.S. spread beyond the bank sector to the rest of the financial system, i.e. hedge funds." [/b]
    [b]•In the May/ April 2009 issue of Foreign Affairs, Robert Madsen, a senior fellow at MIT, pointed out that "Japan’s illness occurred in a relatively benign international environment," with overseas markets hungry for Japanese exports, the yen holding strong, and the government posting a modest surplus. The U.S. is in a very different place, Madsen writes. The U.S. deficit is skyrocketing, and appetite for its exports is weak.
    •Economist David Rosenberg at Merrill Lynch: "Japanese consumers had a higher saving rate (13%) going into the 1990s crisis than Americans had going into the present crisis. In the USA, there is no high savings rate to wind down in support of consumption. It's been more than 25 years since the U.S. savings rate was anywhere close to where it was in Japan at the onset of its multi-year real estate deflation and credit contraction."
    •Analyst Koyo Ozeki of PIMCO: "One factor that probably helped stem the default rate on home mortgages in 1990s Japan despite the sluggishness in the economy was the relative employment stability, thanks to the system of lifetime employment." [/b]

    Lessons from Japan's Crisis for the U.S.

    [b]•Analyst Masamichi Adachi of JPMorgan: "Reliable valuation is key to solving financial instability. A key underlying issue through Japan's lost decade was a distrust of valuations of land prices and NPLs. This issue applies to the current global credit situation too, i.e. valuations of structured finance products and of likely losses at financial institutions."[/b][/u][/i]
    •Analyst Takehiro Sato of Morgan Stanley: "During a liquidity crunch, market players retain cash regardless of the level of interest rates and do not supply funds to external parties during a sharp rise in credit risk. Monetary easing alone won't expand credit or stop collateral values from falling...However, unconventional measures (such as nationalizing corporate debt) are still an option."
    •Central Bank of Cyprus Governor Athanasios Orphanides: "Low or zero interest rates alone do not indicate a liquidity trap as long as there are assets in the economy that the central bank can purchase with money."
    •Analyst David Rosenberg of Merrill Lynch: "Fiscal stimulus in 1990s Japan was a band-aid, not a solution. All the stimulus did was prevent an even greater decline in real GDP. As for monetary policy, aggressive moves to boost the money supply are offset by the contraction of private sector credit as money disappears into debt elimination. Reflationary monetary policies are merely going to minimize destabilizing deflation pressures."

  • Comment Link Mark Hankins Thursday, 12 November 2009 09:05 posted by Mark Hankins

    Since the state now controls large swaths of the financial sector, I would expect it to attempt to enforce stability at the expense of allowing market forces to play out. In other words, the commitment is to follow the Japanese model of propping up zombie banks forever and a day in order to avoid a fundamental economic reordering.

    Sarbanes/Oxley plays into this in that it provides a huge lever over any publicly-traded entity that might be tempted not to play ball. Go along with the government program and you get to stay in place and retire wealthy, step out of line and not only do you go to jail, but perhaps your co-workers and even some in other businesses. It's going to be kind of like the old joke about the termite-infested house being held up because the termites are holding hands.

    Crumb-snatching is therefore a potentially counterproductive strategy ... if it's done it will have to be gradually and covertly, and I'm not sure that lenders can pull that one off.

    In short, the cronies having gained control of the government response to their own misdeeds, they are now in a position to kick the can down the road an infinite distance, unless and until a snoozing populace awakens to wrest control back into its hands. The latter development is unlikely.

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