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KEY has just written down
$100 million off of its CMBS portfolio. It is not even a top ten player
--- Wachovia is #1, Lehman has $40B of this on books, then you have BSC
and MS.
Sell side analysts are quoted: "CRE loans
held in the portfolio should not be subject to
mark-tomarket/model adjustments. The adjustments are market related,
which in turn is a liquidity phenomenon rather a credit one; however,
credit risk will increase the longer liquidity issues persist for the
industry."
I disagree. There is plenty of liquidity in the
system, and more being pumped in by the day. The inability to move the
inventory is due to, and rightly so, the fear of insolvency. The loans
were written at the top of the market at high LTVs. As the market
returns to equilibrium (a long ways off), the loan amounts will surpass
the asset values, hence the insolvency. We are in a historically low
interest rate environment with the FED still pushing money into the
system with a historically high level of players. The reason it is not
working is that you can't solve a solvency problem with a liquidity
solution. You can postpone it, but the eventual return to the mean will
just get that much worse with the inevitable advent of
inflation/stagflation. Realistically, it is a bad idea to try to
inflate your way out of insolvency.
KEY's 100mm mark was on unsold and portfolio CMBS of 1.0 B --- 10% mark. If all of the broker dealers mark to that you might have a serious reset of book value ---- the fact that they are technically insolvent will be revealed.
This is my off the cuff comment without much thought.
I
am working on the next shoe to drop in and effort to get ahead of the
crowd. This real estate thing is getting too crowded and I see several
other big cracks in the financial institutions armor now that I am
taking a closer look. CMBS risk is still highly under appreciated,
through.
