U.S. Economy: Sometimes It's Easy to Connect the Dots

Sometimes, connecting the dots doesn't require too much knowledge, education, or analytical ability.

For example, when you read reports like the following from Bloomberg, "Commercial Real Estate Is a ‘Time Bomb,’ Maloney Says" --

The $3.5 trillion commercial real estate market is a ticking “time bomb” that may lead to a second wave of losses at large U.S. banks, congressional Joint Economic Committee Chairwoman Carolyn Maloney said.

About $700 billion in commercial mortgages will need to be refinanced before the end of 2010 and “doing nothing is not an option,” Maloney, a New York Democrat, said at a committee hearing today. This “looming crisis” may lead to significant losses for banks, force shopping center and hotel owners into bankruptcy, and impede economic recovery, she said.

The response by banks to this “growing threat has been slow and inadequate,” said James Helsel, a partner at RSR Realtors in Harrisburg, Pennsylvania, and treasurer for the National Association of Realtors. “The lack of liquidity and banks’ reluctance to extend lending are also becoming apparent in the increasing level of delinquent properties.”

It's not too hard to see why, as the Washington Business Journal reveals in "Economist: FDIC Gearing Up for Bank Closures," things are humming in one particular corner of the financial realm:

The Federal Deposit Insurance Corp. is gearing up to handle a large number of bank failures expected as a result of bad mortgages, both in residential and commercial real estate, an economist said Tuesday.

“They know they’re going to take down a large number of banks and they can’t do it until they’re staffed up,” said Mark Dotzour, chief economist and director of research for the Real Estate Center at Texas A&M University.

Dotzour expects federal regulators to establish an agency, similar to the Resolution Trust Corp. that disposed of assets belonging to insolvent S&Ls in the late 1980s and early 1990s.

Comments

[CautiousInv...:]

Everybody seems to see it except for Timmy, the architects of the stress test and the big banks.

Jul 10 11:21 AM

[guinnessman:]

We all know that there is a war on job creaters. Let's see who wins the race of who goes broke first, the private companies or the government. Game ON.

Jul 10 11:30 AM

[whidbey:]

The larger picture suggests that when Commercial RE hits the wall it will have an extremely negative effect on not just the banks, but equities overall.
In short, the second leg down will likely start with the fall decline in RE. What we need to fear is the Obama reaction which is to fly to pieces and throw money at the problem while engaged in phoney schemes to "lower the cost of doing business" by taxing the hell out of the owners and shareholders to get health care off the company budget.
In the end we will enter 2010 in a muddle but headed for a dead end where we have money everywhere and not a drop for households. Watch out such non-sense is socially explosive.

Jul 10 11:51 AM

[Moon Kil Woong:]

You could help the US economy more by disposing an insovent Citibank and Bank of America than bankrupting and recapitalizing a hundred community banks people actually depend on to operate their community businesses with. For one thing, they went bankrupt first. The fact they are still around only proves it pays to be the most imprudent, or at least the second most improdent (poor Bear Stearns). Apparently being the worst banks is the gift that just keeps on giving.

I contend that the fall of community banks and credit unions will be fare more jarring to the health of the US economy (and the psyche of the public in that region) than cleaning up a multinational bank. Watch out for a rash of small bank failures. It will be a signal of things getting decidedly worse no matter what the green shoots of the day graphs might show.

Jul 10 02:32 PM

[Fighting Yoda:]

CIT today, and many in the recent past like GGP, Vegas casinos etc a good preview of the unfolding horror show. Fed, FDIC and Treasury are not oblivious to the situation but are trying to play the confidence game - optimism and green shoots and the rest.

In the end some institutions- too big or too connected to fail will survive- and of course some others will fail. Hard to predict which ones- but another major leg down in Regional’s can be predicted.

Jul 10 05:27 PM

[Steve in Gr...:]

Thanks, Mr. Panzer, for the note.

Contemplate the following: "Joint Economic Committee Chairwoman Carolyn Maloney said...doing nothing is not an option..."

The idea that someone like Carolyn Maloney is responsible for government economic policy is deeply frightening. The fact that she needs to do something is even more frightening.

We are so screwed.

Jul 11 09:30 AM

[Gregman2:]

Once again, too much debt on half empty shopping malls and commercial office buildings. That's the beauty of bankruptcy and the genius of our system.

Jul 11 11:28 AM

[roywil:]

I was speaking with a friend who is instrumental (FDIC) in closing banks that are on the rocks.

He estimates he will personally be involved in closing "at least" 400 before the carnage subsides.

No joke. This from the horse's mouth.

Jul 11 06:38 PM

[derryl:]

...until finally Goldman Sachs is the only bank in the land.

Jul 11 09:58 PM