Commercial Real Estate: Is the Fed About to Do Something Right?

I admit to be as negative on the FED/Treasury/FDIC as is possible, but I think they deserve it. Well, even a stopped clock is right twice a day, and it appears we have the makings of a good policy move in the works! Check it out:

Is Fed Abandoning Bailout Of Commercial Real Estate
In what could have been the biggest piece of news today, yet making little headway into the media, the Fed announced that it is adopting a policy statement supporting "prudent commercial real estate loan workouts." And even though in traditional Fed fashion, the statement says a lot but is even more vague, some of the implications from a more nuanced read have very serious adverse implications for commercial real estate.....
....If the Fed is unwilling to recreate QE for CRE, in the same way that it continues to bail out residential exposure, then look for a major double dip in the economy. The only wild card is why the Fed is letting this happen, although if the political backlash against just QE 1 is any indication, then it likely would not have been able to pass additional liquidity measures regardless.

This could be big.

I do not buy the political argument against a CRE backstop/bailout, they do what they want anyways. Perhaps they are actually hitting a wall with how much money they can guarantee.

Now this is preliminary, and who knows what happens when workouts and mods either do not work, or work but require massive bank liquidity infusions to cope, but at least in the early going, the FED may be trying not to replicate their residential adventure. Hat tip out to them!

Add to this it seems CIT (CIT) will not last the weekend unless

private

funding can be found, and that is two in a row for government non action! GMAC was smart to move quick and get the FDIC involved on their side. See, I can be reasonable!

Comments

[lower98th]

There is a mini-uproar about the supportive "no penalty" language for renewing/modifiying loans far above the market price of the underlying CRE (LTV not "held against" banks), for performing loans..."extend and pretend."

Still, I expect the non-performing loans will give the market plenty of reality to deal with.

2009 Oct 31 07:13 AM

[fwi]

I think--I hope--that Wall Street is getting bored with the extend and pretend valuations on the banks' balance sheets. Everyone who was on this bandwagon had a great ride up with the financials. But my guess is that Wall Street has collectively decided that there is now a better opportunity to make money shorting the financials, so all of a sudden, everyone wants "realism", and this latest FDIC move will not save the banks' stock prices.

The fact that they didn't buy the dip in the last 10 minutes tells me the game is on for the shorts.

2009 Oct 31 10:36 AM

[dragonpaw]

Don't hold your breath. Look tor TARP II in some thinly veiled disguise.
What's another trillion or two pulled out of the prestidigitators' (you Timmy and Benji )hats or rear ends. Perhaps included in health-care reform on page 7596, footnote 27; ref.869?!

2009 Oct 31 01:30 PM

[Economic Disconnect]

Dragonpaw,
I know this will probably not hold, but I wanted to try and be nice!

2009 Nov 01 02:13 PM

[BurningLog]

CRE asset quality will, eventually, manifest itself in the form of reduced earnings and writeoffs on institutional financial statements. The mere fact that the FDIC is willing to acknowledge, albeit in an "ostrich with head in sand" fashion, that the CRE capital sources are in the best position to clean up their own mess through prudent but less regulated work out solutions is a risky but necessary solution. Call it Extend and Pretend or A Rolling Loan Gathers No Loss or just flat out buying time until the economy improves; it doesn't matter. Survival of credit capital sources is too critical to our US economy until a better system comes about.

2009 Nov 01 08:33 PM