Warning: This article contains other shocking images which may disturb those with exposure to U.S. debt or equity instruments.

I was fortunate enough to attend Jamie Dimon's lunch presentation at the J.P. Morgan cyclicals conference the other day. I think it's worth re-capping here. I read Dimon's letter to shareholders in the J.P. Morgan annual report a few months back and was amazed by how well Dimon explained the financial crisis in plain English that even non-Wall Streeters could understand. You can find it here. I have always believed that the true measure of intelligence is the ability to explain complex concepts in simple terms. So I had great expectations of Dimon's lunch presentation at the conference and I wasn't disappointed. I will try to re-cap what I heard for you. My apologies to you and to Jamie if I miss anything or mischaracterize anything that was said.

According to a GlobeSt.com article, "Last month, 13 hotel loans totaling $596 million defaulted. These included the $190-million Pointe South Mountain Resort in Phoenix, the $117-million Loews Lake Las Vegas in Las Vegas, and the $100-million Dream Hotel located in New York City."

Now, Urban Digs readers know that the New York City Hotel market is one of the strongest in the country, if not the world, in terms of occupancy (New York City Hotels Going From Foist to Woist). However, you also know that even very tight markets can suffer in a demand recession, and it doesn't help if a bunch of new supply is coming to market as it is in New York City (Hotel Hell - The Zombies Cometh). I thought I would give a little update on the New York City lodging market, since the last time we checked in (chuckle-inducing word play intended) back in March. At the time my outlook was negative and I believed that industry estimates for the New York City market would have to come down.

First posted by Jeff Bernstein on Urban Digs, July 6, 2009 at 2.48 PM

I have noted several times in the past that the commercial real estate market decline is a continuing major challenge for the banking industry (especially regional and local banks) and, as a result, a continuing stumbling block for the economy as a whole. I have laughed along with you at the new industry maxim that "a rolling loan gathers no loss" and averred that pushing the problems out further in time is not a recovery strategy.

"A rolling loan gathers no loss."

--Unnamed Banker, as retold by Joe Sitt

I was fortunate enough to attend IMN's recent US Real Estate Opportunity & Private Fund Investing Forum held last Thursday and Friday. The conference was well attended, I don't have an actual count, but it was as big as the Wall Street equity conferences I used to attend at the Sheraton years ago in the bull market boom days and there were so many Masters of the Universe present it was hard to get a seat in the main ballroom. The mood was grim but energized. What does that mean? Attendees seemed every bit as pessimistic about the commercial real estate market as I could have expected, although there was a range of views extending from "it's bad" to "fuggedaboutit." But nearly everyone was excited about the opportunity to eventually find bargains in the market for the first time in years.

Originally Posted by Jeff Bernstein on Urban Digs June 12, 2009

After the stunning swoon in Treasuries - the 30 year has plunged over 20% year-to-date - it's only natural to ask, where the heck are bond yields going from here? Even more fundamental, what about the availability of credit? Just for a little historical perspective, let's take a look at where we have been.

Before I even get started, I will come clean and remind readers that a year ago I suggested that a new bull market could be born out conditions just becoming less bad (Introducing the Less Worse Bull Market). Major flub, total bonehead call, the market imploded 4 months later. The somewhat improving technicals were merely a head fake that kept complacent investors from bailing before the really heavy stuff came down.

So how do I feel about the current stock market action? Conflicted! I hate the economic outlook, both short and long-term, I hate what the government has been doing to capitalism, risk and reward and all that is fair about our flawed but egalitarian system by not letting banks fail. I believe that smaller banks are in for a world of pain along with the commercial real estate market, while large banks have been incentivized to sit on their festering stinky old loans and "kick the can" forward for as long as possible instead of recognizing losses. This suggests to me that debt capital for worthwhile new investments, at rational prices will be stymied - not what our system needs right now to re-invent itself. Need I mention that the states are bust, the government is bust and there is no next big thing for the U.S. economy to leverage off of....carbon credit trading anyone??

Just a quick overview of highlights from the latest FDIC data for Q1 2009 with my comments (in italics).

Sharply higher trading revenues at large banks helped FDIC-insured institutions post an aggregate net profit of $7.6 billion in the first quarter of 2009.

It's time to revisit bank credit quality again, utilizing the information collected by the Federal Financial institutions Examination Council of the Federal Reserve. I've been doing this rather depressing task for a year or more now. The idea has been to chronicle the unwinding of the debt bubble using data that are not influenced by mark-to-market accounting. Additionally, because this data set was originated after the last major real estate downturn, it includes a couple of economic cycles including a the early 90s "credit crunch." As longtime Urban Digs readers know, the numbers have been shockingly bad and have given lie to the notion that the credit mess is being way over-exaggerated by mark-to-market accounting and a broken securitization system.

The delinquencies you see in these charts are real individual loans going bad as real borrowers stop paying their debts. The charge-offs are real writedowns by banks of the value of the loans they can no longer collect.

A couple of days ago one of my Urban Digs readers pointed out an interesting article from the Financial Times. The article notes that REIT prices in the U.K. have declined significantly below their net asset values and that these declines have exceeded the price declines of the underlying real estate that REITs own. The article touched off some reflection on my part regarding the "REIT indicator".

First a little history: There was a flurry of activity in the late 90s when many REITs came public. After a while the Street worried that the capital they raised would be used to overbuild new properties and the REIT stocks tanked. This also coincided with the Asia crisis and some interruptions in capital market liquidity (yes this is not the first time that the CMBS market has gone kablooey). Further, Internet stocks were just starting to become all the rage, temporarily distracting folks from the value of big fat dividends. A big correction in REITs left valuations quite low.

Stalling tactics! Everywhere I look I see them. The Fed accepts shakier and shakier assets as loan collateral, mortgage forbearance programs and, increasingly, bank loan extensions. In fact, the whole TARP/TALF/PPIP monstrosity embodies it.

The supposition behind all of this activity is that asset values are, somehow, temporarily depressed, true fundamentals are much better than what markets are giving them credit for and ......if we just give everyone a little time, things will work themselves out. Unfortunately, we continue to see evidence that the markets have things more wrong than right. Are there some securities that are oversold? Certainly. All you need to look at is the big bouncebacks we are seeing across markets to know certain parts of the market got oversold, yet the breadth of problems related to excessive use of leverage worldwide continues to surprise.

A buddy of mine from an old New York City real estate family recently returned from a trip to Florida. He's been quite bearish on all things real estate having sold much of his family's multi-family portfolio in New York City over the last few years. He has kept busy since, helping others do financing across the country and has had a ringside seat to the unfolding debacle.

He has been ahead of me most of the way through this in predicting massive commercial real estate losses and an eventual mass expunging of debt through the foreclosure and REO process. He called me today and said "have you heard about the Miami Falcons?" Now I'm a football fan, but not a fantasy aficionado. Surely I hadn't missed news about the Atlanta franchise relocating. "No" he said, it had nothing to do with football. "The Falcons are the only tenants in the penthouses of all the new empty luxury towers in north Miami Beach. They hang out on the roofs looking out at the nature preserve for rats to swoop down on."

This article was first published on Urban Digs on Feb. 28, 2009.

Credit is likely to be tight for several years and it probably doesn’t even matter. That’s a bold statement to be sure. But let’s explore the reasons behind the declining lending capacity in the U.S. market and consider the fall-out – as unpleasant as this may be,it’s probably a good planning exercise for us all.

The FDIC's quarterly banking profile (.pdf) is out for Q4 2008. Here are some headlines with my comments:

Industry Posts $26.2B Loss. That's maybe $262 billion of lending power up in smoke.

"Darling I don't know why I go to extremes
Too high or too low, there ain't no in-betweens" - Billy Joel 1990

Yes folks, we are back to early 1990s levels on bank loan delinquencies and charge-offs. This according to the latest Federal Reserve Board data just out. I'll be referring to a bunch of charts in this piece, but I am going to make most of them pop-ups, because large charts eat up so much space. For illustrative purposes I am featuring the chart below of delinquencies as a percentage of all loans.

So what's going to happen to all those partially built buildings around the city and the boroughs? I am afraid the prognosis is not good unless the developer has deep pockets....and who has deep pockets these days? Even those who do are up to their pockets in alligators right now. But let's go through an example of what happens to a real estate project when it fails to achieve its original highest and best use.....I'm warning those of you with weak stomachs that it ain't pretty. According to the International Herald tribune article cited below, there are over 100 of these sites around New York City.

If you pay attention to the commercial real estate market in New York City, there is no doubt you have seen the recent articles on Larry Gluck's Riverton Houses apartment building investment. The Real Deal recently reported that the property will be foreclosed on February 20th. Even if you never heard of Gluck's Stellar Management, you would most certainly have heard of a little firm by the name of Tishman Speyer and would probably be aware of their investment in Stuyvesant Town and Peter Cooper Village, which is now also on death watch.

If you have not heard of the Stuy Town deal you are missing out on a little piece of history, as in my opinion, this one will go down with AOL/Time Warner (TWX) in the annals of top marking value destroying transactions. But don't feel bad for either the Glucks or Tishmans, they have deep enough pockets to absorb the hits.....or save these deals if they really wanted to. Neither put up very much equity in the deals, relying on the largesse of truly stupid banks/CMBS buyers and not very swift partners to allow them to capture big potential upsides with little risk. In the case of Riverton and several other large deals of similar ilk by large institutional sponsors like Praedium and Apollo (now Area) Real Estate Partners, the sponsors were able to refinance their original purchases and take out their original purchase prices and a huge profit when initiating their current financing. The valuations the banks were willing to place on these properties and the assumptions of future rent growth implicit in these valuations were nothing short of stunning. Oh if only it were just the sharpies who took out these highly levered loans with visions of institutional slum lordship fattening their golden calves. Alas, visions of grandeur actually swept across the entire New York City rent-regulated multi-family market.

This piece was first published on Urban Digs on 2/6/2009.

After touching off quite a lively debate with my last piece on the NYC housing bubble, I wanted to do a follow up piece that answered some questions and explored the issue of appreciation based on number of bedrooms. I also wanted to go as far back in time as the data permitted and look at price appreciation versus inflation to get a feel for how much "excess" return was generated in the New York City market as the result of animal spirits above and beyond inflation.

If you disagree that there was a bubble in New York City residential real estate, even this article is unlikely to convince you, so you may as well click along on your merry way. But if you're in the mode of accepting reality, you may be curious to get an idea of "Just How Big was The Big Apple Bubble?" in residential real estate.

A buddy of mine recently shared with me that one of his mentors used to say that residential home prices should track inflation over the long-term and that when it ran above for some period of time, it would eventually revert to the mean and in the process of so doing, prices would likely deflate to below the trend line for some period of time. I have used similar comparisons to look at past bubbles in many other asset classes, so of course this argument seemed reasonable to me. With this in mind I figured I would share some data with you on the subject of New York City's residential housing bubble

This article was first published January 9, 2009.

I'm a certified machinery and equipment appraiser (CMEA), one of my lesser-known talents. In machinery and equipment appraisal there is a concept called market exposure; my business partner who is a trained commercial real estate appraiser, reminds me that the same concept also applies to real estate appraisal. Market exposure, loosely speaking, is the amount of time a property, company or piece of equipment would be expected to be on the market in order to produce a full price sale. A "full price sale" is generally defined as Fair Market Value (FMV).