Wednesday, February 4, 2009

Capitol's Capital Lost in Loss

TARP. The acronym stands for Troubled Asset Relief Program. The creative wordsmith who came up with it also likely recognized the double entendre of the name, hoping the program would help cover up (like a tarp) the financial mess banks have gotten themselves into by being careless. Of course there's only one problem. All banks are applying for federal TARP money, and barely any of the major banks are using it to lend to new customers, as the government had designed.

“The top 13 banks in this country are not recycling that TARP money,” says Wayne Brandt, managing director of Buchanan Street Partners. “Lending has dropped at all the US banks.” He adds, “The banks are scared. They don’t know how to price these toxic securities. They’re hoarding (the TARP money) and waiting for the storm to pass.”

Why aren't they lending, you ask? Maybe its because so many of them got burned by bad loans. It's hard to get back on the horse right after you've been bucked off. Or maybe, it has a little something to due with the fact that over $160 billion dollars worth of debt affixed to commercial real estate is coming due in 2009, with almost another $400 billion or so to come in the two years to follow. The CMBS market, which financed over $230 billion in commercial property debt in 2007 and even $30 billion in the face of market turmoil in 2008 might be as dormant as Mount Vesuvius in the foreseeable future.

And if you weren’t paying attention, what all of that means is “there continues to be no capital in the system that’s readily available,” says Brandt, who predicts that about half the loans due out there will be extended, some will be reworked through a traditional loan workouts and some, an as of yet to be determined percentage, will be closed upon—and very few of the latter will be in the position to obtain adequate refinancing.

“Everybody knows this recession will get worse,” he says. That means the banks will lend, but only to their best customers. In affect, Brandt says, “they will make new loans to preserve and protect the balance sheets of those who have been loyal, well-capitalized borrowers with strong balance sheets with decades of experience and a track record.”

He adds, “the global system is deleveraging, and this deleveraging means this recession is going to last longer than most Americans expect.”

To make matters worse for property owners, other means of capital aren't promising either. Life companies and private equity companies can afford to be picky, and are more likely to go after the most stable asset classes like student housing and healthcare, given their druthers (of which they have plenty these days).

While TARP hasn't had a chance to fully play out yet, and the Obama administration is in the midst of structuring how they will spread their $350 billion dollars, bigger commercial banks are not likely to have a quick change of heart. The vast majority got burned on bad loans, and few, if any are comfortable gauging what appropriate spreads should be in today's environment. The wounds commercial banks are currently licking will heal with time, and the lending freeze will eventually ease. Its just likely to be later rather than sooner.

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