Everyone says we're fine (but we're not)
In all the talk about how we're all exiting the recession - as if it were a cheesy house of horrors ride at an amusement park - no one seems to remember the underlying cause of the whole mess in the first place: real estate debt and the securitization thereof.
Some $3,500bn (€2,355bn, £2,125bn) of commercial property debt is outstanding in the US alone. (emphasis mine.) Of that, about one-quarter was securitised, where groups of loans are packaged and sold to investors in tranches offering different levels of risk and profit.
Moody's has warned that commercial mortgage-backed securities (CMBS) issued during the boom are set to incur significant default rates, given an average fall in values of 43 per cent since the peak in the US. The holders of certain riskier bonds are already expected to have had their investments wiped out.
Troubles will grow as maturities approach on bonds issued at the peak of the market, according to Moody's. It is estimated that up to $153bn of CMBS will come to maturity by the end of 2012 and $100bn will face refinancing difficulties. The US government has already been forced in effect to underwrite the CMBS market.
(...)A property recovery may yield only limited benefits. "It is questionable whether a recovery will be in time and in sufficient magnitude to absorb the wave of bullets falling from 2011 onwards," says Euan Gatfield, analyst at Fitch.
Although CMBS can be extended, securitisation rules are not simple and most of the products have a legally finite life.
Now you might point out that the US housing market is up 7.4% in November, month-on-month. That is absolutely true, but that was due in large part thanks to the $8,000 tax credit for new home buyers, as well as the $6,500 tax credit for existing home owners of five years standing who want to relocate. Unemployment, by the way, is at 10%, the highest it's been since mid-1983. Now that the tax credit has been extended till April 30th, we're likely to see a levelling off in demand, followed by a fresh spike in sales in April. As with the Cash for Clunkers program, this tax credit is basically the US Government throwing cash at its people, yelling, "Buy, bitches, buy! Keep the wheels of the economy turning!"
The operative letter here is W, as in W-shaped recovery, if we're lucky.
6 comments:
And you say you're looking for a job in IB :)
Most banks mark-to-market these holdings, so they've already booked the losses on paper. The hope is that:
a) They renegotiate the financing (extention--> highly unlikely)
b) The market for the derivate turns upwards via speculation, not underlying. We've seen that in oil derivatives, highly unlikely to be matched in housing, but stranger things have happened.
Hence the regulation to boost capital and not pay out bonuses at banks - absorb the shock better. Again, highly unlikely.
As for a W recovery, most of the governments will not be able to survive a double-dip. It's the Christmas season and a good time for some good old Christian faith and divine intervention.
Hi Pravin!
Yes, I'm rather hopeless, aren't I? :-D
Re (b) I was under the impression that the MBSs were bonds? Granted, there are probably n^n derivatives based on them (hello CDSs!) but are they themselves derivatives? So does the speculation bit apply?
Re the W shaped recovery - there's a bit of a disconnect between the US markets and the US economy here, and the markets seem to be running on mostly hope and dreams and frantic bullish sentiment. The economy, meanwhile, is huffing and puffing slowly behind, "Wait for me? Where are you GOING?"
(Yeah, that made no sense, did it?)
My point is, that while US markets have rallied, I'm not sure the economy has turned the corner.
That said, I'm not sure how much better or worse insulated other economies are. The EU seems to have things well in hand... of course, Germany does have billions of dollars of commercial real estate debt coming dues as well, and then there are Greece's problems as well.
Re it being the christmas season, I'm the grinchiest person ever. This is what happens when malls start playing carols in OCTOBER. *headdesk*
True, the MBS are bonds, but they trade more like derivatives than actual bonds (highly volatile, more than junk)
Regarding the US Markets, I think it's the aftermath of a big bath, where retailers and producers ended up destocking so much in 2008 that they were faced with little else but to restock in 2009. It more likely is a dead cat bounce that will die out, and has not boosted leading indicators to show a sustainable recovery in motion. Hence my statement on a double dip not being able to be absorbed. The economy is not charting upwards, more of a lack of downwards movement. Were it to chart upwards at a pace, we're in for a "shit-hits-the-fan" scenario. Recovery is a very relative term, so not getting worse is what people are clutching at right now.
EU suffers from one big disadvantage: Lack of policy coordination, so I'm not sure as a region it will weather it as well as people hope.
2010 would probably end up being a tougher year for old participants and an easier one for new entrants. And lucky us, we get stuck in the middle of all this :)
As for Christmas carols since October, I've been playing them all year through thanks to the randomizer on my iPod... I must build playlists and use them now...
Pravin, you are smart and know many things. *gazes slack-jawedly*
Ah, that's what you meant re MBSs. I was like, "MBSs are derivatives? How did I not know this?!? FAIL!"
Agree with you re US markets, and will add that 'dead cat bounce' is the funniest expression ever (though even as I type this the PETA people are kicking down the front door...)
EU: I really haven't followed their economies as much, but now that you've mentioned it, I'm wondering, is their exit from recession a EU-wide or is it a result of averaging out? If so, I don't think they can keep expecting Germany and France to keep propping up the rest (in a manner of speaking...)
I was going to mock you re christmas carols, but just as I started typing, the Cocteau Twins cover of Winter Wonderland came on, so I will have to cease and desist. I guess that means I've been mock-blocked? *hangs head in shame at awful, awful pun*
As I have no clue what is going on with this finance talk, let me be frank.
...Ok fine I won't be frank, I'll be Stephen.
Wow, that... that... I have no response to that, Frank.
(Except if we were in the Stonecutters, that remark would totally get you the stone of shame. ;-))
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