Write-downs for CRE

Commercial Real Estate that is. See today’s Heard on the Street column:

After suffering a beating from their exposure to home loans, banks and securities firms are about to take their lumps from office towers, hotels and other commercial real estate. And the losses could last longer than those from the subprime shakeout.

Approx. 80% of subprime loans were securitized. Because those loans ‘trade’ they are subject to mark-to-market rules, meaning banks have to recognize losses more quickly. Only 28% of commercial real estate loans were securitized. Many probably won’t be written down until loss events like foreclosure actually occur.

Goldman, which projects commercial real estate prices to fall over 20% feels the CRE shakeout will happen over a two year period due partly to the different accounting treatment of securitized and non-securitized loans.

Incidentally, I find it highly ironic that Wall Street banks are crying foul over mark-to-market accounting rules. AIG, for instance, doesn’t think they’ll actually have to recognize all of the writedowns they’re currently taking. They think the market is overreacting and they shouldn’t be forced to write-down asset values.

Let me go on record saying thank god for American accounting standards that DO require mark-to-market. Would we rather our financial sector end up like Japan’s, with hundreds of billions of non-performing loans sitting on bank balance sheets for a decade?

Here too, sunlight is the best disinfectant.

By the way, which banks have high exposure to CRE?

Not long ago, Lehman was getting credit for avoiding subprime…..JP Morgan too. Not surprising to see the dunderheads at Citi and Merrill high on the list. Interestingly, this is another list that Goldman doesn’t appear on. They do have leveraged loan exposure though.

[Permit me a non-sequitir dear reader, now that I've mentioned the dunderheads at Citi.....you've probably seen this news....it's a week old now.....but a special award has to go to the alternative strategies group at Citi for starting up a hedge fund to buy distressed mortgage securities last fall. Like Bear, they thought it a good idea to simultaneously launch a highly levered fraternal twin fund. A few months later and these funds have already imploded. In the meantime, they've elevated Vikram Pandit, the head of the Alternative Strategies division and someone who's never run a commercial bank, to CEO. You think they might have learned their lesson after Chuck Prince, Sandy Weill's lawyer and another non-banker, ran the ship aground.]

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