LIBOR, Again (Sorry!)

We are all going to be heartedly sick of discussing LIBOR and LIBOR transition long before it becomes a thing at the end of 2021, but we really need to get this done. I can’t make this at all funny. We have a problem…but not a solution. Fixing it is going to be a heavy lift. Like a colonoscopy, demonstrably necessary, but in no way fun. (Actually, I really should say, that my doctor is a lovely person, but one simply can’t make wonderful really matter when discussing all things proctologic.)

Okay, we are indeed doing stuff. I appreciate and certainly don’t want to diminish the efforts of our trade organizations, major banking institutions or the Alternate Reference Rate Committee of the Fed (ARRC), but I fear we are not doing enough and not doing it quickly enough. Even as one who got a merit badge during an undistinguished boy scout career for procrastination (I never got around to picking it up), I know that to elide this from the immediate to do list, hoping someone rides in on a white horse to make all this better, is really a bad idea.

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SFIG Vegas 2019

As we return to our desks after last week’s whirlwind in Las Vegas for the Structured Finance Industry Group (SFIG) Conference, we find ourselves reflecting on how this conference was at once business as usual while also showing evidence of an evolving industry looking to the future. Approximately 8,050 attendees, including a sizable Dechert team, gathered last week at the Aria to discuss past, present and future and to put our heads together to ask “where do we go from here?” Continue Reading

Sticks and Stones May Break My Bones, But Words Really Matter

After an evening checking out my various high school and college yearbooks for any troublesome content, and checking Mom’s photo albums (I’m good on the yearbooks, but there were a couple cowboy and Indian pics from when I was about 7, that could be troublesome), it got me thinking hard about the power of words, images and narratives. Words will hurt you. Images will hurt you. Narratives will hurt you.

Our industry has to pay attention to the power of words, images and narratives; and particularly right now as the 2020 election cycle gets into high gear.

High school tweets, Texas bar admission applications, and college papers apparently can now ruin careers. Now some may say that’s a good thing and some may say it’s terrible, but let’s face it, it is a thing. In this world of hyper-connectivity, words and images take flight instantaneously and can spread around the market, around a polity, a community or around the globe in a heartbeat. And they never go away. Moreover, there seems to be a view in currency that forgiveness is not possible and balance is no longer relevant and that people are defined by their worst. A sort of the lowest common denominator. Well, heaven forbid that I take sides here, but think, if you will, for a moment on Winston Churchill: Gallipoli, Edward VIII, resistance to Indian independence and certainly some racism towards the people of the Indian subcontinent, but still the savior of the West. Bad outcome? Could happen today? Continue Reading

Opportunity Zones: Monetary Musical Chairs, Anyone?

The new Opportunity Zones program that came to us in 2017’s major tax reform offers investors the chance to roll the capital gains from the sale of any appreciated property into new investments, located within specially designated areas known as Opportunity Zones, and defer—and potentially partially eliminate— capital gains taxes on such sale. The program is similar to a 1031 Exchange, but with a socially conscious geographic focus, that applies broadly to investments across asset classes – not just to real estate. The tax benefits of the program will begin stepping down for investments made after December 31, 2019, so the clock is ticking on the chance to pull capital out of appreciated assets and invest it in a Qualified Opportunity Fund (QOF). The time is now to start thinking about where all this capital will be sitting when the music stops.

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More Fun With Risk Retention: Europe and Japan Weigh In

We’re all just back from CREFC and the mood was broadly constructive.  (Don’t you love that word, “constructive”?  When did “constructive” become a fancy way to say “good”?)  We all went to South Beach this year wondering where the investors were, wondering whether the market was okay and wondering whether December was a blip or a coda. If the industry chatter captured the gestalt, and the gestalt is right, then while this recently strong market will surely expire at some point, this is not that point.

Amongst the frolicking in Goldilocks Land in SoBe, there were some actual issues discussed.  One of these that got some attention, at least by the wonkier members of the crowd, is the new risk retention rules out of Europe.

We’ve written about these before.  It is very much a moving target.  If you think the American rulemaking process is baroque, turgid and opaque, spend some time in Brussels.  Continue Reading

It’s 2019 – Take Courage!

It’s 2019. Nothing really terrible or shocking has happened yet…at least by the standards of December. But it’s early yet. As a card-carrying member of the commentariat, I could not possibly pass up the opportunity to bloviate on the “Year Ahead” with the certain knowledge that no one will remember if I’m wrong, and if I’m right, I’ve got bragging rights! The temptation of course is to go full Nostradamus and say things like, “The path of the market will continue to repudiate and embrace the past and the Fed shall, at last, flom the gabberwobber!” Being Nostradamus is never having to say you’re sorry.

In the spirit of CrunchedCredit, which purports to be firmly rooted in the real world of capital formation, commercial real estate and markets, we feel more than a skosh of pressure to try to be a tad more prescriptive and to stick to things that might be useful for those trying to do stuff. However, seriousness of purpose and a bit of thoughtfulness should not be confused with any real likelihood of being right.

With all that said, here’s what CrunchedCredit thinks about 2019:

  • Hunkered Down Investors. The investor class largely hung it up late in Q4 this past year and we are all nervously awaiting their return. Like that pesky groundhog in Pennsylvania, they’ve got to show up! I am committed to a strategy of hope that the investors will return in early 2019 and embrace risk. We should know pretty soon after this is published whether those shy and anxious investors will poke their noses out of their dens. If not, it could be a rough year. If they do come out, don’t dismiss the possibility that they scurry back into their dens at the first whiff of powder.
  • US Domestic Politics. The cage wrestling in the swamp magnified by our sad headline machine will continue to cause gyrations in, at least, equity markets which seem particularly flighty. Is the problem spooked individual investors or are the equity markets now slaved to the dues ex machina of AI programs with algorithms tied to social media, Twitter feed and the news cycle written by a tattooed millennial with the social skills of a three-day dead carp and zero understanding or interest in the real economy or economic fundamentals? Saul of Tarsus may have found God on the way to Damascus two thousand years ago, so anything is possible I guess, but it’s hard to conceive of anything coming out of the US domestic political scene that would improve the economic environment or investor confidence. If we’re going to have a good year, we’ll all just have to ignore the noise.
  • Ditto Geopolitical Events. Brexit might not be awful but it certainly is not going to be good. Western Europe continues to get weirder and weirder as the tide of political small “l” liberalism continues to recede. As we have observed in this commentary before, absent some remarkable political rapprochement amongst the major players, the question is not whether the European Union survives in its current form, but when it fails. The Euro is, eventually, toast. While Western Europe is always the hands down winner of the Kick-the-Can-Down-the-Road Award, there will be a bridge too far someday soon and the center will not hold. We trust that it is not this year. Revanchist China and Russia are just plain bad news. The ambitions of Russia and China on the world stage during periods of their rapid economic growth may not have been great, but those two bad boys on the world stage in a period of economic financial distress at home is even more frightening.
  • Regulatory Burden. The regulatory burden here in the states is somewhat abated from the “if it moves (or certainly makes a profit), regulate it” heyday of the Obama administration. Moreover, our friends at Basel seem to be quiet at the moment and regulatory initiatives such as the Fundamental Review of the Trading Book and other capital raising regulatory regimes seem to be on a pause for at least as long as the European economic machine continues to stutter. Here at home, the incurred loss methodology of recognizing credit losses might have another day in the sun as the quietly criticized and broadly loathed CECL model (thank you, FASB) looks like it may also be on pause for a while longer. Capping it off, we may get good news on HVCRE, Volcker, etc.
  • Heads I Win, Tails You Lose. There’s a real chance that either interest rates begin to retrace their upward path downward because the economy sucks, or both the short and long end of the curve start to move upward without a concomitant refreshing of economic growth because of inflation and stagnant productivity. In both cases, the economy will contract and the cost or availability of debt will begin to stress businesses in the real economy and imperil capital formation in the commercial real estate space. Have faith in the Fed?
  • The Fed Behaving Badly? Speaking of the Fed, we’re fascinated with the Fed these days. It’s not like we haven’t had a Fed for ages. Nor is it that the Fed didn’t have the same tools in the toolbox, nor the same dual mandate to both protect the value of our currency and insure full employment for decades. What’s different? The media has turned the Fed into a rock star (presumably, however, without the fun of booze, drugs, roadies and wild parties). It’s the shiny thing that we can’t bear to look away from. That fascination keeps moving markets and creates volatility. This would maybe make sense if the Fed were rightly and widely known for its infallibility. However, if they have a secret Rosetta Stone which supports perfect, predictive forecasts, it’s about time they pull it out and start using it, isn’t it? So, it’s likely the Fed will over or undershoot as the Fed attempts a soft landing here. And that’s okay, it happens all the time. A quiet “Oops” is muttered and we adjust. If you’re rooting around for something special to worry about (it’s different this time), it’s the Fed’s balance sheet and its current “autopilot” reductions. If increasing the Fed balance sheet from $1 trillion to $4+ trillion during the Great Recession gets credit for stabilizing the economy and militating against a more significant economic crisis, then shouldn’t we think that shrinking the balance sheet might have a significant economic impact as well? Who knew? We’re in the “Here Be Dragons” part of the economic treasure map and I’ll guess we’ll find out.
  • Entropy. All systems degrade, whether that’s the sun lit uplands of the 2010-18 expansion here in the US, or simply the larger arc of the end of history fantasy born in the late 1990s. Things that work break; systems degrade. It’s been good for a long time. Moreover, as the world gets more complex, interconnected and technologically dependent, it seems to us less rugged and more susceptible to the knock-on consequences of bad things happening. Our economy is a brilliant construct delivering high octane economic performance, but fundamentally pretty fragile. Stone cairns survive from the time of the ancients while beautiful glass vessels shatter. Don’t we feel a little glass vessel-ish to you?

So taking all that on board, I want to announce that It’s Going To Be Okay. It’s fine. And you thought this was going to be another one of those morose, zombie apocalypse type of things that I periodically pen. Nope, not this time.

I mean it’s easy to wring ones’ hands and there’s always something riveting about a train wreck (as long as you’re not on the train…are we?), and all those bad things could happen and could upset Goldilocks. But, take a deep breath, folks. There’s still good news out there. GDP growth has been strong. The real economy has so far shaken off the noise of the stock market. Even the fiddling stock market has roared back this past two weeks. There’s been a number of business-friendly changes in tax and regulatory policy over the past couple of years, and certainly there’s a more business-friendly environment inside the federal judiciary. Trade policy? Well, it could end up okay…right? The banks are stronger. (I hesitate to use the phrase “fortress balance sheet” only because the Europeans do so without any sense of irony.) We’ve got a relatively amiable interest rate environment and significant consumer confidence without overwhelming consumer debt. The corporate debt situation is benign and while government debt is going through the roof, no one seems to care…at least for now. What’s the likelihood of exogenous shocks? None of the geopolitical players, either at home or abroad, presumably are actually intent on blowing up the world. Let’s face it, we’re all pretty good at kicking the can down the road. So while big ticket macro and geopolitical risks abound, odds are that really bad things won’t happen and the economy will continue to grow, albeit at somewhat more muted levels for 2019 and perhaps more years after that.

Let’s talk recession. Here’s the shocking headline: We’re going to have a recession at some time. Put on the big boy and big girl pants and face up to that. There’s nothing wrong with a recession. After 10 years of this expansion, we’ve lost perspective. A recession is not the end of the world. They happen periodically. Always have. Always will. And from the burning embers of every recession a new expansion is born. Like the old adage about generals fighting the last war, when we think recessions these days, we see the Great Recession of 2007-2009, which would indeed suck. But, do we really think that’s the template of the next downturn? Seems to me the next one will be more like the preceding four or five relatively short, intense V-shaped recessions that have characterized the American economy since World War II. It’s just not the end of the world. (Trust me, if you’re a banker and have never seen a recession, and maybe that’s most of you these days, it’s really not all that bad.) If it doesn’t happen in 2019, it’s going to happen in 2020, 2021 or 2022. It’s going to happen. When it occurs, it’ll present everyone in the business community with challenges, but challenges that we have regularly met in the past and will meet this time as well.

So here’s to a good 2019. It might be the last year of this expansion, but maybe not. Someday soon we’ll have to deal with a recession. Not today. Investors are coming out of their Q4 dens, capital formation will continue, the economy will continue to grow, commercial real estate will continue to function reasonably well and the Bad News Bears will tut-tut while continuing to invest and we’ll all have a bloody good time. Enjoy it. It will end, but not yet. So there.

 

 

Ignoring Macro…Or Are We as Smart as a Horse?

My, my, what a couple of weeks.  People, don’t you understand that I’m trying to run a business here?  Is a recession on the doorstep or is that a 2022 thing?  Are things really bad, or really good?  How am I supposed to stay dispassionate and analytic when the stock market gyrates and the drumbeat of portentous news never stops?  The worst December in the market since the Depression says The Financial Times!  It’s very annoying and I feel very much put upon.

All of this has got me thinking, are we ignoring Macro?  Are we not seeing what’s actually in front of us?  Not seeing the Big Stuff?  There is surely enough disturbing things out there to get and hold our attention.  The stock market continues to oscillate widely, the 10-year Treasury Rate is now well below 3%, volume is up and every time another headline crosses the ticker, everything changes again.  Is our trade dispute with China existential?  Is Prime Minister May in or out – happy or sad?  Is Boris Johnson having a good hair day?  The Italians are leaping around and gesticulating broadly, outraged now about how France may be getting a pass on budget discipline.  If France starts to cheat (again), can the center hold?  Japan is building an aircraft carrier…think about it.  In China, some young general suggested it might be a good idea to shoot at an American warship in international waters.  There’s a great idea.  The Donald continues to tweet and we almost had a smack down in the oval office between the President, Nancy Pelosi and Chuck Schumer just last week.  Continue Reading

The CRE CLO Is Back…and That’s Good

We have been writing off and on about the restoration to good graces of the commercial real estate CLO since the early days of this current recovery, and it’s important to keep the conversation going.  Hey, if Pete Rose can get into the Hall of Fame (and as MLB is embracing gambling, that cannot but happen, right?), the full restoration of the reputation of the CRE CLO cannot be far behind.

First, let’s just stop and get some definitional clarity here for those of you who actually have a life.  Fundamentally, the CRE CLO is a device that provides match-term leverage for a portfolio lender, though the technology can be used for other purposes.  Loans are pooled, investment-grade securities are sold to investors, and the loans are repaid from debt service payments.  Customarily, the sponsor retains all of the equity and junior debt, creating structural leverage to enhance returns on the dollars invested in the structure.

It’s really a warehouse funded by the capital markets. As such, it provides for an excellent alignment of interests between investors and the sponsor, who holds the bottom of the capital stack.  The sponsor is in it for the long haul, managing financial assets for its benefit and the benefit of the investors alike. Continue Reading

2018 Golden Turkey Awards

It’s that time again for Dechert’s CrunchedCredit Annual Golden Turkey Awards. In a year made most remarkable by the extraordinary performance of the US economy, idiocy, silliness, pigheadedness and stupidity have tended to be somewhat obscured by the economic good news machine. At the other end of the spectrum, the continued high volume of outrage over almost everything from both the left and right (and I’m sure the middle would do their fair share here if there was anyone at home) makes it harder to suss out the truly memorable and award-winning, but it’s our job to try. As we have said in the past, this would be really hard if the world actually behaved in a predictable, rational, Newtonian universe sort of way, but blessedly it does not.

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Do I Have to Talk About Brexit?

We haven’t written much about Brexit…largely because, for the life of me, I have been unable to embrace, with any conviction, a view as to whether the Europeans will dodge this bullet, as they have dodged so many in the past, or whether chaos will finally ensue.  Then, if chaos ensues, I’m equally clueless about what the contours of the chaos will be; what a hard Brexit will look like.  I am baffled.  And while it is demonstrably true that cluelessness and bloviation are not mutually exclusive, I, perhaps more thin-skinned than most of the chattering class, have been waiting for some sort of an epiphany before I wrote on the topic.

But birds gotta fly, fish gotta swim and us members in good standing of the commentariat gotta prattle on.  Since I’m not convinced I’m going to get any smarter and since this is likely to be one of the seminal economic events of 2019.  I’m diving in.  Might be ugly.  Hide the children.

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