Long ago, I read a book by a man named Herman Kahn, one of the founders of the Hudson Institute and a well-known public intellectual. The book was entitled On The Year 2000. (He was more famous for that truly uplifting missive, On Thermonuclear War.) I suspect I didn’t understand a lot of it, but I was jazzed by this apparently serious effort to peer into the future. How cool! Mr. Kahn was an interesting character; think of a banal-looking, rotund academician, who talked about nuclear annihilation like I discuss box scores. He was, in fact, an inspiration for Stanley Kubrick’s Dr. Strangelove and for General Jack D. Ripper’s famous line in that wonderfully dark comedy, “Casualties? 50 million…tops!” A father of US nuclear deterrent strategy and a considerable intellect, he actually got much of what he thought of the Year 2000 wrong, but in a fun way.
We seem all atwitter about the notion that a recession is about to happen; almost aroused by the prospect. A NASCAR crowd just waiting for a crash? Or is this a Waiting for Godot thing, as the chattering class bloviates excitedly, pointlessly and largely cluelessly? Maybe it’s the 24/7 news cycle at work… Did we run out of car crashes, shootings and natural disasters and needed something to rivet and terrify the unwashed? Or is this just politics? For obvious and entirely understandable reasons, every Democratic wannabe presidential candidate is desperately hoping a recession will arrive before the election. But to be honest, a lot of serious types motivated neither by a political gloom premium, weak ratings nor an affinity for NASCAR, seem to be talking it up as well, clinging to the recession on the doorstop narrative, no matter what (God, guns and macroeconomic theory?).
With apologies to Madeline Kahn, in this case, it indeed is twu, it’s twu! The CRE CLO technology is maturing and evolving into the stable, match term, non-recourse, non-marked to market, dynamic portfolio lender lever technology that its fans (me among them) always thought that it could be. It’s just taken some time.
Tainted by the wildly different, and in hindsight entirely zany, CRE CDO securitization from before the Great Recession (most, but not all, of which died ingloriously before that recession was over) and after having creeped back into usage in the marketplace between 2012 and 2016, the CRE CLO as a technology to securitize whole mortgage loans is finally maturing into a stable and useful tool in the toolbox of the portfolio lender. Growing from a handful of deals in the period 2012 through 2016, total CRE CLO production was around $15 billion; in 2017 it was $7.7 billion; in 2018 it was $14 billion; and in 2019 it would appear to be on track to perhaps be a $20 billion securitization market. Ignoring for the moment black swans, orange swans, dictators, Brexiteers and sundry other loons on a mission to derail our economy or the modern world writ large, the CRE CLO market sector should continue to grow at a respectable pace with only the obligatory brief respite shared by all structured products, during the next recession, whenever it might occur. Continue Reading
The US economy is about to pay the butcher’s bill for a massive disruption of worldwide financial markets resulting from the elimination of the London Interbank Offered Rate, or LIBOR. And, we are doing this on purpose. It seems the denizens of the heights of our international financial fabric felt they had to do this in light of the discovery that a handful of bankers had unlawfully colluded to cause LIBOR to be mispriced for their personal advantage. As Captain Renault said, “I’m shocked, shocked!” This was so bad that we had to blow up the LIBOR index upon which trillions of dollars of financial assets are based? While bankers behaving badly is a problem, why are we punishing markets because our banking regulatory cadres failed to prevent bad behavior? At best, this is a monument to irrational rectitude.
Just a few short months ago we took on the breathtakingly ill-conceived Current Expected Credit Loss (CECL) standard that the Financial Accounting Standards Board (FASB) proposed to implement starting in 2020. CECL will require major shifts in the way lenders model, forecast and reserve for future losses. It would materially drive up capital requirements, impair earnings and ultimately drive spreads higher to the borrowing community. And by the way, it would be pro-cyclical. If we were actually going to do these things (and we shouldn’t), an unelected financial standard setting committee is surely the wrong party to hold the pen.
The lending community screamed bloody murder, and for good reason. Luckily, the small banking community was at the forefront on this cri de coeur. While the money center banks may be one of our pols’ favorite whipping boys, everyone in politics loves the small banker (visions of Jimmy Stewart dancing in their reptilian brains) because those bankers made loans to their constituents, support their local community and, oh, by the way, made significant political contributions.
In order to avoid burying the lead, let me tell you where I’m going here. The CRE securitization business is in trouble. We need to throw out what biologists call the punctuated equilibrium, where once a system initially stabilizes, it thereafter changes little and resists radical change. Elsewise, our business is at very material risk of irrelevance.
But to give you some time to mull all that over, let me set the table first. I’ve been worried…
Tim Sloan resigned as the CEO of Wells Fargo a few months ago. I had briefly worked with Tim and much admired him so, on a personal level, this was sad. Now, Mr. Sloan’s resignation might have been a compelling and obvious move in any crisis consultant’s playbook, so I get that – but – oh, the vilification!
This commentary is about the ease with which we now embrace vilification and the substitution of ad hominem attacks for policy discussion about ideas and about the danger this poses to capital market participants. Continue Reading
The annual June CREFC conference at the Marriott Marquis in New York City was slightly less well attended than Miami (well, no duh!), but low conference attendance and stormy weather didn’t stop over 400 people from attending Dechert’s annual party at the Knickerbocker. The market outlook from the commercial real estate finance crowd this year – perhaps – was remarkably positive given where we are in the cycle. Were we all trying to convince each other, or ourselves? Any unusual anxiety could, of course, be due to the thick fog and heavy rain but the conference itself felt a bit darker than in prior years because there are reasons for anxiety, right? This year, in addition to the tired sports analogies (how many 9th innings can there be?), there were multiple references to driving a car directly into a wall. That’s dark, man. Continue Reading
In an effort to advance the conversation around climate change within the CRE finance community, Jason S. Rozes and Nitya Kumar Goyal recently published Climate Change Impact on Commercial Real Estate Finance — What the Industry Needs to Know Today, which provides a great foundation for understanding how climate change affects our industry and identifies recent developments that require further discussion. Climate change, and particularly its intersection with commercial real estate, is a complicated issue that presents a range of threats and opportunities and we at Crunched Credit look forward to wading into it with you. For more information on this topic or other CRE finance matters, please read our previous post or contact Jason S. Rozes and Nitya Kumar Goyal.
Contagion, at least of the buggy sort, can make for a terrific, spooky movie. Remember Gwyneth Paltrow and Matt Damon in Contagion? (Spoiler alert – she dies early on.) Got to admit, I love The Stand and Captain Trips; we all love a good scare… in the movies. In reality, however, contagion means bad things are happening: Bubonic Plague, excess body piercings and the 24 hour news stories (in no particular order). Contagion is very scary. Continue Reading