Credit Crisis

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The other week, I was musing in this blog about the likelihood of more AIB and Bank of Ireland type auctions of U.S. Dollar denominated assets by European banks. In the Wall Street Journal, on Friday, September 23rd, the headline was “Banks in France Cut Dollar Loans”. The article focuses on two of France’s biggest banks, BNP Paribas and Société Générale, jettisoning U.S. Dollar denominated assets.

And then, the news about Dexia broke on October 10th. Dexia is a huge French-Belgian bank, though with a lesser profile here in the States than its more famous Parisian and Brussels-based sisters. The French, Belgian and Luxembourgian governments immediately swooped in to guarantee deposits and provide credit support and began chitchatting about a good-bank, bad-bank fix. The reaction in the markets has been curiously muted. Dexia is huge. Its reported balance sheet is more than 500 billion euros. (And, of course, Dexia had been reporting Tier 1 capital of 10% a couple of months ago. How’d that happen? But that’s a different story.)Continue Reading Always Look on the Bright Side of Life: How Dexia’s Failure Could be Good for Capital Formation

Returning from a Labor Day weekend spent cleaning up after Irene, here are some notes as I clean out the desk drawer of Summer 2011: 

  • I spent the first week of August with my family on Martha’s Vineyard as the Dow Jones lost 1000 points, bond spreads blew out, securitized lending ground to a halt and the United States lost its triple-A credit rating. Past that, it seems the market held things together pretty well in my absence.
  • Not altogether unsurprising, but still notable that during the trading days following the U.S. downgrade, treasury yields decreased, leaving some doomsday investors scratching their heads. Of course, the thing about betting on the end of the world is that you can only be right once.
  • The third week of August saw the release of almost simultaneous reports that residential mortgage interest rates hit all-time lows and residential mortgage applications hit 15-year lows.
  • Meanwhile, the FHFA is suing 17 or so of the nation’s largest banks for billions in losses incurred during pre-bubble subprime securitizations. Many analysts are asking when (if?) the U.S. will stop punishing banks.

Continue Reading Summer Winds

What the hell is going on here? I’ve got a business to run, and it’s really annoying that I can’t sort out whether we’re in the early stages of recovery or on the cusp of another train wreck. When Dad taught me to drive, he had to keep saying “Don’t look at where you are but where you’re going.” Good advice. Yet only as long as I look at the road right in front of me do I feel OK. If my eyes wander to the horizon, I get really itchy.

This recovery feels very brittle. Oh, sure, transactional activity is way up. If Dechert’s practice is the first derivative of the broader capital markets (and I think it is), then things have been getting progressively more robust for the better part of a year now. We’re growing, we’re hiring, deals are coming in at a goodly pace. Yet, everyone I know with the slightest capacity for reflection is touchy, to say the least.

So let’s do a S.W.O.T. analysis of where we sit.Continue Reading What in the Hell is Going on Here Anyway?: A SWOT Analysis of the Financial Recovery

As the CMBS market begins to get its feet underneath it, a number of folks have begun to pine for the public markets. Since 2009, every CMBS deal has been issued as a 144A (or otherwise privately placed). The public market is beginning to feel like a memory. While there seems to have been relatively robust demand for product, a number of bankers say that demand is still somewhat constrained in the 144A institutional market place. They fondly remember the benefits of the public market: liquidity, better pricing, a wider investor pool. As the market rebounds, these bankers suggest that it may be time to dust off the shelves.

And so we thought it would be useful to revisit that bid and ask. For this purpose, we’ll assume that the hypothetical banker is right and that there are significant benefits to be obtained by reanimation of the public deal zombie. That’s the bid.

Here’s the ask. First, there’s that pesky little liability issue. The liability exposure for bankers and sponsors in the 144A market is less than in a public (registered) deal. No liability under Sections 11 and 12 of the Securities Act. That liability is generally pretty absolute (as to non-expertized info) subject only to a diligence defense. Liability in the private market is limited to 10b-5. The need to prove scienter and reliance in a 10b-5 action is a significant burden for an aggrieved investor. The difference in exposure to liability is a distinction not to be sniffed at. Yes, of course we always mean to get the disclosure right. But the underlying assets are complex and there’s an undeniable hunger among the plaintiffs’ bar to “discover” disclosure defects where honest folks, acting in good faith, thought adequate disclosure had been made. (Note also how much more ominous the enhanced liability exposure in public deals will be after FinReg and its progeny become law. As disclosure gets more complex and elaborate, the opportunities to stumble into liability grow exponentially.)Continue Reading So You Really Want To Do A Public Deal?

Near the epicenter of the late unpleasantness was that wonder of complex engineering, the CRE CDO. It has been blamed for near everything that went wrong or was wrong in the commercial real estate space. It probably is responsible for the winters of 2010 and 2011.

The CRE CDO, as it was initially designed, was an on-balance sheet term financing facility which was designed to be free of the vicissitudes of traditional bank warehousing restrictions and, of course, the dread mark to market of the repo market. The transactions were often dynamic and had substantial term, often up to 7 years. Whole loans (as well as other stuff) which met the elaborate and complex (more on this later) eligibility criteria could be financed on a rolling basis with the proceeds from the disposition of assets reinvested for a substantial portion of the term. CRE CDO paper was customarily rated. The average cost of funds was substantially lower than what could be obtained on a straight bank facility. Continue Reading The Impossible Dream: It’s Time to Bring Back the CRE CDO

Although there is renewed optimism for a vibrant CRE lending market in 2011 (or at least a significantly better market than the prior 3 years), many lenders and servicers continue to face challenges in dealing with delinquent or defaulted commercial mortgage and mezzanine loans (whether held on balance-sheet or securitized). The volume of these “scratch and dent” assets are expected to increase this year and are responsible for continued misfortune by masking positive returns and causing realized losses. Despite this misfortune and the associated headaches, there is appetite in the industry to acquire or aggregate large portfolios of these loans on the cheap, and make a buck or two in the process of restructuring the loans or exercising remedies.Continue Reading Liquidating Trusts: Let’s Detoxify the System at Last

While perhaps akin to stories of sixteen foot gators in the New York sewer system, I have heard that there is a physiological basis for suppressing the more painful memories of childbirth which is the species’ way of ensuring that couples have more than one child. Perhaps a similar thing is affecting investors and market participants to allow animal spirits to be rekindled this January.

Oh, I think it’s fair to say that there were precious few animal spirits in January ’08 and ’09 and we were all a bit fluttery at the beginning of 2010, but I think we’ve put the worst memories of the last 3 years’ unpleasantness behind us and appear intent on enjoying the delightful frisson of booming times once again.
 Continue Reading Animal Spirits and Limits of Memory

Leading with the good news, the commercial mortgage finance market is back and growing at a brisk pace.  From a few standalones in the fourth quarter of 2009, we’ve gotten to a remarkable place.  Even during the first half of 2010, while lenders were hesitantly starting to lend, precious few lenders actually had real balance sheet availability for securitization.  That changed.  We’re back!  

Almost as soon as these markets began to function again, complaints about the quality of the loans began to bubble up.  OK, LTVs remain modest and, broadly, we’re not  underwriting pro forma income, but structural rigor and simplicity did not long endure.  Give me a break.  The joke has always been that our business had a seven year cycle and five year memories so that once in every cycle we’d recapitulate the errors of the last.  But five months?Continue Reading Seven Year Cycles and Five Month Memories

I’m writing from Pennsylvania Station on a particularly bad day for our national rail service (Amtrak) – apparently the heavy rains and gusts wreaked havoc with electrical wires running both North and South, delaying (or cancelling) every Acela, Keystone, Silver Meteor, Silver Star and Vermonter scheduled to leave our country’s busiest transport hub. The (woefully underrated) holiday movie Love Actually opens with Hugh Grant’s musing that when faced with the general gloominess of the world he considers the smiles of arriving Heathrow passengers as they greet their waiting loved ones. On this first day of December and first night of Hanukkah, however, I’m fearful that Mr. Grant would be sorely disappointed in the zeitgeist of the half-million or so travelers looking to depart for Stamford and Boston, Philadelphia and DC and the balance of the Northeast Corridor.Continue Reading Midnight Train to Boston: Dechert Speaks at IMN in NYC

 With Thanksgiving upon us and the holiday season in full swing, we here at CrunchedCredit.com would like to present our “Golden Turkeys”, noting certain special contributions to the ongoing resurrection of the Commercial Real Estate Finance industry.

The Golden Turkey for the Best Self-Inflicted Wound: FASB

Hands down, this goes to the Financial Accounting Standards Board. We don’t know whether to give top honors to FAS 166 and 167 dealing with the transfer of financial assets or the new Fair Value Accounting Rules. But in any event, in a series of changes which certainly must have made more sense to academic accounting communities and to the financial markets and investors for which these little regulatory gems were designed, for reasons which remain curious even now, they’ve imported enormous financial volatility and burdened the balance sheets of financial institutions with assets they don’t own and liabilities for which they have no contractual liability in the middle of the greatest financial correction in modern memory. At least we changed the rules of the game, we drop a giant pro-cyclical engine into the balance sheet, stir in a little FinReg, and, Viola! — chaos. We could have hoped someone with regulatory gravitas could have stood up and said, "What are you thinkin’?" And now for a second heaping of goodness, FASB is considering expanding Fair Value to all financial assets, which will produce even more volatility onto the balance sheets of financial institutions. Oh, and have we mentioned Lease Accounting? If FASB has their way, all leases will be treated as capital leases. we can’t even begin to tell you how bad that is. FASB, the winner in this category, hands down.

The Golden Turkey Award for Best Regulatory Knifefight: FDIC

This award goes to the FDIC. This late, lamented Congress began spinning the tale that the absence of skin in the game caused the capital meltdown over the past three years, and, in large measure, through sheer undisputed resolution, it has become received wisdom. (There must be a Golden Turkey for that itself, isn’t there?) So the SEC begins a regulatory initiative to impose skin in the game requirements for use of a shelf in a publicly registered transaction. Good enough, and then the Congressional locomotive comes through and skin in the game becomes a part of Dodd-Frank. Under Dodd-Frank, all the relevant banking regulatory agencies and the SEC are directed to engage in joint rulemaking on skin in the game. In the middle of all this, the FDIC publishes its new securitization Safe Harbor, which contains a completely freestanding and independent skin in the game provision. Oh, sure, the Reg which is in final form is applicable as of January 1, 2011, has an auto-conform provision that the Dodd-Frank skin in the game provisions won’t be law for two years, so we have, irrespective of the FDIC imposing its own set of conflicts rules on a certain sector of the securitization market, face a specific direction to engage in joint rulemaking. What the banking regulatory community thinks about this one can make the other members of the bank regulatory community and the Federal Reserve think about this one can only imagine. We suspect the SEC might be a bit pouty too.Continue Reading Commercial Real Estate 2010 Recap: And the Golden Turkey Award Goes To…