Commercial Real Estate Threatens "Hundreds of Banks"
In case you've still got money in a bank, Bloomberg is warning that defaults in commercial real estate loans could "topple" hundreds of US banks.
Leaving taxpayers on the hook for trillions in losses.
The note, by Senior Editor James Crombie, walks us through the festering hellscape that is commercial real estate.
Pre-Bailouts and Free Money
To set the mood, a new study predicts nearly half of downtown Pittsburgh office space could be vacant in 4 years. Major cities like San Francisco are already sporting zombie-apocalypse downtowns, with abandoned office buildings baking in the sun.
So what happened? In short, the Fed's yo-yo interest rates first flooded real estate with low rates and cheap money. Which over-built.
Then when the Fed panic-hiked interest rates in the 2021 inflation, that put trillions of commercial real estate underwater.
This could mimic last year's bank crisis, where falling bond prices panicked depositors. That crisis only stopped when Janet Yellen and Jerome Powell effectively bailed out every bank in America with sweetheart loans written on fictitious asset values along with unlimited taxpayer guarantees through the comically under-funded FDIC.
By the way, the FDIC is essentially guaranteeing over $20 trillion in deposits on just over a hundred billion. So they've got a half-penny on the dollar.
Without those government pre-bailouts, one paper last year by researchers at Stanford and Columbia estimated that 1,619 US banks -- about a third of them – could be at risk of failure.
The problem is nothing was actually fixed. In fact, it's getting worse. For the simple reason that as the months roll by there's more and more debt coming due.
Regional Banks at Risk
And that brings us to Crombie, who notes that there's 9 hundred and twenty nine billion of commercial real estate debt coming due in the next 9 and a half months.
That's up 28% from last year, and it's getting bigger every day as banks pretend loans are still healthy by effectively adding missed payments.
We're starting to see glitches in the matrix; New York Community Bank just went through a near-death experience over its garbage portfolio of commercial real estate loans, dropping almost 80% before it was bailed out by vulture investors while the mega-banks hover like mega-vultures.
More will come. Potentially a lot more: a recent study from the National Bureau of Economic Research estimated that up to 385 American banks could fail over commercial real estate loans alone.
These would overwhelmingly be small regional banks, who typically hold a third of their assets in commercial real estate loans.
They hold so much because they know their local markets best, but the Fed poisoned that chalice by flooding easy money to developers.
Conclusion
For now we're only seeing the sickest banks dropping out of the herd. That could dramatically accelerate as that trillion plus in loans come due.
Commercial real estate delinquency rates have already jumped to 6 and a half percent -- up 30% in a matter of months. Rates of distress in office loans just hit 11%.
When the smoke clears, we could lose dozens, even hundreds, of regional banks. Going by the last time with savings and loans, taxpayers ate 80% of the losses.
Meaning you could be on the hook for trillions, while the megabanks gorge on the carcass.
Slashing interest rates could staunch the bleeding. But with inflation marching up every month – currently at 5 and a half percent annualized -- that's not going to happen.
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When bad behavior is papered over again and again, a society builds on malinvestment. Doubles down on stupid, because that’s what endless credit expansion does. It allows a person, a business, a government and a culture to put off the consequences of gluttony for seemingly forever. ‘Make it someone else’s problem’, they say.
I wait for these moments for the pounce point. Sometimes takes a decade or more for the correction in asset prices, but the corrections do come. Every time.
Just like the good times of 2009 where wise investors were able to pick up properties at 10 cents on the dollar of cost of replacement… this one is going to be even bigger. Thinking 1929-1930 style and is all so positively delicious.
As my grandfather always told me, and he lived through the panic of 1907 and witnessed the creation of the leviathan spawned on Jekyll Island as well as the Great Depression, "always sell when the cotton is high and the sun is shining. Never buy until you see bodies in the streets running deep with the blood of stupidity."
Grab a cold beer and the popcorn while we watch this epic bubble deflate.... violently deflate.
Nay... implode ))
Lowering interest rates is not a solution to the massive post-bubble distress in commercial real estate. In fact, no "solution" is necessary. Banks and other speculators that engaged in poor lending/investing practices should simply fail.
What the Fed is doing now, through forward guidance of interest rate cuts, is to build back the bubble in CRE and other assets, thus cushioning potential failures like those discussed here. This is the standard and endless boom-bust cycle.