The Next Potential Bailout

Whenever Bernanke heads to the Hill for these Humphrey Hawkins road shows there’s a theme that pops out amid all the banality. It’s usually indicative of the hot button for politicians and these days that theme provides a good clue of the next potential bailout.

The theme this week was commercial real estate. It’s almost as if the senators and representatives had an “aha moment” as it dawned on them that things were not going swimmingly in the land of big real estate. More likely, is that a lot of lobbyists have been whispering help in their ears lately.

Probably all you need to know about what direction the winds are blowing is to consider the comments of Chris Dodd and Barney Frank, the chairmen of the Senate and House committees that hear from Bernanke on these occasions. Dodd suggested that the looming commercial real estate crisis could, “…even dwarf the residential problems.” and Frank said, “…there’s a great deal of fear” that commercial defaults will produce something similar to residential real estate defaults.

Bernanke for his part fell back initially on the TALF. He noted that the Fed was gearing up to buy some CMBS in the hopes that this would jump start the market but he strained to warn those assembled that might not be enough.

As Bloomberg reports, he’s suggesting further help might be needed:

It “may be appropriate” for the government and Congress to consider “fiscal” steps to support the industry, Bernanke said today. Ideas for fresh support for the market could include government guarantees for commercial mortgages, Bernanke also said today, while noting no proposal on the subject has emerged.

Can you see son of TARP or PPIP or something taking shape here. Once again, do anything to put off the day of reckoning. Right now the watchwords for commercial real estate lenders are extend and pretend. Extend maturities and pretend everything is OK or will become OK. The will become OK part is where the government comes in.

A fair slice of the commercial real estate loans now in jeopardy were uneconomic at birth. They relied on excessively high valuations and unreachable proforma income projections. These loans would have been problematically in a good economy, in a bad one, they have embedded losses that can’t be papered over by even the most agressive of government bailout programs.

Sadly, we’re probably fated to relive the S&L debacle. A lot of forebearance, extensions of loan maturities and other types of chicanery on the hope that things get better. They don’t as we learned once before. Sooner or later, the true value of the assets will have to be recognized, some banks are going to fail and then we can get on with business, just like we did before.

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