A Shameless Self-Promotion

I hate to do this, but an influential business person said I "nailed it" on a response to a blog question about Business and the Economy, and just to prove my comments are not totally whacked-out, stupid or just plain boring, here is my comment along with Bill Nazur's response. I know this is shameless self-promotion, but I'm not above that.


I can just relate what I'm hearing from my sources, some of it is from articles I wrote in NewsLink and Commercial/Multifamily NewsLink:

1. One bank economist I spoke with forecast unemployment to peak at 10.8 percent (the U-3 figure). The U-6 figure is now at 17.5 percent, which includes total unemployment (marginally attached workers, part-time workers, workers who have given up looking for a job).

2. Many sources--mostly investors--are not happy that the FDIC, Fed, Treasury, etc. "extend and pretend" on commercial mortgage maturities. Granted, some of these are performing loans receiving cash flow, but the property values have dropped considerably and may not return for some time. One economist said the banks cannot keep extending these loans forever.

3. In the commercial mortgage-backed securities market, special servicers holding delinquent loans have a fiduciary responsibility to bondholders, who are beginning to engage in "tranche warfare" (investment grade vs. non-investment grade bondholders). AAA bondholders want to speed up foreclosures while lower grade bondholders want to wait.

4. According to sources, at least 500 small-to-mid size and regional banks would fail today if they had to write down all these bad commercial loans. However, there are also 8,000 chartered banks out there.

The problem is the FDIC would go broke if they had to seize all of the insolvent banks at one time. The FDIC, unlike during the Savings & Loans crisis, assist in bank acquisitions and hold some equity in the commercial loan portfolios from the failed banks, my source said. Other loans are auctioned off via DebtX, First Financial Network or other FDIC vendors.

5. Homebuyer tax credits, while improving homebuying, are driving homebuyers to purchase now, and some say this program will decrease future homebuying to spur the economy.

6. Residential mortgage-backed securities also face an "interest waterfall" scenario. If unemployment causes foreclosures on prime loans, then more AAA bond buyers will start losing money, and that can bring a lack of confidence to residential and commercial mortgage securitization, sources say.

7. Unemployed borrowers with prime loans will need "modifications" to improve AAA investor/bondholder confidence, but it can also keep housing prices from falling--another 'extend/pretend' scenario. That's the real estate perspective, but it ties into overall business.

8. Unemployment will likely continue if "toxic assets" force banks to hold more capital reserves. More reserves keep credit from businesses and without, debt, businesses will not be able to expand and hire more people.

9. Stronger businesses do not want to take on debt and, for that matter, neither do consumers. Weaker businesses and consumers may want debt but banks are not willing to risk it. (In fact, some banks are hiking credit card rates for consumers to 29 percent, forcing Congress to move up credit card legislation).

10. Now, because of deleveraging and a vast reduction in credit, many authors and/or sources say we are in a deflationary environment, but most economists I speak to say the risk down the road remains inflationary because the Fed can't print all that money and not have inflation.

11. Others argue that if unemployment continues and consumers save money, having the key rate down to near zero does not matter because consumers with good credit will not want to take on new debt and businesses with good credit histories will not need necessarily want the risk. One source said it will take two quarters without mortgage delinquencies to create more confidence in the business sector to begin taking on debt. But will banks risk it?

A credit-based recession faces these issues. I personally don't think there is one easy answer to it. A wise man, however, once quoted, "Present sacrifices for future gains." The philosophy today seems to be "present gains for future sacrifices."

Here's the response from Bill Nazur, VP of Specialty Lending, Author, Speaker, Media Advisor. (By the way, my real name is Mike. Robert Michaels is a pseudonym...really!)

Mike absolutely nailed it. Most importantly, bullet point 10 summarizes our issues quite handily. There isn't any imaginable scenario that would prevent inflation from occurring. Sadly, too many of my fellow talking heads, analysts (loosely interpreted), and news reporters aren't willing to speak the truth, as long as they generate headline news. The economists are completely right on this one. Brian is also correct that the government is filling a void in the wrong manner. We can't even say this is a Keynesian approach as the stimulus and dollars that are committed aren't being immediately fed into the economy any time soon. This whole thing is tragic....I will just continue to lead my family and friends on the right path. Now, I will run off to your blog, and read the entire post.

By Bill Nazur VP Specialty Lending, Author, Speaker, Media Advisor