Congressional Oversight Panel Weighs In: "Treasury and bank supervisors must address . . . the threats" facing CRE
On Thursday, Feb. 11, the Congressional Oversight Panel issued its report (dated Feb. 10) addressing "commercial real estate losses and the risk of financial stability." The report highlights the possibility of commercial mortgage failures over the next four years, with the potential to cause banks to lose as much as $300 billion. (Now that is big - but are you really surprised?)
The Panel is responsible for overseeing Treasury's TARP program and reporting to Congress with the results.
The report is long (189 pages) (download it here). And it is scholarly,
I have not thoroughly digested the entire report; however, I offer up these highlights and observations (both from the report and from other sources):
- The New York Times begins its summary of the report this way: "A huge wave of mortgage failures on commercial real estate could hit next year, causing banks to lose as much as $300 billion, imperiling lending for small businesses and hindering the economic recovery, a Congressional panel is warning." (Right. We know this. In fact, I'd put the number much, much higher given all of the "maturity defaults" on the 3-4 year horizon.)
- If you want to read the "best" or most relevant portion of the report, read Section One, Part G. It focuses on regulatory, accounting and workout issues.
- The report asks policy makers, bankers and servicers to honestly evaluate "the components of the crisis and to try to moderate them" (p. 103). It then notes that while non-viable banks (due to the poor quality of their commercial real estate loans) should not be allowed to operate, it does not mean that banks "that engaged in relatively prudent lending, but were undercut by the depth of the recession," should be closed (p. 103).
- The Panel notes that "not all banks should be treated the same way" and that there are "reasons not to force all potential losses to be recognized immediately' (p. 102).
- The executive summary of the report (p. 3) concludes with this charge: "The Panel believes that Treasury and bank supervisors must address forthrightly and transparently the threats facing the commercial real estate markets. The coming trouble in commercial real estate could pose painful problems for the communities, small businesses, and American families already struggling to make ends meet in today's exceptionally difficult
economy." (Right. But it'll take more than a 189 page report to pull this topic to the top portion of the political agenda.) - Against this backdrop, the New York Times highlights the political in-fighting between the Panel and Treasury: "The panel’s chairwoman, Elizabeth Warren, has been pressing the Treasury to compel thousands of banks to undergo stress tests like the ones that the Federal Reserve required of 19 of the country’s biggest financial institutions early last year. The Treasury secretary, Timothy F. Geithner, has called that idea impractical."
- And of course, Treasury and the FDIC have been squabbling on various financial reform issues. And did you note that even the U.S. Comptroller of the Currency has weighed in, warning that some of the proposed rules will hamper a healthy secruitization market [link]?
So, where does my quick read take me?
- "Extend and pretend" will continue in order to avoid loss recognition for the (relatively) better banks.
- This report is a must read - just like the October 31 regulatory announcement [link to prudent peace pipe blog posting].
- Of course, will these broad philosophical approaches be implemented at the bank examiner level? (At the recent CMSA January conference [link], FDIC Chairman Sheila Bair answered "YES" - the examiners are being instructed to implement the Oct. 31 announcement.
- The FDIC will continue to take down 4-8 banks every Friday. (Nibble, nibble, nibble - but for good reason: could the consumer really stomach a CRE debacle?.)
- The commercial mortgage problem is attempting to claw up on the political agenda pecking order (fighting health care, Federal deficit, taxes, etc.)
- Regardless of the relative order of importance or priority, it appears that the problem now is a political problem - and . . .
- A complicated problem thus becomes all the more challenging given all of the industry and political players clamoring to be part of the solution (or the TV sound bite). Some of these players are promoting a different cause entirely. So, the podium is crowded with clashing perspectives: Congress (which has many voices); in-fighting within the Administration (FDIC v. Treasury v. Comptroller v. ______ [your pick]); industry groups such as the Real Estate Roundtable, the MBA and the CMSA; and a host of others promoting other (worthy) causes and agendas.
I do not have an answer for the pointed "where is" all of this going.
Only an observation: this is democracy at work.
It is noisy.
It is messy.
And we know that, when compared to other forms of governance, it works.
But there is no promise that it will be painless.
Painless was the "old economy."
If you have any comments or musings of your own, please post them below.
