From Times: That was the overwhelming concern expressed at a public hearing of the COP [this week] that focused on corporate and commercial real estate lending.
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Richard Parkus, an analyst at Deutsche Bank, said he thought two-thirds of all commercial real estate loans due in the next few years — hundreds of billions of dollars’ worth — could go bust. Jeffrey DeBoer, president of trade group the Real Estate Roundtable, fretted that problems in the lending business could cost the nation thousands more construction and real estate jobs. Next up, Congressman Jerrold Nadler of New York expressed worry that the country was headed for a lost decade of economic stagnation.
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A number of the panelists thought the government’s TALF and PPIP programs meant to boost lending were helpful but not the answer. Parkus said he thought extending the terms of commercial loans set to default would only delay the problem and make it worse. As more and more bad loans pile up, he predicted, it will become progressively harder for any of them to get refinanced.

[Parkus] expects that a little over $1 trillion in commercial real estate loans will be up for refinancing in the next four years. Because of falling real estate prices and lower rental incomes, he said, as many as two-thirds of those loans may not be eligible for refinancing and could end in default…“There are very large losses embedded in the system,” [Parkus] said.

emphasis added

Given, among other factors, the renewal dates on maturity defaults and extension risks that a large number of commercial loans valued at billions of dollars are approaching, and more importantly, the deterioration in office rates, and retail rates in particular — which given the declines in consumer spending and the spike in retail bankruptcies constitute a serious and worrisome problem — is only logical to assume that as  valuations on cross-sectional differences in property prices decline while the disconnect between supply and demand persists, CRE will be hit rather hard as a segment. How bad it gets will depend on speed of economic recovery.

CRE prices made HH in October 2007 after appreciating 90% from 2001.

From CB: [A]dvance estimates of U.S. retail and food services sales for April, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $337.7 billion, a decrease of 0.4 percent (±0.5%)* from the previous month and 10.1 percent (±0.7%) below April 2008. Total sales for the February through April 2009 period were down 9.2 percent (±0.5%) from the same period a year ago. The February to March 2009 percent change was revised from -1.2 percent (±0.5%) to -1.3 percent (±0.3%).

Retail trade sales were down 0.4 percent (±0.7%)* from March 2009 and 11.4 percent (±0.7%) below last year. Gasoline stations sales were down 36.4 percent (±1.5%) from April 2008 and motor vehicle and parts dealers sales were down 20.7 percent (±2.3%) from last year.

While today’s retail sales numbers showed a decline in April sales following the recovery earlier this year, let’s keep in mind the drop was strictly concentrated in gas stations and grocery stores sectors – where any weakness is not likely to persist. If we exclude these two categories, overall sales were down only 0.1 percentage point.

In other news: U.S. import prices increased last month by their largest amount in almost one year. Import prices increased 1.6% and export prices increased 0.5%, an important indication that the velocity of money continues to revive. Yes, the hyperinflation subjects comes to mind, but sometimes a fast-growing money supply is not as inflationary as it’s made to be.

Graph: U.S. Census Bureau

The Treasury, argues the professor of economics at Columbia Univesity - hopes to get us out of the mess by replicating the flawed system that the private sector used to bring the world crashing down, with a proposal that has overleveraging in the public sector, excessive complexity, poor incentives and a lack of transparency.

In theory, the administration’s plan, continues Mr. Stiglitz, is based on letting the market determine the prices of the banks’ “toxic assets” — including outstanding house loans and securities based on those loans. The reality, though, is that the market will not be pricing the toxic assets themselves, but options on those assets.

Mr. Stiglitz uses the example of an asset that has a 50-50 chance of being worth either zero or $200 in a year’s time. The average “value” of the asset is $100. Ignoring interest, this is what the asset would sell for in a competitive market. It is what the asset is “worth.” Under the plan by Treasury Secretary Timothy Geithner, the government would provide about 92% of the money to buy the asset but would stand to receive only 50% of any gains, and would absorb almost all of the losses, Mr. Stiglitz says. Some partnership!

What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a “partnership” in which one partner robs the other. And such partnerships — with the private sector in control — have perverse incentives, worse even than the ones that got us into the mess.

So what is the appeal of a proposal like this? Perhaps it’s the kind of Rube Goldberg device that Wall Street loves — clever, complex and nontransparent, allowing huge transfers of wealth to the financial markets. It has allowed the administration to avoid going back to Congress to ask for the money needed to fix our banks, and it provided a way to avoid nationalization.

Essentially Stiglitz’s point is that Treasury Geithner, Wall Street’s new main operative after Paulson, and the administration itself for that matter want to bribe investors to buy up “toxic (junk, trash) assets” and guarantee their losses with taxpayer money. A calculative move since it would facilitate a vast and unprecedented transfer of wealth from the great majority of taxpayers (the working class) to the banks, bondholders and the wealthy.

After Paul Krugman, Prof. Stiglitz is the second Nobel prize-winning economists to rightly criticize the administration’s plan for what it is. A massive, disguised theft.

After recognizing the fact that predicting the course of the economy has for sometimes now become an hazardous occupation, Fed Yellen said that her confidence in the expressed optimism of most professional forecasters - in terms of the economy beginning to grow again within the next several quarters - “is greatly diminished by the nearly unprecedented set of circumstances we face, circumstances that severely challenge our ability to use historical economic relationships to anticipate future developments.”
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“While there are good reasons to think the economy could begin to recover fairly soon, I’m far from confident,” she said, “and thus don’t want to press the case too strongly.” Indeed, in all humility, most of us have failed to anticipate the depth of this downturn and have had to mark down our forecasts repeatedly.

Yellen said an array of effective fiscal and monetary policy programs put in place by the government and the Federal Reserve are “the best hope for recovery.”

“We face an extraordinarily uncertain future, and our main hope for economic recovery lies in the sorts of innovative and aggressive economic policy responses that are being carried out by Federal Reserve and federal government policymakers.”

Yellen said she supports the Fed ’s current broad approach of targeting a range of credit markets through a variety of programs and said the various Fed and Treasury roles, necessitated by today’s extreme circumstances, offer the prospect of “more normal” financial market functioning over the course of this year.

On the subject of deflation, Yellen cautioned that “With economic activity weakening, economic slack is likely to be substantial for several more years. We need to be sure that we avoid the kind of deflation that Japan experienced during its lost decade. While I don’t think such an outcome is likely, it should be on our list of concerns.”

Yellen said core inflation could remain below 1% for the next several years.

On the unemployment front: “The level of the unemployment rate would still rise throughout 2009 and into 2010,” she said. “So, in this sense, the worst of the recession is not expected to occur until next year. And, even by the end of 2011, I would expect the unemployment rate to be above its full-employment level. So I wouldn’t call this a particularly rosy scenario.”

In terms of the housing crisis, Yellen hesitated to call a bottom in the crash, saying that there is not yet any clear sign that the contraction in home building is near its end.

“The recent news that housing starts and permits had jumped in February provides a ray of hope, but it’s too soon to know if this is noise or a signal that the contraction will soon end. The ongoing decline in house prices poses significant downside risk to future consumer spending and the health of the financial system,” she added.

With regard to an exit strategy from the current unconventional policies, Yellen said a possibility is for Congress to give the Fed the authority to issue interest-bearing debt in addition to currency and bank reserves. “Issuing such debt would reduce the volume of reserves in the financial system and push up the funds rate without shrinking the total size of our balance sheet,” she said.

In concluding her speech Fed Yellen pointed out again the fact that we will continue to face serious challenges as we try to right the economy, and “the resumption of growth that we expect by the end of 2009 is far from assured.”

FBN made its initial request on Feb. 26, 2009, for information about the SEC’s response to complaints, tips, inquiries or any potential violations of the securities laws or wrongdoing by R. Allen Stanford, who allegedly ran a large Ponzi scheme via his Stanford Financials Group and/or its affiliates.

Kevin Magee, Executive Vice President of FOX News commented, “It is unacceptable that titans like R. Allen Stanford or Bernard Madoff were able to operate such massive financial frauds under the nose of institutions like the SEC. As a news organization, we believe it is the public’s right to know how these economic atrocities were committed as part of our continued quest to demand government accountability on behalf of the American taxpayers.”

Fox Business recently won a court order over the Treasury Department’s failure to respond to Freedom of Information Act requests regarding use of the bailout funds and the Federal Reserve’s extended loan facilities.

In February, the Federal Court in New York sided with FBN and ordered the Treasury to comply with the network’s requests.

Fox channel is owned by News Corp. (NWSA) and delivers real-time information across all platforms that impact both Main Street and Wall Street.

As the Wall Street attempts to recover further from 12-year lows, Geithner is seeking to convince jittery investors that he has finally a viable program to get credit flowing again.

Here are some excerpts from Geithner’s op-ed piece.

The American economy and much of the world now face extraordinary challenges, and confronting these challenges will continue to require extraordinary actions.
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the gravity of this crisis require that every policy we take be held to the most serious test: whether it gets our financial system back to the business of providing credit to working families and viable businesses, and helps prevent future crises.
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However, the financial system as a whole is still working against recovery. Many banks, still burdened by bad lending decisions, are holding back on providing credit. Market prices for many assets held by financial institutions — so-called legacy assets — are either uncertain or depressed. With these pressures at work on bank balance sheets, credit remains a scarce commodity, and credit that is available carries a high cost for borrowers.

Today, we are announcing another critical piece of our plan to increase the flow of credit and expand liquidity. Our new Public-Private Investment Program will set up funds to provide a market for the legacy loans and securities that currently burden the financial system.

The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets. Banks will have the ability to sell pools of loans to dedicated funds, and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government.

The funds established under this program will have three essential design features. First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors. Second, the Public-Private Investment Program will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments. These funds will be open to investors of all types, such as pension funds, so that a broad range of Americans can participate.

Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets.

The new Public-Private Investment Program will initially provide financing for $500 billion with the potential to expand up to $1 trillion over time, which is a substantial share of real-estate related assets originated before the recession that are now clogging our financial system. Over time, by providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets. The ability to sell assets to this fund will make it easier for banks to raise private capital, which will accelerate their ability to replace the capital investments provided by the Treasury.

This program to address legacy loans and securities is part of an overall strategy to resolve the crisis as quickly and effectively as possible at least cost to the taxpayer. The Public-Private Investment Program is better for the taxpayer than having the government alone directly purchase the assets from banks that are still operating and assume a larger share of the losses. Our approach shares risk with the private sector, efficiently leverages taxpayer dollars, and deploys private-sector competition to determine market prices for currently illiquid assets. Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience.

The new plan represents a test for Geithner, whose tenure has been blemished and complicated by controversy over his personal taxes, criticism of the lack of detail in his Feb. bank-bailout announcement, and his involvement in the AIG bonus mess.

Obviously, the uproar over the AIG’s bonuses has not stopped the current administration from moving ahead with plans to jumpstart the resumption of normal lending.

The new toxic asset plan, which from initial indications seems to be in the right track in terms of its framework and hopefully its success, (always depending here on the private-sector’s willingness to offer its support at an especially tough time) addresses critical points like government’s planning on how to share the risk with private investors or arrive at a fair price for the assets that would neither trick/deceive taxpayers nor harm the banks.

The new plan will involve three separate approaches that are all aimed at attracting institutional investors by offering abundant loans and generous terms.

First, “the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money that those partnerships will need to buy up troubled assets that banks want to sell.”

Secondly, “the Treasury will hire four or five investment management firms, matching the private money that each of the firms puts up on a dollar-for-dollar basis with government money.’

Third, “the Treasury plans to expand lending through the Term Asset-Backed Secure Lending Facility, a joint venture with the Federal Reserve.”

The Treasury plans to contribute up to $100 billion in new capital to the effort, although the possibility of that amount expanding down the road, remains highly probable. In addition, the FDIC would provide guarantees against losses on a pool of loans that a bank wants to sell. The program could guarantee as much as $500 billion in loan investments.

The three efforts are designed to unglue markets that have seized up and hopefully clear the way for an amelioration and unclogging of the credit markets. However, Calif. Democratic Rep. Brad Sherman, who sits on the House Financial Services Committee, expressed skepticism about the plan’s prospects.

“It looks like a scheme in which the taxpayer takes all the risk and the hedge funds get almost all the profits,” Sherman told Reuters.

But the key protection for taxpayers, notes NYT, is that “the private investors will bid in auctions against each other for the assets. As a result, administration officials contend, the government will be buying the troubled loans of the banks at a deep discount to their original face value. Because the government can hold those mortgages as long as it wants, officials are betting the government will be repaid and that taxpayers may even earn a profit if the market value of the loans climbs in the years to come.”

While institutional investors so far have refused to pay more than about $0.30/on the dollar for many bundles of mortgages, even though most of the borrowers are still current, with so little donwside risk - hedge funds and private equity firms can pay higher market price for the toxic assets. At the same time, many of these assets no longer trade which makes their pricing process very hard and complicated. The Treasury’s hope however, is that introducing private investors will help create market prices.

I’m sure the plan will receive strong criticism since different people have their own preference. Still, the reality is that unless we fix the housing market and banking system, which acutely involves getting rid of “toxicity”, you guarantee to have a deep and a very long recession.

“Many of you likely are frustrated, and rightfully so, by the impact that the financial crisis and economic downturn has had on your banks, as well as on the reputation of bankers more generally. You may well have built your reputations and institutions through responsible lending and community-focused operations, but nonetheless, you now find yourselves facing higher deposit insurance assessments and increasing public skepticism about the behavior of bankers–outcomes that you perceive were largely caused by the actions of larger financial institutions. Many of you managed your businesses prudently and shunned more exotic instruments and activities. And many of your customers–households and businesses–avoided excesses and are able to meet their financial commitments on a timely basis.

No doubt this frustration has been heightened by the problems caused by financial firms that are too big or too interconnected to fail. Indeed, the too-big-to-fail issue has emerged as an enormous problem, both for policymakers and for financial institutions generally. Creditors of a firm perceived as too big to fail have less incentive to monitor and restrict the firm’s risk-taking through adjustments to the price at which they lend money to the firm. If left unaddressed, this weakening of market discipline creates an unlevel playing field for smaller institutions, which may not be able to raise funds as cheaply, even if their individual risk profiles are better, or at least no worse, than those of their larger competitors. The erosion in market discipline distorts market behavior and can give firms an incentive to grow–either internally or through acquisitions–in order to be perceived as too big to fail.

Government rescues to prevent the failure of major financial institutions also have required large amounts of public resources. These actions have involved extremely unpleasant and difficult choices, but given the interconnected nature of our financial system and the potentially devastating effects on confidence, financial markets, and the broader economy that would likely arise from the disorderly failure of a major financial firm in the current environment, I do not think we have had a realistic alternative to preventing such failures. That said, these episodes have shown clearly that the problem of too-big-to-fail is extremely serious.
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Supervisors must pay close attention to compensation practices that can create mismatches between the rewards and risks borne by institutions or their managers. As the Federal Reserve and other banking agencies have noted, poorly designed compensation policies can create perverse incentives that can ultimately jeopardize the health of the banking organization. Management compensation policies should be aligned with the long-term prudential interests of the institution, be tied to the risks being borne by the organization, provide appropriate incentives for safe and sound behavior, and avoid short-term payments for transactions with long-term horizons.

…an important element of addressing the too-big-to-fail problem is the development of an improved resolution regime in the United States that permits the orderly resolution of a systemically important nonbank financial firm. We have such a regime for insured depository institutions, but it is clear we need something similar for systemically important nonbank financial entities.”

The comments were Mr. Bernanke’s first since the Fed decision two days ago to increase debt purchases. He said that the Fed “continuously assesses the effectiveness of its credit-related tools” and so far officials “have generally been encouraged by the market responses,” including a drop in mortgage rates.

The Fed Chief concluded his remarks by encouraging the community bankers to “operate prudently in the current environment, but not to let fear drive their decisions.”

Administration officials are urging patience and insist they are moving faster than anyone has tried to do before. However, the reality is - the Department’s version of the plan, initially introduced by Secretary Geithner in mid February, has faced challenges from the start and more importantly - so far it has gone nowhere, at a time when urgency is imperative and needed to bolster the financial system.

Geithner, notes the Time has been burdened by thin staffing as he tries to get nominees to the Senate who can pass muster. But let’s face it. That’s not really an objective excuse for someone in charge of such an important department at a such critical time with the U.S. economy confronting its toughest financial crisis in the last seven decades. Geithner’s responsibility is not to delay ; his obligation is to give a detailed plan in clear terms of how we are to proceed. Something he keeps failing to produce. The slip(s) is embarrassing for Treasury officials who have been assuring the media and the markets that the plan was coming. We simply can not continue to respond to market pressures for recapitalization without a specific, well-defined and coherent restructuring or rehabilitation program.

But then again, Geithner’s disappointments didn’t just start with his tax problems. They continued with his incomplete Feb. 10 proposal intended to relieve banks of their toxic assets and was heavily criticized for not providing a detailed plan in clear terms or explaining for that matter, how the program would work. As recently as March 14, Geithner again told Bloomberg TV he would release details of his plan soon, adding the Treasury already is well on its way to starting “a dramatic lending program to help securities markets get flowing again.” Further complicating the matters, besides the latest delay and the uproar over AIG an their bonus structure, is now the International Monetary Fund’s [IMF] latest report - released Thursday (3/19).

The IMF said in the report, prepared for a meeting earlier this month of finance ministers from the Group of 20 nations: “Geithner’s plan to fix the financial system lacks “essential details”…Critical details concerning the valuation of distressed assets remain unclear…The plan also does not address how severely undercapitalized or insolvent banks will be resolved or clarify the role of the vehicle that will hold the government’s preferred shares….More specifics will be needed to calm frayed market sentiment.” [Bloomberg]

It seems Geithner’s Treasury Dept., at least from a reputation perspective has started at this point a seemingly irreversible downhill slide. Let’s hope they don’t make the economy part of it. With such performance we won’t be able to get banks working again, which makes it an essential element in any economic recovery. And more importantly - we will not manage the crisis or see a gradual improvement in credit conditions, unless we immediately put together an effective program for valuing and disposing of toxic assets, and remediate banks and financial institutions as necessary.

The Federal Open Market Committee [FOMC] has announced that the Open Market Trading Desk (the Desk) will begin a Treasury purchase program of up to $300 billion to help improve conditions in private credit markets. The Desk will concentrate purchases in the 2- to 10-year sector of the nominal Treasury curve, although purchases will occur across the nominal Treasury and TIPS yield curves. Consistent with prior outright Treasury purchases, these purchases will be conducted with the Federal Reserve’s primary dealers through a series of competitive auctions via the Desk’s FedTrade system. On average, the Desk will purchase Treasury securities two to three times per week. Further details will be provided early next week after consultation with the primary dealers and other market participants. The Desk plans to hold the first purchase operation late next week.

The Fed’s move to expand its balance sheet is another effort from the central bank to stop the economy from continuing contracting, improve credit conditions and block the squeezing on bank balance sheets from further intensifying. However, a constant Fed balance sheet expansion raises some questions about its manageability. Let’s keep in mind, the central bank has already made commitments to the high-priority Term Asset-Backed Securities Loan Facility (TALF - one of the Fed’s vehicles for revving up consumer lending) and Mortgage Backed Securities [MBS] programs. In addition, the Fed today also announced that it will purchase an additional $750 billion in agency mortgage backed securities, bringing its total purchases for the year to $1.25 trillion. A large balance sheet with large purchases my prove difficult to manage, though not impossible, from an unwinding perspective when the “exit strategy” will inevitably be put into effect.

The FOMC also said gross issuance of coupons is expected to be around $1 trillion higher in FY2009 than the previous fiscal year, and the Fed will therefore be absorbing a significant share of the new supply.

By committing itself to pump more than $1 trillion into securities purchases the fed aims at increasing private lending, revive housing and spur the economy to future growth.

Mortgage refinancing activity should be quite strong into the coming weeks.