Monday, February 23, 2009

Atlanta FED's Lockhart Says 2009 Year of CMBS Crash

Dennis Lockhart (not related to FHFA's much more clueless James), President of the Atlanta Fed and voting member of the Fed's policy-setting committee, had some surprisingly insightful commentary today, most notably recognizing that debt backing the commercial real estate market is doomed.

"Many banks are pretty heavily exposed to commercial real estate. It is also a big part of the securitization market. So commercial real estate is one that concerns me. Around $400 billion of commercial real estate refinancing was hanging over the market and [I am] monitoring its progress with care. If you think of 2007 and 2008, in a negative sense, as the year of...residential real estate issues, it is possible to think of 2009 as the year of commercial real estate. That is the one domestic factor that keeps me up at night," he told the Association for Financial Professionals after a speech. "We see very little risk of hyper-inflation, or serious inflation, in the short term. If anything, we're somewhat more concerned about the opposite," Lockhart told a questioner. "One of the requirements of the future, conceivably, as the economy recovers, will be the return to more conventional policy and shrinking of the Fed's balance sheet (and), conceivably, rate rises. You have to time that appropriately to ensure that we don't have a long-term inflation," Lockhart said.

In his prepared remarks, Lockhart stressed that the U.S. central bank had undertaken to use all the tools at its disposal to aid the economy, and he endorsed government action to boost bank balance sheets. "By injecting capital into banks, I believe the U.S. Treasury has strengthened and will further strengthen bank balance sheets. Economic forecasts will tend to be overly optimistic as the economy goes into a recession, but overly pessimistic as the economy comes out of recession and begins its expansion phase. Perhaps we should take some comfort from that," he said. Asked after the speech if he was confident that China would be able to boost domestic demand speedily, Lockhart made plain that he was not holding his breath for quick results from stimulus measures announced by Beijing. "Whether that is going to be possible in the short-term is a very debatable question. Because shifting from a high savings, low consumption society to a lower savings, higher consumption society in a short period of time can't easily be done," he said. Sphere: Related Content
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Economics of Contempt said...

Ironic, seeing as the Fed is thinking (very hard) about expanding the TALF to include already-issued CMBS. If they do, that $400bn refinancing time-bomb would probably go off right in the Fed's face. I'm guessing Lockhart will vote against that TALF expansion (though I suspect he'll lose).
It's been funny to watch the Fed's moves on the CMBS issue in the past couple weeks. They called a couple big banks and asked what they thought about expanding the TALF to include existing CMBS too. The rumor that the Fed was open to the idea of accepting existing CMBS spread like wildfire (even by Wall Street standards), and got everybody all excited. Now there's a huge lobbying effort underway to get the Fed to accept existing CMBS as collateral in the TALF. Not surprisingly, the Street has managed to convince the Fed that this would have Totally Awesome Effects on the CRE market, banks' balance sheets, the US economy, AIDS in Africa, etc. Now the Fed is leaning toward actually doing it.
This is the story of the financial crisis. It's amazing how much the Street is carpet-bombing the Fed's balance sheet. Seriously, how much more of this can the Fed take?

Dark Space said...

EOC, the $400 billion in commercial mortgages maturing, are mostly not CMBS. In fact, just $26 billion CMBS mature in 2009, and most are 10-year old loans on stabilized properties.

Further, extending the TALF to secondary issues, would have no effect on these maturing CMBS loans - you want to create a primary marketplace they can refinance into.

The concerns with the $400 billion in maturities lie square at the base of your local and regional banks, rather than Wall Street. Most of that $400 billion consists of short-term, floating-rate loans on transitional and under-development projects.