The Buck has Been Passed

I'm going to take a potentially pre-mature victory lap for my piece "Let's Not Face it the Banks are Bankrupt". The story of many large banks, potentially 10 out of the top 19 needing to raise large sums of capital to be "well capitalized" in the government's eyes has been leaked so widely, that it doesn't even matter. We have already been told that none of these banks will be allowed to go under and that they are fundamentally sound and will be able to raise public capital independently or not, whatever.

MOVE ALONG FOLKS NOTHING TO SEE HERE!

In the words of Simon Johnson, a former chief economist of the IMG and now a professor at MIT's Sloan School of Business:

"The stress test was a clever stalling action from a tactical point of view," Johnson said. "They wanted to wait until the economy showed signs of bottoming out. Now, everyone's more relaxed, and they can go easier on the banks."

Frankly, the one big remaining issue I saw for banks and the economy as a whole was the potential for the commercial real estate debacle to lay waste to what remaining capital the banks had. But this news is now on the tape. Yesterday, the Wall Street Journal quoted chapter and verse the bear case for bank losses from commercial real estate and correctly pointed out that it would be hardest on the in many cases until now unscathed local and regional savings banks and S&Ls, who never got into any CDOs, CDSs or SIVs, but stuck to their knitting lending to local businesses and gulp.....real estate owners and developers.

Noah had asked me to mention the pending wave of CMBS paper due to mature over the next couple of years. As reported by Globe St., according to REIS there is $166.7 billion in CMBS paper maturing between now and 2012. The news here is pretty grim, with delinquency rates rising quickly, up 42 basis points quarter to quarter in Q1 to 1.76% and 300% year-to-year (albeit off very low levels). REIS sees the delinquency rate potentially hitting 6% by year-end.

The government however, is well aware of the issues in the CMBS market and their potentially nasty impact on banks. To wit, some nuggets from Bernanke's recent testimony to Congress

"Conditions in the commercial real estate sector are poor. Vacancy rates for existing office, industrial, and retail properties have been rising, prices of these properties have been falling, and, consequently, the number of new projects in the pipeline has been shrinking. Credit conditions in the commercial real estate sector are still severely strained, with no commercial mortgage-backed securities (CMBS) having been issued in almost a year. To try to help restart the CMBS market, the Federal Reserve announced last Friday that recently issued CMBS will in June be eligible collateral for our Term Asset-Backed Securities Loan Facility (TALF). "

The government is also no doubt aware that banks are both extending existing loans (Loan Extensions Bridge to Nowhere?) and not making new loans, because they don't have enough capital to recognize their bad loans in any compressed period of time, much less lend (Excess Reserves Go Berzerck as Lending Flatlines).

No doubt the powers that be understood that the death of the CMBS market was a big enough problem (Death of the Shadow Banking System), without banks siezing up as well. It was only a matter of time before lending which was flatlining...sustained partly by extensions of existing loans and drawdowns on lines of credit....started to decline as actual defaults started rolling in.

So it is just in time that the stock market turned, the consumer came out of their bunker and markets began to loosen up....yes credit markets sometimes follow equity markets (it happened in 2003 too). De-levering is creeping into the system. REITs are coughing up properties and doing dilutive equity deals. They are alsobuying back debt at cents on the dollar in some cases, which can be highly accretive.

All of this courtesy of quantitative easing (The Path of Delevraging - Quantative Ease Please). The Fed has taken out the big money guns and threatened to drown anyone who was short anything and it has been working. The only thing investors hate more than losing their money, is seeing others make money, while they sit out. Those who have sat out this rally may be toast (I would include myself here, but luckily I was stupid enough to be nibbling all the way down....I finally gave up, just about the optimal time to load the boat.)

Those in CMBS land, leveraged loan land or anywhere else risky who don't get long look like they are going to get flattened. Now I'm not a big bull here, I still think the future is going to be quite rocky, but having been a professional investor, I have a feel for how much pain can be absorbed before capitulation sets in (Noah I'm feeling your pain) and this rally has all the marks of sucking in everyone before it's done. Unfortunately, my radar doesn't see out far enough to know what will actually happen once the inevitable correction sets in.

The stock market leads consumer confidence.....but all you wizened Urban Digs readers already know that.....and so the painting of the tape has had its intended effect in the real world. People feel like the storm has passed and despite the recapitalization of the banking system for the 2nd, or is it 3rd time, Ma and Pa won't be pulling their money out of the bank.

The financial mess has been swept into a pile and is being washed away by the monetary hosers. The buck has been passed. This is now on our creditors' shoulders. China, Japan, BRIC and ROW, I wish you all luck. I hope Uncle Sam can pay you back, but if not it will go down in history as the greatest non-military victory of one nation over others since Reagan and company convinced Russia to get into an arms race and that drove them bankrupt. We tempted all these guys into playing our game...capitalism. We even showed them that sovereign defaults are not to be feared, we sharked them by throwing a few hands. Now they are all in....so what if were bluffing? everyone goes broke with us.

The question is, now that we have transferred all the bad debt and liabilities for our diversion into insanity onto the federal government and taxpayer, can we service this debt, without pure monetary devaluation. We are gonna find out.

Noah also wanted me to mention that the bond market dosn't act so great (View image)
and the dollar looks a little shaky (View image).

Have a nice day!

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