Monday, December 22, 2008

Bailouts - when will they end?

As most people knew and predicted, once one industry got a bailout (loan or direct grant of cash), it would be hard to tell all other industries 'no.'

The investment/banking industry was deemed 'too big to fail' and got their money ... well, OUR money, actually.

The auto industry was deemed by Congress and the President to be 'vital to our American economy' - so vital, in fact, that the normal bankruptcy reorganization laws that have proven good enough for the rest of us just wouldn't do. They got OUR money, as well.

Cities, counties and states have their collective hands out - and now it's developers, according to the Wall Street Journal (subscription may be required.) They've got massive debts coming due and no new credit available.

With a record amount of commercial real-estate debt coming due, some of the country's biggest property developers have become the latest to go hat-in-hand to the government for assistance.

They're warning policymakers that thousands of office complexes, hotels, shopping centers and other commercial buildings are headed into defaults, foreclosures and bankruptcies. The reason: according to research firm Foresight Analytics LCC, $530 billion of commercial mortgages will be coming due for refinancing in the next three years -- with about $160 billion maturing in the next year. Credit, meanwhile, is practically nonexistent and cash flows from commercial property are siphoning off.

Unlike home loans, which borrowers repay after a set period of time, commercial mortgages usually are underwritten for five, seven or 10 years with big payments due at the end. At that point, they typically need to be refinanced. A borrower's inability to refinance could force it to give up the property to the lender.

A recent letter sent to Treasury Secretary Henry Paulson, and signed by a dozen real-estate trade groups, painted a bleak scenario: "Right now, we believe there is insufficient systemic capacity to refinance expiring, performing commercial real-estate loans," said the letter. "For many borrowers, [credit] simply is not available," the letter noted.

To see the impact of this, you only have to look at General Growth Properties, Inc., the owner of the Shops at Fallen Timbers Mall in Maumee. They had hoped that this mall would be 80-85% full by this time, but it's only about 2/3 full, which they blame on the economy.

Additionally, their share price was recently as high as $53, but closed Friday at $1.75. In October they had $8.5 billion in debt and was considered highly leveraged with little ability to restructure its debt soon because of tight credit markets. Analysts were predicting they were ripe for a takeover or that they might be forced to sell some of their properties.

This is consistent with what major developers are saying in their request to be included in the new (yes, NEW) $200 billion loan program initially created by the government to salvage the market for car loans, student loans and credit-card debt.

The developers are saying that if commercial real estate is included, banks might have an incentive to make more loans to them since they'd be able to repackage and sell them more easily to investors with the assurance of government backing. They're even asking lawmakers to consider setting up a separate program just for lending to commercial real estate only.

Of course, they're also saying that the world will end without government help.

""We've been urging Washington to put this as one of the top priorities in dealing with the economy," says Steven Spinola, president of the Real Estate Board of New York, underscoring the need for the government to help spur commercial property lending either directly or indirectly.

The real-estate executives are warning that the approaching surge in commercial mortgages coming due poses another major threat to the global financial system, which already is on life support. With rent prices falling and vacancies rising due to the weakening economy, delinquencies on commercial mortgages already have begun to rise sharply."

And why shouldn't they say this? It's worked for everyone else, so far, why won't it work for them?

The problem is - it's not working and won't do anything, in the long term, to help the economy. Taking dollars from all of us (including our descendants) in order to temporarily shore up failing businesses just buys them some time. It doesn't address the failed business models which got them into trouble in the first place. It also means that the money being taken from each of us won't be used in the 'correct' way - which is the way we would spend the money in a free market if we'd had it. Instead, the free market is destroyed by rewarding failure and eliminating the consequences of bad decisions. This will encourage more risky actions and decisions in the future, because they suffer no negative reinforcement for having made them.

If left alone, the market will correct itself - and yes, it will be painful. But not nearly as painful as the catastrophic impact of government interference in trying to avoid any of the pain. FDR's 'answer' to a recession turned it into an depression and prolonged the bad economy. Markets have ups and downs and it's folly to expect we'll never bear the brunt of the 'downs.'

The lesson is there, it's plain to see and we should be able to learn from it. However, having failed to learn from it, Congress and the President are doomed to repeat it.

We should not be surprised when the proposed 'solution' doesn't work.


Erv said...

There's only two ways this can end:

- We, the individual and stand on our own and just say no more

- The city/state/nation collapses and someone bigger comes and tells us how to do everything their way.

Timothy W Higgins said...


I often wondered if there would ever be an end to the bailing out in this country, but I believe that even Congress is starting to get a bit tired.

Besides, this kind of bailing involves "evil corporations" and Democrats might find it a bit more difficult to sign on and keep their hands clean.

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