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NYT: Commercial Real Estate a “ticking time bomb” for banks

This morning’s New York Times reports that office vacancies are up across the country, which is bad enough, but also that banks large and small are on the hook for commercial real estate investments gone bad.

Stock analysts say commercial real estate is the next ticking time bomb for banks, which have already received hundreds of billions of dollars in capital and other assistance from the federal government. Big banks — like Bank of America, JPMorgan Chase and Morgan Stanley — each hold tens of billions of dollars in commercial real estate securities. The banks also invested directly in properties.

Regional banks may be an even bigger concern. In the last decade, they barreled their way into commercial real estate lending after being elbowed out of the credit card and consumer mortgage business by national players. The proportion of their lending that is in commercial real estate has nearly doubled in the last six years, according to government data.

Just as home loans were pooled, then carved up and sold to investors as securities over the last two decades, commercial property loans were repackaged for the financial markets. In 2006 and 2007, nearly 60 percent of commercial property loans were turned into securities, according to Trepp, a research firm that tracks mortgage-backed securities.

Now that the market for those securities has dried up, borrowers cannot easily roll over the loans that are coming due.

Just to review: Caterpillar was chugging along fine last summer with its stock trading in the 80s till the meltdown in big banks blasted everything and everyone. Cat’s business didn’t change at all but its stock lost over half its value in a classic Wall Street panic.

Even if Obama buys a Cat D11 for every adult American, Cat’s stock will crater again if there’s another bank-driven financial meltdown. That’s what all investors are up against in this market.

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Tom Mangan posted at 10:10 am January 6th, 2009 |

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