Easy Street

The One Financial Crash We Avoided

Marketplace Contributor Jun 29, 2012

One of the most remarkable things about the Aspen Ideas Festival is the attendees. The vast mix of non-profit workers, CEOs, investors, government officials, economists and journalists ensures that you never know what kind of conversation you’ll get into.

Yesterday at lunch, for instance, Marketplace’s senior producers and I ran into a prosperous, independent investor in commercial real estate. He makes his profit by buying up commercial mortgage-backed securities. Yes, they’re like the residential mortgage-backed securities that you know and love from the financial crisis, but CMBS aren’t mortgages on homes; they’re mortgages on big office buildings, malls and other big commercial properties.

The investor and I talked about one of the strange miracles of the market: the commercial real-estate market has been under the same pressure as the housing market for over four years – yet, unlike housing, the commercial real-estate market hasn’t crashed.

Let’s get one thing out of the way: It’s not because the commercial real-estate market is better. It’s because Wall Street sees its own self-interest in saving commercial real estate from the same fate as the housing market.

As the investor wisely pointed out, the market for commercial real estate was rife with all the same corruption as the housing market: banks didn’t do their homework before signing loans, ratings agencies were overly generous in classifying weak loans as strong, and when it came down to mark down the value of the struggling commercial real-estate loans, many banks simply blithely refused. They inflated the values of the loans to make their balance sheets look good.

The investor was annoyed because he was paying the price for all that incompetence: while he makes his living buying bad loans, there were very few bad loans he could really trust to hold on to their value. The shoddy underwriting practices of the commercial real-estate boom left the market with a lot of junk debt. He didn’t want to waste his money on it.

When Marketplace’s vice president heard this, he looked surprised. “So what’s going to happen? It all sounds pretty bad.”

The investor and I looked at each other and shrugged, with the same answer: “Nothing’s going to happen.”

There are two reasons for that: zero interest rates, which means big investors don’t have to confront the consequences of being punished with higher interest payments; and more importantly, Wall Street banks and commercial real-estate investors worked together to renegotiate better deals to avoid defaults. Wall Street will work to save professional investors in a way that it rarely would for regular consumers.

The commercial real-estate market is one designed purely for Wall Street’s big boys: professional investors and big banks work together. There’s no little guy, no Mom-and-Pop. And that has been its salvation: when the money guys get together, they cut each other breaks. They have one advantage homeowners don’t: banks and big investors can change the terms of their loans when they get too burdensome or too near default. No one on Wall Street wants to push a good client into default.

As a homeowner, you don’t have that freedom. Have you ever tried to renegotiate your mortgage with a bank? Yeah, good luck with that.

It’s not all bias, of course. Big investors generally have good credit, are savvy, and will be around for a long time to pay their bills. You can’t guarantee the same of homeowners, some of whom may be a few paychecks away from defaulting on their mortgages.

Still, the commercial real-estate market shows that you don’t always need government bailouts. Wall Street may not always clean up its own messes, but it can work to save its friends if it really wants to.

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