FDIC Deposit Insurance Fund Goes Negative

For the first time since 1992, the FDIC's Deposit Insurance Fund is showing a negative balance:


The DIF decreased by $18.6 billion during the third quarter to a negative $8.2 billion (unaudited) primarily because of $21.7 billion in additional provisions for bank failures. Also, unrealized losses on available-for-sale securities, combined with operating expenses, reduced the fund by $1.1 billion. Accrued assessment income added $3.0 billion to the fund during the quarter, and interest earned, combined with realized gains from sale of securities and surcharges from the Temporary Liquidity Guarantee Program, added $1.2 billion.

The DIF’s reserve ratio was negative 0.16% on September 30, 2009, down from 0.22% on June 30, 2009, and 0.76% one year ago. The September 30, 2009, reserve ratio is the lowest reserve ratio for a combined bank and thrift insurance fund since June 30, 1992, when the ratio was negative 0.20%.

More alarmingly, the massive spike in deposits ($491 billion in a single quarter) and total assets at problem institutions popped up $200 billionish in nine short months- exactly while the reserve ratio drops:

"CRE Somewhere Between Orderly Massacre & Disaster"

Blackrock's Fink on CRE

Larry gets paid over $23 MILLION a year to be AVERAGE, in his own words: "We were wrong along with everyone else. I'm not any less wrong than anyone else, and I'm not any more wrong than anyone else. I'm right in there...."

One might draw the conclusion that despite an average investment performance and a susceptibility to following the herd mentality, his real value add derives from being able to secure $3.3 BILLION commitment for funding from the U.S. Government's PPIP ($1.5 billion funded to date).

In a further display of brilliance, Larry goes on to say that there is all too much talk of a bubble being created in the stock market, and that the economy is now in a period of stability. See WSJ article here....

CRE & Capital Markets - Implications for California

From the California State Controller's Office, November 2009 Economic Summary Analysis:

Capital Markets and Valuation

Whereas excessive and imprudent leverage fed the bubble, deleveraging not only popped the bubble, but, in the process, destroyed record amounts of equity and debt. Most deals financed with high leverage from 2005 to the present are under water. The equity is gone and the debt, if it trades at all, trades at a deep discount to face value. Most leveraged equity invested in real estate has evaporated since property prices, if marked to market, have fallen 30% to 50%.


The chart above shows overall U.S. property total returns, quarterly (at annual rates) and lagging four quarters. This appraisal-based, lagging index shows sharp negative returns exceeding the deterioration of the RTC (Resolution Trust Corp.) period of the early 1990s. Second quarter 2009 returns indicate the possibility that total returns, while still negative, may have hit a point of inflection. We expect that property values in many sectors, especially office, retail, and industrial, will likely deteriorate further in 2010 with improvement beginning sometime in 2011.

The deflationary spiral is ongoing and likely to proceed much further. The economy is deleveraging, a painful process that spares few sectors, least of all real estate. At present there is a historic capital markets imbalance, the resolution of which awaits the massive in-process repricing of all commercial real estate. We believe that, despite the availability of few sales comparables, the bottom of the cycle is at hand.

Emphasis added by ENSO: Highlighted text seems to be somewhat contradictory and typical of ungrounded optimism endemic in certain quarters of the financial markets.

A crisis of unprecedented proportions is approaching. Of the $3 trillion of outstanding mortgage debt, $1.4 trillion is scheduled to mature in four years. We estimate another $500 billion to $750 billion of unscheduled maturities (i.e., defaults). Unfortunately, traditional lenders of consequence are practically out of the market and massive amounts of maturing debt will not easily find refinancing. Marking-to-market outstanding debt will render many banks, especially regional and community banks, insolvent, especially as much of the debt is likely worth about 50% of par, or less.

The inability of many banks and other capital sources to lend not just to real estate firms but to other businesses in the State as well presents a real challenge to the private sector and state
and local governments.

Property—National and California Perspectives


Commercial property operations — occupancy and rental growth — remain weak. The good news is that vacancy rates are peaking in most commercial property categories in California and elsewhere across the nation. The recent trend and outlook for vacancy rates in Los Angeles, San Diego, and San Francisco mirror the nation, as shown in the chart above.

Emphasis added by ENSO: A "peak" in vacancy rates can only be determined a posteriori

San Francisco, of the three profiled California cities, has the lowest vacancy rate. Since the city’s vacancy rate will reach equilibrium sooner, rental growth will turn positive as early as 2010. However, Los Angeles and San Diego will likely lag by as much as two years.

Implications for California

The economic crash and its aftermath are affecting all sectors of the economy, real estate being no exception. Real estate, especially in the transactional sub-sectors (e.g., brokers, etc.), accounts for a significant share of the California labor force. The downturn has created a vicious negative feedback, a symptom of which is still ongoing property deflation and tenant defaults. Attendant symptoms are reduced property tax revenues, failing businesses, decimated transactions volume, and reduced income and sales tax revenues. The extent to which the recovery is delayed will depend on a number of factors, not least of which is the extent and timing of loss recognition by owners and financial institutions.

CRE and Small Business

From Atlanta Fed President Dennis Lockhart: Economic Recovery, Small Business, and the Challenge of Commercial Real Estate

How serious is the CRE problem for the financial system and the broad economy?

First, let me provide some overview comments: While the CRE problem is serious for parts of the banking industry, I don't believe it poses a broad risk to the financial system. Compared with residential real estate, the size of the CRE debt market is smaller, and the exposure is more concentrated in smaller banks.

However, I am concerned about the potential impact of CRE on the broader economy. Unlike residential real estate, there is not the same direct linkage from CRE to household wealth—and therefore consumption—caused by erosion of home equity. However, there could be an impact resulting from small banks' impaired ability to support the small business sector—a sector I expect will be critically important to job creation.

To add some detail: At the end of June 2009 there was approximately $3.5 trillion of outstanding debt associated with CRE. This figure compares with about $11 trillion of residential debt outstanding.

About 40% of the CRE debt is held on commercial bank balance sheets in the form of whole loans. A lot of the CRE exposure is concentrated at smaller institutions (banks with total assets under $10 billion). These smaller banks account for only 20 percent of total commercial banking assets in the United States but carry almost half of total CRE loans (based on Bank Call Report data).

Many small businesses rely on these smaller banks for credit. Small banks account for almost half of all small business loans (loans under $1 million). Moreover, small firms' reliance on banks with heavy CRE exposure is substantial. Banks with the highest CRE exposure (CRE loan books that are more than three times their Tier 1 capital) account for almost 40% of all small business loans.

To repeat my current assessment, while the CRE problem is very worrisome for parts of the banking industry, I don't see it posing a broad risk to the financial system. Nonetheless, CRE could be a factor that suppresses the pace of recovery. As the recovery develops, the CRE problem will be a headwind, but not a show stopper, in my view.

It's appropriate to be a bit tentative in the assessment of CRE risk to the financial system, however. In 2007, many underestimated the scale and contagion potential of the subprime residential mortgage-backed securities problem. With this experience in mind, my assessment should continue to be refined.

Lending Standards Tighten, Loan Demand Weakens

From the October 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices:

Survey included a special question on the status of CRE loans on banks' books that, at the beginning of 2009, were scheduled to mature by September of this year. Among the domestic respondents that reported having such loans, about 75% indicated that they had extended more than one-fourth of maturing construction and land development loans, and 70% reported extending more than one-fourth of maturing loans secured by nonfarm nonresidential real estate. In contrast, only 15 to 20 percent of domestic banks reported that they had refinanced more than one-fourth of each of the two types of maturing CRE loans.

Federal Reserve Commentary on CRE

Jon D. Greenlee, Associate Director, Division of Banking Supervision and Regulation of the Federal Reserve testified today before the Subcommittee on Domestic Policy, Committee on Oversight and Government Reform, U.S. House of Representatives. His remarks include the following on commercial real estate:

Prices of existing commercial properties have already declined substantially from the peak in 2007 and will likely decline further. As job losses have accelerated, demand for commercial property has declined and vacancy rates have increased. The higher vacancy levels and significant decline in the value of existing properties have placed particularly heavy pressure on construction and development projects that do not generate income until after completion.

As a result, Federal Reserve examiners are reporting a sharp deterioration in the credit performance of loans in banks’ portfolios and loans in commercial mortgage-backed securities (CMBS). At the end of the second quarter of 2009, approximately $3.5 trillion of outstanding debt was associated with CRE, including loans for multifamily housing developments. Of this, $1.7 trillion was held on the books of banks and thrifts, and an additional $900 billion represented collateral for CMBS, with other investors holding the remaining balance of $900 billion. Also at the end of the second quarter, about 9% of CRE loans in bank portfolios were considered delinquent, almost double the level of a year earlier. Loan performance problems were the most striking for construction and development loans, especially for those that financed residential development. More than 16% of all construction and development loans were considered delinquent at the end of the second quarter.

Of particular concern, almost $500 billion of CRE loans will mature during each of the next few years. In addition to losses caused by declining property cash flows and deteriorating conditions for construction loans, losses will also be boosted by the depreciating collateral value underlying those maturing loans. The losses will place continued pressure on banks' earnings, especially those of smaller regional and community banks that have high concentrations of CRE loans.

The current fundamental weakness in CRE markets is exacerbated by the fact that the CMBS market, which previously had financed about 30% of originations and completed construction projects, has remained closed since the start of the crisis. Delinquencies of mortgages backing CMBS have increased markedly in recent months. Market participants anticipate these rates will climb higher by the end of this year, driven not only by negative fundamentals but also by borrowers’ difficulty in rolling over maturing debt. In addition, the decline in CMBS prices has generated significant stresses on the balance sheets of financial institutions that must mark these securities to market, further limiting their appetite for taking on new CRE exposure.