The Coming Investment Opportunities And Risks

As Europe and Washington bumble and stumble on with political bickering and no real resolutions of the sovereign debt and banking crises, and no agreement anywhere other than the UK as to how to deal with the massive deficits now burdening most counties, the prospect for a robust CMBS market next year dims further. Instead of the $50 billion of CMBS issuance in 20011 that many projected, it is likely to end under $30 billion. In 2012 it is likely to be around $30-$35 billion maybe. It is really impossible to predict, but there is no reason to think that it will be anymore. With all European sovereign debt in question and on credit watch, the failure of a recent German bond issue, and a potential crisis looming with Chinese banks, there is little prospect that investors will be rushing to believe AAA ratings on CMBS and to buy large quantities of these issues. In fact, there is now talk of eliminating rating agency ratings as the metric for certain institutional investors. Whether that happens or not, there is a clear message that ratings are very suspect. Everyone should have clearly learned that after 2008, but even that complete demonstration of the invalidity of ratings did not seem to end the reliance on the major rating agencies. The downgrade of US Treasuries again demonstrated the invalidity of rating agency work. Now we have major questions about the ratings to European sovereign debt. Given all of this, why should anyone think that a AAA rating of a CMBS issue has any more validity than the sovereign ratings. If the US is not AAA, then how can you say a tranche of CMBS is.

The ramifications are that to revive CMBS bond sales will take a reset of the belief of investors, especially institutional investors, that CMBS mortgages and therefore, bonds, are being well underwritten and that the monetary and fiscal crisis of the western world is really being dealt with by political leaders who have even a rudimentary understanding of banking and economics, which it seems is not the case in the White House or Europe. The only hope we had that anyone in the White House understood anything about banking or finance, was Daly, and they quickly demoted him and shoved him aside. It is clear they have no interest to hear what he has to say. My own personal dealings with the White House on mortgages and how banks and mortgage lending really work, just reinforced their complete lack of any understanding. Congress is so divided that even the members who do understand the subject have no real influence on the outcome of legislation.