To get a sense of where things are headed, follow the capital flows. If you observe the dot com crash and the housing induced crash of 2007-08, then you begin to realize that almost all crashes throughout history have been preceded by major inflows of capital chasing higher yield or dream returns.  Going back to the tulip mania, or the South Sea Bubble, it is always the same. Investors, homeowners, commodity speculators, or whoever, are chasing a fantasy that inevitably blows up in a banking or capital markets collapse.

Back in the mid to late eighties we had capital flowing to and from savings and loans. Texas banks were lending like there was no end. Starting in 1993, when securitization was about to take off, several of us looked at what we were creating, and we even talked of the eventual crash because we could see how we were creating a massive inflow of capital to real estate to an extent that would eventually run wildly out of control. Some of us were old enough to have understood what was about to happen when too much capital is driven into a formerly controlled product. Which is exactly what happened. It always starts with a good idea and careful underwriting and lending. The underwriting in 1993 was conservative and relatively careful. The early years of CMBS were limited in risk by limited amounts of capital to lend. We could be choosy. The original dot com deals were based on more sound management teams and ideas. Then, as always, came the drive for volume (more capital), lower standards, CDO’s SIV’s, derivatives and in the end, virtual loans and pools. In other words, massive amounts of capital flowed into CMBS and housing in the chase for yield and bonuses. That is why the Europeans and Chinese became buyers of the bonds. In theory they could get better yield than at home, and the paper was “rated”. Investment bankers moved paper off their own balance sheets into CDO’s and SIV’s to make room for more capacity and even more capital raised. By 2007, the capital was flooding into the market from all over the world, at a rate way beyond sound underwriting demand. Because there was a never ending flow of capital to housing, it drove brokers and lenders to dive down deeper into the trash heap to get any garbage they could find to make a loan against. Barney Frank forced the banks to make loans in redlined areas which had been avoided because the lenders knew that meant bad credits and bad loans. When the capital from Europe flowed in to buy the paper, the banks were all too happy to make loans to bad red lined credits and get Barney and the media off their backs. They thought they had sold the garbage to institutional and  offshore dumps,  only to find that those put back clauses would really be upheld. Massive capital inflows had to get shoved out, so inevitably, as always happens, credit quality went into the toilet and the capital flowed out to the borrowers who had no business getting any of it.

Want to continue reading?
Become a Free ALM Digital Reader.

Once you are an ALM digital member, you’ll receive:

  • Unlimited access to GlobeSt and other free ALM publications
  • Access to 15 years of GlobeSt archives
  • Your choice of GlobeSt digital newsletters and over 70 others from popular sister publications
  • 1 free article* every 30 days across the ALM subscription network
  • Exclusive discounts on ALM events and publications

*May exclude premium content
Already have an account?


NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.

GlobeSt

Join GlobeSt

Don't miss crucial news and insights you need to make informed commercial real estate decisions. Join GlobeSt.com now!

  • Free unlimited access to GlobeSt.com's trusted and independent team of experts who provide commercial real estate owners, investors, developers, brokers and finance professionals with comprehensive coverage, analysis and best practices necessary to innovate and build business.
  • Exclusive discounts on ALM and GlobeSt events.
  • Access to other award-winning ALM websites including ThinkAdvisor.com and Law.com.

Already have an account? Sign In Now
Join GlobeSt

Copyright © 2024 ALM Global, LLC. All Rights Reserved.