The CMBS Time Bomb
“I’s comin’ ‘Lizbeth! I’s comin to ya….Fred’s comin’ baby…”
Fred Sanford to his deceased wife, Elizabeth from Norman Lear’s Sanford and Sons ca. 1970, in reaction to something his idiot, incompetent son, Lamonte, recently said or did. However, in my opinion, Lamonte was a person of sound judgment who greatly surpassed the good intentions of his father, Fred, and at times, his intellect.
For those of you with WSJ access, the link to the Saturday 3/1/25 article is They Crashed the Economy in 2008. Now They're Back and Bigger Than Ever. If you do not have access, then permit this summary. The title alone suggests what is coming…” Now They’re Back… the Wall Street Wizards”.
Kids, this article is humorously naive at best, frightening and painfully foreshadowing to say the least, if not worse. The implosion of the CMBS world contributed monumentally to the economic collapse of 2008. Hindsight can attribute its demise to multiple factors, but three reasons stand out:
Irresponsible underwriting of the underlying credits encouraged by the fact that the underwriters do not work for the same companies who purchase and hold their paper long term and are thereby separated from the consequences of their underwriting.
The paper they generated was “rated” by rating agencies hired by the underwriting companies and thus “competing” for the rating business. This affects work product for the most obvious reasons. Favorable ratings encourage repeat business…unfavorable ratings do not.
Greed especially exacerbated by not living with the consequences of your “work.”
The atmosphere and celebration of the Las Vegas sideshow says it all… sexy sky suites, “clone attire”, high end Vegas bars and clubs and best of all, more heavily attended than ever because the article concludes as to “what makes this cool again…” more deals, new asset classes, and most importantly more cash “ cash chasing yield, yield you just can’t get anywhere else. Brilliant insights abound... - I favor Chris Flanagan, Bank of America guru who says as a market signal with a very straight face, “it’s ok, everything is going to end up here .”( that’s right the same BAC institution under CEO Brian Moynihan, ex Brown University rugby player who went long with a couple Trillion $$$ when long term rates hovered at 2% just a couple years back …. How has that been that working, big fella?). God, I hope you are wrong Chris. In this same article, Y’all fail to mention the Trillions of $ of seriously underwater (20-30% conservatively) CMBS loan dollars in just the Commercial Real Estate space ALONE maturing in the next three years; and now, we get to look forward to how this latest financial manipulation (the subject of this WSJ article) will potentially impact all the other lucky “new asset classes” you girls and boys have infiltrated and have referenced herein. The article fails to lay out their perception as to how they have now built a better, safer mousetrap … but, no need, it is all gonna end up there anyway, right Chris old boy?
Now in fairness, it’s been suggested to me by others that possibly through Dodd Frank there are greater controls in place in the CMBS market to “prevent” the debacle of 2008. I hope they are right, and my speculation is completely off base. However, I think I’d be equally remiss if I failed to comment on the current political climate where “the shackles” of excessive government regulation are going to be rolled back as we enter America’s “Golden Age”. (Did I say that correctly, “Golden Age”, right)?
Yea, Fred, I feel your pain…... it’s comin’ ‘Lizbeth, it’s comin’!! Hold on baby, cause don’t ya know Daddy’s comin’; cause Rosy you are the one!!
AREC is a fully integrated, multi-disciplinary team with unmatched expertise in real estate finance, capital strategies, and portfolio management. Let AREC help you with your distressed CMBS or other commercial real estate debt. Our years of experience spanning multiple financial crises can help you engage with your special servicer or special assets lender to provide you with negotiating leverage aimed at optimizing your outcome.
