How Long Is This Going To Take?

Implications: This article notes the recent statement building financing of financial institutions and concludes its opening remarks with “I don’t know, you don’t know, and they don’t know”.  The article states the assumptions of current bank recapitalizations and in particular recaps the Bear Stearns acquisition.  It’s notable to me that Warren Buffet recently said that he didn’t have the appetite to pick that one up on those acquisition terms, or something to that effect.  

Analysis:  I don’t think we’re anywhere near to solving our asset quality problems so that we can turn to rebuilding the businesses to be refinanced with the loans generated by the new capital in place.  If this recent capital put in place is stated in the article as early, I believe the next round of losses will dilute this capital with further losses and further rebuilding of balance sheets.   The reason I think we have asset quality problems is I believe we are extending and modifying our loan assets to borrowers whose quality and quantity of revenues are lacking.  We’re trying to outrun our poorly conceived and funded debt whether consumer or commercial.  What is my evidence substantiating this claim?  Well, I think I can cite just Arizona’s home loan picture for likely proof.  The claim is that 92% of Arizona’s home loans are current.  At the same time, one in 70 homes in the Phoenix metro area is said to be in foreclosure.  The industry standard given normal times might be that 90% of residential loans would be current, 6 % of the remainder would be cured within the initial 30 day period and the balance would be a further problem typically leading to a foreclosure rate of less than 1%.  So here we have hard times going and better ratios than normal.  What’s happening, how come?   My view is that we’re keeping these poor quality investments alive with lenient underwriting, extensions and modifications that will lead to deferred defaults.  We’re just postponing the inevitable in the hope that unforeseen good news will carry us beyond the problem.  How does that work?  Well, ask the old American Savings investors of the early 80’s how they lost their equity position through institutional failure.   Real estate investors will need to reassess their refinancing needs, review the financing assumptions for new and to-be-renovated projects and recalculate the space needs of their proposed buyers and/or tenants to determine whether to go ahead or how they can float their operational cash needs.  There might be a few sleepless nights coming up over this one.