Monday, March 03, 2008

This article from today's Wall Street Journal has a scary headline, but the content does not support it. "Wall Street Braces for Its New Pain" prepares the reader for imminent trouble in the commercial real estate market. The headline is based on a study by Goldman Sachs that says the commercial real estate values are going to drop by 21% to 26% over the next few years and banks holding mortgages are in trouble. The problem is that banks are holding real estate mortgages and did not package them fast enough in to Commercial Mortgage Backed Securities (CMBS). (This is just the opposite of all those subprime loans the banks packaged and sold. The banks can't win for losing. They can sell the crap and have to write it down or keep the crap and write it down. )

The article states that write-downs in the CMBS market will be similar to those in the CDO and leveraged-loan markets. The current default rates on CMBS are .4%, but this is expected to rise if loans coming due cannot be refinanced. This makes sense but it has not happened. The headline implies that a shaky market is about to implode. It article does not read that way to me. The real estate market still appears solid and the default rates are near historic lows.

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