(photo: Rainforest Action Network)
We’ve been hearing about a looming crisis in commercial real estate (CRE) for a while, which has already been the cause of dozens of community bank failures. With nearly half of CRE loans – as much as $700 billion – underwater, a wave of defaults can be expected. And yesterday offered the first indication that Tim Geithner is aware of the issue. Speaking on CNBC, Geithner acknowledged the difficulties in the CRE market:
Mounting losses from commercial real estate loans will continue to be a problem for the U.S. and especially smaller banks, but it can be managed, Treasury Secretary Timothy Geithner said Monday.
“Commercial real estate’s still going to be a problem for the country,” Geithner said in an interview with CNBC. “But we can manage through this process.” […]
One way to help manage the commercial loan distress, Geithner said, is through the $30 billion fund proposed by President Barack Obama to provide money to midsize and community banks if they boost lending to small businesses. The program, which must be approved by Congress, would use Tarp money repaid by banks, which now has reached about $176 billion.
As Megan Carpentier notes, this is a completely irrelevant solution. How $30 billion sprinkled around community banks for them to lend out, with a return of far less than that over a period of years, can paper over $700 billion-plus in CRE loan defaults is mystifying.
In February, (Elizabeth) Warren noted that $1.4 trillion in commercial real estate loans would need to be refinanced between 2011 and 2014 when the shorter-term commercial real estate mortgages end, and a significant proportion of those are underwater already. More than $50 billion in commercial real estate mortgages are already in default or foreclosure — both figures are far larger than Geithner’s $30 billion plan to extend credit to small businesses. Sheila Bair, the chair of the FDIC, expects that commercial real estate defaults and losses will be the number-one factor that drives small and medium-sized banks into failure this year at a higher rate than they experienced in 2009. Extending credit to small businesses to the tune of $30 billion doesn’t seem like the best solution to the coming commercial real estate crisis or its downstream effects on businesses or the banks holding the loans.
Geithner went on in the appearance to tout the potential $8 billion dollar “profit” from the Treasury sale of Citigroup stock, a profit you can only derive through fantasy accounting.
If Treasury wants to pretend they have solutions to deep-seated problems in the economy, you’d think they’d invest in some better explanations. Or alternatively, do what’s needed to fix the problems.
