The Past Decade's Lesson Learned...Hopefully

By Sule Aygoren Carranza

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It’s been an eventful decade for commercial real estate. We went from one of the greatest bull runs to a market that spiraled out of control within a matter of years. The trigger? The Wall Street collapse of the late 2000s, which participants in GlobeSt’s online survey rated as the biggest real estate story of the past 10 years.

I guess you could say it all started with the housing boom. Low interest rates and relaxed financing allowed nearly everyone who wanted a home to have one, and for those who already had a home to refinance. The competition in the market and the over-zealousness of certain mortgage underwriters led to creative financing structures on very highly leveraged mortgages. And this wasn’t limited to the single-family housing sector; these types of deals were happening for commercial assets as well.

So what happens when the bill comes due? Will all these people, who probably would never have obtained financing in a normal climate, suddenly be able to pay up?

Of course not. But that didn’t really matter to the folks that made those deals at the time—once the paperwork was signed and those loans were cut up and sold into the securitized market, it was out of their hands.

Well, in 2007, banks and other financial institutions were forced to write down bonds on securitized subprime mortgages that, until then, were investment grade. The MBS write-downs were so drastic that institutional losses were in the hundreds of billions of dollars.

Lehman Brothers was the first to crumble, but that’s probably just because its fiscal quarter ended before most other institutions. It was in the bad position of having to report its MBS losses—some $7 billion worth of them—before everyone else. A mere five days after revealing its losses, and after a failed sale to another institution, Lehman was forced to file for bankruptcy.

Soon after Lehman, Bank of America said it would pay $50 billion to acquire Merrill Lynch, which was having problems of its own. At the same time concerns over AIG’s capital position started to surface. Responding to these events, the Fed established the $70-billion fund for troubled financial firms, and the Central Bank eased its restrictions on lending.

Remember, all this happened over a weekend. By Sept 15, Lehman’s bankruptcy and JPMorgan’s buy of Merrill Lynch was followed by a massive fall in the Dow. The same day, AIG got downgraded and rumors that Washington Mutual—the biggest savings bank in the country at the time—was in peril started to circulate. 

Once the government announced its $85-billion bailout of AIG, stocks plummeted even further and more rumors popped up about the health of certain Wall Street institutions. The Fed even went so far as to temporarily ban short selling on financial institutions to keep the markets—which were rising and falling based on the news coming out of the media—from going haywire.

The following several days were filled with speculation and emergency meetings on Capitol Hill. By Sept 21, the Bush Administration’s proposed $700-billion Wall Street bailout was announced. While investors rallied, the general public railed against the plan, as republicans and democrats battled out the details in Washington.

At the same time, the remaining two Wall Street investment banks, Goldman Sachs and Morgan Stanley, announced they would be converted to traditional bank holding companies, giving the federal government more control over them and reducing the likelihood of their failure.

WaMu almost came tumbling down, until the FDIC stepped in and worked out a deal to sell its assets to JPMorgan. And Citigroup and Wells Fargo started fighting over who was going to buy Wachovia, with Wells Fargo ultimately becoming the winner after battling in courts. As if things in the US weren’t bad enough, the first rumblings of trouble among Europe’s financial institutions started to emerge.

By early October, the $700-billion bailout was signed into law. The government also introduced other programs to deal with the troubles asset crisis, including TALF. Yet stocks didn’t rally, since investors viewed these moved as mere band-aid measures.

Oh, did I mention that by now, job losses were being reported at a massive pace? And states were facing a funding crisis as well? And Europe’s financial crisis was getting worse, resulting in the Fed and several European Central banks agreeing to simultaneously cut their funds rates?

Soon, Bernanke was on TV reporting that the downturn will last longer than many has expected, or hoped, and warned the nation that further interest rate cuts were on the way. Not that it mattered—consumer borrowing declined as underwriting became tighter and average US citizens saw their own pockets shrinking. And soon, major corporations announced trouble of their own, including the Big Three automakers. In the end, bailouts did little to help the economy.

A lot of other market-changing events happened after that autumn, but those few weeks in 2008 were the genesis of the entire conundrum we’re in today. In a matter of mere weeks, the entire country’s financial system experienced an upheaval and subsequent government intervention of unprecedented proportions, leaving in its wake economic repercussions that will reverberate for years to come.

What caused it all? There’s a lot of finger pointing going on. Was it Wall Street greed?
Relaxed—or nonexistent—regulations? Naïve borrowers? Americans’ love of excess?

It’s probably a mix of all of the above. We all—everyone from consumers to the largest corporation—are feeling the effects of the downturn that started in 2007. We may “officially” be out of the recession, but not if you are still unemployed.

What we have here is a crisis of confidence brought on by the excess of the past decade. Things are finally starting to get better, but we’re still paralyzed. Consumers are reluctant to spend, as are businesses. That means no one’s really hiring. No one’s lending capital, limiting business growth. For commercial real estate, that not only means no one’s taking space, but the lack of liquidity also has the investment market at a standstill.

Our financial system and the way we conduct business has been irreparably altered—all due to a series of events that took place a couple of years ago. Let’s just hope that as we move forward, we take these lessons learned and try to avoid a repeat of history.

(To search across all ALM blogs, go to www.Lexis.com.)