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PLACE YOUR CMBS BETS

This week we asked about how the CMBS market is doing. The lion’s share of you (69%) roared that CMBS is sleeping off the bad times, while 12% of you think CMBS is dying and a brutal 19% think CMBS is dead and done for. Patrick O’Malley, senior director of sales in Massey Knakal’s northern Manhattan/Bronx division, was nice enough to speak with us about CMBS and solutions.

“These numbers do not surprise me and I think they are truly reflective of the delusional optimism that Wall Street holds for this market. Financial institutions will have to seriously rethink their business model and how they are going to make money. The model of securitizing and piling on fees while transferring the credit risk is broken.

“There has never been a time like this. The Federal Reserve has never before jumped in to save an investment bank by guaranteeing its portfolio so it could be sold or let people bring toxic assets to the lending window as collateral. I could probably take my baseball card collection and get a loan from the Fed right now. They will take anything.

Every Fed offering of recent weeks has been oversubscribed, indicating that institutions, no matter how big or small, are still borrowing 28-day paper below 3% to get through this mess. Remember that the markets can stay irrational longer than most can stay solvent and the Fed is doing a damn good job of keeping banks solvent. It will take longer than most people think to get the markets back on solid ground but Wall Street has a funny way of moving forward and forgetting about the sins of their past.

“There is no reason to panic as the market and retail investors alike now understand the nature of the beast that was created and the time and measures it will take to get it back into the cage. While we will see more banks likely fail and maybe another Wall Street investment house it will not be a surprise like Bear Stearns. To date roughly 7% of banks have failed opposed to 25% during the last banking crisis and it will be painful to a large majority of people but it will not be a panic.

“Buy securitizing and re-securitizing while getting more and more fees. There is no simple solution.

“CMBS is a function of the risk institutions are willing to take in order to leverage returns. When the market settles down in a few years Wall Street will come back looking for those returns once again, but if my guess is correct, it will be under a new name, trade on a new market and the cycle will go on. Let’s hope they won’t be borrowing at 30-to-1 leverage next time.

“The sub-$50 million market is doing just fine as balance sheet lenders are willing to lend with LTVs of 60% to 70%. It is the bigger deals that are seeing some financing difficulty, but if the asset is right and the location is prime the money always seems to appear.

“I do not think it is clear whether banks/financial institutions have another model for generating the types of profit that the CMBS model has. Dare I say they may have to go back to old-fashioned banking?”

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