Commercial Real Estate Blog

A conspiracy is nothing but a secret agreement of a number of men for the pursuance of policies which they dare not admit in public.” - Mark Twain

Normally I don’t get to engrossed in conspiracy theories and the such, but what is happening with oil and the financials and the dollar is becoming so gross that it is difficult to ignore. We talk about here the impact, whether directly or indirectly, all these forces have on the commercial real estate market and the general situation we find ourselves in today, but I felt compelled to write a post about what I believe is happening with the economy, financials, and the bailout underway at the hands of the populace.

First, a graph showing the Dow Jones Financial Services Index vs an ETF tracking the price of crude oil since the credit freeze began in earnest last summer (click for full-size).

I am of the camp that is fascinated by Wall Street. The ability with which Wall Street has managed to screw up, only to find a creative solution to the problem has been one which amazes me. They’ve managed to do this time and time again. This time, it goes without saying, they’ve managed to dig a giant hole. One where losses are into the hundreds of billions, with some estimates pegging total losses to be at over a TRILLION dollars when this is all said and done. That’s a lot of cheddar.

It seems Wall Street has again found a cure. Over the past few years, we’ve started to hear the term Sovereign Wealth Funds (SWF). These are funds which are state-owned investing in assets, projects, and securities worldwide. Over the past year, since the credit meltdown hit Wall Street, SWF have been running around Wall Street investing in everything from Citigroup, Morgan Stanley, Merrill Lynch, and real estate as well to the tune of billions and billions of dollars.

The SWF of Kuwait, UAE, and Saudi Arabia seem to me to be working in concert with the investment banks to bail them out. The same investment banks who are blaimed for “speculating” the oil price to where it is right now are benefitting from huge cash infusions from the very same SWF benefitting from high oil prices.

Thus it is easy to see that Wall Street has once again managed to find a cure by getting the public to bail them out at the gas pump. The investment banks drive the price of crude up (and thus gas prices). The money flows into the oil producing countries and their sovereign wealth funds, which in turn reinvest the premium the investment banks created for them back into our financial institutions, with all of this financed by the public without having to mess with a tax increase or a congressional bailout replete with lobbying, hearings, public scrutiny or outcry. Absolutely Genius.

The sub-prime woes plaguing Wall Street firms is undoubtedly likely to continue. Citibank is expected to report approximately $11-12B in write-downs. Taking a quick sample of what has happened to the stock prices of companies such as Washington Mutual and Citigroup, it is without a doubt the case that those firms with large amounts of commercial paper on their books are keeping a close eye on the market.

The increasing difficulty with which commercial paper can be re-traded, coupled with the fallout in the residential market is unlikely to lead very many lender’s to relax the tightened standards anytime soon. While defaults in the commercial sector have remained relatively static, the fear alone of what might lurk around the corner is enough to keep lenders in their current state of hibernation.

Bank of America, Citigroup, and JP Morgan are expected to announce as early as today the establishing of an $80 Billion Commercial Paper fund. The fund is aimed at helping unlocking the asset-backed paper market from its current condition.

The fund might also help avoid units setup to provide subprime debt from selling off their assets at “fire-sale” prices. The several months subprime lending has become essentially not available with lending for things such as vacant buildings extremely difficult to place.

My guess is the $80 Billion funds initial goal will be to inject confidnece into the marketplace so that prices of commercial paper stabilize and provide reasonable exist for the investment vehicles that originally issued or purchased the debt.