I would really like to believe our beleaguered President when he says that he sees “glimmers of hope” in the economy…
…but the sober reality of the current economic crisis is like a series of giant tsunami waves. Only the first in a series of waves has already hit us, with devastating consequences.
That FIRST wave was the residential mortgage crisis and the resulting financial system collapse.
A SECOND giant wave is just now appearing, and will apparently batter our shores for the next two years:
NEW YORK (Reuters) – General Growth Properties Inc, the second-largest U.S. mall owner, declared bankruptcy on Thursday in the biggest real estate failure in U.S. history. Ending months of speculation, General Growth, along with 158 of its 200-plus U.S. malls, filed Chapter 11 while it tries to refinance its debts. But the ongoing global financial crisis made it impossible for General Growth to restructure outside of bankruptcy and could signal further troubles for other financial institutions who are General Growth creditors.
The collapse underscores the pressure on U.S. commercial real estate with few sources of available funding. The company received approval on Thursday from federal bankruptcy Judge Allan Gropper to use its cash collateral to operate its businesses during bankruptcy. Chicago-based General Growth, which owns such valuable properties as South Street Seaport in New York, Fashion Show in Las Vegas and Faneuil Hall Marketplace in Boston, listed total assets of $29.56 billion and total debts of $27.29 billion.
At the end of 2008, about $15.17 billion of General Growth’s debt consisted of mortgage loans that had been securitized into commercial mortgage-backed securities, according to research firm Trepp. "This underscores that real estate companies are most vulnerable to refinancing risk rather than market risk," said Nomura’s London-based property analyst Mike Prew.
The collapse marks a sad chapter for a company that has been growing since 1954, when brothers Martin and Matthew Bucksbaum decided to expand their family’s grocery business and build a shopping center in Cedar Rapids, Iowa. The company expanded steadily through both building and buying malls, the largest acquisition being the 2004 purchase of high-end mall owner Rouse Cos for $14.2 billion. That deal, financed entirely with debt, added 37 valuable U.S. malls to its portfolio, but also added enormously to its debt load. Earlier this month, the company had tried to restructure Rouse bonds, but failed to get the necessary support. "When we did not achieve the necessary amount of agreement on the bond solicitation, at that point we recognized that it was conceivable that we would not get the time outside of bankruptcy that we had hoped for to work on a restructuring," General Growth President Thomas Nolan told Reuters.
The company’s collapse is not expected to be an isolated event. About $814 billion of commercial mortgage debt is expected to mature over the next two years, according to real estate research firm Foresight Analytics. "We will see a significant rise in delinquent and defaulted mortgages in commercial real estate above and beyond what we already experienced," said Sam Chandan, president and chief economist at Real Estate Economics.
If you’ve been to a mall or shopping center lately, then you’ve seen a rash of "Going Out Of Business" signs, and more and more empty storefronts each month. No tenants means no rents to pay all those outstanding commercial mortgages, or to provide income to the institutions, insurance companies and REIT’s that own huge portfolios of commercial properties. The Wall Street Journal reported on Thursday that the Federal Reserve was considering offering longer loans to investors in commercial mortgage-backed securities to help jump-start the market for commercial real estate debt. Here comes another multi-trillion-dollar bail-out !!!
A THIRD, and biggest tsunami wave of all, will appear as unemployment peaks, when tens of millions of shattered and bankrupt families default on all of their trillions and trillions and trillions of dollars in consumer loans and credit card debt.
What I want to know is: Where is the safe high ground ?