As Kirk said to Khan after being threatened with the loss of his life and vessel, with Khan demanding the "code" to the "Genesis device":
"Here it comes."
Of course what was "coming" wasn't the code, it was incoming fire.
I have warned for more than two years that despite all the claims that "The government has this under control" that they do not - they were doing what so many people in government do - either lying outright or displaying tremendous hubris, believing that by waving their hands in the air and shouting they can overcome the math.
If you have been in this market picking up fish as the water went out, smugly congratulating yourself on your intelligence while failing to look upward, you may be about to get a really ugly surprise:
Their efforts could be undermined by a surge in foreclosures of commercial property carrying mortgages that were packaged and sold by Wall Street as bonds. Similar mortgage-backed securities created out of home loans played a big role in undoing that sector and triggering the global economic recession. Now the $700 billion of commercial-mortgage-backed securities outstanding are being tested for the first time by a massive downturn, and the outcome so far hasn't been pretty.
Except that the lying hasn't stopped, you see. Indeed it has been abetted by Washington DC and the willful blindness of regulators who have for more than two years refused to apply the principles of sound banking in their dealings with these institutions. The result?
Until now, banks have been able to keep a lid on commercial-real-estate losses by extending debt when it has matured as long as the underlying properties are generating enough cash to pay debt service. Banks have had a strong incentive to refinance because relaxed accounting standards have enabled them to avoid marking the value of the loans down.
The Journal calls this "relaxed accounting standards." That's a polite way of saying that the government has made legal accounting fraud and willful disregard of the impairments that are embedded in these loans - impairments that with any proper regulatory system would have been forced to be recognized as they occurred.
Still, most of the $6.7 trillion in commercial real estate is privately owned. Also, it is unlikely commercial real estate will benefit much from an early stage of an economic recovery. What landlords need is occupancy and rents to rise, and that means employers have to start hiring and consumers need to shop more. So far, there are few signs this is happening.
Got it? $7 trillion of exposure that had its "value" set during the era of fraudulent lending and accounting, where rents and occupancies rise to the sky, growing literally all the way to the sun. Such magical thinking - the belief that compound (exponential) earnings growth can be maintained indefinitely on a planet that is comprised of a finite landmass with finite resources is the height of stupidity.
When that "expectation" is embedded in securities it is by definition a fraudulent act, as mathematics make such structures impossible to work on an indefinite forward basis, and yet commercial real estate is nearly always financed on a cash-flow debt-service basis, with principal payoff being accomplished not through amortization but rather through rollover - a rollover that is, at best, highly-speculative and at some point in the future mathematically certain to fail.
This is in fact exactly identical to the magical thinking that went into people taking out OptionARMs on their homes with the expectation that they could "roll it over" before it recast. Both rely on a mathematical impossibility - the continual compounding of growth in income (rents, personal income, etc) on a perpetual basis while we live on a finite ball of rock with finite (even if vast) resources.
The structuring of securities that rely on such mathematical concepts is by definition Ponzi Finance, because the compounding that is relied on to make the structure work over time is mathematically impossible.
If we had honest regulators these structures would be deemed felonious and everyone responsible would find themselves on the business end of an indictment. Every financial institution sandbagging the "value" of these instruments would be forced to recognize their impairments or be closed.
But we don't live in a nation with honest regulators. We live in a nation where the mathematically impossible is not only allowed to be sold and the suckers (that would be you, your pension fund, etc) money harvested, but when the mathematically inevitable blowup comes we instead (try to) bail out, once again, the purveyors of these scams with taxpayer money.
It may look easy to pick up fish off the newly-evacuated sea floor, but if you fail to heed the roar in your ears and fail to look up what will inevitably come, while it may surprise you, does not surprise anyone who has passed sixth grade math.
Audio Streams
