If you’re reading this, I can’t imagine you’re exactly blown away by Mr. Ross’s ‘vision’. We in the commercial real estate world have been living the slow motion train wreck for many, many months. Ross’s comments are especially interesting, however, when you consider he participated in the purchase of $0.5 Billion of real estate debt on October 6th. Perhaps it was the $1.39 Billion loan from the FDIC that made him more comfortable with the asset class.
You may remember the trade as the Corus Bank deal led by Starwood Capital. There is an interesting quote in the article form Oct 6:
“The FDIC will provide the Starwood-TPG group with $1.39 billion of zero-coupon debt to help pay for the purchase and as much as $1 billion in working capital. Similar financing was included by the agency in deals involving IndyMac Federal Bank and BankUnited Financial Corp. The government will have to continue offering such low- cost debt to persuade investors to absorb troubled bank loans and real estate, according to John Grayken, founder of Lone Star Funds, a Dallas-based firm that buys distressed assets including mortgages.”
“What’s the point?” you ask. Well, it seems we’ve found another major source of capital for the eventual restructuring of the US real estate market: Uncle Sam. Yes, I’m willing to call loans in the billions “major” and I’m willing to call the FDIC, Uncle Sam. Put more directly, we are replacing private debt with public debt. So, the next time some congressman hammers ‘wall street’ for excessive leverage, ask him what he thinks about FDIC policy.
Why not let the private markets step in and fund this trade? I’m sure there’s plenty of cash available at a high enough interest rate. It would mean more pain in the near term, however, and no one wants another “Lehman”.
I’m sure the policy makers are telling themselves, “It’s only a temporary measure. Once the markets ‘return to normal’, private sources of capital will step in.” Well, not if the US government keeps supporting the market! We’re just creating a situation where an option to access public money is actively keeping private business out of the market. (Where have I heard that before?)
The take away? Really big borrowers like Citi and Goldman get TARP money. Really big sources of capital have the option to borrow from US taxpayer to buy real estate loans. Tiny borrowers like individuals, just lose their house and probably wont get a public option for health insurance because…. well, that’s communism!