The Other Real Estate Crisis — Commercial Property

This article was originally published by the Fiscal Times on Saturday, Sept. 18, 2010 and the Washington Post on Sunday, Sept. 19, 2010.

The landmark Mayflower Hotel in Washington, D.C. has been a watering hole for presidents and pundits alike. But like other commercial real estate properties throughout the country affected by the mortgage crisis, the Mayflower is under water.

By Katherine Reynolds Lewis and Jonathan O'Connell

It was dubbed Washington's second best address by Harry S. Truman, and it has hosted events for every presidential inauguration since Calvin Coolidge. Franklin Roosevelt used it as a retreat to work on his 1933 inaugural address. And FBI Director J. Edgar Hoover was a lunchtime regular.

The elegant Renaissance Mayflower Hotel, a Washington landmark since 1925, was considered a hot property when Rockwood Capital of San Francisco acquired it for $260 million in March 2007. Then, practically overnight, the real estate market collapsed and credit evaporated in a historic global financial meltdown. The new hotel owners, saddled with $200 million in debt, watched as the value of the property tumbled. By August, credit agency Realpoint estimated its value at $128 million.

The Mayflower loan was underwater, the plight of hundreds of billions of dollars' worth of commercial properties across the nation that are worth less than their mortgages. If the hotel's owner couldn't find a way to restructure the debt, it could lose the property.

A staggering $1.4 trillion of commercial real estate loans will come due nationwide in the next four years, forcing borrowers such as Rockwood to refinance or default on their obligations. Trouble lingers even at doorsteps in Washington, one of the strongest markets in the country thanks to a broad employment base, a sound infrastructure and a massive government presence.

This is happening at a time when the capacity to absorb such debt has been slashed, following the bankruptcies of financial firms such as Lehman Brothers and the collapse of the commercial mortgage-backed securities issuance down to a tenth of its peak size. The thought of a string of commercial real estate defaults walloping the barely recovering economy and jeopardizing the stability of still-tottering banks is enough to keep analysts up at night.

"It's a very tricky time right now," said Geoffrey DiMeglio, director of consulting at Market Outlook, a consulting firm. "Even in a weak recovery, I don't see employment improving the fundamentals in real estate fast enough to get these properties out of default."

Are There Still Banks Too Big to Fail?

This article was originally published by the Fiscal Times on Friday, Sept. 3, 2010.

Fed Chairman Ben Bernanke told the Financial Crisis Inquiry Commission that federal regulators must be ready to close down the largest banks and financial institutions if they once again threaten to bring down the global financial system.

By Katherine Reynolds Lewis

Two years after Washington had to spend hundreds of billions to bail out much of Wall Street, members of a Financial Crisis Inquiry Commission said Thursday the country still has a problem with financial institutions that are "too big to fail."

Federal officials and most financial experts agree that so-called too-big-to-fail-institutions like AIG and Citigroup helped cause the crisis and were a huge drain on the Treasury and Federal Reserve.

The major financial overhaul legislation pushed through by President Obama this year put in safeguards to try to avoid a repeat of the crisis in which federal officials were forced to decide which firms would go under or be auctioned off and which had to be propped up because of their importance to the financial world. But commissioner Byron Georgiou, a skeptic, noted that the six largest financial groups in 2009 constituted 63 percent of gross domestic product, an increase over the 58 percent of GDP they represented in 2007, at the height of the housing bubble, and both up from a mere 17 percent in 1995.

“Given their increasing size, do you really believe these institutions would be allowed to fail today?” said Georgiou, a personal injury and financial fraud lawyer. “Are we really in any better shape today to avoid the bailouts that have been so criticized in the last few years?”

Could Lehman Brothers Have Been Saved?

This article was originally published by the Fiscal Times on Thursday, Sept. 2, 2010.

The former CEO of Lehman Brothers testified during one of the final hearings of the commission investigating the U.S. financial crisis that federal regulators prematurely forced the firm into bankruptcy before all other options were exhausted.

By Katherine Reynolds Lewis

Just days before the two-year anniversary of Lehman Brothers' collapse, banking regulators passionately defended their handling of the crisis at a Financial Crisis Inquiry Commission hearing, while the former Lehman CEO insisted the government prematurely forced the firm into bankruptcy before all other options were exhausted.

"Lehman was forced into bankruptcy not because it neglected to act responsibly or seek solutions to the crisis, but because of a decision, based on flawed information, not to provide Lehman with the support given to each of its competitors," said Richard S. Fuld Jr., the former chairman and chief executive officer. "We had the collateral. We had the capital."

In testimony Thursday, Federal Reserve Chairman Ben Bernanke countered that charge, saying it was impossible for the Fed to rescue Lehman Brothers from bankruptcy in 2008 because the Wall Street firm lacked sufficient collateral to secure a loan. Asked how the Lehman case differed from that of American International Group Inc., which received $182 billion in taxpayer aid, Bernanke said there was a fundamental difference.

AIG, as the biggest insurance company in the U.S., had valuable assets which could back up the Fed's emergency loan, he said. "The Federal Reserve will absolutely be paid back by AIG," Bernanke said.

Whether it would have been possible to save Lehman Brothers is one of the most perplexing questions to emerge from the financial meltdown that led to one of the worst recessions in U.S. history. That question clearly divided the 10 members of the commission, whose questions at each were other almost as pointed as the ones they posed to witnesses, who gave sworn testimony.

The hearings underscored a hard truth: that for all the new laws and pending regulations Congress and the Obama administration have put forth in response to the meltdown, future crises will only be averted if industry professionals and the regulators who oversee them use good judgment and pursue hints of trouble even in the face of rosy conventional wisdom.