A weekend topic starting with Time. “The idea that banking mistakes could plunge the U.S. economy into a recession is familiar—the Great Recession that began in 2007 was caused when banks made risky home loans and then sold to lenders who did not understand exactly what they were buying. Indeed, the current banking crisis has some parallels to 2008, says Neil Fligstein, a sociologist at the University of California, Berkeley who has extensively studied the financial crisis.”
“‘Banks are finding themselves with investments that are losing big money, and when depositors come in, they can’t turn them into something liquid fast enough to pay back people who want their deposits,’ he says. ‘That’s what happened in 2008—people had all these mortgage-backed securities and no one knew what they were worth.’”
From Reuters. “An executive who also serves on the board overseeing the New York Federal Reserve warned on Friday of potentially systemic problems in the real estate finance market and called on the industry to work with authorities to avoid things getting out of hand. Noting there is $1.5 trillion in commercial real estate debt set to mature in the next three years, Scott Rechler, who is CEO of RXR, a large property manager and developer, tweeted: ‘The bulk of this debt was financed when base interest rates were near zero. This debt needs to be refinanced in an environment where rates are higher, values are lower, & in a market with less liquidity.’”
“‘If we fail to act, we risk a systemic crisis with our banking system & particularly the regional banks’ which make up over three quarters of real estate lending, which will in turn put pressure on local governments that depend on property taxes to fund their operations, Rechler wrote.”
Yahoo Finance. “If there is anything commercial real estate owners don’t need right now, it’s a banking crisis. Now they face the prospect that beleaguered banks, especially smaller ones, could get more aggressive with lending arrangements, giving landlords even less room to breathe as they try to refinance a mountain of loans coming due. ‘There were already liquidity issues. There were fewer deals getting done,’ Xander Snyder, First American senior commercial real estate economist, told Yahoo Finance. Forced sales of more trophy buildings at large discounts are expected in the coming years as owners struggle to refinance at affordable rates. ‘Sellers will want the price that everyone was getting [back] in December 2021, and buyers are kind of even afraid to buy something right now cause they don’t even know what the price of these buildings are,’ Snyder said.”
Bisnow Atlanta in Georgia. “The lender on a fully occupied Alpharetta office building has moved to foreclose on its owner, a move that shows just how aggressively some banks are trying to remove office debt from their books. ‘There is some upcoming vacancy later this year, but the bank does not appear to be interested in office loans anymore,’ Brian Granath, a partner at OA Management’s parent company said in an interview. ‘Competitors are in our shoes and facing the same thing. All of these 4.5% interest rate loans are rolling at 6.5% to 7%. And now with the banking crisis, banks are unwilling to lend cash.’”
The Real Deal on California. “Redco Development and AEW Capital Management have walked away from San Francisco’s historic First National Bank building after failing to make their mortgage payments. The San Francisco-based Redco and Boston-based AEW Capital have filed a deed-in-lieu of foreclosure for 1 Montgomery Street, the San Francisco Business Times reported. They flipped the keys of the vacant building to lender Square Mile Capital, now known as Affinius Capital, based in San Antonio.”
“‘The combination of lack of tenants, doubling of interest rates and decline in value is lethal,’ Ken Rosen, chair of the Fisher Center for Real Estate and Urban Economics at UC Berkeley, told the Business Times.”
From News.com.au. “A tech consulting giant, that reported a whopping revenue of $US61.6 billion ($92.1) last year, has revealed it will slash 19,000 jobs including in Australia. The grim news just doesn’t stop with Accenture with the ‘tech wreck’ getting a whole lot worse with Amazon announcing that 9000 jobs will be slashed adding to the 18,000 roles it cut just two months ago.”
The Globe and Mail. “Years from now, historians may say that March 10, 2023, marked a pivotal day in the history of the global economy, when Silicon Valley Bank was forced to shut down amid one of the largest bank runs in U.S. history, a prelude to a global banking crisis. I think the world has entered a long and deep bust cycle, the magnitude of which will exceed the 2000 dot-com crash and 2008 financial crisis. We’re coming off a 13-year bull market fuelled by low interest rates and easy money. Many managers have known only good times. Private equity and the venture-capital sector have attracted too much capital, propping up unreasonable valuations for growth stage and ‘pre-IPO’ financings – fuelling bloat, froth and bad business models.”
“The past decade has seen an explosion in the number of startups and venture-capital funding. The focus was on growth at all costs, and many startups were burning cash without any clear path to profitability. Quibi, Jawbone, WeWork – the list of companies that raised $10-million, $100-million or $500-million before failing goes on and on. Investors were chasing unicorns, and founders were living in a bubble. However, this unsustainable model is starting to unravel. The bubble has burst, and reality has set in. Since no active investors today have experienced working in a high-interest-rate world, everyone needs to learn.”
The American Prospect. “About five years ago, a man I’ll call ‘Ben’ took a marketing gig for a startup called Blockchain Terminal (BCT), which claimed to have raised $15 million to become the Bloomberg of cryptocurrency. A few months later, BCT owed Ben $150,000, the titular CEO quietly left, the real founder turned out to be a convicted Canadian felon who had served time in prison for perpetrating an $800 million Ponzi scheme, and it became abundantly clear that the ‘Bloomberg of blockchain’ wasn’t going to be produced, nor did it need to exist. ‘There was something clearly wrong with every single person I was meeting,’ Ben says of his travels in crypto land. ‘There was clearly a systematic deeper rot at the heart of all this I didn’t quite know how to process.’”
“He would ultimately call ‘the FBI and the SEC and the DOJ and any other authority I could think of.’ But first, he called Signature Bank to advise it to immediately cut ties with BCT, and conduct thorough due diligence on any other crypto clients it might consider taking on. Ben is not sure who he ended up speaking with, but everyone at Signature was good at making clients feel heard; that was their thing. The rep said cheerily, ‘We really appreciate you letting us know.’”
“By the time BCT’s founders were indicted on fraud and conspiracy charges in early 2020, Signature Bank had reinvented itself as one of the crypto-friendliest banks in America, possibly to offset an unusual slump in its previous client base, the New York City landlord class. But while the big bet had shrunk its stock price, Signature seemed to have weathered Crypto Winter all right until a hysterical billionaire bank run took out Silicon Valley Bank on March 10. As almost an afterthought, they announced the closure of Signature, which had seen a run on its deposits, and the bailout of its landlords as well.”
“The two banks shared some critical traits: explosive growth during and after the pandemic, a high proportion of uninsured depositors, a large portfolio of low-interest loans to private equity and venture capital funds (turns out Signature had poached the department of SVB that doled out so-called ‘capital call’ loans to investors in private companies in 2021), and of course, the lobbying victory of 2018, when large regional banks won exemptions from the drudgery of annual stress tests and certain capital and liquidity requirements. So it goes with the gargantuan phalanx of flimflammers and rug-pullers who sold America’s debt-enslaved youth on the fever dream of the blockchain.”
The Los Angeles Times. “It turns out high-income people are also fleeing the state — a new twist in the California exit. Many descendants of last century’s arrivals now see better opportunities for the good life in other states. California is too expensive, and their earnings can buy more elsewhere. That said, our big cities are still jampacked. And we’ve got more people than our available water and electrical grids can often handle, contributing to the departures. Entering the 21st century, when California’s population was about 34 million, we were predicted to reach 45 million by 2020 and 59 million by 2040. So much for that. We hit a peak of 39.6 million in 2019 and have been losing population ever since.”
“Until now, we’ve been in denial, telling ourselves that college-educated, upper-income people weren’t leaving. Our progressive tax base and growing economy were secure. The departees were lower-to-middle-income people who weren’t the heavy taxpayers or big job producers. Everyone seemed to buy into that, although many could cite anecdotal evidence to the contrary.”
“I plead guilty. This is what I wrote two years ago: ‘More affluent people have been moving here than departing. They can afford our escalating costs of living. Political spin about wealthy people abandoning California is fake news.’ That was what the think tanks were saying. Now one has dug into the latest data and discovered that people of all economic classes are leaving, including the wealthy.”
“The median price of a single-family home in California was $735,480 last month, according to the California Assn. of Realtors. That’s out of many people’s reach even though it was nearly 5% lower than the previous February. Since then, mortgage interest rates have risen dramatically. The net loss of high-income people is relatively small, says Public Policy Institute of California demographer Eric McGhee. But the number leaving California ‘increased dramatically’ to 220,000 in 2021, he reports.”
“It wouldn’t take many fleeing rich people to hurt the state treasury. The top 1% of earners pay nearly 50% of the state income taxes. The top 10% kick in roughly 80%. ‘Taxes definitely are part of the story’ why high-income people are leaving, McGhee says. ‘Taxes is the last straw that pushes them over the edge.’”