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Saturday, December 12, 2009

Preparing For The Next Wave

With nary a mention in the press, last week, the FDIC held a seminar open to all insured banks.  The name of the seminar? The Interagency Commercial Real Estate Loan Workouts Seminar.

What might "workout" mean?  Is this about loans to gyms or other places to work up a sweat?

Nope.  Workouts are when banks attempt to save or revive a loan whose borrower is no longer willing or able to pay as agreed.  Times like when they aren't making any money.  Not like now, though.  The administration tells us everything is chugging along just fine.

Maybe the FDIC and the other banking regulators didn't get that memo.

The scary part is the potential impact on banks - and with the bailout mania, the potential impact on us.  While a home loan is perhaps a couple of hundred thousand dollars, a commercial real estate loan is most times a couple of million dollars - sometime tens or hundreds of millions.  One single big loan going under can drag the bank down with it.

Want to REALLY be scared?  The dollar volume of C & I Loans (Commercial and Industrial) is more than DOUBLE that of the Commercial Real Estate loans (despite the individual loan amounts generally being smaller).  C&I loans are usually made for working capital (cash flow) and equipment purchases.

Among the top 21 TARP bailout recipients alone, commercial real estate and C&I loans total $1.8 trillion (PDF).  That's nearly two trillion, with a "T", concentrated in only 21 banks.

Now, workouts are a common, everyday occurrence at banks.  The expected volume is not.  The bank regulators sees what's coming, and are preparing the banks for how to handle the deluge.

While the regulators were quietly bracing the banks for what is expected to come, I can just see some Administration talking-head at the close of the seminar -

Nothing to see here.  Keep moving.  Thanks for comin'.  Don't trip over the Green Shoots on your way out...

Accept The Challenge

Unless we have a spectacular Christmas sales season, we're going to see large numbers of companies going under in the next few fiscal quarters.  Unless, that is, there's another bailout - and I suspect there will be.

How will that affect you?  In the short-term, it could be beneficial.  The company you work for may be able to get easier access to cash to keep the business open.

Long-term, though, it is unlikely to be good for any of us.  At some point, the money printed or borrowed by the Treasury department, or created out of thin air by the Federal Reserve will hurt our economy.  Higher inflation and higher taxes are both in our future.

You know the drill:  Buy and store tangible goods you use, reduce your expenses and buckle-up for a bumpy ride.  Washington is going to be digging deeper into your pockets.

Copyright 2009 Bison Risk Management Associates. All rights reserved. You are encouraged to repost this information so long as it is credited to Bison Risk Management Associates.


Anonymous said...

I know a fellow (not me) who bought stock in a local banking company at 18 1/2 and sold for 4 1/4. And this is a big bank with branches in four states. Every little town has one. United Community Bank, if it goes away, will take a lot of little people with it.

Chief Instructor said...

Most people who have a 401k or other retirement plan were hit hard by the sub-prime loan blowup.

I worry for anyone right now who owns any stock (with a few exceptions). The administration tells us all is well, but I'm skeptical, to say the least.

Anonymous said...

I had/ have an IRA that was going to fund my retirement. You note I am still working, alas.

Chief Instructor said...

Yep this economy has, "rocked my world" as my boys say. There are clearly benefits and down-sides to not having a salaried/hourly position.

It certainly keeps me on my toes!