WEBVTT NOTE Economic Crisis: A Look Ahead 1 00:00:00.000 --> 00:00:06.000 Well, it's hard to follow an uplifting outlook like that. 2 00:00:10.500 --> 00:00:13.500 Unfortunately, I'm going to carry on with the same theme. 3 00:00:16.000 --> 00:00:25.000 Unfortunately, I was there for part of this, but now I'm here and it feels much, much better. 4 00:00:25.000 --> 00:00:45.000 Denial, Anger, Bargaining, Depression, Acceptance 5 00:00:55.000 --> 00:01:01.080 12 months after being in the recession, the Bureau of Labor Statistics finally came clean 6 00:01:01.080 --> 00:01:05.720 and said, yeah, the economy isn't doing so hot. 7 00:01:05.720 --> 00:01:11.760 So we got through the denial stage, but I think we're smack dab in that anger. 8 00:01:11.760 --> 00:01:12.760 Whose fault was it? 9 00:01:12.760 --> 00:01:19.320 It was those guys on Wall Street, it was the mortgage brokers, it was the appraiser, whoever 10 00:01:19.320 --> 00:01:20.320 it might be. 11 00:01:20.320 --> 00:01:30.320 We're in that anger stage, and now with this, just exactly what Gary talked about, we're in that, you know, government's in that bargaining stage. 12 00:01:30.320 --> 00:01:41.320 Hey, let's put together a plan. Geithner's got a plan. Every week he has a plan. 13 00:01:41.320 --> 00:02:10.320 So, we're still in that bargaining stage, but eventually that's not going to work, and then we'll go through the depressions stage, we'll all be depressed, if we're not already, and then we'll have acceptance, and that's probably when the mal-adjustments will have been cleared, and the economy will be put back on an equal footing again. 14 00:02:10.320 --> 00:02:40.320 To take off a little bit from what Gary was talking about, because he was talking about the investment banks becoming commercial banks to qualify for government assistance and an effective nationalization of Fannie and Freddie and, by the way, there's probably no two entities that have had more ongoing regulation, they've had their own regulator since, what was it, 1992 or 1993, I think, 15 00:02:40.320 --> 00:02:51.320 are continually regulated and regulated right into being penny stocks for those who have owned those securities. 16 00:02:51.320 --> 00:02:58.320 And obviously, they continue to ask for more money over and over and over again, and there's really no end in sight. 17 00:02:58.320 --> 00:03:04.320 And of course, that's the continual mantra. We just haven't had enough regulation in the last few years, 18 00:03:04.320 --> 00:03:08.720 if we could only have been regulated more and believe me as someone who used to be 19 00:03:08.720 --> 00:03:14.400 regulated you could barely turn around and not bump into a regulator I mean they 20 00:03:14.400 --> 00:03:19.800 were they were constantly at your door and constantly telling you what to do 21 00:03:19.800 --> 00:03:26.080 and if you work at one of the big banks they honestly were on site all the time 22 00:03:26.080 --> 00:03:33.720 so but we have a huge concentration of assets with the largest banks in the 23 00:03:33.720 --> 00:03:41.720 of the country. So the idea of nationalizing the banks really isn't very hard. 114 banks 24 00:03:41.720 --> 00:03:50.760 constitute the banks that are greater than $10 billion each. That is 1.4% of the banks. 25 00:03:50.760 --> 00:04:00.040 They contain 78% of the assets. So when you offer tarp money or talp money or talcum powder 26 00:04:00.040 --> 00:04:07.360 or whatever they're going to call it to these banks to bail them out, you really just have 27 00:04:07.360 --> 00:04:13.240 to hit that top 112 and you've effectively nationalized these guys and of course we can 28 00:04:13.240 --> 00:04:19.920 see very rapidly what the government is very interested in when they start regulating. 29 00:04:19.920 --> 00:04:26.360 They want to know how much people are going to make and they better not make more than 30 00:04:26.360 --> 00:04:28.300 and the President does. 31 00:04:28.300 --> 00:04:37.020 And you better not be sponsoring any golf tournaments or anything else that might upset the other 32 00:04:37.020 --> 00:04:43.420 Fed Chairman Barney Frank. 33 00:04:43.420 --> 00:04:47.460 And that's what regulation is going to look like for the banks. 34 00:04:47.460 --> 00:04:50.760 Nationalization, that's what it's going to look like. 35 00:04:50.760 --> 00:04:59.040 and of course we know what going to government quote service providers is like, we've all 36 00:04:59.040 --> 00:05:06.640 got our license plate, driver's license, things like that and of course getting banking services 37 00:05:06.640 --> 00:05:11.640 will be very similar to that I think. 38 00:05:11.640 --> 00:05:18.400 But the banking industry is in a very bad way, you know, we hear some mixed results 39 00:05:18.400 --> 00:05:35.400 I got an alert a while ago on my Blackberry. Ken Lewis at B of A, if you don't know who he is, the head guy, he said that B of A is profitable and there's no need for nationalization. 40 00:05:35.400 --> 00:05:44.400 Now he honestly says this every other day, one of these guys. So I think Shakespeare comes to mind, me thinks you protest too much. 41 00:05:44.400 --> 00:05:49.160 much because I think these guys know what's going to happen but they're 42 00:05:49.160 --> 00:05:53.400 continuing to the guy at Citibank said yesterday that they are they sent a memo 43 00:05:53.400 --> 00:06:01.320 to their employees they're making money of course we've taken bailouts four 44 00:06:01.320 --> 00:06:06.000 different times but he didn't include that in the memo but supposedly 45 00:06:06.000 --> 00:06:11.680 they're doing better than they ever have but the overall banking system for 46 00:06:11.680 --> 00:06:18.880 2008. Actually, other than a couple of accounting tricks, if you take the accounting tricks 47 00:06:18.880 --> 00:06:31.240 out, the entire industry lost money. And it's been a long time since that has happened. 48 00:06:31.240 --> 00:06:41.460 And when you lose money in a bank, that lowers the amount of capital you have. And you have 49 00:06:41.460 --> 00:06:46.460 You have to maintain a certain level of capital to stay in business. 50 00:06:46.460 --> 00:06:56.020 Now if you can't go sell capital in the financial markets, which nobody can sell private capital, 51 00:06:56.020 --> 00:07:02.100 and you can't get TART money because you don't have any friends at Goldman Sachs, then you 52 00:07:02.100 --> 00:07:04.120 have to shrink your balance sheet. 53 00:07:04.120 --> 00:07:09.420 And this goes again to something that Gary said a while ago, is that banks are going 54 00:07:09.420 --> 00:07:14.940 to have to shrink their balance sheets. So if you go to your, you guys that are in business 55 00:07:14.940 --> 00:07:20.640 and you have to go to your bank and you're looking to renew your line of credit and you've 56 00:07:20.640 --> 00:07:28.500 always revolved it and you've always performed, don't be surprised when they say, no thanks, 57 00:07:28.500 --> 00:07:33.120 can you pay us off? You're going to say, hey, I'm a good customer. I know you've got a bunch 58 00:07:33.120 --> 00:07:38.300 of deadbeat real estate guys that aren't paying you. Why don't you extend my credit? I can't 59 00:07:38.300 --> 00:07:42.520 I get the deadbeat real estate guy to pay me off, so I need you to pay me off so I can 60 00:07:42.520 --> 00:07:47.180 shrink my balance sheet to make the amount of capital I have worked. 61 00:07:47.180 --> 00:07:51.460 And that's going on throughout the banking system. 62 00:07:51.460 --> 00:07:57.640 And I think you're going to see more and more of that because as banks write down the level 63 00:07:57.640 --> 00:08:04.680 of their assets, they're going to lose capital and they're going to have to shrink the asset 64 00:08:04.680 --> 00:08:13.820 side of the balance sheet, and that means their loans. And the real estate market is 65 00:08:13.820 --> 00:08:19.040 not going to turn around right away. In fact, the only part of the real estate market that's 66 00:08:19.040 --> 00:08:26.400 really melted down has been the residential side. The commercial side is just starting 67 00:08:26.400 --> 00:08:38.040 to Roll Over, and for years and years and years, the cap rates that lenders used to 68 00:08:38.040 --> 00:08:43.320 underwrite commercial real estate loans got lower and lower and lower. 69 00:08:43.320 --> 00:08:45.200 What's that mean? 70 00:08:45.200 --> 00:08:49.260 That's the opposite of what a P-E ratio would be to a stock. 71 00:08:49.260 --> 00:08:57.940 So if you had a 10 cap on a real estate deal, that's like 10 times earnings of a P-E ratio. 72 00:08:57.940 --> 00:09:03.100 And that used to be kind of our default sort of cap rate in a commercial real estate map. 73 00:09:03.100 --> 00:09:05.060 It was a 10 percent cap. 74 00:09:05.060 --> 00:09:08.460 If you didn't know what the cap was, you'd kind of guess 10. 75 00:09:08.460 --> 00:09:16.380 It got to the point in the boom where banks would underwrite at 6 percent cap, 5 percent 76 00:09:16.380 --> 00:09:24.340 and Cap, and that means, to put it in PE terms, 20% price earnings ratio. 77 00:09:24.340 --> 00:09:31.620 So you can see, as commercial real estate reverts to where residential has, is that 78 00:09:31.620 --> 00:09:37.700 commercial projects will be cut in half just on probably cap rate alone, let alone the 79 00:09:37.700 --> 00:09:43.980 fact that their vacancies are going up, the rents are going down. 80 00:09:43.980 --> 00:09:52.500 I mean, if someone would have brought a construction loan for a retail center with Circuit City, 81 00:09:52.500 --> 00:10:02.640 Sharper Image, you know, there's a few others, Starbucks, you know, you would say, boy, that's 82 00:10:02.640 --> 00:10:08.040 a slam dunk. Well, guess what? Two or three are bankrupt and the other one is cutting 83 00:10:08.040 --> 00:10:19.320 locations all the time, and let alone the yoga shop and the karate studio and all the 84 00:10:19.320 --> 00:10:21.280 other users out there. 85 00:10:21.280 --> 00:10:29.500 So the commercial side of real estate lending is going to take the next hit because it was 86 00:10:29.500 --> 00:10:34.620 really an outgrowth of residential development. 87 00:10:34.620 --> 00:10:39.500 The more rooftops you put up, the commercial development sees the rooftops, the commercial 88 00:10:39.500 --> 00:10:46.260 developer says, gee, look at all those houses, I better make a retail center. 89 00:10:46.260 --> 00:10:55.180 Same way with office, office was heavily dependent on title companies, engineers, appraisers, 90 00:10:55.180 --> 00:11:00.900 also involved in the residential housing business. 91 00:11:00.900 --> 00:11:02.900 and let alone industrial buildings. 92 00:11:02.900 --> 00:11:11.100 Anybody that flew into Atlanta, took the 85, you saw acres and acres of empty industrial 93 00:11:11.100 --> 00:11:14.600 space that is currently being unused. 94 00:11:14.600 --> 00:11:21.380 So I think the commercial side of the real estate loan portfolios is the next shoe to 95 00:11:21.380 --> 00:11:23.780 drop. 96 00:11:23.780 --> 00:11:28.220 Meredith Whitney, who's done some great work on Wall Street, wrote a piece in the Wall 97 00:11:28.220 --> 00:11:35.900 Journal the other day that credit cards is the next squeeze so I think credit 98 00:11:35.900 --> 00:11:42.020 card lines of credit are going to be restricted and again this is banks 99 00:11:42.020 --> 00:11:48.420 trying to desperately hold on to cash and protect the capital that they have 100 00:11:48.420 --> 00:11:57.380 by shrinking their balance sheet and if you don't think real estate lending is 101 00:11:57.380 --> 00:12:04.900 is important to the banking industry as a whole. It's 60% of the aggregate loan portfolios 102 00:12:04.900 --> 00:12:10.760 of all banks is in real estate. Now that's a very, very high number and it's increased 103 00:12:10.760 --> 00:12:21.260 since roughly 51% since the fourth quarter of 1997. The number of banks has already decreased 104 00:12:21.260 --> 00:12:30.460 from 14,482 in 1991, we're at 8,305, and who knows how many we will end up with by the end of this, 105 00:12:30.460 --> 00:12:41.860 but suffice it to say that many will be under federal control of some sort by the end of this period. 106 00:12:41.860 --> 00:12:43.860 Thank you very much.