Don’t Like The Numbers? Change The Rules!
Nov21Most business owners wrestle with the things that they cannot control in their business. Realistically, there’s only so much you can do, right? But most have figured out how to navigate and protect themselves from those things that they have some control over. The one wild card for which no one can prepare is that of changing regulations.
In these crazy times of “make it up as you go” regulation, this issue has become particularly acute. A dizzying number of new rules, new laws and rule changes have rained down on business owners for the last year or so. Many have targeted the financial services industry including banks, investment firms, real estate companies, insurance companies and mortgage companies in what seems to be an attempt to “fix” the numbers. The FASB, FDIC, Comptroller of the Currency and Federal Reserve have been especially busy.
The latest is interesting. The Wall Street Journal recently reported ( Banks Get New Rules on Property ) that a new set of guidelines has been released for banks with troubled real estate loans. The new guidance is designed for banks trying to work with commercial property owners who are “experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in selling or renting commercial properties.” The guidelines encourage banks to restructure rather than foreclose saying that they “will not be subject to criticism (by regulators) for engaging in these efforts.” Loans restructured using these guidelines will also not be classified as “high risk” by regulators just because the underlying real estate collateral has declined in value.
Obviously, the play here is to try and forestall more bank failures as a result of the significant declines in commercial real estate value as well as the growing distress among property owners due to economic conditions. Predictably, banks are rushing to adopt the new rules ( Banks Hasten to Adopt New Loan Rules WSJ 11/12/09). But, just how long can we hold off the inevitable? Some $1.4 trillion in commercial real estate loans will be maturing in the next five years, half of which are estimated to be “under water” now.
So, the question is…how can we cross our fingers when they are all stuck in the holes in the dike? Oh, and the water is rising…FAST
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Comments
David Hinz says:
November 22, 2009 at 12:29 pmThe new rules seem to come with a subset of new “unwritten but understood” new rules.
The CEO of a recently closed bank in Michigan told a local radio station how the FDIC came into his institution and pointed out that because of declining property values in the area, some of the loans [which were not in default] put the bank at risk, and therefore demanded that the bank put more money into reserves to protect itself against failure should those loans default.
The bank complied.
The FDIC then came into the bank and decided that the institution no longer had enough working capital to ensure that it would remain solvent — the money was still there, but now because it was in “reserve” accounts it could no longer be counted — and closed their doors.
A large regional bank took over the assets — after all, those assets were insured by the FDIC — and the local bank is now out of business.
Expect to see more local banks close as the government consolidates control of the economy.
Bob Chiore says:
November 23, 2009 at 3:56 pmRe Dave’s remark above: We’re the government, and we’re here to help!
Harry says:
November 30, 2009 at 12:41 pmYour Comments
This is just another stall tactic on the part of our bureaucracy.
Rich says:
December 2, 2009 at 7:19 amYour Comments
Rick: I thought the economic recovery had started! Now we have to worry about the commercial real estate market going belly up? But wait. The government will save the day with new regulations. Although according to Dave, the government won’t criticize you for complying, it will just put you out of business.
Bob Chiore says:
December 4, 2009 at 10:43 amCommercial real estate is an interesting question, and one that the MSM doesn’t seem to inclined to look at. And, of course, there is the Dubai bubble, which could haunt the markets for some time to come.