Today’s Housing Bubble Commercial Real Estate Bubble Post

In the years leading up to the 2008 crash I was posting a series called “Today’s Housing Bubble Post.” (Scroll down, it starts in March, 2005.)

Quick summary: Wall Street was bundling mortgages into “bonds” with a good interest rate. The money was made on selling these bonds, called Collateralized Debt Obligations (CDO). When a bank makes money from the loans themselves they look carefully at how risky the loans are. But when a bank makes money from passing along as many loans as they can to someone else they don’t care how risky the loans are, they only care how many they can pass along.

So Wall Street was doing everything it could to give as many loans to people as possible, no matter how risky. The knew it was risky, but didn’t tell the customers for those loans. They told the customers there was very little risk. This is known as fraud.

Those fraudsters made many, many billions from this scheme. The entire economy blew up. No one was held accountable for what happened. No one.

When you let people make billions from fraud and not hold anyone – anyone – accountable, guess what happens. They do it again. They call it a business model.

When the tide goes out that you learn who’s been swimming naked

Commercial real estate is office buildings, retail, etc. This is an industry that lives on loans.

Do you think office buildings are worth what they were worth before COVID? Do you think that financial institutions learned their lesson from the 2008 crash, when no one was held accountable?

Take a look at this, from The Intercept, THE BIGGER SHORT:

A longtime industry analyst has uncovered creative accounting on a startling scale in the commercial real estate market, in ways similar to the “liar loans” handed out during the mid-2000s for residential real estate, according to financial records examined by the analyst and reviewed by The Intercept.

… This time, the issue is not a bubble in the housing market, but apparent widespread inflation of the value of commercial businesses, on which loans are based.

Uh oh.

Now it may be happening again — this time not with residential mortgage-backed securities, based on loans for homes, but commercial mortgage-backed securities, or CMBS, based on loans for businesses. And this industrywide scheme is colliding with a collapse of the commercial real estate market amid the pandemic, which has business tenants across the country unable to make their payments.

Overstating borrower income, inflation of past financials, misstated financial fundamentals … and selling bundles of loans to pension funds, etc, to offload the risk. Just like 2008.

Read THE BIGGER SHORT, it’s all there. Trump’s real estate practices are mentioned, too.

Also, you can listen to the story on the Deconstructed podcast, THE WHISTLEBLOWER TRYING TO STOP THE NEXT FINANCIAL CRISIS