"CMBS Pricing Is (Barely) Good News for the Banks May 3rd, 2009
By David Goldman
The big question about the banking system has been whether the cash flow on the distressed assets they own or can acquire cheaply will offset loan losses inevitable in a deep and long recession. My view from the outset has been yes, but barely: banks stocks were a screaming buy when C traded at $1 and BAC traded at $3, but were fully priced respectively at $4 and $10.
A crucial difference between the US banking system and Japan’s during the “lost decade” of the 1990s, I observed, was credit structuring: US banks typically held the top of the capital structure of mortgage, credit and real-estate deals, while hedge funds owned the bottom of the capital structure. Hedge funds can vanish without important systemic damage. Not so the banks. The big question could be reformulated this way: will the credit protection that the banks bought in the form of structuring be sufficient to protect them against losses?
The sale price of Boston’s Hancock Tower last March, I observed at the time, was high enough to make whole the holders of AAA-rated bonds backed in part by this deal. That, I argued, was good news for the banks. We have seen a general improvement in AAA-rated bonds backed by commercial collateral during the past few weeks, as the graph of the CMBX Index below from Markit Partners makes clear.
A $70 level on the index is nothing to shoot off fireworks about, but it’s a lot better than the $55 level at which the index was trading not long ago. Again, the available evidence suggests that the banks will be able to keep their noses above water and eke out enough earnings to compensate for their losses — just barely."