Via the Seattle PI:
The stress tests are done
Surprise — many banks are fine
Now, go buy that bridgeH/T Corrente
May 062009
May 062009
Investors and funds are filing motions left and right to stop the transfer of any assets to Chrysler… at least until the company ponies up $6.9 billion in assets to cover their debt obligations.
This thing is already a mess!
The gurus in Washington say that the Chrysler bankruptcy is prepackaged, and it’s going to be fast and easy. Yeah, right. Beware hubris. Like the previous administration thought that the Iraq war was going to be fast and easy.
I practice bankruptcy law, said a friend of mine, and is there a courtroom anywhere in this land that’s big enough to hold all the players in a Chrysler bankruptcy? It’s the first ‘big’ automobile bankruptcy in the U.S. since Studebaker in 1933. There’s no recipe book for doing this. The judge in the case might just have to book Madison Square Garden to have enough space for all the participants. And everyone is entitled to their day in court. Considering the tens of billions of dollars in play, I expect we’ll see many days in court, up to and including the U.S. Supreme Court. That should take only a few years.
Yet the stocks of real estate investment trusts (REITs), which are popular among income-oriented retail investors, are still trading at high enough levels that discount a ‘garden-variety’ recession in commercial real estate.
REITs were designed to invest in portfolios of rental properties, and generally pay no corporate income taxes if they distribute at least 90% of their profits as dividends to their shareholders.
“REITs thrive in an environment of steadily rising property values and rents. But in this ice age for commercial real estate, the REIT business model will cease to function properly; a REIT’s tax-free status doesn’t allow it to retain much excess capital during lean times. Since REITs pay out all their earnings, they cannot grow without taking on more debt. During the boom, a REIT strategy encompassing growth, leverage, and acquisitions was a virtuous cycle that led to juicy dividends and soaring stocks; in this bust, it’s morphed into a vicious cycle of dividend cuts, dilutive equity offerings, debt offerings at double-digit interest rates and bankruptcies.
“The REITs that levered up and grew too fast at the peak will go to zero in bankruptcy. Others could fall into the low single digits by year-end as the market anticipates that creditors will take title to many properties in 2009 and 2010. These developments would push the value of the REIT Index dramatically lower.
It’s Time to Rethink the Problem
If there’s one thing the financial crisis has taught us, its’ that we grossly misjudged the risk we were taking on. We offer five perspectives on rethinking risk — on everything from finance to housing to social policy — in the hopes of stopping the next major meltdown before it starts.
Private Risk Is the Public’s Business
By David Moss
Risk Is Best Managed From the Bottom Up
By Nomi Prins
The Rich and Powerful Can Avoid Risk
By Robert A. Johnson
Housing Is Local, and Lending Should Be, Too
By Alyssa katz
A Strong Safety Net Encourages Healthy Risk-Taking
By Jacob S. Hacker
Read the articles at http://prospect.org/cs/articles?article=its_time_to_rethink_the_problem