Commercial real estate loan
bombshell ready to hit 3000 small banks

BY MORRIS R. BESCHLOSS
PVF & economic analyst emeritus

Three thousand small banks, which are holding veritable tens of millions of dollars of commercial development loans, may be on the verge of severely curtailing their lending activities, because of their massive involvement in that sector during the last decade.

A Congressional Oversight Panel analyzing the optimum use of TARP (troubled asset relief program) funds are seriously pointing to the overextended commercial sector as yet another time bomb ready to explode, if remedial action is not taken expeditiously.

These local and regional banks’ involvement in massive loans to developers of shopping centers, offices, hotels, and apartment buildings, could threaten the creditworthiness of such banks and bankrupt developers not able to pay off or roll over the loans due to come to fruition later this year.

Such a wave of credit crises could generate the double whammy of a great number of local and some regional banks down the tubes, or at the least unable to make additional loans when constrained by these circumstances. If such a calamity reaches its full extent by mid-year, it could even eclipse the spate of residential foreclosures and the advent of troubled large banks, beset by greatly overvalued mortgage derivatives in 2008.

Although a commercial sector tsunami has been expected by mid-summer this year, the TARP oversight panel warns that literally hundreds, if not thousands of small businesses, such as developers, could be cut off from their lending sources, in addition to putting the banks themselves under severe duress.
This could be tantamount to creating another major dip in the tenuous economic recovery, as commercial developments wither on the vine, putting the commercial sector on the edge of a financial precipice, not to mention job losses and growth opportunities that would have to be mothballed.
Since 40% of America’s 8,100 banks are involved in this forthcoming collapse, it’s expected that major amounts of TARP money will likely be directed to undergirding these banks from financial disaster. Whether such a move can constrain a commercial sector blowup remains to be seen.

Small-business sector continues paring inventories as jobless claims stagnate

Most recent statistics validate the conclusion that the bulk of America’s small business sector, which employs 65% of the overall U.S. worker potential, is still reducing its inventory positions despite an upward thrust in sales throughout most sectors in December. This is supported by an inventory to sales ratio of 1.12, well below December 2008’s 1.32, and even last November’s 1.14. A ratio of 1.12, for instance, means that it would take 1.12 months to clear the shelves of existing inventory.

This is the lowest point reached since mid-year 2008, when the worldwide business boom had reached the highest point in recent history. Much of the continued inventory shrinkage has been driven by the fear of illiquidity, as small businesses continue to face concerns with credit availability and slow demand growth.

Despite the more propitious outlook in stemming the Obama Administration’s perceived anti-business initiatives, business in general continues to concentrate on maximum productivity. Generally speaking, based on my continued communications contacts, the industrial manufacturing and distribution sectors are becoming more incensed at the growth of the national debt and the runaway deficit, with little to show for it.

The historical evidences of expanded demand, job creation and innovative opportunities are conspicuous by their absence. “The lack of understanding by the Federal Government as to what makes business tick has taken its expenditures into areas of non-productivity,” according to many influential business decision makers.

At this stage, it looks as if demand must first assert itself before the productive sectors will extend risk capital for future growth.

Thursday’s continued jobless claims and the ongoing extension of continuing claims are further proof that the unemployment overhang continues to act as a deterrent to the creation of new jobs necessary to stimulate further economic recovery. The Federal Reserve Board’s discount rate raise today may signal first step in future monetary tightening.

Triple D not in cards for U.S. economy

Despite a spate of demoralizing statistics released at the end of February, which pundits seized upon to warn of a double dip recession and deflation, such a pessimistic conclusion is fallacious.

Some of the gloomier analyses even predict a return to the Great Recession’s rock bottom, which hits its low point late in 2008 and the first quarter of 2009. Even though I have often emphasized the undertow of current economic weakness, I expect the latter part of 2010 to shine brighter than the cloudy business skies we’re witnessing today. My multi-fold reasons for greater buoyancy are as follows:

1) The Washington, D.C. impact of crushing debt engendered by the Obama initiatives will have been dissipated. The tidal wave of anti-incumbency popular reaction coming in November will neutralize any shred of dominance that the White House is asserting on the survival of independent businesses.

2) The amazingly strong recovery by the world’s emerging nations— China, India, Taiwan, South Korea, Brazil, Russia, etc.— are already eclipsing the U.S. comeback. This will have a salutary effect on America’s exports, which are rapidly becoming a lead sector in the U.S. recovery.

3) The liquidity generated both internally and through investment input into U.S. businesses is on the uptick, warding off a repetition of the mid-2008 financial meltdown crisis.

4) Even a pending commercial development disaster will be moderated by combined actions taken by the Federal Reserve Board and the U.S. Treasury. This will protect a majority of the banks that could have gone under without remedial action being taken.

5) Deflation, which has stratified the Japanese recession for the past decade will not be repeated in the U.S. Despite an inflationary stasis within the American economy, general business will be on the upswing, even if ever so slowly at this time. By the second half of 2010, inventory liquidation will have ended as overall demand will force tens of thousands of companies to expand their activities, even cutting into unemployment ever so slightly.

6) If there is an expected super reversal in the U.S. Congress’ political composition in November, expect a business boom to be rekindled, setting off the first real forward motion the American business sector has witnessed since 2007.