Will the pandemic cause commercial real estate to implode, or will bank fraud do the job first?

example of a mall
Are we looking at the next bubble to burst?

I attended a roundtable discussion a while back, where we discussed worldwide trends. 

A question about business came up: “What business functions will never go out of style?”

My answer: “Debt, equity, and liquidity.”

Seems simple and practical, right? 

You have a business idea or life aspiration, and someone rolls up to enable those goals by either offering a loan, selling shares on your behalf to potential investors, or providing tools for managing cash flow so that your goals can stay alive.

There’s plenty of money for banks to make by doing these three things, so why does a bank need to commit fraud like money laundering, LIBOR manipulation, tax evasion, municipal bond bid rigging, winning municipal business through bribery, misrepresentation of mutual fund risks, undisclosed billing for identity theft protection, improper foreign exchange trading, futures market trading violations, failure to disclose conflicts of interest, obstructing investigations of suspected trade violations, illegal opening of credit card and bank accounts, misrepresentation regarding loan interest rates, illegal student loan practices, misuse of insider information, and so many other shady activities?

Greed is my guess. Because making good money is never enough for bankers.

But you have to admit it takes an impressive amount of nerve to commit enough residential mortgage fraud to crash the financial markets in 2008 — resulting in a long recession and recovery period — and then receive money from the government to cover these losses from fraud and expand their businesses, making it almost look like the banks received a reward for nearly destroying Western civilization.

Fast-forward to the present and it looks like the fraud hasn’t stopped. Truthout reports that a whistleblower complaint has been filed with the US Securities and Exchange Commission that alleges banks are committing a similar kind of mortgage fraud — except the loans referenced in the complaint involve commercial borrowers, who are typically investors themselves.

Meaning, the NINJA concept of lending to consumers has become the overstatement of income flows of commercial property owners to secure larger loans than deserved.

Residential mortgage-backed securities (RMBS), based on one- or two-family homes, are now commercial mortgage-backed securities (CMBS), based on the assumed value of malls, office buildings, and apartment complexes.

The scam in both instances involves banks knowingly issuing loans that don’t match with the borrowers’ financial strength, unjustifiably overvaluing assets, or mysteriously restating profits upwards of properties owned by businesses.

Mall property values have already been taking negative hits for the past few years. I mean, who goes to malls these days?

But the coronavirus pandemic has caused virtually all commercial real estate property values to sink. Mall prices have imploded the most —  especially since the retail stores housed by malls have been closed and lack the money to make lease payments to landlords. Add to this trouble the high likelihood that more retailers that will permanently close, and we’ll see malls face even more downward pressure, which will also tank the value of CMBS.

If the whistleblower complaint allegations are verified to be true and the commercial real estate fraud is systemic, we could have a perfect storm for a not-so-trivial financial event in the near future — assuming the federal government doesn’t step in to help.

Have we learned anything from 2008? There has not been a formal response from the SEC regarding the complaint.

Read the Truthout piece and come to your own conclusions …

song currently stuck in my head: “look up” – chico freeman

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