Of Course, They’ll Lend it Out
Last evening I watched the very entertaining HBO television movie version of “Too Big to Fail” based on the acclaimed book of the same name written by my friend, The New York Times’ Andrew Ross Sorkin (in which he was kind enough to quote me).
The film ends with the Henry Paulson character, having just injected billions of dollars in cash into all of the nation’s largest financial institutions answering – half in the affirmative, half by way of a prayer – his aide’s telling questions: “What will they do with the money? Will they lend it out?”
His response, delivered with something less than total conviction: “Of course they’ll lend it out…they’ll lend it out.”
We know, of course, that “they” have not lent out the unprecedented quantity of nearly free money that is currently mostly earning interest on deposit with the Federal Reserve. Not that the banks really could “lend it out.” Credit worthy borrowers in the corporate sector are chock full of cash and have few opportunities to spend or invest it in this lackluster economy. The rest of the business and consumer economy remains so engorged with debt that lending more would be akin to writing losses.
So what’s a financial institution awash in cash supposed do? Well, trade with it of course. We are arguably at the apogee of the U.S. government intervention and liquidity dump, and now that macro-fundamentals are demonstrating that commodities and many equities cannot sustain a bubble-like rally to the moon through speculation alone – trading opportunities take a bit more creativity to invent.
When highly liquid asset values are less predictable going forward, why not move on to less liquid assets that will defy gravity for a period of time because value judgments for such assets lag macro-level events? Housing, the sine qua non of illiquid assets, is no-go for the next few years. But – ah! – what about commercial real estate in prime markets, the value of which has (albeit in a limited volume of trades) “recovered” smartly in the midst of a revival of excess-liquidity-induced lending that, once again, is treating real estate cash flows as though they are government bond coupons.
So, it was with great interest this morning, that I noted an article in The Wall Street Journal by the ace real estate reporters, Eliot Brown and Kris Hudson, describing a deal by Wells Fargo and Blackstone to acquire about $1 billion of commercial mortgages from Allied Irish Bank at prices that, at least in this writer’s opinion, are interestingly “full.”
Now Blackstone is entitled to do as it pleases and only has its investors to answer to. But Wells Fargo is a U.S. government chartered, regulated and insured bank. Buying dicey loans on U.S. commercial real estate at prices in the low 90’s, according to the article, is an interesting exercise in financial prudence by a bank already burdened with about $120 billion of its own, likely compromised U.S. commercial real estate loans.
And lest the point be lost, Hank Paulson – in the dramatic moment referenced above – most assuredly was not hoping that the banks he had just stuffed with cash (and which the Fed continues to make sure are awash in liquidity), would “lend it out” to bail out Ireland. Nothing against Ireland here, but c’mon!
Appropriately, this leads us to one other interesting moment in the film I watched last night. In a tense sequence in which then-head of the New York Federal Reserve Bank, one Timothy Geithner, was frantically seeking to arrange shotgun marriages among failing banks and investment banks, he is portrayed as trying to jam Wachovia Bank down the throat of John Mack of Morgan Stanley. In rebuffing the advance in no uncertain terms, Sorkin reports Mack as having said to Geithner that he had no interest in Wachovia, as “everyone knows they were writing loans with their eyes closed!”
But another bank was quite enthusiastic about acquiring Wachovia, and did so. And its ticker is WFC.
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