Previous columns have argued that a “person on the street”, unschooled in sophisticated economics and financial wizardry, might interpret much news nationally and internationally as signaling real trouble in the shadows. Several new events may vaguely illustrate this theme.
Goldman Sachs, a major Wall Street investment firm, was bailed out in the 2008-2009 financial crisis and paid a large additional fine for originating mortgages in a questionable fashion. That crisis involving many other firms was largely generated by a bubble of residential mortgage-backed securities. The minimally evaluated risk of default of the underlying loans in those securities was “laid off” by creating the securities and selling, then repackaging, and selling them again to the next greater fool. The Dunce Cap eventually came off, our economy virtually collapsed, many failed banks and investment firms “too big to fail” were rescued by socializing their unpayable debts to the public at large, and no one went to jail. Corporations, long held under our common laws to be essentially “persons”, are the only individuals immune from incarceration. Goldman Sachs did repay their debt to the government, but now may be repeating their earlier mistakes in a new venue.
That firm is now “letting” some of its biggest customers partner with it in certain new investment classes. These clients, such as large insurance funds, and perhaps even pension funds, will somehow become co-lenders with Goldman Sachs to private-credit funds and non-bank lenders like mortgage providers. As I noted in my prior Hints and Whispers article, private-credit funds and non-bank lenders are gradually displacing banks as major sources of credit for both residential and commercial real estate, both of which are edging into extremis with rising defaults. Those two markets are now more “available” as banks themselves retract from these types of loans due to a combination of factors involving the status of bank assets, risen interest rates, and greater restrictions by the Federal Reserve. Those two categories of new lenders are far opaquer and more unregulated than the banks. This move by Goldman Sachs may not be so much acquisition of new funding sources and broadening of investment instruments to sell customers. It may really be another “laying off of risk”. Given the rising level of defaults in commercial real estate, and similar problems in residential real estate including condominiums, large apartment complexes, and even large tranches of private homes now “owned” by Real Estate Investment Trusts and other such, this bubble may expand to the point of implosion again. How will these investment entities be “rescued”, and who will do it? As one American philosopher once said, “it’s deja vu all over again”.
Many large apartment holdings are already skirting close to the edge of insolvency. Most attention has been fixed on office complexes becoming ever more ghostly with over $40 billions of office loans officially in distress, and $67 billions “at risk” of distress. But $81 billions worth of apartment complex loans are similarly at risk now. That risk may be catapulted into disaster by what is essentially a modern variant of the old mortgage-backed securities called CRE CLOs. These are Commercial Real Estate Collateralized Loan Obligations, considered far riskier than mortgage-backed securities or simple mortgages as they are temporary bridge loans with floating interest rates. That “debt” is about $75 billion, with almost 11% of it in distress. While some CRE CLOs are generated by speculators, much of them are funded by the above noted private-credit funds and non-bank lenders. CRE CLOs may be the pin prick that pops that bubble.
Meanwhile, back at the Fed…. The central bank is selling off assets at a furious pace to rebalance its bankrupt books, and to reverse the effects of their long-term quantitative easing that has generated such unexpectedly high and persistent (to them) inflation. Treasury bill and bond prices and yields are a crucial factor in this process and in maintaining “full faith and credit” in our vaporous fiat currency. China is one of the major holders of our Treasury indebtedness. Subliminal fear always exists as to the disastrous effects that would occur if the CCP decides to engage in a massive sale of our indebtedness, collapsing its “value”. But China’s own economic difficulties, driven by their own government-inflated real estate bubble’s collapse, may be forcing a version of that dreaded scenario. The CCP’s regional and smaller banks are trying to rescue their own balance sheets, denuded by that real estate collapse and the involution of their consumer economy and inability to sell all their cheaply made products either domestically or internationally, in a buying frenzy of CCP central bank/government bonds. This has required a massive sell-off by those central bank units of the U.S. debt they hold to the point where some of those larger banks have almost defaulted in those sales. These types of internal “three cups and ball” games are too complex for me to understand. But the underlying message is that a very large segment of their banking industry may fail if they are forced to stop buying their own government debt in order to save the central banking system. Does that sound in any way familiar? And given the very large CCP holdings of U.S. debt, the large amount of U.S. products (mainly agricultural and other commodities) that they buy, and the importance of China as a supplier of goods that we no longer can produce domestically at a reasonable price, their problems could be a new kind of pandemic for which we cannot Warp Speed a “vaccine”.
Don’ hold your breath. Listen carefully for the faint sounds, peer deeply into the darkest parts of the shadows for any further hints. In the clear light of day, somethings must drastically change. Be an agent of that change.