Chris Macke is urging US regulators and politicians to start forcing banks to clear their balance sheets of troubled real estate loans. However, rather than demanding a mass fire-sale of assets, the founder of Chicago-based investment and advisory firm General Equity Real Estate argues it can be done in phases.
The problem is will the government listen? After working with the Federal Reserve, other governmental agencies and various Congressional staff members advising them on the issues facing the commercial real estate industry for the past two years, Macke admits he was growing increasingly “frustrated” at the actions being taken. Here, Macke talks to Zoe Hughes about the problems he has experienced to date, the challenges that face the industry and the opportunities.
Why are you speaking out now?
We all know that banks and financial institutions have no incentive to sell any of their problem loans and
are even being given more latitude to “extend and pretend.” In 2009, mark-to-market rules were relaxed and the Federal Deposit Insurance Corporation [FDIC, the US banking regulator] issued new loan workout guidelines further increasing banks’ ability to delay and pray. Collectively this means banks don’t have to deal with their commercial real estate loan issues and can delay the inevitable charge-offs for many of these problem assets. Instead they can restructure or extend those loans and deal with them in the future. My argument is that the problems are going to be a lot more expensive to fix if we leave this to drag on much longer. 
The sooner we get real the sooner we will begin to heal.
What are you calling for?
We have to stop what we’re doing first of all, we have to stop allowing banks to push the issue into the future and start dealing with their legacy loans. I give a lot of credit to the FDIC for the auctions they’ve
announced and the Federal Reserve for its recent decisions, but there is an “extend and pretend” crowd out there who think if they just wait long enough the losses will disappear as a result of a stronger economy. I disagree with that, firstly, because these loans were underwritten with values that depend on rates of growth in rent and residual values that have never been sustained, even in a robust economy. And secondly, it is circular logic: hold impaired loans until the economy recovers, but these impaired loans constrain the very credit the economy first needs to recover. Lastly, at this point in the cycle, liquidity doesn’t drive prices, prices drive liquidity. Holding these loans prevents us from generating the market pricing we need to generate the liquidity we need. Banks don’t have to deal with their commercial real estate loan issues and can delay the inevitable charge-offs for many of these problem assets … My argument is that the problems are going to be a lot more expensive to fix if we leave this to drag on much longer.
Why will it be more expensive?
First, we cannot rely on government spending forever. Without a resurgence in private sector spending we will return to moderate or possibly negative growth. Avoiding this requires the return of normal bank lending levels because private sector spending is heavily dependent on credit. However, banks can’t make new loans when their portfolios are full of impaired commercial real estate loans. The longer we wait for banks to finally clean up their troubled commercial real estate loans the more expensive it will be. If you think selling a loan now is painful, imagine selling a loan in 2012, when the number of loans maturing has increased significantly, and extend and pretend has continued to hobble bank lending. If we don’t clean up the banks’ balance sheets we won’t have bank lending and thus we won’t have sustainable growth in the US economy – instead we will have a Japanese type situation of stagnation caused by our own “zombie” banks.
It’s widely acknowledged that forcing US banks to write down their troubled assets will make many of them insolvent? Aren’t we just in danger of creating another systemic risk if we force action now?
This argument is based on a debate technique called “exclusion of the middle”. The systemic risk argument relies on just that, it refuses to accept there can be a middle ground. We only look at the two ends of the scale. There’s a big difference between what the regulators are doing today in trying to make it easier for banks to extend and pretend and getting to a point on the scale where we face systemic risk and potential collapse of the system. My call is for the banks to deal with their assets in phases, to deal with a material portion of their legacy commercial real estate loans every year.
Dealing with legacy portfolios one chunk at a time?
Yes, and to speed up this process a temporary reduction in the capital requirements for banks could be implemented allowing loans to be cleared at an even faster rate. When banks are able to support them, return the capital requirements to “normal” levels. Then, when things again start to overheat increase the capital requirements further. Some may say that this additional increase will reduce available credit. What will actually happen is that it will ensure we have capital when we most need it. By providing a cushion that will allow banks to keep lending during the next downturn we will avoid the situation we are in today. There is too much credit during the speculation phase of commercial real estate cycles, if we didn’t we wouldn’t have speculation. So reducing credit during that point in the cycle is not a problem. Not having credit during the downturn is the real problem. Banks taking phased losses not only won’t bring about a collapse of the US financial system but it will start the required healing process sooner rather than later. We need to start doing something now. We need to get real to heal. We only look at the two ends of the scale. There’s a big difference between what the regulators are doing today in trying to make it easier for banks to extend and pretend and getting to a point on the scale where we face systemic risk and potential collapse of the system.
What’s your fear?
My fear is that alternative policies won’t even be considered until the first or second quarter of 2011 after the 2010 mid-term elections, at which time it could easily take another two to four years for the real estate market and wider economy to fully recover. If that happens, banks are not really going to get back to robust commercial real estate lending until 2014 at best. Just figuring out and working out who has what rights in a CMBS loan with multiple lien-holders will take years. The sooner we get real the sooner we will begin to heal.
What’s your hope?
That the 2010 US mid-term elections will change the political calculus. That the political environment will change from politicians fearing a public backlash against further bank assistance to them fearing facing the electorate again with an economy that continues to be weak because they did nothing about the “zombie” banks.
If you do not receive this within five minutes, please try to sign in again. If the problem persists, please email: 
