Audit Notes: Bloomberg eyes CMBS, newspaper optimism, Weil on bank books

Signs of froth return to commercial real estate lending

Bloomberg News is good to keep an eye on the securitization market for early signs of froth. It reports that mortgage-backed securities in commercial real estate are raising red flags again:

Buyers are gravitating toward the debt even as lenders include risker loans in new offerings. Citigroup and Goldman Sachs sold about $1 billion of securities that include a $100 million mortgage for a tower in lower Manhattan that uses projected rents for vacant space to calculate the building’s income. The practice was common during the boom years leading up to the property market crash in 2007.

“It’s not a trend we want to see,” said Lea Overby, a debt strategist at Nomura Holdings Inc. in New York. Lenders “are starting to push the envelope,” she said. “Underwriters will push the market as much as buyers will let them.”

Effectively, banks are lending against vacant space on the expectation that it will soon be filled with rent-paying tenants, which allows borrowers to lever up their purchases more. The higher the debt, the more bonds the Street can turn around and sell off to investors.

One thing Bloomberg doesn’t mention: 222 Broadway was the fictional offices of Gordon Gokko Gekko in Wall Street.

— There are a couple of ways to look at this bizarrely optimistic survey results of newspaper publishers put out by the University of Missouri: Either we don’t know something publishers know or they’re out to lunch.

In the largest survey of its kind, nearly two-thirds of responding publishers expressed optimism about the future of the newspaper industry. Forty percent said they were “somewhat optimistic,” while 25 percent identified themselves as “very optimistic.” Thirty-one percent were neutral. Only four percent identified themselves as “not optimistic;” no respondent chose “not optimistic at all”…

Responding to the question, “Do you ever envision a time when your organization will not publish a printed edition,” 62 percent replied “no.” One-third of the respondents replied “yes,” and 5 percent said “maybe.” Circulation size also was associated with answers to this question, with publishers of smaller papers less likely to envision a time without a printed edition.

— Bloomberg’s Jonathan Weil has a good column on the bogus balance sheets of the financial industry, and why now is the time for them to fix their accounting:

There has been plenty of news lately that backs up the assertions by the Basel, Switzerland-based Bank for International Settlements about hidden losses. At Hudson City Bancorp Inc. (HCBK), one of New Jersey’s largest lenders, the balance sheet was so detached from reality that the company agreed last month to sell itself to M&T Bank Corp. (MTB) at a 20 percent discount to book value, or assets minus liabilities. Even so, the $3.7 billion sale price was 12 percent more than Hudson City’s stock- market value at the time. So its shareholders benefited…

This week, the Treasury Department sold most of its majority stake in American International Group Inc. (AIG) While the sale drew widespread praise, it also showed the government may not have much faith in AIG’s financial statements, four years after bailing out the insurance giant. The Treasury sold at $32.50 a share, or a little more than half of AIG’s book value.

(Creative Commons photo credit on the home page JayeClaire)

Has America ever needed a media watchdog more than now? Help us by joining CJR today.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,