Economy Watch – Feds to Publish CRE Loan Modification Guidelines Soon

By: Dees Stribling, Contributing Editor

The heads of the Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Office of Thrift Supervision were all before the U.S. Senate Subcommittee on Financial Institutions on Wednesday sounding a warning about bad commercial real estate loans and their threat to the health of the banking system, none of which is news, but all of which is troubling.

“The most prominent area of risk for rising credit losses at FDIC-insured institutions during the next several quarters is in CRE lending,” FDIC Chairman Sheila Bair told the solons.

Already nearly 100 U.S. banks have failed this year, putting stress on the FDIC, and boatloads of sour commercial real estate debt have been the culprits most of the time. Bair added that federal regulators will soon publish guidelines on reworking commercial real estate loans, but she didn’t offer any particulars.

The thorniest knot for CRE lenders will be construction and development loans, since many such projects are in the deep freeze, and not offering much in the way of returns to keep current on the debt. According to a Deutsche Bank estimate, commercial real estate loan losses for banks in the coming years could reach $300 billion.

Bruce Wasserstein Passes Away

Bruce Wasserstein, chairman and CEO of the investment bank Lazard, died Wednesday at age 61. The company had previously announced that Wasserstein had been hospitalized for a heart murmur, but a cause of death hasn’t been determined. Though best known as a master-of-the-universe M&A specialist in the 1980s, lately Wasserstein has received some attention for the relative strength of Lazard throughout the financial meltdown on Wall Street.

Wasserstein is survived by his wife of 10 months, Angela Chao, seven children from previous marriages, and the daughter of his late sister Wendy, whom he adopted.

Financial Derivatives to be Regulated

The House Financial Services Committee is expected to vote Thursday on a bill regulating financial derivatives. If it passes, the measure will be the first major bill aimed at overhauling financial regulations to actually make it into law. The absence of such reforms was widely noted in September on the occasion of the first anniversary of the collapse of Lehman Bros., and sometimes characterized as a lost opportunity.

Under the legislation, firms trading derivatives would be required to meet certain capital and reporting requirements, and many of the deals would have to go through clearinghouses, which would provide data about market. Currently, derivatives are essentially unregulated, a situation that allowed, for example, credit-default swaps to rise like the Creature from the Black Lagoon and get its fingers around the throat of American International Group.

The Financial Services Committee is also expected to vote on a proposal to create a Consumer Financial Protection Agency, though its fate is considerably less certain than the derivatives bill, which is considered likely to pass.

Wall Street reach a psychological milestone on Wednesday when the Dow Jones Industrial Average closed above 10,000 for the first time since late last year, when all the indices were in a downward spiral. Since the spring, they’ve been in an up mode. A new bubble? Could be.

In any case, on Wednesday, the Dow gained 144.80 points to achieve that milestone (10,015.86), or 1.47 percent. The S&P 500 was up 1.75 percent and the Nasdaq gained 1.47 percent.