I Can Write a New Banking Story Every Day

February 22, 2010

A friend of mine was recently hired by Bank of America to assist in managing its problem loans – also called special assets, special situations, workouts, choose the metaphor of the day…

Beginning with his first day on the job, until he quit 3 weeks later, he was provided with five new files every day. Each file contained between 1,000 to 1,500 pages of information on a particular commercial real estate asset. His job was to read and review each and every document in the file, determine what documents were missing from the checklist of the bank’s required documents needed to dispose of the asset, and manage the asset through complete resolution.

I read at an average speed. I imagine Evelyn Wood reads fast. But how many people can read between 5,000 and 7,500 pages daily (translating to 25,000 to 37,500 pages weekly) of documents related to different asset classes, properly analyze the documents, and determine the correct steps required to asset manage each problem asset through to resolution? I’ll guess no one.

This is the experience at only one bank. At least on residential assets, I’m aware this is occurring at other banks. The sheer volume of problem loans, or whatever they need to be called, will not allow for the assets to be properly resolved by the lenders. Bureaucracy will not maximize the value of the assets; it will merely provide an opportunity for weak people to act like bullies.

I know all banks are actively loaning money. That’s what they all tell me. Meanwhile, Wachovia Bank recently told a 20 year plus client that it would not renew the client’s line of credit. The reason provided – “new management is viewing the credit differently”. Differently from what, I don’t know; but they view it differently nevertheless. While there are some credit questions related to the client’s financing needs, the client rarely uses the financing and has never been in monetary or other default on its line of credit.

Unfortunately, 2009 was not the worst of times. More important that bracing yourself for the upcoming tsunami of loan problems hitting the street, is getting prepared for the opportunity that this credit crisis is creating.


The Tipping Point

January 26, 2010

Malcolm Gladwell, in “The Tipping Point: How Little Things Can Make a Big Difference”, essentially discusses the ripple effect. Certain memetics create epidemics until they achieve critical mass. We may have seen the beginning of a tipping point yesterday.

The front page of the January 25, 2010 issue of The Wall Street Journal had a story about a group led by Tishman Speyer Properties, in a joint venture with BlackRock, Inc., two behemoths in the real estate industry that had “returned” apartments known as Peter Cooper Village and Stuyvesant Town to its creditors. The 11,000+ unit apartments, located in Manhattan, were acquired in 2006 for $5.4 billion (that’s right billion with a “B”). Sources estimate the present value around $1.8 billion.

What happened to “extend and pretend” or a “rolling loan gathers no loss”? Very smart people at the Tishman/BlackRock joint venture decided it was better to provide the lender with essentially a deed-in-lieu of foreclosure rather than file a plan of reorganization and try to keep the property. Bye-bye equity, adios management fees. The lender, who after significant negotiations had plenty of opportunity to renegotiate the debt, decided it was best to accept the property. Who will manage the apartments, what type of CAPEX is required to ensure that the tenants live in habitable units, how much will the lender ultimately sell the apartments for…..

I’ve been looking for a tipping point of when the economy will start to improve. What I believe I just read, was a tipping point that the tsunami is going to begin. Trillions of dollars of commercial debt will be maturing over the next few years. There is more than $3 trillion in cash sitting on the sidelines waiting for investment activity, not wanting to invest and catch a falling knife, but not having any product to invest in either. The wait is almost over, product will be forthcoming very soon.

The World is (still) Falling Apart – Part II

December 17, 2009

What a great year 2009 has been! Although this statement seems contradictory to the title of my (most likely) final blog entry of 2009, it has been a great year. My family remains healthy. Both of my sons will be graduating schools this year and continue to make me a proud parent. I wake up every day feeling blessed to come to work at Santos, Postal & Company. My colleagues are smart and interesting people. I enjoy their company and camaraderie. The work is stimulating and I get to help people and businesses with financial issues that might otherwise provide devastating results had it not been for my guidance.

Of course, 155 years ago in 1854 a traveler took a room in a small boarding house. After a long day he removed his boot and when it dropped to the floor it made a very loud noise. Not wanting to wake up the other guests, he very gently placed his other boot on the floor after removal. Ten minutes later the guest in the room below him banged on his door and inquired when the other boot would fall.

2009 has been a year of many fallen boots. Paragraph one above spoke about how great the year was. [Look at everything in context]. However, the world continues to fall apart. My blog entries for 2009 were:

1. The World is Falling Apart – Part I
2. Bad Bank, Good Bank
3. Mortgage Modification for High Net Worth Individual
4. Austin Powers or Timothy Geithner
5. Executive Leaders Radio Program
6. Credit Cards
7. Dividend (NOT)
8. Success Exists!!
9. Chicken Little
10. Wine or Banks; or is it Whine about Banks
11. Summertime Blues
12. U.S. Small Business Administration
13. Pat On My Back (Or Am I Scared)
15. Bank Intellect (An Oxymoron)
16. Random
17. Cicero, Unemployment & Porn
18. Debt by Credit Cards
19. Retail Sales Down – Duh?
20. Will We Ever Have Free Markets Again?
21. Susan Boyle and Student Loans
22. LEEDing the Way: The Green Movement and Sustainability
23. Tzuris for Credit Unions
24. SBA’s 100% Guarantee ARC Loan Program
25. Credit Card Accountability Responsibility and Disclosure Act of 2009
26. Tax Increases
27. A Rolling Loan Gathers No Loss
28. Bank Thinking at its Best – NOT!
29. New York Lawyers – Courtesy – Wachovia
30. CIT Group files for Bankruptcy
31. Real Estate in Recovery: What Can Be Done to Prepare for a Turnaround

Too much unemployment, too little bank lending. Why should banks loan money when they can borrow money for free from the government and then loan it back to the government, essentially risk free, at a spread in excess of 3%. The Washington Post’s Binyamin Appelbaum stated “The federal government quietly agreed to forgo billions of dollars in potential tax payments from Citigroup as part of the deal announced this week to wean the company from the massive taxpayer bailout that helped it survive the financial crisis”. This seems real fair. Can Citi executives use the tax savings to pay themselves larger bonuses? All sectors of real estate, from residential to commercial to retail to hospitality remain depressed. Billions of dollars in loans will be maturing. Depressed values create calls for additional equity, which will be forthcoming; thereby forcing present equity holders to leave the party. Cash is now king, and is staying on the sidelines. What will be the “Tipping Point” to allow for new equity to come to a transaction and a new lender to loan money? When will companies begin hiring again? When will consumers spend? When will someone get rid of the kryptonite so we can all be strong once again?

Who knows? Timing is impossible to predict when we’ll return from this Bizzaro World. However, I do know that the Government must stop spending money like a drunken sailor on leave (no offense to the military here, whom I deeply respect for all you do for our country). Only We the People can save ourselves. Reliance on the Government has historically, and will continue, to create so many additional problems from excessive debt burdens to welfare societies…. Regardless of your political ideology, doesn’t it incense everyone that the Health Care bill specifically excludes members of Congress, the very people shoving a new law down the throat of their constituents?

Finally, I ran into Andy Blocher, CFO of Federal Realty, the other day when we were both trying out the new restaurant at Rockville Town Square. Andy asked me to mention him in my next blog entry – and I just complied.

I wish all readers a very happy and healthy New Year. You can also follow me on twitter at @BobGreenfest.

Real Estate in Recovery: What Can Be Done to Prepare for a Turnaround

November 10, 2009

I just finished listening to a webinar on the above referenced topic. According to the sponsors, over 1,400 people had registered for the webinar. Obviously the topic is of tremendous interest, not to mention there was no cost to participate.

The unanimous consensus of the panel was that we are not close to a real estate turnaround. I’ve been an advocate that there won’t be a turnaround until we achieve a Gladwell like “Tipping Point”. One gentleman stated that there will not be a real estate turnaround until all parties to a transaction show up voluntarily. By this statement he means the seller is not forced to sell, the buyer is not forced to deploy some equity raised in a blind fund that will expire unless invested, and the lender providing financing is not the existing lender on the property. I thought this statement made a lot of sense. The panel further indicated that until credit markets loosen up, the above aspect of willing participants in a deal cannot occur.

Much was said on the prospect of troubled real estate. Basically, this is like a marriage, where lender and borrower really need to communicate and compromise. Lenders need to recognize that values are not where they were a few years ago and they will need to write down loans. Borrowers will be asked to put additional equity into projects in order to have loans written down and restructured. Lenders will need to realize that borrowers will not put additional equity into a project unless they receive a financial return. As you can imagine, the give and take that is required to accomplish the many workouts that are occurring, further burdened by the role and decision making authority, or lack thereof, of Special Servicers, and multiple tranches of loans, is complicated at its best. And, although I electronically submitted a question about how the panel perceives FDIC Policy Statement FIL-61-2009 – recognizing loan restructures with collateral shortfalls – and its effect on commercial real estate, no one answered this question.

All in all, nothing new to report on the subject of real estate turnarounds, but further confirmation from a panel of experts on everything I’ve been saying and writing about for the last year.

CIT Group files for Bankruptcy

November 2, 2009

CIT Group, a 101 year old company that lends money to small and medium sized businesses has filed for Ch. 11 bankruptcy. CIT filed what is known as a prepackaged plan.

CIT filed bankruptcy on Sunday, November 1. Since its filing yesterday, every news service has reported this fact. Almost no story has opined on what CIT’s bankruptcy filing actually means. I finally read an article in DailyFinance titled “Why CIT Group’s bankruptcy doesn’t matter”. How wrong the author is!

If you’ve been reading my blog from the beginning, I always opine on events and my predictions are very accurate. It’s difficult to predict the timing of something, but in general my statements have proven completely true.

I will once again go out on a limb. CIT’s prepackaged Ch. 11 bankruptcy filing will be devastating to small and medium sized businesses. I don’t care if Carl Icahn is providing $1 billion in finding to CIT while it reorganizes. I don’t care if the government won’t step in and provide funding to CIT once again. [Note, under TARP the government provided CIT with $2.3 billion which will never get repaid.] Icahn’s funding and the government’s lack of intervention does not provide any confidence.

Although CIT’s bondholders are “on board” with this filing, the cost of filing, the time and attention that management will devote to the corporate politics related to the filing, the water cooler talk that will occur among CIT’s employees and the negative effect on company morale (which already stinks), and the fact that CIT will be so busy managing its problem assets, will cause a further malaise on providing new funds to businesses. It will also create an atmosphere of stupid decision making when it comes to renewing lines of credit with existing customers. CIT’s filing, although anticipated since the summer, is the start of the boulder rolling down the hill and taking out anything and everything in its path.

The stock market declined by more than 2% last Friday, but the financial sector has been down more than 15% since mid October. Watch for a further decline in financial stocks.

My very first blog entry was titled The World is Falling Apart – Part I. We may be up to Part II at this time. Do not let short term increases in the equity markets, albeit substantial increases, fool you. Unemployment is significant, consumer spending is down, and “false” GDP reports (due to government intervention – i.e., cash for clunkers, home buying credits, etc.), lead me to believe the other shoe will be dropping, and dropping very hard. Many companies will fail. More people will lose their jobs. The Alt-A financing market will decimate the residential markets. On and on and on…..

The good news is that out of crisis always comes opportunity. Where will you be looking for opportunities?

New York Lawyers – Courtesy – Wachovia

October 16, 2009

According to my blog stats, it’s been 42 days since my last posting. This is the longest period I have gone between postings since I first published the blog.

I’ve been working on a very interesting real estate case. Without divulging confidences, a Special Servicer has sent a notice of default and accelerated a 9 figure loan secured by 1,150 apartments in Harlem. There are so many twists and turns related to this matter, which is only starting, that it would already take an entire book to explain everything that has occurred. Needless to say, the matter requires a significant amount of time and attention.

Of course, due to the myriad complexities of the engagement, a number of law firms are involved. The firm representing the Special Servicer is a New York based firm. Granted, they are on the “other side of the table” in the negotiations. I respect that they need to represent their client’s interest. However, our team received a letter the other day in response to something we sent to them. The New York lawyer’s letter was nasty and disrespectful on so many different levels. Why does an educated person feel the need to respond in such a discourteous manner? Is his self esteem so low that he feels the need to try and belittle others to help deal with his own personal issues? His letter, especially the tone of it, truly accomplished nothing positive for his client. I’m not sure why people feel a need to get down to this low level as you really can attract more bees with honey than vinegar.

On another front, I recently had $995 stolen from my checking account. Someone, somehow duplicated my ATM card and withdrew funds from a bank in Illinois. On the day the theft occurred, my bank, Wachovia, stopped all transactions on the card and called me. I spent 40 minutes with them on the phone going over which transactions were mine, and which transactions were fraudulent. Erica at Wachovia understood what occurred and promised me that the funds would be back in my account within 24 hours. She also sent me a new debit card via overnight mail.

There are so many times banks act in a bureaucratic manner. I get very upset when people have to follow procedures, at a cost of not thinking (see blog entry titled Bank Thinking at its Best – NOT! for an example of not thinking). On the matter of my money being stolen, Wachovia went above and beyond for me. They notified me of the theft and then truly made an effort to immediately rectify the situation. Thank you Erica, and everyone else I’ve talked with at Wachovia since the theft, for really showing what customer service can be.

Completely unrelated to all of the above, my oldest son turns 21 years old tomorrow. I can’t even begin to express how proud I am of him; he’s become a great man. I hope he has a really great birthday!

Finally, for those who missed reading the Washington Business Journal article and have asked me about it, the link is http://ow.ly/uMks For those who have called and written to tell me they enjoyed reading it, thank you.

Accounting firms help clients weather tough financial times

September 4, 2009


Bank Thinking at its Best – NOT!

September 3, 2009

Banks have many ways of protecting its depositors and stockholders from fraud. They compensate their executives at very high levels so these individuals can use their super brain powers to serve their financial institution in a fiduciary capacity.

Yesterday, a large bank, that I won’t name but represents America, would not allow Steve Valdez to cash a check in its Tampa branch without providing his thumb print. The bank’s rule is if you do not have an account with the bank then, even if the check is drawn on the bank and you provide two forms of identification, you must still provide a thumb print to cash a check. This is a level of extra protection the bank provides without even having to charge a fee for this valuable service.

Unfortunately, Mr. Valdez could not provide his thumb print because he was born with no arms.

How come a barista at Starbucks has the ability to provide me with a free cup of coffee if I have to wait a minute for the new pot to brew, but a teller in a bank can’t cash a check for an armless man because they require a thumb print?

Is there really a need for me to have a concluding paragraph with a punch line – isn’t this story a punch line all by itself?

“A Rolling Loan Gathers No Loss”

August 18, 2009

Although the title to this entry was taken from someone else, and is the mantra of most lenders in today’s market, I just heard a story which indicates that lack of thought continues to persevere among some lenders, and inaction and paralysis are still the number one reaction to a situation.

A borrower owed a lender more than $750,000 on an interest only loan. The loan was secured by two residential properties – one being the borrower’s primary residence. The present loan to value was more that 100%. The lender was portfolioing this loan.

The interest rate was above market and the borrower wanted to reduce the loan balance by $150,000, obtain a reduction in the interest rate to a market rate, and extend the term of the interest only period for five years.

This is considered a no brainer request for any lender. The curtailment of $150,000 brings the loan to value ratio to less than 100%, enhancing the lender’s collateral position. Reducing the interest to a market rate will continue to allow the lender to profit. Extending the loan for five years provides the borrower with time to figure out a longer term strategy – i.e., refinance with a conventional loan, sell the property, etc.

Although the borrower called the lender on a number of occasions and made the above referenced restructure request, the lender has yet to provide the borrower with a decision on this issue. Although I hear similar situations daily about lender paralysis, this one was too ridiculous to not write about it. Not only has the lender not communicated with the borrower, but their lack of communication is costing them the opportunity to restructure an “iffy” situation and make it better.

In these trying economic times, all businesses should strive to provide exemplary customer service. Even if the lender did not want to restructure the loan, at least have the decency to communicate with its own customer.

How to handle a sticky customer situation with care

July 28, 2009

by Sue Marquette Poremba

Sometimes bad things happen. It can be a relatively minor thing, like a store clerk forgetting to include a purchased item in a customer’s bag. Or it can be a problem that affects thousands of lives, like the theft of medical records from a doctor’s office.

How a business reacts to a crisis can be the difference between keeping customers happy and losing them–and their referrals–for good. Here are some tips to help you handle your next customer crisis.

Keep customers informed. The employees at Newark, N.J.-based BookSwim.com call it the Great Shelf Collapse of 2008. The paperback rental company stored books in an old warehouse that had no air-conditioning. On a hot summer day, the plastic bookshelves melted, bringing 20,000 books crashing to the floor in an unorganized mess. Within hours, e-mail notices–complete with photos of the mess–were sent to every customer, alerting them of the situation.

“Not all of our customers would have been affected by the crash, but we wanted everyone to know before it became a problem they discovered on their own,” explains customer service representative Chip O’Brien. “When they’re aware of the problem in advance, it makes them feel as if they’re involved in the company, rather than feel swindled and cheated when we failed to send their books.”

Admit when the mistake is yours. Robert Greenfest still remembers the mistake he made years ago when he owned a residential mortgage firm. He was working with a young couple buying their first home and locked their interest rate in for a 5/1 mortgage with a 5 percent down payment. “Everything was approved, and the day before settlement the lender called to tell me I had made a mistake,” says Greenfest, today a principal with Santos, Postal & Company, a 35-person accounting firm in Rockville, Md.

The customers did not have any more capital to put down, and if they did not close the next day, they would have been in default of the contract. “The mistake was mine, and I decided to purchase their loan, out-of-pocket, for $1,600,” Greenfest says. “In my mind, it was the right thing to do.”

Empower your employees. When an angry customer walks into your business, chances are, you aren’t the one dealing with the problem. Your employees on the front lines–those answering the phone and standing at the cash register–are the first ones dissatisfied customers encounter. That’s why your employees need the tools, information and training that can help them diffuse heated situations on the spot, Greenfest says.

If your employees run to grab a manager every time an angry customer walks in the door, your patrons might think your staff doesn’t have a handle on company policies. Brief your workers on the proper procedure for handling all kinds of disputes, from simple pricing disagreements to major slip-ups that could cause you to lose multiple customers.

Validate what the customer is feeling. “Sometimes, the customer simply wants to be heard,” says Julie Murphy Casserly, founder and owner of JMC Wealth Management in Chicago. The customer has a right to be angry or upset if a business transaction goes wrong, and while the business owner may not be able to correct the problem, recognizing these feelings goes a long way to smoothing customer relations.

There will be times when a sticky problem can be easily corrected, and times when it cannot. But owners who take the time to explain the problem will be the ones whose customers are willing to give them a second chance.