The Next Bubble Breaks

April/19/2009 2:48AM
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It’s been coming. Most of us knew it was. This week it broke. The commercial mortgage bubble.

General Growth went into Chapter 11. Their debt is estimated to be $24 billion. Familiar firms hold the paper. Citigroup and Goldman Sachs ring a bell?

Just look around your neighborhood. How many retail stores have closed in the malls and strip shopping centers? How many new shopping centers are done and empty? Landlords are renegotiating rents down to keep tenants in business. Vacant office space is prevalent. Cash flow has to be negative in many cases. The big and the small will go first. The medium sized developers may hang in there longer. Depending on how long the economic slump continues, they will eventually be in trouble too. 

It’s amazing how much of this is just common sense. You see the problems every day. Then, you see the result and we all act surprised. Consumers are not spending. Layoffs are announced every day. The auto industry is in shambles. Until hiring starts and consumer spending follows, the commercial mortgage business is in trouble.  

You don’t need Wall Street to tell you it’s not over. The Fat Lady has not sung on this mess.

So how much will the banks be buffeted by this wave? I believe they have tens of billions of dollars in write-offs in the next few quarters as the commercial real estate market craters. 

Get out your checkbook. You will need to pay for this just like you are going to pay for the subprime mortgage mess. Banks giving back TARP money will be right back at the pay window asking for a different version of TARP to cover these write-offs. 

There is one big bubble still roiling. The credit card bubble. As the unemployment rolls grow, the credit card problem will magnify.

Until these issues are over and done, don’t expect much good news in the financial world.

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