News that Moves: FAS 157 Changes, Commercial Real Estate Collapse

RCM Comment: Update on the FASB decision:

Where impaired assets losses are concerned, FASB has caved in and is not requiring immediate write offs for the full amount. Instead, banks must write off the part that is impaired because it was a bad asset, but the rest that is impaired because of market conditions (as determined by the bank) is allowed to stay on the books under a different balance sheet item.

Where valuation of portfolios is concerned, the rule REMAINS fair market value. However (and here is the rub) if a bank can prove there is not an active market for an asset, then said bank may use a model that is supposed to approximate the "hypothetical active trading price based on today's environment."

It seems to me both of these rule changes are akin to allowing the lunatics to run the asylum. The reaction to the EPS news from banks over the next few weeks will be very telling. The financials have experienced a big rally into the news, so a sell off on the news would not be unexpected. Beware, if these banks announce "better than expected" EPS and the stocks sell off this will be a no confidence vote in the new FASB rules and a major crack in the foundation of this market rally.

RCM Comment: Another shoe has dropped with a bang and yet there is a dearth of news coverage. The commercial real estate market is staring into the abyss and yet, I'm constantly hearing about the bottoming of markets and the possibility of economic recovery. I humbly submit that without a stabilization of the commercial market there will be no recovery. I can concoct many possible scenarios to explain the stock market rally over the last month, but the explanation of the commercial real estate collapse is devoid of creativity. The collapse is plain and simply a reflection of the crumbling economic situation. We must monitor this situation closely and use our findings as a litmus test for any "recovery" scenarios.

U.S. office vacancies hit 15.2% and are rising - WSJ
WSJ reports cos, struggling to cut costs, dumped a near-record 25 million square feet of office space in the first quarter, driving vacancy up and rents down, according to data to be released today by Reis. Businesses that needed to lease space took advantage of the market weakness to extract concessions from landlords. But the trends exacerbated financial woes for owners, especially those who owe more on their mortgages than their properties' current value. The office vacancy rate nationwide rose to 15.2% from 14.5% in the previous quarter, and likely will surpass 19.3% over the next year, according to Reis. That would put the vacancy rate above the level during the real-estate bust of the early 1990s, the worst on record. Effective rents, which include free rent and other landlord concessions, fell 2% in the first quarter to a national average of $24.16, the largest drop since the first quarter of 2002, according to Reis. Sublet space, on average, is going for between 10% and 15% less than what landlords are charging. The weakening commercial real-estate market is posing yet another threat to the ailing economy because it is causing the value of buildings to plummet, often to less than the amount of their mortgages. In one closely watched transaction earlier this week, the marquee John Hancock Tower in Boston was valued at $660.6 million in a foreclosure auction, less than half of its $1.3 billion price in 2006. Washington policy makers are scrambling to extend bailout programs to help shore up commercial real estate.