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Wednesday, August 25, 2010

REIT Strategic Defaults

I hear that REITs are choosing to strategically default on large commercial loans in order to conserve cash and/or improve bargaining power for renegotiations and refinances, despite being able to make their payments.

The moral hazards of the bailouts and TARP are showing up in the private sector. Just like I predicted two years ago. (Circa October 2008.)

This bodes very badly for the banks.  And tomorrow's borrowers, individuals and businesses alike, will have a much harder time getting decent loans as long as strategic defaults are on the minds of bankers.  After all, what is good business sense today for one group will beget what is good business sense for bankers tomorrow.  Expect much higher rates, much lower loan-to-value ratios and greater numbers of representations, warranties and negative covenants in agreements.  As strategic default risk grows in the banking lexicon, banks will adjust by trying to ameliorate this risk.  Consumers and small business owners will soon pay the price. 

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