Sunday, October 17, 2010

The rest of the CRE story - Tranche warfare

That's tranche warfare but it might as well be trench warfare. SW brought up the idea that the big whigs holding on to newly developed commercial real estate could make out like bandits once the economy turns around. Unfortunately that may not be the case. You see while on a residential level the banks and mortgage companies were selling subprimes like peanuts at a baseball game, commercial banks had a few tricks up their sleeve as well. I'm no whiz at the inner workings of this high level finance but this fellow who tracks such things seems to know what's going on. I have no reason to doubt him. From Mark Marasciullo:

What's a tranche? With the emergence of CMBS (commercial mortgage backed securities) many lenders originated loans and then bifurcated the loan into an A note (senior tranche) and B note (junior tranche). In some instances there was even mezzanine debt subordinate to the B note and in various cases the B note was split into multiple strips (i.e. B1, B2, B3 and so on), all of which are tranches. Typically the A note was sold to a trust, which was then securitized in the form of CMBS. I just looked at a deal where the A note holder is completely trapped, the inter-creditor agreement between the A note and B note holders stipulates that the A note may only sell its position to a party in the existing capital structure. In other words, the B note holder has the position senior to it (i.e. the A note) cornered, and will dictate the outcome for the asset. In cycles past the lender and borrower fought it out when the market corrected itself, this time the various lenders are warring amongst themselves.

Read more:

So as you can see the big boys were doing much the same as the home loan boys. Only the numbers for those residential loans look like chump change compared to the CRE mess. I leave you with this chart as an example.

click on image to enlarge


Demeur said...

I note that we got into this mess a few years back. There was a time when (if you were going to purchase a stock) you only had a choice between a common stock and preferred stock. Bonds were much the same. Now with all the choices and levels and rules we've basically let wall street run rough shot over us. This was also the reason FDR split the investment houses and the banks, so they couldn't get away with stuff like this.

BBC said...

And yet, none of it is going to have much effect on me.

Oso said...

The Volcker Rule would have taken up a good portion of what Glass-Steagall did.
Sucks that Obama's financial "reform" bill basically duct tapes the Volcker Rule to the basement floor then shuts off the lights.