Randomly Noted

Wells Fargo reported earnings today and in general, it said it thought the corner has been turned in terms of deterioration of credit quality in its lending portfolios – generally lower writeoffs and money set aside to cover bad loans. But, while things may be looking better, money still is being lost in these portfolios. And when it comes to commercial real estate, it continues to show stress. Wells Fargo reported that its nonperforming commercial real estate assets rose to 4.09% of total loans in the first quarter. That’s up from 3.77% in the 4Q and 3.22% in the quarter before that.

Improvement in general. But that commercial real estate market is still hurting pretty badly.

The abacus, like the one pictured above, was a simple tool devised centuries ago to help people count and add.

The ABACUS 2007-AC1, a synthetic collateralized debt obligation at the center of Wall Street’s latest scandal, was created not that long ago and is anything but simple. Earlier today, the Securities and Exchange Commission charged Goldman Sachs and one of its executives with fraud surrounding the sale of ABACUS. Investors lost at least $1 billion and hedge fund operator Paulson & Co. picked up that amount. The charges and scandal will lead to renewed calls for tough regulation on Wall Street. And may lead to more debate about whether structured products are good or bad for financial markets.

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Debt Coming Due In A Market Not Friendly To Refinancings

If you believe we are at, or near, a bottom in the commercial real estate market, Excel Trust has a deal for you. This real estate investment trust plans to raise between $240 million and $270 million in an initial public offering to go out and buy retail properties on the cheap.

What’s a little different about the Excel deal is that it has lined up 16 retail properties to buy upon completion of the IPO. Other REITs that have looked to take advantage of the distressed commercial real estate market raised the money first and then planed to go bottom fishing. So with Excel, you know which properties are being bought and can make an investment decision on that rather than investing in a blind pool.

The 16 properties are 93.5% leased and the company has a pipeline of other properties, too. Given the large amount of commercial mortgage backed securities coming due this year and next, Excel believes those will have a difficult time getting refinanced and therefore there will be even more sales at distressed prices. As Excel says in its offering documents, it believes it can buy “Class A” properties at “Class B” prices. Class A are defined as those in prime locations.

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Ambac's shares are up 70% today

Ok, it is good news for Ambac that the monoline insurer of bonds posted a profit late yesterday of $558 million versus a $2.3 billion loss in the year ago quarter. But the fact remains that when you peel away some of the items behind the earnings, the company still didn’t perform all that well.

For starters, it had a $133.2 million gain related to the change in value of its credit derivatives portfolio. Add to that a $472 million tax benefit. Those numbers alone add up to $605 million of gains.

It continues to see stress in its portfolio of residential mortgage backed securities. The company recorded a net loss of $385.4 million.

The worst may be over for companies like Ambac. But that doesn’t mean they are finished feeling the pain of the credit crisis.

There are a number of elements of the Morgan Keegan mutual fund fiasco that are plain outrageous. Start with making up prices for securities in a number of Morgan Keegan’s mutual funds. Continue with those made up prices often coming from the manager of the funds himself.

Yes, lying to investors is downright criminal and its good to see regulators from FINRA to the Securities and Exchange Commission go after the people involved. But to me, what is more troubling is an allegation put forth by four state regulators who also investigated what was going on with these funds – that the managers of these funds often bought securities that they never bothered to attempt to understand.

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The New York Fed on Maiden Lane

The Securities and Exchange Commission today approved a rule today designed to reduce the risk in markets like those for asset-backed securities. But some real questions remain as to whether the new rule would really prevent much of anything.

Basically, the SEC wants issuers of asset-backed securities to retain at least 5% of the securities they are offering. As SEC Chairman Mary Schapiro says: It will force them to have some “skin in the game.”

But will making issuers have “skin in the game” really make them more responsible in evaluating risk?

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Former Treasury Secretary Henry Paulson gives the ultimate insider’s view on the steps taken to prevent the global credit crisis from bringing down the financial system 1 1/2 years ago. And in his book on the subject, he apparently tells of the liquidity problems facing one of the bluest of the blue chip corporations in the U.S. – General Electric. According to an article in yesterday’s Washington Post, GE CEO Jeffrey Immelt on at least four occasions spoke with Paulson about the problems GE was having accessing the credit markets. The Post, excerpting from the book, said Immelt came to Paulson’s office the day Lehman Brothers filed for bankruptcy and told the Treasury secretary the company was having a hard time borrowing money in the commercial paper market for more than a day. In other words, investors would only loan GE money overnight and barely any longer. The Post notes that a day earlier, GE had set a letter to investors telling them it was having no problems accessing capital markets. The concerns over GE had to do with its GE Capital unit and its heavy exposure to the commercial real estate market as well as its mounds of debt. GE has denied misleading investors.

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The problems facing the commercial real estate business are hitting the big and small. The Wall Street Journal reported today on the decision by Tishman Speyer to essentially hand over the huge Peter Cooper Village and Stuyvesant town apartment complex in NYC to its creditors. The $5.4 billion paid for the property was the most ever paid in the residential real estate business. But much smaller transactions remain in trouble and continue to affect medium and small sized banks all over the country.  PrivateBancorp of Chicago reported today that it wrote off $27 million of commercial real estate and construction loans. It had $436 million of nonperforming loans, of which 72% was in commercial real estate or construction.

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The finances of many state and local governments are just a mess. Huge budget gaps, hard decisions about what programs to cut, threats of higher taxes and municipal layoffs. You would think investors wouldn’t want to touch municipals  with a ten-foot clipped coupon.

But as Newswires reporter Stan Rosenberg reported today, pent up demand and an appetite for still decent yielding maturities led to the strong sales today of $4 billion in new securities. Another reason – investors who missed out on the 14% gains in munis last year – the best in the fixed-income world – did’t want to miss another chance. The pros are forecasting new issuance could reach $450 billion this year. But buyers should be very selective. Yes, very few municipal issuers have ever defaulted. But municipalities will feel the brunt of the financial crisis much later than other sectors. And there is more pain to be felt on that front.

Vacant NYC Commercial Space - Photo By Heesun Wee

The conventional wisdom has been that the problems in the commercial real estate market might peak at the end of this year or certainly by early 2011. Now, one of the major ratings agencies is out with a report that suggests the peak in problems won’t happen until 2012. That not-so-rosy scenario was part of a monthly delinquency report from Fitch, which says are up five times from a year ago. The big loser? Hotels. About 9.13% of those loans are delinquent ($4.6 billion versus $363.7 million a year ago.  - a 1,175% increase.  It’s no wonder companies like Hyatt are on the prowl for acquisitions. See WSJ interview with Hyatt CEO.