The Financial Crisis Inquiry Commission delivered a report on the on the causes of the financial crisis to the President and Congress this week in which it found that the crisis was avoidable and a result of human actions, inactions and misjudgments, with some sections of the reporting addressing commercial real estate. An excerpt from the section titled "Leveraged loans and commercial real estate: you’ve got to get up and dance'" follows:
The credit bubble was not confined to the residential mortgage market. The markets for commercial real estate and leveraged loans (typically loans to below-investmentgrade companies to aid their business or to finance buyouts) also experienced similar bubble-and-bust dynamics, although the effects were not as large and damaging as in residential real estate. From 2000 to 2007, these other two markets grew tremendously, spurred by structured finance products — commercial mortgage–backed securities and collateralized loan obligations (CLOs), respectively — which were in many ways similar to residential mortgage-backed securities and CDOs. And just as in the residential mortgage market, underwriting standards loosened, even as the cost of borrowing decreased, and trading in these securities was bolstered by the development of new credit derivatives products.
Historically, leveraged loans had been made by commercial banks; but a market for institutional investors developed and grew in the mid- to late 1990s. An “agent” bank would originate a package of loans to only one company and then sell or syndicate the loans in the package to other banks and large nonbank investors. The package generally included loans with different maturities. Some were short-term lines of credit, which would be syndicated to banks; the rest were longer-term loans syndicated to nonbank, institutional investors. Leveraged loan issuance more than doubled from 2000 to 2007, but the rapid growth was in the longer-term institutional loans rather than in short-term lending. By 2007, the longer-term leveraged loans rose to $387 billion, up from $46 billion in 2000.
To read the full report click here. For more news and information visit Blumberg Capital Partners.
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