CMBS spectaculum

“hotels and big cars mean wealth”, artwork by Ali Kurt Chamsanet

According to todays Wall Street Journal the CMBS Market Rises From Ashes of Collapse.

MBS are securities or debt obligations which are backed via pools of mortgage loans. CMBS are MBS for the commercial market. Aggregating loans in a pool is called securization. Very simplified: MBS are a means to deal with mortgage loans (in particular by using pools). The securization of socalled “subprime” MBS (MBS for loans with a high risk) was a major reason for the (still ongoing) financial crisis.

According to the Wall Street Journal article there are now some transactions taking place which may indicate a beginning of a stabilization of the commercial real estate market where one has to say that a good month ago it was said that “For CMBS, ‘Worst Is Yet to Come” and moreover the article says:

The rise in delinquencies on existing CMBS loans also is worrying issuers and investors. Today, more than 8% of $578.6 billion of loans packaged into CMBS are at least 60 days past due. Credit-rater Standard & Poor’s expects that rate to reach as high as 11.5% by year’s end.

MBS are hedged and protected by CDS (credit default swaps). So these may give amongst others some indications about the state of CMBS. The CDS was already mentioned together with other derivatives in this randform post. In this post a source (namely the bank for international settlements (BIS)) was given for the notional value of derivatives. However it is difficult to get much more and more detailled information. Even reports may sometimes be less useful. And it is not only me who is having trouble to find better information but even the SIFMA (Securities Industries and Financial Markets association) writes in their position:

SIFMA supports the use of clearing organizations for standardized transactions and reporting through data repositories for all other OTC derivative transactions. SIFMA believes that every OTC derivatives clearing organization and data repository should be subject to federal regulatory oversight, thereby ensuring that the systemic risk regulator and other federal financial regulators have access to all of the information needed to monitor OTC derivatives markets. It is important for the federal government to create a single set of regulations in order to promote clarity and accountability.

So if I understand this correctly the SIFMA wants not only more clarity but also more regulations for derivatives. This could be e.g. the case because the current notional amount for OTC’s according to BIS (2009) is: 614.674 Trillion US dollars (approx. 600 times million times million or 614.67*10^12), the current notional amounts of CDS which are still outstanding are according to this document of BIS (2009) 36.92 trillion US dollars (i.e. 36.92 * 10^12 US dollars) (list). As a comparision the World domestic product 2009 is 57.94 * 10^12 US dollars. As the randform post explains these amounts can be seen as “insurance securities”, which would need to be paid if all “worst cases” come together. It is clear that such a sum can’t be paid, even not if well-meaning billionares would interfere (see e.g. here or here or here (math remark: 120 billion US dollars are 120*10^9 US dollars, i.e. the OTC amount is 5000 times 120 billion). And it is needless to say that a shaky CMBS market may pose a risk which could make to come together not only a few worst cases.

But unfortunately it seems not everybody is convinced about regulations (scroll to headline: grave mistake), thus in particular this may have been a reason why the G20-London summit reached only an (as wikipedia puts it, see headline: outcome) agreement to “ATTEMPT to bring wider global regulation of hedge funds and credit-rating agencies.”

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