Rick Fitzgerald -The MultiFamily Expert

I’m rethinking the decision to let Lehman Brothers fail now. Really didn’t consider what that has done to the short term bond market investors who fund major corporate debt. Didn’t pay enough attention to that and now some really big companies can’t roll their short term debt. My bad.

We have too many accounting loopholes and these off balance sheet investments things. The failing banks seemed to have great balance sheets but they were rigged. Investors have no faith in them now. I hate it when my bank uses funny accounting rules and stuff to make a buck.

Speaking of accounting rules, this “mark to market” rule is putting a hurt on my people. Just because someone sells a stove at a flea market doesn’t mean all the stoves have the same value especially if you stole it.

What’s a derivative anyway? Don’t trust anything I can’t spell, especially if you tell me it’s worth a few trillion dollars. Actually, I can’t spell a lot of things but it’s mostly the $50 trillion dollar I don’t trust.

Now my Treasury guy and that Fed guy wants to buy all those bad investments from the banks without changing some things. I think I’ll change my financial advisors while I am at it.

Seems like I got a $700 Billion dollar aspirin instead of a cure for cancer.

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The Feds are scrambling hard these days to “save the economy”. I think that’s a fair statement to make. When the big, rich and powerful begin to lose money and fear they will lose more it really does illustrate the trickledown economics applied to Main Street. No money trickles down for anyone and my multifamily investment market along with every other market is affected even though the government is pleading with banks to part with their cash.

Actually it took me awhile to realize Main Street was me and you.

The credit market (unfortunately including my beloved Fannie Mae multifamily investment market) have seized up almost entirely on “Main Street”. Many Banks are flush with cash but have no clue what to do right now. What they do know is hoarding cash is better than losing cash. When banks hoard cash so do investors. And when banks don't lend to each other, it can get ugly. Folks it's getting ugly.

The LIBOR index shot up to more than 2 points over the Fed Fund rate on the 3-month loan. That may not sound bad but doubling the rate banks lend to each other is in reality telling other banks to take a hike. When banks don’t lend to each other, they don’t lend to “Main Street”.

It was a huge mistake on the Feds part to allow the investment bank of Lehman Brothers to fail. Lehman shot itself in both feet and more but most likely was stunned with the Feds move. The issue with that failing is the corporate bond market now clearly understands that anything is possible.

Bear Stearns collapse was so quick that it was thought to be a casualty of the high risk, high reward business. However allowing Lehman Brothers to fail was a deliberate act of thought.

The Federal Reserve and Treasury Secretary Paulson are working behind the scenes for a number of companies beginning with Countrywide Mortgage and the largest banks in our world. It will be a matter of history that Paulson heading Goldman Sachs in the past is on going to this day.

Warren Buffett bet $5 BILLION dollars into Goldman Sachs betting with house money and a back door guarantee from the Feds. Buffett heaped huge amounts of criticism on the way investment banks conducted business for years.

Getting double digit return guarantees on $5B has a way of changing minds I guess.

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The LIBOR index comes up once in awhile in conversation especially when providing a multifamily investor a rate quote. Multifamily loans and investing include the LIBOR index routinely now.

Years ago, when multi family investments were less common, investors rarely asked how LIBOR worked. Banks rarely used the index when working with bank customers unless they were corporate.

LIBOR officially is the London Interbank Offered Rate created in part by the British Bankers Association and Bank of England going online in 1986.

The index is in simple terms the rate that the 200 international member banks will lend to each other. LIBOR is more costly than borrowing funds from the Feds but in the old days, banks would only borrow from the Feds as a last resort. Shortly thereafter, the Regulators would come knocking. Come to think of it, banks only borrow from the Feds today as a last resort today as well but the Feds are just too busy paddling to come knocking.

The index rocked along out of the consumers’ eye until it became a popular index tied to borrowers with less than stellar credit. Many of the subprime mortgages you have become aware of are based on LIBOR plus 6% which was a standard quote.

The index changes daily creating too much change for prime credit borrowers who prefer a more stable index like the Prime rate.

However, it has slowly crept into the main stream lending programs as the index which is used after a fixed rate term has expired. For instance, a multi family investment loan may be a 5 year fixed term with a margin (as in a profit margin) of 2.75% over the 6 month LIBOR rate. In effect, you would be paying 2.75% over what a bank could borrow money from another bank.

Now if they could only find a bank to loan them the money.

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Another name that many of my multifamily investment clients don’t recognize much is “The Reserve Management Corp”. They actually created the “money-market” funds investment. The average multi family investor hears the phrase money market account at their local bank but in most cases it is not a genuine money-market account.

The banks began using the name "Money market" to keep customers as true money market accounts were actually investments under the SEC and not the FDIC and customers were taking a lot of money with them.

The Reserve Management Corporation was extremely successful in attracting money into the fund. So much so, that everyone felt it was as safe as or safer than trying to invest large sums under the FDIC cap of $100,000. It was much easier as well for wealthy and well to do clients.

But they had a bad last week as well especially when Lehman Brothers failed. Most money-market clients don’t pay much attention in where the fund invests their money. Never had much a need to notice until the largest and oldest money-market fund disclosed that they held $785M in Lehman’s paper which suddenly the entire amount was gone in a plume of smoke. Some of my multifamily investment clients had money at Lehman Brothers.

The chain of events led to an unthinkable “run on the bank” stampede pulling out over $176 Billion dollars from money- market funds in one week from the entire industry. The Reserve Management Corp along with all the investment banks were in extreme danger creating the need for the Feds to step in on Friday.

On Monday, the bailout was announced. Although absolutely deplorable, our banking system needs the help.

If you are a multifamily investment owner or just don’t have time in the day, be sure to call or email. It’s part of my job to track the activities of the financial market and see how it applies to real estate.

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You have probably heard of the bailout but how much is known about this RTC entity?

The Resolution Trust Corporation (RTC) was enacted due to the failed thrifts and Savings and Loans debacle which came to a head in 1989.

What many don’t know is the RTC was the brain child of a brilliant management group leading a small bank called North Carolina National Bank (NCNB).

First Republic Bank in Texas was the largest bank in the state. I had the unfortunate pleasure of working for the bank almost 10 years before it became the largest modern day bank failure in the history of the United States.

We were convinced that Wells Fargo or Citicorp would be our new owners however they had trouble with the real estate assets just like what’s happening today and also unloading all the losses on to the FDIC. You would think we would learn by now.

Little old NCNB had an idea that proved to be the ticket. What if you transferred those troubled real estate loans to a bridge bank entity that could work out the loans as needed. In addition, the team had received an IRS ruling that gave the small bank a huge tax break on the transaction. And NCNB had acquired the bank in effect a tadpole swallowing a whale. You know this bank now as Bank of America.

And it saved our bank in Texas because we didn’t have a $3.9 Billion dollar anchor weighing us down.

Although you don’t see much in print crediting the bank with the idea, I was there when it was hatched. I found one FDIC reference to it listed under the link above.

It’s actually interesting reading on the creation of the RTC and what you may have in the end when Congress enacts some legislation.

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