Dubai-CRE thoughts from Wilbur Ross

I'm sure my day will be filled with much reading but it would seem that my first choice this morning was a good one. I have become somewhat intensely buried in the Dubai news. I am continuing to find my exploration of financial and global capital markets most fascinating. Such a different world from my space, my nature, my peace.

So as the story goes, infrastructure is built on the premise that the people will come, and their cash will follow them. Bring on Credit Crunch and Plunging Global Economic and cash flow has withered. Does this not remind you of the video "The Empty City" (China's Empty City). Dubai has $3.5Billion of an estimated $80B debt which represents 100% of their economy. No matter how you look at it, that's a big number. This potential default is with Islam's largest bond issue EVER, and it is currently trading at 58.5/60.5, suggesting that investors and market sentiment are very skeptical. And remind me again, markets are expressions of human behaviour, and sentiment is, well the mood. All this while our mood is still recovering from 2008.

Who will be affected? Mostly the Euro/ME banks, the American banks do not have significant exposure. The interesting aspect of this is what it means to CRE. I have written a couple of times highlighting that CRE may be another shoe dropping soon (Are we approaching the precipice of CRE pricing?). Mr. Ross's view is that US CRE shoe is falling already, but that aas compared to the residential mortgage meltdown, this market is considerably smaller ($11T vs $3.5T) - though I would continue to argue that we have become far to comfortable with throwing around these big numbers. It used to be that a Million and a Billion were VERY big numbers. Money is like energy, it flows and changes shape, but unless you're Helicopter BB, then it does NOT magically appear out of thin aire. And some of the regional banks have 1/3 to 1/4 of their loan portfolios in CRE. So a 50% reduction (chosen randomly) in CRE valuations, means that the 5% equity loans, a total of $1.3TRILLION comes due in the next few years will NOT qualify for re-financing. This means 5x or 6x loan to equity ratios and very very likely more banks (regional) to the distressed bank list in the states. The FDIC released its latest report on 24-November and stated:

"The number of institutions on the FDIC's "Problem List" rose to its highest level in 16 years. At the end of September, there were 552 insured institutions on the "Problem List," up from 416 on June 30. This is the largest number of "problem" institutions since December 31, 1993, when there were 575 institutions on the list. Total assets of "problem" institutions increased during the quarter from $299.8 billion to $345.9 billion, the highest level since the end of 1993, when they totaled $346.2 billion. Fifty institutions failed during the third quarter, bringing the total number of failures in the first nine months of 2009 to 95." (FDIC Quarterly banking profile).

The question is how might this compare to Residential meltdown. Mr. Ross's view is that it will be different, the governments will not support these CRE issues in the same manner, and banks will likelt be forced to extend the loans, and likely also a cheaper levels that ever before.

Where does this leave us with the Dubai news? The weekend is quiet for those of us that are not directly involved. For those working on this matter eslewhere in the world, I expect there are some tense moments of determining a path forward. The markets on Sunday night Asian open, European open and finally America open will be MST interesting to watch (and learn, watch and learn). Let's not forget Greece, Spain, Italy, Ukraine,, and many others that have been challenged by their massive debt loads.