Commercial Real Estate Is Next

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Financials are dragging the market down again this morning and I think it has to do with a story in this morning’s Wall Street Journal which is the most highly read on “Wall Street Gears for Its New Pain: Commercial Real Estate To Yield Write-Downs; Defaults Slim So Far” (subscription required).

Basically, just as Wall Street investment banks bought up tons of residential mortgages which they securitized and sold for fees, they did the same thing with loans on commercial properties.  And they’re stuck holding the bag on a lot of these Commercial Mortgage Backed Securities (CMBS): CMBS Exposure Chart.

As you can see from the chart, Lehman (LEH) has the most exposure at around $40 billion.  So it’s no surprise that its stock is down the most of any of the i-banks listed on the chart with exposure to CMBS.

The price of credit default swaps on these CMBS has soared in the last few months (CMBX Index Chart).  What this implies is that the market is fearful, transaction volumes are way down as are prices.

According to the WSJ article, Goldman’s Financials Analyst, William Tanona, is expecting $7.2 billion in total writedowns on CMBS in the 1st quarter from Bear, Citi, JP Morgan, Lehman, Merrill and Morgan.  Their total exposure is $141 billion.

Also see: “Wall Street’s Next Crisis”, Jesse Eisinger, Portfolio, December 2007

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