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Treasury Working on 'Plan C'

By Anonymous

From the WaPo: Treasury Works on 'Plan C' To Fend Off Lingering Threats

... the Treasury Department has assembled a team to examine what could yet bring it down and has identified several trouble spots ... Informally known as Plan C, the internal project is focused on vexing problems such as the distressed commercial real estate markets, the high rate of delinquencies among homeowners, and the struggles of community and regional banks, said government sources familiar with the effort.
...
The team is also responsible for considering potential government responses, but top officials within the Obama administration are wary of rolling out initiatives that would commit massive amounts of federal resources ...

The officials in charge of Plan C -- named to allude to a last line of defense -- face a particular challenge in addressing the breakdown of commercial real estate lending. ... these groups face a tidal wave of commercial real estate debt -- some estimates peg the total at more than $3 trillion -- that they will need to refinance. ...

Thousands of these institutions wrote billions of dollars in mortgages on strip malls, doctors offices and drive-through restaurants. These commercial loans required a lot of scrutiny and a leap of faith, and, for much of the decade, the smaller banks that leapt were rewarded with outsize profits.

In doing so, many took on bigger and bigger risks. By the beginning of the recession in December 2007, the median midsize bank held commercial real estate loans worth 3.55 times its capital cushion -- its reserve against unexpected losses -- according to the Federal Deposit Insurance Corp.

... Another issue identified by the Plan C team is homeowner delinquencies, which continue to rise as large numbers of people lose their jobs and miss monthly payments.

"A lot of scrutiny and a leap of faith"? More of the later, not enough of the former. It didn't take much "scrutiny" to understand there was substantial overbuilding in CRE, especially for retail space and for hotels. And yet banks kept making loans in 2006, 2007 and even in 2008 ...

Full post as published by Calculated Risk on July 09, 2009 (boomark / email).