Free Shell Game (Stand Alone 2) by Joseph Badal Page B

undercapitalized and take over every bank they feel like taking over. They bring in a Gerald Folsom who liquidates the bank’s loan portfolio and forecloses when borrowers can’t pay off their loan balances. After foreclosure, the bank dumps a ton of commercial and residential real estate on the market, depressing property values even further. The sharks ultimately come in and scoop up that real estate at fire-sale prices. Then, when the economy starts to improve, rents will rise and property values will increase, and the sharks will have made out like bandits. But that’s an eight to ten-year cycle.”
    “It sounds like a shell game,” Edward said.
    “The ultimate shell game.”
    “How can you be so sure about the recovery time?”
    “Two reasons. First, because it happened before. Someone once said that history is not one damned thing after another; it’s the same damned thing over and over. It took ten years for real estate markets to recover after the ’86 Act; it’ll probably take at least as long this time. Economic and financial dislocations like this are dream killers. They destroy people’s savings and investments, small businesses, and millions of jobs.”
    “Based on your description of things, it sounds to me as though the federal government is the real dream killer.”
    “You could say that,” Snowden agreed. “It’s the macro killer. But guys like Gerald Folsom, in a much smaller, but more personal, vicious way, murder people’s dreams as well.”
    “You said two reasons.”
    “Yeah. In February of this year, the Congressional Oversight Panel of TARP issued a report about commercial real estate. It wasn’t encouraging. Commercial real estate debt totals $3.4 trillion in the United States. Banks hold forty-five percent of that total, or about $1.5 trillion. According to the panel, smaller banks had commercial real estate portfolios equal to one point six times their total risk-based capital. By the third quarter of 2006, that had increased to three point two times. Because the typical commercial real estate loan has about a 20-year maturity and a 5-year call, there is real concern, especially in an environment like today’s, where real estate values have declined so much, that when the 5-year call period is up on many of these loans, the value of the real estate will be below the loan amount. The bank and the borrower will find themselves underwater. Just like they did with residential properties.”
    “Fortunately, that’s not our situation,” Edward said, half-hoping Snowden might find a way to still finance the company’s debt.
    “Yes, but what if you can’t find a bank to refinance your loans? What if every bank in the country has the same problem we do? If you can’t refinance your loan balance when your loan matures, what do you think is going to happen?”
    “The bank will place us in default on our loan,” Edward said, feeling sick.
    “I know none of this is fair, to you or to the banking community,” Snowden said. “But it’s the situation we have to live with. The regulators are forcing banks to shrink their balance sheets at a time when the country needs banks to stimulate the economy.”
    “So what do we do?”
    “Try a couple other banks; maybe you’ll get lucky. But I wouldn’t count on it, because your financing needs are real estate-based. Commercial real estate loans have been branded by the regulators as toxic, regardless of the quality of the borrower or the current status of the loan. Your best bet is to work out a deal with Broad Street National.”

CHAPTER THIRTEEN
    Katherine stopped at the post office on her way to the Winter Enterprises’ headquarters building. She opened her box, hoping there would be a letter from Carrie. She hadn’t heard from her daughter in over a month and had a difficult time not letting her imagination run away with itself with visions of her daughter lying in a pool of blood or in the hands of some Islamic terrorist