CMBS failures

CMBS, securitized loans made on commercial real estate, is predicted by real estate folks, to cause a massive amount of pain all over the place. This is of course a huge generalization, but the industry press and reports generally show big “bar charts of pain”, showing rising tides of CMBS explosions.

So, the question is, when a specific asset which was leveraged with CMBS goes bad, what is the trickle effect? Well, when only one asset ACTUALLY defaults, which is going to be well after the impending fate is well known by those involved, sometimes very little. The CMBS offering that one asset was a part of was built to have a series of steps which would be triggered which would absorb the blow, spreading it over the whole offering, flowing through a byzantine structure.

The problem I think most people involved in the market intuitively feel is what happens when the great majority of such assets tank? The answer is not well understood. In fact, because each CMBS offering had different byzantine structures, any type of “global” understanding of the problem inevitably ends up at the generalized level, ie “massive amount of pain all over the place.”

As banks and the government work at this problem, with a mixed set of goals, inevitably more byzantine structures and rules apply, never allowing things to just happen. The theory is, if everything just happens, there will be panic and collapse, which is probably true. The issue is because no one wants to smite the Gordian Knot, they instead layer more yarn all over it, making it into a Too Big to Smite Knot!

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