I'm sure some of you already saw it, but wanted to share the blog post Tom Barrack published Sunday. Not the most controversy-free personality, but food for thought. Everything below the link is a quote.
Based on my own personal past experiences I would like to share with you some thoughts on how to alleviate the potential blockage in the commercial mortgage market which is beginning to raise its perilous head. Addressing this major looming crisis in liquidity in a coordinated manner will be essential in averting a crisis in credit and a long term economic recession.
Consider, for example, the American hotel industry -- a sector that was hit particularly hard during the 2008 financial crisis. From January 2008 to January 2009, hotel occupancy dropped to less than 60%. This reduction in occupancy caused the losses of hundreds of thousands of jobs supported by the hotel industry, including direct jobs at hotels as well as indirect jobs supported by hotel employee wages, the hotel-related supply chain, and ancillary spending by hotel guests. Currently, in the dawning hours of the COVID-19 crisis, hotel occupancy rates are approaching 0% and are likely to remain at those levels for the foreseeable future. Even assuming an optimistic estimate of 25% hotel room occupancy in the coming months, job losses are projected to total between 2.8 and 3.5 million -- a roughly eight-fold increase compared to the 2008 financial crisis.
Below are My Suggestions for Partial Solutions:
- Support for CARES ("Coronavirus Aid, Relief, and Economic Security Act")
- Encourage Congress to provide an amount up to $500 billion to the Secretary of the Treasury to support programs or facilities for the purpose of providing liquidity to the financial system including the purchase of obligations from issuers and secondary markets, as well as making loans or other advances secured by collateral or entering into repurchase contracts as permitted under Section 13(3) of the Federal Reserve Act.
- Regulatory Streamlining
- The strong leadership in the SEC could investigate a temporary holiday on mark-to-market rules which would free up billions of dollars in liquidity overnight. Unlike the 2008 crisis when collateral values were inflated by overleveraging, pricing in the pre-COVID economy was very efficient. But mark-to-market rules have, in the past week, wreaked havoc on repo transactions.
- Suspend the requirements under US GAAP for loan modifications related to COVID-19 that otherwise would be classified as a TDR. Furthermore, suspend any determination of a loan modification as a result of the effects of COVID-19 as being a TDR.
- Current Expected Credit Losses (CECL) / FASB Update no2016-13. We are in the middle of the rollout of FASB's new CECL rule; its impact is incredibly procyclical, which is not helpful at a time when we need lending to flow, not diminish. A suspension of CECL to at least 2024 will allow banks and non-bank SEC filers to make billions of dollars available to borrowers by releasing regulatory capital from their balance sheets.
- Liquidity Coverage Ratio (LCR). Prudent bank regulators have in recent days encouraged banks to use their liquidity and capital buffers and the Fed's discount window to provide assistance to their customers, but more can be done to allow banks to forbear on repoing collateral without triggering LCR violations. The fractured bank regulatory environment -- Fed, OCC, and FDIC -- should be streamlined for faster future decision-making.