The Banks Are Not Okay | Top of Mind | Aspen Funds
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The Banks Are Not Okay | Top of Mind


Discover Bob and Ben’s insights and analysis of the state of bank’s balance sheets amidst talk of a commercial real estate crash. Article –

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Bob Fraser: All right, Bob and Ben here with a Top of Mind episode for you. Are the banks okay? Are they not okay? You’ve been hearing about the commercial real estate crash and banks are in trouble. Let’s find out. 

The Invest Like a Billionaire Podcast

Ben Fraser: This is the Invest Like a Billionaire podcast, where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you’ll learn from this podcast will make you a better investor and help you build legacy wealth. Join us as we dive into the world of alternative investments, uncover strategies of the ultra wealthy, discuss economics, and interview successful investors.

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The Current State of Banks

Ben Fraser: All right. Welcome back to another episode. We’re very excited to come to you with another Top of Mind.

These are shorter little segments on our podcast that are sometimes reacting to different things. We’re reading about the economy and the market and sometimes more educational content. And today we saw a very interesting article titled the banks are not okay. And Hey, that’s it. Very good click bait, and it’s a recurring theme that we’ve heard over the past year and last year when the big issue of the bond portfolios was the interest rates going up and skyrocketing. It really impacted the bank’s balance sheets and their bond portfolios was a big concern, right?

We saw Signature Bank have a pretty big meltdown and Silicon Valley Bank, right? These are the banks that. Got all the headlines in, it died down a little bit. They changed some of the methodology on reporting and the hold to maturity and it alleviated, but now it’s coming back.

Banks are out. Okay. And why does this matter? I think the big question is why do I care? If you look back and we’re actually sharing the screen here, you can see a little chart. This is really interesting on the number of assets and banks and the problem bank list. So this is.

The Role of Banks in the Economy

Ben Fraser: From the FDIC that monitors all the banks and at the last big recession back at the great financial crisis, there were a lot of issues in real estate, but it was really a banking crisis that caused and exacerbated this whole global collapse. And so the banking system is such a lifeblood of our economy.

And so it’s a big issue. 

Bob Fraser: It’s like the plumbing of the economy. It’s like the plumbing and infrastructure. So yeah, when you really have a systemic crisis is when a real estate crisis or other fiscal crisis becomes a banking crisis because banks are the financial plumbing and yeah. 

The Impact of the Commercial Real Estate Crisis

Bob Fraser: So we’ve been reading about the commercial real estate crisis and it’s a big deal. You’re seeing office buildings, especially, they’ve dropped as much as 50 percent in value. If a bank loaned 70 percent of the value of that thing, they’re going to take massive losses. And, the article we’re referring to was talking about New York community bank whose shares closed down 44 percent yesterday.

Based on loan loss reserves from their commercial real estate portfolio. All right. Are we looking for a, is this a massive banking crisis and and, we can cut to the chase, right? 

The Health of Banks and the FDIC’s Problem Bank List

Bob Fraser: Bottom line is it’s not. And so showing you here, this is the little chart from the FDIC. And this is their problem bank list, and these are the list of banks.

Now, this is a private list. The FDIC does not share the names of the banks. They only share a number of banks and the total assets of these banks. And they do that for obvious reasons. They don’t want to cause a run on the bank. They don’t want to be a problem, right? But you can actually infer what those banks are.

And there is an official problem banks list, but. The bottom line today is there’s 44 banks that are problem banks back in 2009, it was approaching 900 problem banks. So we’re not even close. The banks are actually quite healthy and have taken precautions to make sure that they’re very healthy.

But what I did like about the article is it was saying how what’s really, what’s, what this is going to do is it’s going to cause. 

The Future of Lending and the Rise of Alternative Funding

Bob Fraser: Even more restricted lending, it says, which reduces the available financing and makes the industry more dependent on alternative funding sources like private equity with higher financing costs than commercial banks.

That’s a hundred percent true. We’re actually in the market, right? We’re in the debt markets all the time, Ben and I and our firm, and we’re absolutely seeing that. The number of deals that are coming to us to fund or just exploded. It. And people that are desperate for even a half a million dollars, just to complete a project.

That’s no brainers. But they cannot get funding for these things and they’re willing to pay private equity type rates. We’re definitely seeing, while it’s not, we’re not in danger of this becoming a systemic crisis. We’re just not, it’s a, it is a credit crisis that there’s, a liquidity crisis that is creating a huge stress in the commercial real estate market.

Ben Fraser: Yeah. And yeah, I’ve shared before that my background was actually in the banking industry. I was a commercial banker and a writer for a while. And it’s interesting cause I continue to have a lot of relationships with bankers and work with a lot of bankers. Yeah. And. They are putting pencils down right now, but they’re not really. 

Bob Fraser: They’re not funding deals. They’re just saying. 

Ben Fraser: They’re not putting new money out unless it’s to an existing, big time borrower that they work a lot with, maybe they’ll do a one off a deal. But, I’m also asking, how’s your portfolio doing? I’m trying to get an inside scoop on you guys headed for a blow up.

And, what’s interesting about how banks work, which you may not understand because this one’s related to the loan loss reserve. So banks have to estimate their expected losses that they’re going to incur from assets that they have to write down or that the loans that they’re not going to fully collect, and that’s just kind of part of their ongoing reporting.

And if they report it and they have a big loss. That could impact as a surprise, which it did in this scenario and what’s really driving a lot of the concern, as you said, is the commercial real estate, but. 

The Current State of the Commercial Real Estate Market

Ben Fraser: As we’ve talked about in many other episodes, the commercial real estate market, one is not just one market, right?

It’s an amalgamation of hundreds of markets and also many different types of assets, office leads the charge on the biggest hit to values and is usually what most people refer to when they’re saying the real estate market is in trouble for obvious reasons, offices is struggling and will likely continue to struggle, but.

Multifamily, it’s a very mixed bag, industrial, we’re still pretty darn bullish on it. Retail, we’re still very bullish on it, and these different asset classes are going to perform very differently based on where they’re at in the country and what type of product. And so ultimately, my, my expectation is we’re going to see a lot of these, little mini bubbles popping, you coined that term mini bubble before and.

More in an idiosyncratic way, not in a systemic system, the whole system crashes, but there’s pockets where there’s higher concentrations, maybe at a bank with a lot of offices, right? Or a lot of exposure to one certain asset class or one certain market that’s getting hit pretty hard.

And we’re going to see some of those things start to pop in the system, but it’s hard to believe that it’s going to be a systemic issue, especially with the data you’re showing right here. The numbers, we had a little spike here in 2022, but, that was really from, likely a signature bank, right?

That was just the assets and the problem bank spiked. That got absorbed, uh, by JP Morgan, right? And I wouldn’t be shocked if we start seeing the number of banks on the problem take up over the next few quarters. Because it’s likely there’s going to be issues, right?

I think that’s pretty obvious from the other things that we’re seeing a reading that we share, but I don’t think it’s going to spike by a factor of, 10 times to the level we saw in the last. The financial crisis. 

Bob Fraser: Yeah, it’s, And the commercial is under stress. There’s also a lot of money sitting on the sidelines looking for these crazy good deals.

So yeah, again, it’s not this free fall scenario where there’s just no buyers and a lot of people are waiting for these deals and we’re just not seeing a lot of them, because the sellers are not yet willing to take those prices yet. But the bottom line is, we’re not going to see a banking crisis in 2024.

Ben Fraser: So I’ll take the other side of this too. Yeah, there, there might be some issues of stress and I 100 percent agree. I think the biggest result of this is going to be banks continuing to tighten. What I think there’s actually a portfolio constraint. I was talking with a banker just the other day.

They are, they can’t lend on any more commercial real estate. 

The Impact of Interest Rates on Banks and Borrowers

Ben Fraser: Because their portfolio isn’t paying off because interest rates are so much higher. So no one’s selling. And so all the deals that they expected to be sold by now. So they had new money to lend and are still just sitting there. So it’s this constant focus on their balance.

Bob Fraser: That’s a great soul. So a bank has. A certain percentage of his portfolio is allocated to commercial real estate and there’s always turnover in their portfolio. So they get one of their loans, gets refinanced out, they get paid off that frees up capital to go lend somewhere else. But what’s happening is that because they’re carrying all these historic loans at lower interest rates, the borrowers are not refinancing, so they’re not getting paid off. So they’re fully allocated. 

Ben Fraser: So it’s literally in our portfolio, I just set out updates to our investors on all of our assets. We’re at that point where we’re looking at, should we refinance? Should we sell? Selling right now is off the table. Cause it’s just not a good time to sell, right?

The values are down and there’s not a lot of buyers that are ready to move. And then refinancing, this is what’s crazy to me. We’ve priced out several different properties. I don’t know what accounts that refinance would look like. And to pay interest only loans with agency debt, that’s, usually lower interest rate than what you can get at regional banks.

And interest only, right? So you’re just paying, but the principal is actually the same or more on a monthly payment basis than what we’re paying right now on some of our amortizing loans at low interest rates. And it doesn’t make any sense. So I’m just going to keep voting and we’ll just continue to wait.

I think that’s what ‘s happening. So you have that issue. And then on top of that, as there is more stress that starts to percolate through different banks, I think that will cause a further tightening. Because now they’re even more reticent where they previously just couldn’t. Now it’s even reticent on top of that.

And I think that’s creating this really incredible opportunity right now. 

The Opportunity in the Private Credit Space

Ben Fraser: We’re seeing in the private credit space, which we’ve talked about and have been played in for a while. We’re seeing continual deal flow where good deals, good properties, and you can come in with pretty incredible positions in the capital stack with lower risks.

In charge of premia because there’s no other capital available. And really interesting time in the market and hope this was interesting to you. 

Conclusion and Call to Action

Ben Fraser: If you’re enjoying it, please subscribe and share it with a friend. And thanks so much for listening. Tune in to our next show. Thanks so much.



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