I bet you anything, the members of the Fed Open Market Committee would rather have killed off zombie firms with the latest rate hikes than prolonged their life (death?
Unfortunately not. But the companies they looked at are all publicly traded. And you wouldn't believe how many zombie companies there are. It's way more than you think, though arguably almost all of them are small.
Do you think the bank would act similarly (I believe some already are) for commercial real estate companies when their loan payments would come due, as this sub-sector is currently struggling with all the remote work, especially in big cities?
Very much so. If you can choose between giving a broke customer more money to keep the loan afloat and admitting to your shareholders that you have a defaulted loan, you will try to avoid admitting failure as long as possible. It's what happened in the sunup to the financial crisis and it is what happens today. Whether we are talking about business loans or CRE loans doesn't make much of a difference.
But is it the right thing to do, or is it just delaying the pain? The commercial property problem is not going away unless more people come to the office, even if the interest rate decreases. I read recently that converting a commercial property to a residential one is complicated and sometimes very expensive because it was sold as a solution that would solve the problem.
Since I am not an economist, I could be wrong. I thought we should let the free market decide if a company/entity should live or die (or maybe the free market thinks that these companies should survive in the short run for a better future or until we figure out what to do with these entities, but what happens if there is no better future/solution?) Most of the time, it is pay now or pay a lot more later but maybe this would be an exception. Only time will tell.
As everything is so interlinked, a lot of things can turn into too big to fail, and pain can spread to other industries. In this case, I believe several banks will fail if this is not delayed or resolved sooner or later. Is there a better solution, or will the future boom/bust cycles sooner or later be saved by government involvement, which in turn will allow people/organization to take bigger and bigger risks?
Do we need a new way to think about the economy and/or about how to manage risk?
Honestly, it is the wrong thing to do to throw good money after bad. But banks, like other companies have to defend their share price and that means it is better to delay the inevitable, especially if the inevitable becomes a huge mess big enough to ask the government for help *see finance pal crisis of 008).
The market expects every company to grow every quarter, and this short-term focus sets us in this situation. In most cases, the CEO’s pay is also tied to stock price, giving them an incentive to be short-term focused, too.
"Show me the incentives and I will show you the outcome." - Charlie Munger
Do they name some of these zombie companies ? Is it a mix of publicly traded & private? It seems extraordinary...
Unfortunately not. But the companies they looked at are all publicly traded. And you wouldn't believe how many zombie companies there are. It's way more than you think, though arguably almost all of them are small.
Do you think the bank would act similarly (I believe some already are) for commercial real estate companies when their loan payments would come due, as this sub-sector is currently struggling with all the remote work, especially in big cities?
Very much so. If you can choose between giving a broke customer more money to keep the loan afloat and admitting to your shareholders that you have a defaulted loan, you will try to avoid admitting failure as long as possible. It's what happened in the sunup to the financial crisis and it is what happens today. Whether we are talking about business loans or CRE loans doesn't make much of a difference.
I thought so too.
But is it the right thing to do, or is it just delaying the pain? The commercial property problem is not going away unless more people come to the office, even if the interest rate decreases. I read recently that converting a commercial property to a residential one is complicated and sometimes very expensive because it was sold as a solution that would solve the problem.
Since I am not an economist, I could be wrong. I thought we should let the free market decide if a company/entity should live or die (or maybe the free market thinks that these companies should survive in the short run for a better future or until we figure out what to do with these entities, but what happens if there is no better future/solution?) Most of the time, it is pay now or pay a lot more later but maybe this would be an exception. Only time will tell.
As everything is so interlinked, a lot of things can turn into too big to fail, and pain can spread to other industries. In this case, I believe several banks will fail if this is not delayed or resolved sooner or later. Is there a better solution, or will the future boom/bust cycles sooner or later be saved by government involvement, which in turn will allow people/organization to take bigger and bigger risks?
Do we need a new way to think about the economy and/or about how to manage risk?
Honestly, it is the wrong thing to do to throw good money after bad. But banks, like other companies have to defend their share price and that means it is better to delay the inevitable, especially if the inevitable becomes a huge mess big enough to ask the government for help *see finance pal crisis of 008).
It is the classic moral hazard problem.
The market expects every company to grow every quarter, and this short-term focus sets us in this situation. In most cases, the CEO’s pay is also tied to stock price, giving them an incentive to be short-term focused, too.
"Show me the incentives and I will show you the outcome." - Charlie Munger
Amen to that.