"Loan extension has been one of the most common modification strategies used by special servicers, and has been criticized by many as extend-and-pretend or delay-and-pray, etc,” says Malay Bansal, head of Portfolio Management and Advisory for Commercial Real Estate & CMBS at NewOak Capital, an asset management, advisory, and capital markets firm in Manhattan. “However, that is not the only modification being done. A recent example is the 270 Peachtree loan on a 336,000 San Franciscooffice in Atlanta in the LBUBS 2000-C3 deal. The $33.9 million loan which had matured in July 2009, was modified in three respects - $10.87 million or about 32% principal was forgiven, loan coupon was dropped from 7.77% to 3%, and loan was extended by two years. In another example, a $18.25 mm loan on Houston apartments was modified to forgive 33% of the loan along with an 18 month extension. As the volume of these modifications grows, it will become even more important for CMBS investors to have a good surveillance program.”

American Pessimism?

“At the annual Federal Reserve retreat for Central Bankers the most popular buzz words were ‘angst’, ‘slog’, ‘ambiguity’ and an usual degree of ‘pessimism,” says James Frischling, President & Co-Founder at NewOak Capital. “Words in contrast to typical American optimism and confidence foreign central bankers expect. What can government policy makers do to help stimulate growth? With Congressional elections looming, spending big money isn’t an option, so the ‘hope and pray’ strategy may very well prove to be the action plan for the foreseeable future.”

“American consumers are well versed in the issues plaguing the economy. $800 billion in federal spending and trillions worth of credit from the Federal Reserve saved many financial firms and prevented what would have been a far greater crisis, but hasn’t had the expected trickle-down effect. Fears of a double-dip recession are gaining momentum and Main Street’s negative mood is making its way to Washington. As Washington has been underestimating the challenges facing the US economy since the crisis began, this may be a good thing. If you don’t fully understand the problem, you certainly can’t fix it.”

New Transparency Era Beginning to Emerge?

"A new era for transparency might be emerging,” says Ron D'Vari, the CEO and Co-founder of NewOak Capital, a New York based advisory, capital markets, and asset management firm. “A rating agency recently sent an e-mail requesting input for its methodology in a publish fashion – a welcome sign. However, the real proof for new era will be how many investors actually actively study the methodology and provide meaningful comments. The best results are achieved when investors as a group take a more proactive role in defining and understanding the process upfront as opposed to finding the rating flaws postmortem.”

“With the economic recovery still sputtering, great worry over the state of the commercial real estate market, and significant uncertainty still hovering over the bank industry due to the pending implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the First Niagara Financial announcement that it will purchase NewAlliance Bancshares Inc. for $1.5 billion is welcome news," says Mark Ruh, Managing Director at NewOak Capital. "The purchase price represents a 24% premium to the August 18 closing price of NewAlliance, and payment will be split 86% stock and 14% cash. The transaction pricing implies price/tangible book of 163% and a deposit premium of 13.5%."

“This is the first real open-bank acquisition in two years, and happened because acquirers can now trust the better balance sheets in the industry. This transaction should mark the beginning of a robust bank M&A market over the next several years. For banks under approximately $1 billion, the regulatory expense and complexity of being in the banking business will significantly rise. Many of these smaller stressed banks that don’t fail will not be able to raise capital, thus forcing many of them into the arms of acquirers. With pending bank failures and future acquisitions, we should see dramatic industry consolidation and less than 5,000 banks by 2015 or 2016."

Who wants to be labeled ‘Systemically Important’?

“The Dodd-Frank financial regulation bill advanced with the promise it would prevent giant financial companies from bringing down the entire financial system if they failed and attempted to end the ‘too big to fail,” fallacy, says James Frischling, President & Co-Founder at NewOak Capital. “Regulators must now decide which companies will be classified as ‘systemically important’ – meaning they are under more intense scrutiny least they grow too large.”

“Firms that are ‘systemically important’ will be hit with stricter capital and liquidity requirements, which aims to discourage their taking outsized risks. Identifying the banks that make up this group is fairly simple: any bank holding company with more than $50 billion is on the list. It’s the other types of large, interconnected, financially savvy companies that won’t be so easy to identify.”

“Despite what appears to be joining a club that will be on the short-list of companies watched more closely by regulators, it’s also an endorsement that such companies have a US Government seal of approval or have been identified as important and therefore safer to do business with. If you’re a large non-bank entity and not on the list, but your biggest competitor is on the list by being deemed ‘systemically important’, who do you think your target clients will prefer to work with? Many non-bank financial companies will complain that stricter capital requirements will hurt their competitive nature, however, this is one list that is going to be sought after. If you’re on the FBI’s most wanted list, you want to be among the top ten, it carries more pizzazz.”

War: Will Its End Help or Hinder the Economy?

"Historically wars have been good for the economy. So what would the end of Iraq and Afghanistan wars mean for the US economy?,” asks Malay Bansal, head of Portfolio Management and Advisory for Commercial Real Estate & CMBS at NewOak Capital, an asset management, advisory, and capital markets firm in Manhattan. “On Aug 19, with the combat troops leaving the country, the Iraq war was declared to be over after seven and a half years. Plan is to pull US troops out of Afghanistan by next year. The two wars have cost US roughly $1 trillion since 2001 or $110 billion/year. With wars scaling down and deficit & debt at high levels, the defense department and congress have already started talking about reducing military spending-starting with a proposal to close the Joint Forces Command base in Norfolk, VA which includes 2,800 military & civilian positions and 3,000 contractors. Lower spending will decrease the stimulus from that spending. Also consider that these wars were financed by increased deficit & debt, and there was not a huge buildup for exports to help reconstruction effort abroad. ”

To answer questions in investors mind surrounding “what, when, and how”, I was fortunate to be joined by some of the best experts in the field of residential and commercial real estate on a panel I moderated. Below is a brief summary of my impressions of the thoughts expressed as I heard them.

The general macro and real estate outlook by the panel was that uncertainties have improved significantly from the dark days in 1st half of 2009. While residential real estate has been in its 5th year of decline and seems to be stabilizing, the commercial real estate may still have sometime to go due approximately 40% drop in values from the peak and meager lending capacity in the face of refinancing needed in the next three to five years.

In both sectors, the general “extend and pretend” and modification strategies by current lenders have led to much less than expected supply. The demand by distressed investors appears to be generally high due to large amount of capital raised, but so far it seems to have been disciplined when opportunities were not attractive.

Despite continuing challenges in both residential and commercial markets, some on the panel were of the view that investors should not try to pinpoint the bottom of the market as there continues to be large war chest of capital to take advantage of unique opportunities as they present themselves. The implication is that early investors may be rewarded better as the market turns from fear to greed.

The RMBS and CMBS sectors have appreciated 40% to 50% from the bottom in early 2009 and liquidity has improved significantly. Due to the run up some investors are deploying leverage, particularly for the more senior parts of the capital structure. Some of the earlier investors came from wholeloan and real estate side as they didn’t see the right opportunities as banks where not selling at the lower prices. I came away with the overall impression that the sector may be over picked, hence better opportunities would be either in long/short or direct investments. Both of these would require a great deal of detailed property-by-property analysis and the right infrastructure to manage and service.

After a long period of select activities, there has been a modest amount of non-performing residential wholeloan trading and some banks now are regularly putting packages up for bid. The packages seem to be getting bids in the forty and in some cased up to high fifties range depending on the attributes. The number of bidders have increased significantly and as a result return targets in this sector also have come down. The flow in this sector is expected to continue and perhaps accelerate as modification remedy runs out.

Large REO liquidations seemed to be below what one would have expected given the level of non-performers. This is partly because the modification angle has not yet taken its full course. The institutional investors seem to have not yet fully develop an efficient way to find an added-value investment model to the bulk residential REO sector. The market seems to be mostly mini-bulk entrepreneur operators with private investors.

As a listener to the session, I came away that opportunities a head still look promising but require a great deal of due diligence up front, value-added management throughout, and perhaps an all-in risk-adjusted expected return in the teens and not twenties some distressed funds were initially targeting. That means that some degree of leverage still needs to be used and is selectively becoming available even for distressed real estate.

“The overall picture is that of increasing uncertainty with slow job growth creation, increasing job losses, slow manufacturing growth, higher taxes, chaotic government policy, and artificially stable housing prices,” says Ron D’Vari, CEO & Co-Founder of NewOak Capital, a Capital Markets, Asset Management, and Advisory firm in Manhattan. “All of the above clearly points to a slowdown in the US recovery driven by waning stimulation and effects of quantitative ease.”

“To fix the problem, the Fed can encourage bank lending by further reducing interest rates on bank reserves, and reinvest cash from maturing MBS to maintain at least the current support of the mortgage markets. Longer expected period of low interest rates should help heal some of the lesser deep wounds A modest simulative action by the fed could reduce what might otherwise be a general collapse of the economy. Like Bette Davis said in the movie All About Eve, “Fasten your seatbelts, it’s going to be a bumpy night.”

Pershing Square & Winthrop’s Bold, Creative Move On Stuy Town

"While most people value the Stuyvesant Town & Peter Cooper Village around $2 billion, the move by Pershing Square and Winthrop to pay $45 million to jointly purchase the mezzanine loans junior to the $3 Billion senior loan shows boldness and creativity,” says Malay Bansal, head of Portfolio Management and Advisory for Commercial Real Estate & CMBS at NewOak Capital, an asset management, advisory, and capital markets firm in Manhattan. “They paid $45 million for the mezz loans that many considered worthless, and are now foreclosing on the mezz to step into the borrower’s shoes."

"Simplistically, they become owners of a $2 billion property with a $3 billion loan. However, this will give them ability to negotiate with the special servicer and tenants, or try to use a bankruptcy filing to work out the loan. The creative part of their move is that they get to a much higher value than most others by using a plan to convert the buildings to coops with the support of tenants. In any case, the $45 million price for the mezz will be worthwhile since it can help avoid the approximately $100 million in transfer taxes that a foreclosure on the properties would entail.”

FHA Mortgages and Credit?

“The Federal Housing Administration is raising the bar on consumers looking to it for home loans by requiring higher monthly fees, larger down payments and better credit scores,” says James Frischling, President & Co-Founder at NewOak Capital. “These long overdue reforms are a clear indication that the FHA recognizes needs to put itself in a better position to avoid some of the crucial errors that took place during the housing bubble.”

“The keep it simple theory with respect to the issue of raising the credit standards of FHA insured mortgages will be to reduce the amount of borrowers unable to make good on commitments. Some critics argue that the timing of these changes could curtail first-time home buyers who rely most on the FHA insuring their loans at a time when the economy is badly in need of a boost. Yet increasing lending to questionable borrowers is a recipe for disaster and shows we’ve not learned from past mistakes. As to the speculation that the new policies at the FHA will encourage use of the Fannie Mae or Freddie Mac programs, I say: ‘Imitation is a heightened form of flattery. A commitment to increasing the credit quality of your portfolios should be your next move as well.’”

All of the above clearly points to a slowdown in the US recovery driven by waning stimulation and effects of quantitative ease.

So, what can the Fed do about it?

Well, they can keep emphasizing the uncertainty and downside risks with one potential result being that interest rates will remain low for quite some time This by itself is very powerful and would encourage risks taking.

They can also encourage bank lending by further reducing interest rates on bank reserves, and reinvest cash from maturing MBS to maintain at least the current support of the mortgage markets. Longer expected period of low interest rates should help heal some of the lesser deep wounds A modest simulative action by the fed could reduce what might otherwise be a general collapse of the economy.

Like Bette Davis said in the movie All About Eve, “Fasten your seatbelts, it’s going to be a bumpy night.”

For the commercial real estate property market conditions, The Real Estate Roundtable has just published its 3rd Quarter 2010 Sentiment Index survey of more than 110 senior real estate executives. While the survey found significant concerns and uncertainty about economic & job recovery outlook, government policy, and capital markets, the overall sentiment is that the industry is in for a long slow recovery. The survey reports a Current Conditions Index (reflecting how markets are today vs 12 months ago), a Futures Conditions Index (expectations on how markets will be 12 months from now), and an Overall Sentiment Index, which is the average of the two. For the first time, the survey’s current and future conditions indices merged, scoring an Overall Sentiment Index of 74 (down from 76 in the previous quarter). This score suggests a relatively positive trend and a flat trajectory.

The actual data on commercial real estate is sending conflicting signals and is being read by different people in different ways. Cushman & Wakefield report last month showing US CBD office vacancy dropping to 14.8 % in Q2 from 15% at end of Q1 -first drop since 2007, CMBS statistics showing declining pace of deterioration in delinquencies, etc are seen by many as signs that the CRE market is stabilizing. Others point to declining rents and high unemployment as factors that point to further declines ahead. Both the viewpoints have some validity, which probably implies that the CRE sector might move sideways in near term with some volatility caused by which of the two views is stronger at any given point, till additional market data clarifies the picture more.

Going back to CMBS spreads, the tightening probably just reflects the sentiment expressed in other surveys of an expectation of slowly stabilizing CRE market. For CMBS, as opposed to properties, a consensus that the property price decline has stopped will be enough for bond spreads to tighten. Real estate prices do not necessarily need to go up for CMBS spreads to tighten. What happens if the sentiment on the economy sours impacting the view on the commercial real estate too? Even in that scenario, more and more people are coming to the view that the senior most CMBS bonds will likely not suffer a principal loss, which makes them attractive given the additional yield they provide compared to other similar investments. So, worsening economic conditions may actually cause people to move up in capital stack, creating demand for senior most bonds, and providing support for spreads. No one knows what future will bring, but logically, odds look in favor of the spreads moving in the direction suggested by the unanimous view.

All of the above is fine for trying to understand these markets, but one practical conclusion, and the real point of this article is this: if senior CMBS securities can go up in value even when property markets go sideways, and will have some support if the property markets decline, then logically, senior CMBS bonds have to be better investments at present than commercial real estate properties or loans for those who can invest in any of those.

Note:The views in this article and my spread predictions in the Commercial Mortgage Alert article referenced are solely my own.

This article was originally published here.

The most common thread in a lot of comments, both in the panels and in private conversations, was the lack of opportunities to invest. Investors, remembering how much money was made purchasing cheap assets from RTC sales during the last real estate downturn of early 1990s, have raised a lot of money in anticipation of a similar opportunity this time around. However, those fire sales have not materialized, causing some disappointment. Many do not seem to realize that the investors were not the only ones who learnt from the early 90s experience. The owners of the assets, and the regulators, learnt too - if the assets are sold at cheap fire sale type of prices, investors make a killing, but the owners of assets lose out. So, this time around, the owners of the assets are trying to hold out as long as they can and it makes sense. Regulators, having learnt from the experience too, seem to be doing everything they prudently can, to give latitude to owners to avoid fire sales. Somehow, many seem to be disappointed at things not having played out the same way as they did in 90s! Seems logical that they should not, still many are surprised.

The good news from many was that the opportunities, though not as plentiful, are there. And people are doing deals. They take a little more searching, a little more digging into the things that are out there to separate the good ones from the bad, and they are often a little smaller than ideally desired, but they are there. On the easy ones, there is competition, and sometimes those assets get overbid. So, discipline in the process is as important as ever.

Another lesson that I came back with was that those GPs who gave themselves (or were able to get) more flexibility when raising funds in terms of types of investments, timeframe, and returns are better placed to take advantage of opportunities as they come up than those who got narrower mandates from their LP investors.

The more I think about it, the more it seems to me that this time around, the process will be stretched out over a period of time. In commercial real estate, values are down – around 40% by some commonly used metrices, and there do not seem to be any immediate drivers that will quickly and significantly drive prices up. This is bound to result in transfer of assets from those owners who are overleveraged and do not have ability to put in more capital to refinance maturing loans in the new lower leverage environment. That will create opportunities for those with patient capital to invest. Just slowly. And they may not get fire sale prices, but they will be investing at today’s lower prices.

This forum served up the usual pundits’ assessments of the state of our industry, revealed strategies and tactics de jour to capitalize on current opportunities, and provided fabulous networking opportunities with key industry players.

Panel speakers opening the conference let all the usual ‘double-dip,’‘half-full glass’, ‘tale of two cities’, and baseball game inning estimate metaphors fly. It seemed the FUD factor (fear, uncertainty and doubt) that dominated last year’s event was subtly in play this year amidst the optimism.

I sized it all up as follows:

1) Signs of recovery in the economy and the market are clear. But are they real or just the result of performance enhancing government intervention? It’s too soon to tell.

2) Banks and financial institutions are hanging on for dear life to their book valued real estate. Consequently the deal flow remains 95% below ’07 levels. This has led to otherwise idle dealmakers throwing their un-deployed capital at scarce deals sometimes bidding beyond rational fundamentals, which is why many of the recent press releases touting dozens of bidders for sub 6 cap assets are seen more as a report of the continuing problem rather than of the emerging resolution.

3) Meanwhile, there is tremendous surplus of un-deployed private equity fund capital and oversupply of operators. These players are dividing their time between chasing rare deals and containing their legacy damage.

4) The above means that first time fund sponsors are facing the most difficult fund raising prospects in over 20 years. Some LP’s are recalling their un-deployed capital and refusing to invest in anything other than a specific deal subject to their full discretion. However, first time funds are being raised now when the sponsor offers a distinct and compelling strategy, a competent track record and excellent and honest investor service.

The main justification for the cost of a fund is to allow investors and sponsors to capture deal flow profits that they would otherwise forego by serially raising capital for each deal. Yet there is miniscule deal flow. This begged questions about the pertinence today of the real estate investment fund model that no one dared to ask.

State of the Industry

A common thread throughout the conference among GG’s and LP’s was that until deal flow returns, the deal sponsor is king. ‘Show me the deal and we will show you the money’ seemed to be on everyone’s lips.

As far the state of the fund manager compensation structure, as expected 1.5/15 is the new 2/20 along with full cavity search due diligence. I also sensed a lot of LP resistance to management fees on un-deployed funds, with higher pref’s, no catch ups and more of that show me the deal first attitude.

On the operator side, track record is king with possible muligans on selected well explained failed legacy projects. Some operators are being asked to invest more than just token point or two or equity. Here too, you get the rubber glove treatment!

When they could get deal flow and profits, GP’s most alluded to core and core plus in A/major US markets. Multifamily seemed to be the first choice from risk adjusted return view point. However, the fed’s continued life support of agency financing has been blamed for otherwise inexplicable cap rate compression. The other major food groups; office, retail and industrial all received their share of panel speakers’ polarized picking and panning. One man’s feast seemed to be another man’s poison.

There was some talk of big killing made by sellers of finished lots that were purchased in ‘07-’08. It seems builders are back to hoarding finished lots and land with their big loss carry back tax refunds. A bright spot was that when asked about required returns most speakers quoted sub-20 IRR’s, with mid-teens as a median bid. Overall, indomitable optimism won a narrow majority. Most panel speakers seemed confident that the worst was over and they are ready to pounce on the good deals as soon as banks balance sheets get well enough to take the losses.

Overall, the conference was an insightful snapshot of the pulse of the market, and some useful color about new opportunities and how to seize them. Yet what I valued most was the concentration of intellectual capital a handshake away, and the dozens of powerful contacts I made and followed up with.

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To contact Carlos Vigon, please email cvigon@newoakcapital.com

The Reforms

Ratings agencies have been criticized heavily by many for their role in the U.S. financial crisis, in particular over conflicts of interest and their failure to recognize the high risks inherent in complex structured products. They have also been blamed for throwing fuel onto the fire of crises by belatedly and aggressively ratcheting down ratings. Numerous proposals have been put forward to reform the rating process to avoid these issues.

The US Congress, after resolving the differences between the House and Senate versions last week, is on the path to pass a sweeping financial regulatory reform bill aimed at increasing oversight and regulation of the US financial system. Among the issues addressed is reform of credit rating agencies. However, the compromise bill avoids most of the stronger proposals. The bill directs SEC to conduct a two-year study to determine if a board overseen by SEC should be setup to help pick which firms rate asset backed securities (the Senate version of the bill had required such a regulatory board). The bill also adopted a softer version of proposed liability provision than was in the house version of the bill (investors must show a company “knowingly or recklessly” failed to conduct a “reasonable” investigation before issuing a rating). The compromises are better than the extreme versions of proposals even though it means that the proposed regulations may not do much to change how the agencies operate.

Earlier, in mid April, SEC made some changes. In the update of Regulation AB, it eliminated the involvement of rating agencies in the shelf registration process by removing the requirement that the ABS be rated investment grade. This clearly has no impact on the rating process.

SEC also promulgated the Rule 17g-5, which went into effect on June 2, to address perceived conflicts of interest with issuer-paid ratings provided by nationally recognized statistical rating organizations (“NRSROs”). The rule aims to increase the number of ratings and promote unsolicited ratings for structured finance products. To achieve this goal, the rule requires issuers and hired rating agencies to maintain password-protected websites to share rating information with non-hired rating agencies. The concept is good, but if implementation means rating agencies will have to share all information with other agencies, they may have less incentive to dig deeper and find more data.

None of these changes are radical overhauls or even proportionate to the amount of Calpers has sued the three major bond rating agencies for $1 billion in losses it said were caused by Markets reacted violently to the cuts as investors worried about the safety of the debt of these countries, and contagion spread from Greece to other countries. Stock markets tumbled worldwide, and bond and currency markets had big moves and became very volatile.

Another way ratings impact markets is via the feedback loop between the markets and ratings through portfolios tied to indexes mandating certain holdings of particular debt. For example, the Barclays Euro Government Bond Index includes Greek debt as 4% of index, but only if the bonds maintain a certain credit quality based on lower of the rating from S&P and Moody’s. Greece had been 4% of that index but was excluded starting May 1, due to S&P’s downgrade. That in turn likely forced selling from investors tracking that index.

Critics assailed rating firms for fueling woe in Europe and Europeans criticized debt-rating agencies, accusing them of spooking the markets and worsening the plight of financially stretched governments such as Greece, struggling with heavy debt loads.

There are several other examples where a company needing to raise more debt in capital markets finds it cannot do so, or not at a reasonable cost, once it has been downgraded even while it was attempting to raise capital to improve its financial situation. The downgrade increases cost of financing as investors demand more yield reflecting lower rating. The downgrade may also result in existing investors having to sell holdings, further increasing the yields in the market. It can become a vicious circle increasing the likelihood of default. The downgrade reflects rating agency’s opinion of the outcome, but it also becomes a causal factor in determining that outcome. The rating agencies in effect become the judge, jury, and the hangman for the company.

The Real Problem That Has Not Been Recognized

In the current system, the rating agencies’ opinion can become a causal factor in making that opinion become reality. Time and again, in structured products and otherwise, it has been clear that the rating agencies are not infallible in their judgment, and do not have any special powers of predicting future. Their failures in predicting subprime mortgage performance have been appalling. But even if you look at the forecasts of defaults in corporate bonds, the predictions do not match the actual outcome, and the predictions themselves change over time, as they should.

So, if ratings are heavily embedded in the system and are needed, and yet rating agencies are not smarter than everybody else, and if they do not have special predictive powers about the future, how do we avoid giving their subjective opinions so much importance and extraordinary power?

The answer lies in recognizing the real problem – one that has not been addressed in any of the proposals so far. The real problem is that the rating agencies are combining two roles into one. First role is to provide a rating based on statistical analysis and past performance of the assets – remember that SR in NRSROs stands for Statistical Ratings. The second role is that of a research analyst to provide an opinion on what might happen in the future. Currently, rating agencies combine the two. The ratings are a mix of statistical analysis and somewhat subjective opinion on the future. This allows rating agencies to downgrade companies or countries even while they are in the process of attempting to improve their financial condition. At the same time, it leaves rating agencies open to criticism if they do not act and the feared worse outcome becomes reality before their downgrade. This also allows subjectivity and flexibility in ratings process that creates perceived conflicts of interest in issuer paid ratings.

The Solution

The logical solution is to separate the two roles. NRSROs should be doing Statistical Ratings – based on past performance of assets, known facts, events that have already taken place, and statistical models and methods that are well disclosed. They can put bonds on watch for upgrade or downgrade if a financial event is in progress or expected, but cannot downgrade or upgrade till the event actually happens. So they will not be precipitating events, and cannot be blamed for not downgrading sooner. This role will be limited to those approved as NRSROs.

The second role of providing credit ratings in the form of opinion on future performance should be separated from the NRSRO role, and should be open to any research provider, including NRSROs. These credit ratings could be designated as Informational Ratings without any legal or official role impacting investor charters, debt covenants, etc, which will only use the ratings designated as NRSRO Ratings. This will take the non-NRSRO rating agencies back to sort of where rating agencies started - as market researchers, selling assessments of corporate debt to people considering whether to buy that debt.

The information provided to NRSROs should be made available to all NRSROs and other non-NRSRO rating agencies, in a manner similar to password-protected website required under SEC Rule 17g-5. However, to promote competition and improve quality, the other rating agencies should be free to gather more information and not have to share it with others.

The conflict of issuer paid rating could be avoided if issuers were required to pay a fixed fee based on deal type (maybe to a group set up by the SEC or an industry association for that purpose) which would be divided between all NRSRO raters informing issuers of their decision to rate the deal after the issuers post the information on the password-protected website for credit raters. This will avoid ratings-shopping by issuers even though the agencies will be indirectly paid by the issuers. The NRSRO Rating will be provided to investors without any charge. The NRSROs will only provide the current rating, along with disclosing their rating methodology to investors. They will not provide any opinions or qualitative information.

For more qualitative information and opinions, investors will look to the Informational Ratings and more details from research providers (including NRSROs and non-NRSROs). This will be paid for by the investors looking for enhanced information and research. This will be the main source of income for credit raters and will incentivize them to compete with others for investor subscriptions and produce quality results.

Separating the two roles avoids the issues of rating agencies precipitating events if they act or facing criticism if they do not. It avoids the perception of conflict from issuer-paid ratings, by allocating costs between the issuer and the investors. It also preserves the role of rating agencies where its needed, while encouraging the investors to do more work on their own and look for third party unbiased research and opinion.

“The National Association of Insurance Commissioners backed off from its proposal to increase the capital that insurance companies must set aside for commercial mortgage loans. That is a good thing for the commercial real estate market,” says Malay Bansal, head of Portfolio Management and Advisory for Commercial Real Estate & CMBS at NewOak Capital, an asset management, advisory, and capital markets firm in Manhattan. “The NAIC had proposed to increase the MEAF for insurers with average loss experience from 2.6 to 4.0, which would have been an increase of 53% in capital that insurance companies would require for holding commercial mortgages. That increase would have resulted in insurance companies reducing their mortgage holdings and would have made it difficult for them to originate new loans. NAIC opted to leave the MEAF for insurers with average loss experience at 2.6%, while increasing it to as high as 4.6% for those with greater than average losses.”

Will China’s Exchange-Rate Policy Reduce Pressures on European Sovereign Bond Crisis?

“Latest China’s exchange-rate policy should help reduce pressures on European sovereign bond crisis on the margin,” says Ron D’Vari, CEO and Co-founder of NewOak Capital, an integrated advisory, capital markets, and asset management firm based in New York. “Beijing knows well that in the long run maintaining a huge current account surplus is not sustainable but at the same time it desires to maintain its export competitiveness against a double dip in western economies. Announcing it just a week before G-20 meeting is clever and will reduce trade war tensions. A gradual appreciation of RMNB over the next 2-3 years should improve world trade and reduce the risk of US and Europe economies to fall back into a deep recession. This is masterfully timed and incredibly wise move on Chinese part despite studies showing RMB’s overvaluation having fallen from 40% to 25%.”

Community Banks in High Demand: Yet Can New Owners Satisfy Existing Customers?

“The failed bank count thus far in 2010 currently stands at slightly over 80 and demand from private equity firms for banks in general remains strong” says James Frischling, President & Co-Founder at NewOak Capital. “The general view is that what goes down, must eventually go up. With so many banks in need of capital and trading at discount to their historical levels, from chaos comes opportunity and the investors are ready to pounce.”

However, the demand for deploying capital into the weakened banking space, while a much needed solution for preventing further damage to the financial system, doesn’t necessarily meet all the demands of the FDIC or the customers that these community banks serve. ‘Community continuity’ has become an important part of the approval process and protecting the customer base that was once served by these institutions is something suitors and potential acquirers need to pay closer attention to. Like any investment, proper and thorough due diligence is required, but beyond the acquisition target’s balance sheet or the capabilities of management, the target bank’s place in the community and its ability to retain its customers under new ownership will go a long way in making the investment a profitable one. ”