Last August, the Journal of Finance published a study by two finance professors that should have made bold headlines in every major business newspaper in America. It didn’t – suggesting that Americans will eventually learn about Wall Street’s chicanery in commercial real estate the same way they learned about Wall Street’s subprime residential mortgage scams after the 2008 financial collapse: from a movie like The Big Short or Inside Job.
Wall Street On Parade only learned about this paper recently from one of our engaged readers.
The paper was authored by John Griffin, Professor of Finance at McCombs School of Business at the University of Texas, Austin and Alex Priest, Assistant Professor of Finance at the Simon Business School at the University of Rochester.
The paper takes a forensic look – from an exhaustive number of perspectives – at why the income stream on Commercial Mortgage-Backed Securities (CMBS) is being consistently overstated by 5 percent or more when sold to investors by certain originators of these loans.
The largest participants in this overstatement of income are the same Wall Street mega banks that were bailed out by the U.S. taxpayer after they blew up Wall Street in 2008 with their subprime residential mortgage scams and then received trillions of dollars in secret revolving loans from the Fed for more than two years at below-market interest rates in order to resuscitate themselves.
The authors find that more than 40 percent of CMBS loans originated by UBS and Goldman Sachs have income overstatements of more than 5 percent, while between 30 and 40 percent of loans originated by Citigroup, Morgan Stanley, JPMorgan Chase and Bank of America feature such overstatement. (Smaller players are included as well in the study.)