So its official- on the front page of today’s Journal- Banks are extending and pretending! Well we all know that. AND WE ALL KNOW WHY. No one individual or institution has any motivation to take the current 40% average write down hotel loans would require. As the Cowardly Lion in the Wizard of Oz said, “Not nobody. Not nohow.” Think expansively about this. No one in America wants to take the pain and pay the current price for all those historically horrendously bad hotel loans made from 06 and 07 (raise your hand if you made a loan then and are proud of it). Like all bad little boys and girls we want to change the rules when we get caught…that’s what the FDIC did last October.

Two important questions “What are the consequences?” and “When will it hit the fan?”

Consequences- The current pig in the python (about $20B plus non performing hotel loans in banks and $16.4B in special servicing) will increase within a year to a cow in the python (two thirds of hotel loans in banks are underwater and another $5B plus in CMBS hotel loans are in queue) and by 2012 will be an elephant in the python with projected maturity defaults… and well you see the problem as we don’t have any more non-aquatic mammals for analogy. Remember this – adjusted for inflation hotel income will not get to 2007 levels until 2017. So the consequences – when it does blow up it will be far far worse because of the pile up and denial. But again this is a problem no one has any motivation to solve now so don’t expect any action any time soon to take the losses.

When will it hit the fan?- How about when we have the follow-on recession and we are out of our $2 Trillion stimulus bullets and it’s so bad for us all we all are motivated to clean up the mess and start over.