Fire Sale America

BROOKLYN, N.Y. — An executive from a fund that buys “distressed assets” held a luncheon audience spellbound Monday as he talked about what his firm thinks assets such as consumer debt are really worth.

The holders of delinquent credit card debt are valuing the paper at about 14 cents to 15 cents on the dollar on their books, and they are willing to sell the debt for 2 cents to 5 cents on the dollar, Timothy Clark, a senior partner at CarVal Investors, Minneapolis, said at an insurance industry conference organized by Standard & Poor’s, New York.

CarVal invests mainly in commercial real estate loans, single-family mortgages, business loans and consumer debt. For CarVal, even if the credit card paper prices go down to 2 cents on the dollar, “that may be too much,” Clark said.

Some in the insurance industry and elsewhere have been looking for “green shoots” – evidence that parts of the economy are starting to recover.

“I’m kind of green shooted out,” Clark said. “We do believe that there’s future pain yet to come.”

The government has stabilized the financial markets, but government debt is high, and first-quarter corporate earnings were terrible, Clark said.

Because the U.S. population is aging, Americans need to increase their savings rate to about 8%, from 1.8%, over the next decade simply to fund their retirement. That alone could cut U.S. consumer spending about $800 billion per year, Clark said.

Some banks seem to be continuing to value assets at inflated levels, Clark added. In many cases, he said, CarVal is willing to pay just 50 cents to 70 cents on the dollar for assets, and the banks are still valuing the assets at 65 cents to 85 cents on the dollar.

Over in the commercial real estate sector, prices already are down 35% to 45% in many markets, and vacancy rates are approaching the levels last seen in the early 1990s. Meanwhile, commercial real estate borrowers will need to refinance about $600 billion in debt that is set to come due in the next 24 months, Clark said.