Wednesday, January 13, 2010

WSJ: BofA REIT Dealings

In what was supposed to be a puff piece on Bank of America taking over the IPO market for Real Estate Investment Trusts it seems the Wall Street Journal may have exposed a practice that could come back to haunt that bank, and taxpayers. It appears that BofA is dangling the carrot of big credit line facilities for hurting REIT's in order to win investment banking business (stock issuance). The following quote from the story seems to confirm this:

"ProLogis Chief Financial Officer Bill Sullivan said the company tapped Bank of America to run the stock offering because of the lending relationship.

"Our view, very consciously, was, 'Hey, let's let these guys make some money … and that will help us as we go to deal with some of the bank-line issues,'" Mr. Sullivan said."

BofA earns big fees on these stock issuance deals, but what about the risk they are taking by extending the credit and using the credit as a way to attract the stock underwriting business? While this might not be anything new we should be concerned because commercial real estate isn't exactly in a good position right now and if the downturn is extended we could see BofA become an owner of yet more illiquid real estate......requiring further bailouts.

Scott Dauenhauer CFP, MSFP, AIF