The Deal Magazine's Deal Economy Preview Reveals Pressure Centers in Today's Rapidly Changing Market

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The magazine's cover story examines how the woes of residential real estate may soon be joined by their brethren on the commercial side

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witnessing what in many respects may prove to be the proverbial calm before the storm … loans issued in the boom years are only now coming due, with little or no prospect of refinancing.

The Deal, the business and financial magazine, ( ), today leads with an examination of the commercial real estate market as it unveils its "Deal Economy Forecast," a biannual special report providing analysis of critical issues financial and corporate dealmakers will face in the coming year.

In the cover story, "The Coming Commercial Crash," senior writer Matt Miller writes that the commercial real estate market is "witnessing what in many respects may prove to be the proverbial calm before the storm … loans issued in the boom years are only now coming due, with little or no prospect of refinancing." While conservative estimates place potential troubles at $81 billion, others believe that distressed commercial property in potential default may exceed $400 billion. The crisis is expected to worsen in 2010 and remain until 2011.

As part of the "Deal Economy Preview," senior writer Vipal Monga's story, "A Matter of Interpretation," opens the debate on whether fair-value accounting deepened the crisis or provided the remedy. He asks, "Does the market price always accurately reflect fundamental value? And what about those circumstances where markets are illiquid and barely function, beset by a lack of buyers and sellers?"

Monga mentions when Merrill Lynch & Co. sold a notional $30.6 billion portfolio of mortgage-backed securities for 22 cents on the dollar. Many believed this "inaccurate estimation" of value led to several large banks--including Lehman Brothers Holdings Inc.--to absorb heavy losses, based largely on mortgage-related write-downs.

While critics, as quoted by William Isaac, a former chairman of the Federal Deposit Insurance Corporation, argue fair-value accounting is based on highly emotional market swings that can reverse themselves quite easily once the emotion wears off, proponents say it's the best valuation method and there's no alternative.

Secrecy, opaqueness and losses have sent regulators and exchanges searching for solutions for the credit default market, senior writer Donna Block explains in "Extreme Makeover." Among the options under study is the creation of a central clearinghouse for credit derivatives.

While standardized trading would ease one set of problems, Block remarks, it may create another. There's no doubt that buyers and sellers will be forced to disclose more information and come up with more capital to trade--making the market less attractive. But while an extreme makeover of the CDS market will make it a lot less lucrative, it will also be much safer.

In "They Need a New Drug," senior writer Alex Lash writes while the top 20 drug companies in late September had an average $75 billion in cash and very little debt, sputtering productivity, political backlash, regulators and generic competition loom large.

Now with public and private biotechs increasingly desperate for funding, the time would seem ripe for more deals in the sector. But biotech managers and investors who hope for a sale should be warned, Lash says, that buyers are more likely to browse gingerly through bargain bins than line up at the doors before dawn.

In the final story of the special report, senior writer David Marcus' "Parisian Views" notes that like everything else originating in the U.S., the financial crisis eventually made its way to France. However, the French response has been distinct, shaped by the structure of its markets and the country's acceptance of aggressive government involvement in the economy.

About The Deal LLC
The Deal LLC, (, is a diversified media company that is the authoritative voice of the deal economy. We serve the global deal community-corporate and financial dealmakers, advisers and institutional investors-by providing business and financial news and information that offers fresh insights on the deal economy, a set of interrelated activities, focused on dealmaking of all kinds, whose purpose is to generate corporate growth in a continually changing global market. We offer a comprehensive line of print and electronic products - The Deal Pipeline, The Deal, The Daily Deal and - and live annual events including Private Capital Symposium, Distressed Investing Forum, Corporate Dealmaker Forum and M&A Outlook. The Deal LLC, a privately held company, is owned by private investment funds, including U.S. Equity Partners LP, sponsored by Wasserstein & Co. LP.

Marielena Santana
msantana at thedeal dot com

Martha Brown
mbrown at thedeal dot com


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