It's only when the tide goes out that you learn who's been swimming naked," the billionaire investor Warren Buffett has famously said. During the crash of 2008, the whole world learned just how dangerously nude Wall Street was. Now it may be happening again – this time not with residential mortgage-backed securities, based on loans for homes, but commercial mortgage-backed securities, or CMBS, based on loans for businesses. John M. Griffin and Alex Priest are, respectively, a prominent professor of finance and a Ph.D. candidate at the McCombs School of Business at the University of Texas at Austin. In a study released last November, they sampled almost 40,000 CMBS loans with a market capitalization of $650 billion underwritten from the beginning of 2013 to the end of 2019. "Overall," they write, "actual net operating income falls short of underwritten income by 5% or more in 28% of loans." This was just the average, however: Some originators – including an unusual company called Ladder Capital as well as the Swiss bank UBS, Goldman Sachs, Citigroup, and Morgan Stanley – were significantly worse, "having more than 35% of their loans exhibiting 5% or greater income overstatement." With almost every lender, including Ladder, the overstatement increased as time went on. These income overstatements might cause defaults under any circumstances. But it has been particularly dangerous in a severe economic downturn like the one caused by the coronavirus pandemic.
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