Remember 2007? Glory days, right? Everything was booming, and nothing was booming quite as much as real estate — especially commercial real estate. Malls, hotels, warehouses, industrial parks: Everything was being built, and everything was being financed on ridiculously generous terms. Remember interest-only loans? Good times.

But commercial real estate is different from residential in one important way: Your standard residential mortgage goes 20 to 30 years. Your standard commercial loan goes for five years, at the end of which you either make a big balloon payment (what it is that balloons remind me of?) or you refinance, the idea being that five years is long enough to get your project built or developed, to secure tenants and leases, get your cash flow flowing, etc. Five years: Seems like it was only yesterday. By my always-suspect English-major math, that means that a whole bunch of commercial mortgages written at that poisonous sweet spot when prices were highest but lending standards were lowest are coming due . . . oh, any minute now.

In New York City alone, there’s about $70 billion worth of commercial mortgages — some of which have been sold off as mortgage-backed securities, naturally — coming due this year. The national total is more than $150 billion, or a bit more than 1 percent of U.S. GDP. That’s going to be a little awkward: The value of U.S. commercial properties has declined by an average of 45.7 percent since their all-time high in 2007, according to Real Capital Analytics. Those 2007 vintage loans weren’t exactly bulletproof: Typical terms included a 20 percent down payment and a five-year payment schedule that required little more than interest payments. An $80 million mortgage on a $100 million property is not so bad, but an $80 million mortgage on what is now a $60 million property is a problem. More than half of the 2007-vintage loans are expected to have trouble refinancing, and maybe well more than half.

This is true even for borrowers who have never missed a payment. Banks are required to take into account a number of factors when rating commercial mortgages. One of the most important is the loan-to-value ratio, which has a lot of borrowers over a particularly uncomfortable barrel: They may have the cash to make their payments, and they may have the cash flow to continue making payments on a refinanced loan, but their properties still are worth less than their mortgages, so nobody wants to refinance. And those are the lucky ones: Just as those loans were mostly for five years, most commercial leases are for about the same length of time. With retail and office-space rentals down, lots of commercial borrowers are sitting on largely vacant properties that are not producing much in the way of cash flow. Among the more high-profile cases, the WTC 3 tower at the World Trade Center still has not located an anchor tenant, which could put the much of the project on ice. Thousands of strip malls across the fruited plains have empty storefronts, and thousands of office buildings have floor upon vacant floor.

Standard & Poor’s advises: “One-third of maturing loans are for office properties, for which five-year lease terms are fairly common — and if tenants don’t renew these leases, securing new, long-term lease commitments may be more difficult in the current environment. Those leases [were] signed in 2007, at peak rents will likely reset to lower levels as five-year leases roll.” S&P’s bottom line: “50%-60% of the 2007 vintage five-year-term loans maturing next year may fail to refinance, and retail loans are at the greatest risk.”

Translation: Armageddon at the strip mall.

And it’s not just a problem for New York City and other big, coastal cities. Richmond, Va., has it worse than Manhattan, Washington, or Los Angeles, according to the local Times-Dispatch, which reports that a dozen large commercial properties have gone into foreclosure recently and that 12 percent of the commercial properties in the Richmond-Norfolk market are “distressed.” In Bergen County, N.J., commercial foreclosures are up 7 percent this year over last year. In the first year of the recession, there were 373 foreclosure actions filed in Bergen County, while in 2011 there were 1,586. Commercial foreclosures are up 10 percent for the state as a whole.

In hard-hit Phoenix, about half of the commercial mortgages backing securities are at risk of default, and a couple of hundred, mostly strip malls and other retail, office buildings, and apartments, already are in default.

Taking a look at the commercial MBS (CMBS) market, Standard & Poor’s issued this advice: “Buckle Up.”

Trepp, a CMBS-analysis firm, in its most recent report (data as of October 2011) finds that the delinquency rate for multifamily-property mortgages is 16.73 percent; for hotels, 14.12 percent and rising; for offices, 8.95 percent and rising; for industrial properties, 11.59 percent and rising; and for retail, a steady 7.61 percent. Trepp managing director Matt Anderson does not sound like a ray of sunshine: “Overall, we do not expect 2012 to be a repeat of 2008, but there will be more disappointments than pleasant surprises in the New Year. The banking sector has not yet returned to ‘normal’ despite two years of earnings growth. With increased regulation and the temptation for banks to take additional risks in order to preserve margins, 2012 should be a very interesting year.”

Not as bad as 2008 — is there a better example of damning with faint praise?

Trepp gets to the real concern here, which is that these mortgages and mortgage-backed securities are sitting on the balance sheets of a bunch of still-wobbly banks. How wobbly? About 100 banks went under last year, and about 250 are expected to go under this year. Trepp finds that, of the banks that went toes-up in 2011, bad commercial real estate accounted for two-thirds of their failing loans.

This is a textbook case for the Austrian business-cycle theory: Artificially low interest rates and loose money produce overinvestment, by both bankers and builders, in a bubble — this time, offices, apartment buildings, and retail space — that can’t be sustained once the artificial stimulation comes to an end, as it must. In this case, that malinvestment has to be worked out at two levels: At the financial level, among the lenders and borrowers, but also at the physical level: There’s going to be a lot of dark storefronts out there, with serious long-term consequences for nearby neighbors and for local real-estate markets: Foreclosures will put more property onto the market, driving down rents and subsequently making existing loans less tenable as the cashflow of commercial properties is diminished. They called the Depression-era tent cities “Hoovervilles.” The next time you see a mile of half-abandoned strip malls, think “Obamaville.” 

Not as bad as 2008? Probably not — and let’s hope it is not even close. But there’s a $3 trillion commercial-mortgage market lurking out there, and a lot of CMBS investors — banks and insurance companies in particular — that Washington thinks are “too big to fail,” a problem we persistently refuse to address.

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, published by Regnery. You can buy an autographed copy through National Review Online here.

Dino LaVerghetta, a 28-year-old New Yorker, does not outwardly seem to be the least bit retro, but he might be a generation or two out of place, with one of those stories that you sometimes forget are still happening every day: He’s the child of Italian immigrants, and his father ran a pizzeria — “total Italian stereotype,” he grins — before getting into real estate. LaVerghetta married his high-school sweetheart, and, just as the children of immigrants have for generations, advanced through higher education and a profession: Today, he’s a securities lawyer at a prominent international firm. He probably wouldn’t call it a white-shoe firm, but it’s a white-shoe firm.

LaVerghetta is a throwback in another way, too: He’s an Upper East Side Republican, an increasingly rare urban species whose habitat has been decimated — the formerly Republican-dominated expanse of middle Manhattan populated by financial professionals has largely abandoned the GOP — and whose political leadership is endangered, if not quite extinct. LaVerghetta has his eyes on New York City’s 14th Congressional District, which encompasses eastern Manhattan, Roosevelt Island, and part of Queens, a seat that has been occupied by Democratic incumbent Carolyn Maloney for 16 years. From the pizzeria to Congress in one generation: It won’t surprise you to learn that LaVerghetta talks about the classic American values of free enterprise, limited government under the Constitution, and fiscal responsibility. 

What might surprise you is his take on the Glass-Steagall Act. The 1999 repeal of Glass-Steagall, the Depression-era law that had prohibited the combination of regular deposit-taking banks with investment banks, insurance companies, or other kinds of financial operations, has long been cited by the Left as the root of all bankster evil. Democrats have framed it as another case of deregulation-mad Republicans acting as the running dogs of their corporate masters to the general detriment of the Republic. The real story is, of course, more complicated than that: The repeal of Glass-Steagall was signed into law by a Democrat, Pres. Bill Clinton, after every Democrat in the Senate voted for it, along with 155 Democrats in the House — three-quarters of the Democratic caucus at the time. One of the Democrats who voted for the repeal of Glass-Steagall was Carolyn Maloney, and LaVerghetta intends to remind voters of that fact, often.

“The 1999 repeal of the Glass-Steagall Act, which was supported by Carolyn Maloney, was a mistake,” he says. “It is no coincidence that the nation faced a near financial meltdown within ten years of its repeal. The financial system would be far better off if we tossed out the 2,300-page Dodd-Frank Act and simply put the 34-page Glass-Steagall Act back on the books.” As a securities lawyer, LaVerghetta knows a little something about financial regulation, and he’s under no delusion that Glass-Steagall would have prevented all of the financial turmoil that rocked the world following the subprime meltdown. It is difficult to say what Glass-Steagall would have changed at Bear Stearns or Lehman Bros., to say nothing of AIG.

What it would have done, LaVerghetta argues, is establish a pretty good firewall around the depository banks, the places where Americans park their paychecks and savings accounts. With those insulated from the shenanigans that the investment banks were up to, he believes, we could have avoided the bailouts. “The only way to avoid the need for future bailouts is to ensure that our depository-banking system is insulated from speculative investments,” he says.

The Democrat in the race is not exactly Larry Kudlow when it comes to understanding Wall Street. Her ideas on financial reform are utterly conventional ORPism, (Obama-Reid-Pelosi-ism), but the GOP is not girding its loins to do political battle in Manhattan. LaVerghetta knows he has a tough race ahead of him. “It’s a shame that the party of free enterprise has abandoned the center of the financial universe,” he says.

LaVerghetta’s main primary opponent is Ryan Brumberg, who advertises himself as the “true fiscal conservative” in the race and whose candidacy is supported by, among others, the libertarian investor Peter Thiel, who founded PayPal. Like LaVerghetta, Brumberg comes from an archetypal New York background, although one of a different sort: He’s a McKinsey management consultant.

Brumberg is popular with New York conservatives (both of them), and his program for financial reform — winding down Fannie and Freddie, a “pre-commitment for the government to never bail out the banks” — is orthodox Republican stuff. Asked what kind of guarantee mechanism would be necessary to make that “pre-commitment” against bailouts credible, he was unable to produce a convincing answer — which is understandable, because there is not one. The only way to head off future bailouts is to elect to Congress men who will not vote for bailouts. TARP passed the Senate 74–25 and the House 263–171. You do the math.

And it still is far from clear that our government was capable of implementing a superior plan, even if anybody had offered one.

Brumberg scoffs at the idea of reinstating Glass-Steagall. Judge Richard Posner, the eccentrically libertarian legal and economic critic, has endorsed reinstating it, for reasons similar to those articulated by LaVerghetta. As is often the case — on issues ranging from drug legalization to financial regulation to health-care reform — the real intellectual action is on the right, but the operational politics are moving things to the left. LaVerghetta is a Ron Paul guy arguing for the reinstatement of an FDR-era body of banking regulations so that the next time around the markets can destroy the investment banks but not grandma’s passbook account. Brumberg is a libertarianish conservative who will talk your ear off about capital-requirement rules and pre-packaged bankruptcy plans. Clueless Carolyn is not exactly bubbling with innovative thinking on the financial issue that matters most to her constituency.

Thirty blocks uptown, Charlie Rangel is probably taking a nap and thinking nothing of it, his slumber troubled, if at all, by financial matters touching Wall Street only incidentally.

– Kevin D. Williamson is deputy managing editor of National Review.

You know that bank we own? No, not that one, this one. There seems to be some trouble:

An all-out war has broken out between Citigroup CEO Vikram Pandit and a prominent securities analyst who is saying that the big bank may be cooking the books by inflating its earnings through an accounting gimmick, FOX Business Network has learned.

The analyst, Mike Mayo, of the securities firm CLSA, has been telling investors that Citigroup (C: 3.70 ,+0.04 ,+0.96%) should take a writedown, or a loss on some $50 billion of “deferred-tax assets,” or DTAs. That is a tax credit the firm has on its financial statement that Mayo says is inflating profits at the big bank by as much as $10 billion.

For that critique, Mayo has been denied one-on-one meetings with top players of the firm, including CEO Vikram Pandit, Chief Financial Officer John Gerspach, and any other member of management, while other analysts enjoy full access to the bank’s top executives, FBN has learned.

In fact, Mayo hasn’t had a meeting with Pandit or anyone in Citigroup management since around the time of the financial crisis, in the fall of 2008, when Citigroup was on the verge of extinction and needed an unprecedented series of government bailouts to survive.

You know who ought to be able to get a meeting with Vikram Pandit? Tim Geithner. And if not Tiny Tim, then his boss, Barack Obama, who was the top recipient of Citigroup campaign contributions in the last election cycle, having taken in more than $730,000. You know who else might be able to get a meeting? New York Sen. Kirsten Gillibrand, who is the biggest recipient of Citigroup money in this election cycle so far.

Obama and Gillibrand should know: If you’re going to bail out the bank and take the bank’s money, then when it’s time for due diligence, you need to make sure that somebody steps up.