I’ve been reading Michael Lewis’s book The Big Short: Inside the Doomsday Machine, about the people who found a way to make a load of money betting on the collapse of the subprime mortgage market. Over the past decade, I’ve often wished I’d had money to invest in a way to express my feeling that the residential real estate market in the past decade was a house of cards, but as the book points out, it wasn’t enough to merely have the money. The people Lewis profiles also had to figure out how to bet against the conventional wisdom; one of the guys he writes about actually invented the type of trade that the others used to make their billions. Either way, no millions for Darrel.

I can’t help but feeling that we’re going to see some similar stories coming out of the commercial real estate market. A report that came out last month from TARP Congressional Oversight Panel Chairwoman Elizabeth Warren predicting that half of all commercial mortgages would be be “underwater” by the end of this year has been getting some play this week.

From the report’s Executive Summary:

Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will reach the end of their terms. Nearly half are at present ― underwater – that is, the borrower owes more than the underlying property is currently worth. Commercial property values have fallen more than 40 percent since the beginning of 2007. Increased vacancy rates, which now range from eight percent for multifamily housing to 18 percent for office buildings, and falling rents, which have declined 40 percent for office space and 33 percent for retail space, have exerted a powerful downward pressure on the value of commercial properties.

The largest commercial real estate loan losses are projected for 2011 and beyond; losses at banks alone could range as high as $200-$300 billion. The stress tests conducted last year for 19 major financial institutions examined their capital reserves only through the end of 2010. Even more significantly, small and mid-sized banks were never subjected to any exercise comparable to the stress tests, despite the fact that small and mid-sized banks are proportionately even more exposed than their larger counterparts to commercial real estate loan losses.

Presumably, the larger size and smaller quantity of commercial loans (as compared to residential loans) precluded the dive in lending standards that led to stories like the one Lewis recounts where a California crop picker making $14,000 a year got a loan for a $750,000 home, or the baby nurse of one of his profile subjects whose mortgage lenders convinced her to leverage a single townhouse purchase in Queens into five townhouses, but it would be a mistake to think that bankers, developers, and businesspeople are somehow smarter about money just because they have more of it. Someone, after all, lent the money to the crop picker and the baby nurse to buy the house, someone built the houses thinking they could sell them, and someone lent the builder money to build the houses they thought they could sell.

As Lewis elaborates, the initial act of lending the money to the home buyers isn’t where the real money was. It was the bond market — where mortgages were bundled into packages of several thousands and traded between investors and second and third-generation trade instruments were created that simultaneously magnified the volume and obscured the risk of the original mortgages — that was the scene of the real crime. And after reading Lewis’s book, I can’t help but suspect that, while I still don’t have the money to do any investing, that there are probably collateralized debt obligations and credit default swaps aplenty to be heard of coming from commercial mortgages.