Fed Starting to Panic over TALF Collateral Concerns

The Federal Reserve of New York is apparently just now realizing that Commercial Real Estate collateral is more than just wishful thinking. In a press release issued yesterday, the NY Fed announced that it had picked TREPP to serve as a collateral monitor for the CRE Hail Mary pass better known as TALF. One would have expected the Fed to actually have some sort of algorithmic modeling of CMBS cash flow projections before it had decided to dedicate $1 trillion to this neutron bombed segment. Of course, always better late than never. From the press release:

The TALF is designed to increase credit availability and support economic activity in part by facilitating renewed issuance of consumer and business asset-backed securities (ABS) and CMBS. Trepp is an established provider of information and analytic services to the CMBS and commercial mortgage finance industries. As a collateral monitor for the newly issued and legacy CMBS assets, Trepp will assist the New York Fed by providing valuation, modeling, analytics and reporting, as well as advising on these matters. Trepp will not establish policies or make decisions for the New York Fed, including decisions whether to reject a CMBS as collateral for a TALF loan or exclude loans from mortgage pools.

I may be rusty, but last time I used TREPP, it told me the CMBS market was overoptimistic by about 1,000 bps. And that was when AAA spreads were at 1,000. One would hope not too many tweaks occur to the TREPP engine as it is "ported" over to the Fed: in that case there may be some hope that Dudley, Geithner et al, realize just how massive cumulative losses will be on all sorts of vintages and classes and will finally abandon the zany TALF plan altogether. Or if not, as Wall Street Pro says, perhaps they will let the taxpayer put the last dollar in to the TALF purchase (displacing the 12x leveraged chunk from various hedge funds), and allow them to actually pocket the upside instead of just footing the downside.

Comments

[dcb]

Hey, I have a good idea.
Let's have the private bankers (NY fed) determine what they will accept as collateral from the private banks that own them. Does anyone smell a conflict of interest here.

2009 Jun 17 08:35 AM

[yellowhoard]

I think the strategy is to dribble out new funding demands.

If they came out on day one and said "this is going to cost 30 trillion dollars", the dollar would have collapsed.

This way, a trilliion here a trillion there, is so much more civilized.

2009 Jun 17 08:39 AM

[dcb]

I see a huge potential conflict with this program. NY fed chosen by wall street bankers determines what collateral they will accept from this bankers who control their job..

seekingalpha.com/artic...

please see link above, full article below
The Federal Reserve of New York is apparently just now realizing that Commercial Real Estate collateral is more than just wishful thinking. In a press release issued yesterday, the NY Fed announced that it had picked TREPP to serve as a collateral monitor for the CRE Hail Mary pass better known as TALF. One would have expected the Fed to actually have some sort of algorithmic modeling of CMBS cash flow projections before it had decided to dedicate $1 trillion to this neutron bombed segment. Of course, always better late than never. From the press release:

The TALF is designed to increase credit availability and support economic activity in part by facilitating renewed issuance of consumer and business asset-backed securities (ABS) and CMBS. Trepp is an established provider of information and analytic services to the CMBS and commercial mortgage finance industries. As a collateral monitor for the newly issued and legacy CMBS assets, Trepp will assist the New York Fed by providing valuation, modeling, analytics and reporting, as well as advising on these matters. Trepp will not establish policies or make decisions for the New York Fed, including decisions whether to reject a CMBS as collateral for a TALF loan or exclude loans from mortgage pools.

I may be rusty, but last time I used TREPP, it told me the CMBS market was overoptimistic by about 1,000 bps. And that was when AAA spreads were at 1,000. One would hope not too many tweaks occur to the TREPP engine as it is "ported" over to the Fed: in that case there may be some hope that Dudley, Geithner et al, realize just how massive cumulative losses will be on all sorts of vintages and classes and will finally abandon the zany TALF plan altogether. Or if not, as Wall Street Pro says, perhaps they will let the taxpayer put the last dollar in to the TALF purchase (displacing the 12x leveraged chunk from various hedge funds), and allow them to actually pocket the upside instead of just footing the downside.

HAVE THE FED THAT ADMINISTERS THE PROGRAM NOT CONTROLLED BY THE PEOPLE IT SERVES. BANKERS PICK NY FED THEREFORE HAVE CLEVELAND FED RUN THIS PROGRAM THIS HELPS ELIMINATE CONFLICT OF INTEREST.

SENT TO gao, TARP OVERSIGHT COMMITTEE AND NEIL BARTOFSKY.

2009 Jun 17 08:49 AM

[CautiousInvestor]

The Fed is either very sensitive to deterioration occurring in CRE markets and want to safeguard taxpayer monies or they are, in the face of growing downgrades, designing a means to circumvent their own asset criteria which are pasted below.

To be eligible as collateral for TALF loans, legacy CMBS must be senior in payment priority to all other interests in the underlying pool of commercial mortgages and, as detailed in the attached term sheet, meet certain other criteria designed to protect the Federal Reserve and the Treasury from credit risk. The FRBNY will review and reject as collateral any CMBS that does not meet the published terms or otherwise poses unacceptable risk.

Eligible newly issued and legacy CMBS must have at least two triple-A ratings from DBRS, Fitch Ratings, Moody’s Investors Service, Realpoint, or Standard Poor’s and must not have a rating below triple-A from any of these rating agencies. More broadly, the Federal Reserve is formalizing procedures for determining the set of rating agencies whose ratings will be accepted for various types of eligible collateral in the Federal Reserve’s credit programs.

2009 Jun 17 09:11 AM

[klh]

from today - "The really awesome part of this particular commercial real estate blow-out (Extended Stay) is that the Fed actually owns $744 million in face value of various JUNIOR classes of the debt on Extended Stay and also held $153 million of the senior debt that was packaged and sold as bonds. That is courtesy of the Bear Stearns collateral that the Fed guaranteed so it could coerce JP Morgan into buying the now defunct broker dealer back in March of 2008, when "the worst was over."

2009 Jun 17 11:32 AM

[Commercial Mortgage Loans]

They have one thing right; we need the CMBS market.
The Government can not create the needed liquidity alone.

2009 Jun 17 12:10 PM

[Fighting Yoda]

Most of CMBS does not meet the collateral criteria - that is the problem, hence no one is taking up TALF - zero applications in the first month. Fed will likely dilute the collateral requirement.

2009 Jun 17 09:06 PM

[joebhed]

So, what happens when the few $hundred billion of these loans hit the wall and there is a loss to the "FED"'s operations?

It's not our problem, unless we're taxpayers.
I have seen no discussion of this, but it appears that the loss would hit the Fed's balance sheet and its Operating statement, creating a reduction in its "profits".
As we all know, the Fed grace is in its ability to repay to Treasury the "excess" profits from its operations.
So a loss that results in reduced profits from operations seems like it results in a reduced repayment to the Treasury, which seems like it must be made up by, guess who, the taxpayers.
Not to worry.
We're regulating.

2009 Jun 18 08:47 AM

[RTF 360]

HR 1207 Ron Paul’s Audit the Fed bill is now up to 258 cosponsors.

The White House, {in ' warp speed ' response to Rep. Paul's' populist move for Federal Reserve transparency} seeks to give the fed more power ,much more secrecy and also the full protection of the Executive Branch and Executive privilege ...... primary evidence that Banksters have already hijacked Americas government with their full frontal assault on U.S. Constitutional separation of powers and it's checks and balances .
----------------------...
In this issue of The Institutional Risk Analyst, we comment on the economic stability plan of Larry Summers and his plans for making the Fed part of the White House staff. We then feature a guest comment by Joe Mason on the Obama Administration proposal to fix the private market for securitizations.

us1.institutionalriska...


Comprehensive Plan for Regulatory Reform (June 17): New framework includes 1) The Fed as systemic risk regulator and creation of ‘council of regulators'. 2) Requires the originator, sponsor or broker of a securitization to retain a financial interest in its performance ('skin in the game'). Also regulate all financial derivatives for the first time. 3) Consumer Financial Protection Agency for strong investor protection and rules against predatory lending. 4) New resolution mechanism that allows for the orderly resolution of any financial holding company whose failure might threaten the stability of the financial system, including large hedge funds and major insurers such as AIG. 5) Lead the effort to improve regulation and supervision around the world
The Fed will retain day-to-day supervision of the largest bank holding companies - which the Bush administration had proposed taking away - and may become sole regulator. The Fed will also directly supervise non-bank financial companies that reach a size and complexity comparable to these banks. Fed is also likely to be given the final word on bank capital requirements, including a surcharge for the systemically important financial institutions. FDIC will receive a new non-bank/holding resolution authority. No federal insurance regulation but a national insurance office within the Treasury to gather information about the industry (Financial Times, June 1
www.crisisbydesign.com.../
Should be required reading for every American regardless of political party who is concerned about his country's future.
I've read "The Hidden Beginning" several times and completely concur with Mr Weisman.
It's all about bank capital and reserve requirements

2009 Jun 18 01:57 PM

[LKofScotland]

perhaps the TALF should be renamed the "RALF" or "really aweful loan fund." Better yet would be the "BARF" for "Bad Asset Relief Fund." Perhaps when we're done spending aircraft carrier battle group money on "bailouts" we'll take the time to ask how the war is going. any bailouts for those guys (and gals) from Uncle Sam? How about healthcare? If you want an idea of what government run healthcare will look like just ask a vet how long it takes for him to see an RN let alone a doctor. It's been over two years and running for me.

2009 Jun 18 09:10 PM