Brian Kelly

TALF Creates a New Class of Toxic CMBS Assets

Fishhooks,

As I understand your position, it is similar to the logic the government is using, i.e., the perception that money is available to fund AAA asset purchases has tightened that space and that action should lead to other tranches tightening as well.

In that light, it is a technical issue as opposed to a toxic issue, which is exactly the bank's logic behind not marking down assets. They claim a liquidity constrained market is not a market. But I think we are really talking semantics--if I can't sell an asset when I want/need to it is toxic to me.


On Mar 31 12:02 PM Fishooks wrote:

> I'd take your observation and argue the opposite position. Whether
> or not you agree with re-instituting leverage into the system through
> the legacy-TALF (albeit without the pesky margin calls that banks
> used to enforce), the initial reaction displays the marketplace's
> view of the difference between liquidity-strained and toxic.
> BBB rated tranches with ~5% credit enhancement were and are fundamentally
> troubled given the poor underwriting characteristics in combination
> with declining real estate values (as 'Convexity' points out). Having
> more $$$ in the system doesn't change the opinion cashflow/terminal
> principal value.
> Even though the tightening in AAA assets since PPIP/Legacy TALF were
> announced is nowhere near enough to signal a turn in fortune, it
> does display that the market's price point at this part of the capital
> structure (30% attachment point) is significantly impacted by the
> availability of $$$ (or at least the perception of the availability
> of $$$) to own the securities. Thus, it could be appropriately argued
> that it's more of a technical trading issue than a toxic asset issue.
> By that logic, at least 70% of the CMBS universe on a notional basis
> (much more on a market value basis, no matter what you perceive market
> value to be) is in the midst of a technical issue not a fundamentally
> toxic one.

TALF Creates a New Class of Toxic CMBS Assets

I also think that the T-bill auctions will be a key to watch. Since the Fed is only buying 2-30 yr maturities the same disparity could occur if investors only want what the government is buying. I am not suggesting that T-bills are junk or toxic, just that it may take a little extra yield to entice buyers.


On Mar 31 05:02 AM Moon Kil Woong wrote:

> Hmmm, keen insight.
>
> A s the government moves into corporate bonds and credit card debt
> expect the same disparity between what the government will support/back/guarantee/or
> take onto its books and what it won't. Unintentionally, what it won't
> take on it's own books may suddenly become junk even though it was
> just high yielding before.