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Guest Post: Is The Federal Reserve Accepting Illiquid CMSs As Collateral For TALF Loans?

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Wed, 11/04/2009 - 18:48 | 120295 tj3
tj3's picture

"Remember, the commercial mortgage bond market is only $700 billion"

I don't know but that doesn't sound right.

Wed, 11/04/2009 - 19:02 | 120315 ghostfaceinvestah
ghostfaceinvestah's picture

Doesn't sound right to me, either.

Also, how many CRE loans are on bank balance sheets?

The big diff between RRE and CRE is that most balance sheet resi loans are on the books of the big players - WFC, BAC, and JPM.

There are a lot of CRE loans are on the books of community and regional banks.  You know, the ones who actually lend to Main Street.

Wed, 11/04/2009 - 19:25 | 120352 Pizza Delivery Man
Pizza Delivery Man's picture

$5,300 bn, but whatever. We don't use real numbers in this country anymore, we use imaginary numbers. Pick a random number and just use that one.


Wed, 11/04/2009 - 21:51 | 120495 Assetman
Assetman's picture

Yeah... the $5.3 trillion figure is roughtly correct.

One thing to remmber that under CMBS/TALF, the Fed requited the underlying collateral to be rated AAA by at least 2 rating agencies-- which does narrow down the universe somewhat.

Well, except for the fact that the Fed had been pressing agencies to delay downgrades until the collatral was actually taken.

My sense is that the program was/is highly tailored to protect the investment banks that packaged these securities.  As long as the CMBS stuff taken remains on "negative watch", I'd gather that those securities will remain illiquid.  In many cases, that will mean unwinding the collateral in a massive liquidation process to see how much had "disappeared".

Perhaps the $700 billion is the potential collateral amount eliible under the program.  In any sense its a good way for a "bank" to jettison a toxic asset and get $100 in loan money for collateral that might be worth $30.  It's a great racket for a "bank" holding a ticking time bomb.

What gets me is that the Fed has full knowledge going into these deals, that the collateral is expected to rot.  That pretty much chaps my hide, podner.

Thu, 11/05/2009 - 14:08 | 121003 tip e. canoe
tip e. canoe's picture

The Federal Reserve -- putting the private in the public's bum since 1913...

Thu, 11/05/2009 - 00:05 | 120582 FischerBlack
FischerBlack's picture

Actual CMBS issuance is closer to $1.2 trillion according to http://www.cmsaglobal.org/uploadedFiles/CMSA_Site_Home/Industry_Resource...

On the S&P fact sheet you posted, the $5.3 trillion figure is what they're saying is the market value of all commercial real estate in the US. The total of all US MBS outstanding is something like $9 trillion face including residential, GSE-backed, conduits, and CMBS. Add in CDS and you can generate some huge notionals, but CMBS liquidity is not a huge fraction of total MBS liquidity. The $1.2 trillion figure sounds about right to me.

Wed, 11/04/2009 - 20:57 | 120446 Anonymous
Anonymous's picture

first of all. CMBS not CMSs, red flag #1, secondly I can't understand what this guy is mad about at all. Does he know what illiquid means? it means no one is buying it. He realizes these are bonds that are traded on a secondary market right?

That bond had probably traded, just because it may not have traded recently. Just because it was downgraded doesn't equate to liquidity. This 'paper' is filled with huge holes IMO. I could go on, but its just too poorly thought out.

Thu, 11/05/2009 - 00:38 | 120599 FischerBlack
FischerBlack's picture

The author is using the term 'illiquid' in a more colloquial sense than a finance MBA might, but then again, so are you, and this is a blog, so we forgive such things.

The point of it is that the security in question might have been accepted as collateral for a TALF loan 18 days before a downgrade which presumably would have negatively impacted the liquidity of the security, i.e., the ability to convert the security to cash at or near par. It's another example of our financial institutions gaming the system for fun and profit, as the author implies the institution could have known of the downgrade in advance.

This isn't earth-shattering, of course. But what's cool about this article is that it's all the work of one guy using publicly-available data and connecting dots. Maybe this article isn't it, but in all of that data, there might be a massive smoking gun. I think work like this should be encouraged. Get enough people sleuthing through the data with a Rockstar energy drink in one hand and The Google in the other, and who knows what they might find.

Or, if you like, you can take the blue pill...


Wed, 11/04/2009 - 23:09 | 120546 Anonymous
Anonymous's picture

That's because it isn't right. At least one of the 39 Tyler Durdens needs to research more.

Wed, 11/04/2009 - 23:12 | 120549 Anonymous
Anonymous's picture

That's because it isn't right. At least one of the 39 Tyler Durdens needs to research more.

Wed, 11/04/2009 - 18:48 | 120297 Gordon_Gekko
Gordon_Gekko's picture

Yes - that and each and every piece of trash in the whole entire world. In fact, reliable sources indicate that to avert the very serious threat of "deflation", the Fed will soon start accepting the trash generated everyday by American households as collateral to provide "loans" (read: helicopter drop) to them. The Fed is creating money out of thin air as we speak (write) with which it will "buy" Waste Management Inc. in order to successfully execute this program. It is also rumored that the Fed will be buying landfill sites where the trash will be dumped so the public can actually see the collateral backing their currency, hence eliminating the need for auditing the Fed. The program has been aptly titled "Cash for Trash" or "How Ben Bernanke Will Save America From Deflation" (HBBWSAFD).

Wed, 11/04/2009 - 19:01 | 120314 RockyRacoon
RockyRacoon's picture

Good analogy Gordon.  Cash for trash.  And when it comes time to stop the QE, those trucks will be stuck in their own muck, up to the axles.

I like how you channeled the Mogambo!  He has a Superb Way With Words (SWWW).

Wed, 11/04/2009 - 19:03 | 120320 ghostfaceinvestah
ghostfaceinvestah's picture

LMAO!!!  +10

Gideon Gono is gonna be so jealous.

Wed, 11/04/2009 - 19:11 | 120332 deadhead
deadhead's picture

That's beautiful GG!

Actually, isn't that part of the official Obama "new green economy" that will lead us to the new promised land?  I see tens of thousands of unemployed people being hired ala FDR's CCC program rampaging through landfills at 25 bucks per hour (full gov't health ins, pension, 5 week pd vacation, etc) pulling out #2 recyclable plastic to save the dolphins and prevent glacial melting. 

Wed, 11/04/2009 - 20:27 | 120417 ghostfaceinvestah
ghostfaceinvestah's picture

GG, did you see this?


India Buys 200 Tons of IMF's Gold Allotment

"A senior finance ministry official said the central bank may seek to buy more gold from the IMF directly. "It makes sense to buy gold as it will appreciate more than the U.S. dollar," he said."



Wed, 11/04/2009 - 20:58 | 120447 MinnesotaNice
MinnesotaNice's picture

Well there you have it... couldn't be any clearer... the demise of the dollar is inevitable.  

Thu, 11/05/2009 - 05:38 | 120668 Gordon_Gekko
Gordon_Gekko's picture

Thanks for the link ghostface.

Wed, 11/04/2009 - 21:04 | 120453 Miles Kendig
Miles Kendig's picture

Classic GG

Wed, 11/04/2009 - 23:00 | 120540 deadhead
deadhead's picture

yep, Miles.  GG calls 'em like he sees 'em. 

i don't watch those reality shows, but could you imagine one like survivor with gg on an island with geithner, bernanke, blankfein and summers?  i would watch that all day long lol!

Wed, 11/04/2009 - 23:28 | 120565 Miles Kendig
Miles Kendig's picture

Just as long as Chumba gets to call the winners and losers...  I can hear him now.. WHAT.. You sorry bitches.. You had better TRY harder or else!

Wed, 11/04/2009 - 19:06 | 120327 economessed
economessed's picture

The Fed must be subject to independent audit and the consequences of those findings.  But before we do that, we need to ensure Melvin Watt (D-NC 12th) is brought into the bright light of public accountability.


Melvin Watt must be outed.

Wed, 11/04/2009 - 21:05 | 120455 Miles Kendig
Miles Kendig's picture

Have a little faith..

Wed, 11/04/2009 - 22:27 | 120519 earnyermoney
earnyermoney's picture

Mel Watt represents the nation's most gerrymandered district. Hell will freeze over before he looses an election. Article from W-S Journal sheds some light on the issue: http://www2.journalnow.com/content/2009/jan/29/gerrymandered-districts/o...

Wed, 11/04/2009 - 19:11 | 120333 Anonymous
Anonymous's picture

what world do you live on? commercial loans not going to be a problem??? Oh boy, I haven't gotten a chuckle all day long from anything I've seen until that one. Dude, I deal with and see the carnage of commercial real estate on a daily basis (and sometimes when I'm asleep at night in my dreams as well) and it aint gonna be contained. Like Dan Patrick, a former ESPN guy used to say, "You can't stop him, you can only hope to contain him." Except in this case, they aint even gonna come close to containment.

And if your point is that the home mortgage was bigger and that was contained and is now over... er... have you looked at the real estate market recently?

Wed, 11/04/2009 - 19:13 | 120337 Anonymous
Anonymous's picture

More free money as the 8000 home purchase plan gets extended.

Wed, 11/04/2009 - 19:17 | 120342 Anonymous
Anonymous's picture

what world do you live on? commercial loans not going to be a problem??? Oh boy, I haven't gotten a chuckle all day long from anything I've seen until that one. Dude, I deal with and see the carnage of commercial real estate on a daily basis (and sometimes when I'm asleep at night in my dreams as well) and it aint gonna be contained. Like Dan Patrick, a former ESPN guy used to say, "You can't stop him, you can only hope to contain him." Except in this case, they aint even gonna come close to containment.

And if your point is that the home mortgage was bigger and that was contained and is now over... er... have you looked at the real estate market recently?

Wed, 11/04/2009 - 19:28 | 120357 Anonymous
Anonymous's picture

Well you did not have to do this much work to find out if the Wachovia bond was accepted or not. They publish a list of CUSIP's that have been accepted or rejected.

Wed, 11/04/2009 - 19:33 | 120365 jimcg
jimcg's picture

This was taken from an 8/11/09 article by the Cleveland Federal Reserve Bank. Now, I believe that they are only referring to commercial bank holdings, that would exclude the major insurers, pension funds, mutual funds, and private paper. I believe that the actual number is enormous considering that, aside from stand alone office buildings, and unneeded shopping malls, most new residential developments contained their own small to medium retail strip centers. 

It's in the interests of so many to lie about the reality of the situation, like the recent recommendation of several REITS by Cohen & Steers.

"The economic downturn has hit bank CRE loan portfolios particularly hard. The total volume of commercial mortgages held by banks more than tripled in the last decade both nationally and in the Fourth District. Nationally, the volume at commercial banks peaked at approximately $1.8 trillion last year".

Link: http://www.clevelandfed.org/Research/trends/2009/0809/01banfin.cfm


Wed, 11/04/2009 - 19:35 | 120367 Froggy
Froggy's picture

Don't know if anybody recalls this, but back at the end of May, S&P downgraded huge swathes of CMBS.  Something like 70% of 2007 vintage, 60% of 2006, and 50% of 2005...for a week.  Then, one we(a)k later, they reversed the entire thing and disappeared the report they produced which justified the downgrades.

I downloaded the report to use as the basis of my deal underwriting for my distressed CRE fund, and now there is no record of it on the S&P website from whence I got it.  Their criteria essentially stated that in place NOI should be discounted 20% and cap rates of 9+% for anything not located in NYC.  The timing coincided with the CMBS TALF program, and I suspect they were pressured by somebody (Fed?) into throwing that report down the memory hole.


Wed, 11/04/2009 - 20:15 | 120406 Anonymous
Anonymous's picture

Froggy, Is that you Froggy? Is it really you?

Thu, 11/05/2009 - 00:12 | 120587 Froggy
Froggy's picture

It is me.  I'm keeping my perspectives in comment threads nowadays rather than on B5 or FR.  Trying to keep potential investors in my fund from some of my more "controversial" political commentary. 

Wed, 11/04/2009 - 20:19 | 120408 deadhead
deadhead's picture

froggy...Tyler did a story on that very item, I remember it well.  I think he had also had the report in the story and it would be in the archives.


Thu, 11/05/2009 - 15:09 | 121101 Froggy
Froggy's picture

He did do the story on both the downgrade and the reversal, but the reports were not included.  I did download the report on my own at the time though, and if anything, it (the downgrade) was conservative IMHO.

Wed, 11/04/2009 - 21:17 | 120467 Assetman
Assetman's picture

Given than the CMBS/TALF was predicated on collateral rated AAA, S&P took a swath of it right out of eligibility when they downgraded.

Apparently, that pretty much screwed around with the Fed's plan for total world domination.

Or something like that.

Wed, 11/04/2009 - 20:07 | 120402 Anonymous
Anonymous's picture

It would be an even bigger surprise if the Fed stops accepting CMSs and end their ongoing acceptance of CRaP and TuRDs.

Wed, 11/04/2009 - 20:54 | 120443 MinnesotaNice
MinnesotaNice's picture

It is really a dangerous situation when the rule-makers (i.e. the government) have the power to generally disregard the rules that apply to them much of the time... yet have tremendous and irrefutable power to apply all other rule of law as inconsistently and punitively as they want to the general public.  There is a definite power imbalance that is quietly being created here... in addition to a complete loss of faith in those in power.

Wed, 11/04/2009 - 21:10 | 120460 Miles Kendig
Miles Kendig's picture

+! to MnNice.  (Insert flash of dancing figure)

The rule of law must be reasserted with applicability to all with preference to none.  Transparency, personal accountability and fidelity must become the foundational principles of any future structure.

Wed, 11/04/2009 - 23:02 | 120541 deadhead
deadhead's picture

+ a couple of trillion on that one Miles.

if no rule of law, we are phucked.

Thu, 11/05/2009 - 00:33 | 120597 Rusty_Shackleford
Rusty_Shackleford's picture

"When you see that trading is done, not by consent, but by compulsion - when you see that in order to produce, you need to obtain permission from men who produce nothing - when you see that money is flowing to those who deal, not in goods, but in favors - when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you - when you see corruption being rewarded and honesty becoming a self-sacrifice - you may know that your society is doomed."

Ayn Rand

Thu, 11/05/2009 - 05:52 | 120669 TumblingDice
TumblingDice's picture

Very well said. That is why a written constitution was such a great idea. It created rules for those who made them. While the human condition was and forever will be anarchy, at least it can be controlled to a good degree when we follow the constitution. When we follow the constitution it is always anarchy because there is always the potential for anarchy, since at any time those in power can still do whatever they want and whether or not they get away with it depends on what other people do, uphold the constitution or not. When we do not follow the constitution it is anarchy in full motion. The government does what it wants and that is that. They will do anything that benefits them, even if the benefit is minute, as long as they can. That is how we see the capitol building become a whorehouse and not the enforcer fo contract law, security and law it should be.

Wed, 11/04/2009 - 21:18 | 120469 time123
time123's picture

No matter what they do, the conclusion is very interesting. It is bullish for the stock market, and those saying that CRE is the next big bubble to bring everything down, although right on facts, may be wrong in terms of the outcome. Time will tell.


admin: http://invetrics.com

Wed, 11/04/2009 - 23:36 | 120568 litoralkey
litoralkey's picture

This article starts from false premises, gets lost in the dangerous forest of too little knowledge, and falls off a bridge at the conclusion.

Did Woody Allen write this piece?


Thu, 11/05/2009 - 01:19 | 120626 Anonymous
Anonymous's picture

this is magnificent, and i strongly disagree with litoralkey and his absent minded correlation to Woody Allen, shame on you.


Thu, 11/05/2009 - 01:49 | 120640 Anonymous
Anonymous's picture

I told you it wouldn't be a problem. There will be a $2.4 trillion stimulus package in February.

Just one problem:

economic activity is declining.

Thu, 11/05/2009 - 10:27 | 120745 Anonymous
Anonymous's picture

WHY does Mary Shapiro STILL HAVE A JOB?!!!!

Her best bff, Bernie Madoff would like to see her more often!!

WHY is this vapid, clueless beeeotch not IN JAIL????

Thu, 11/05/2009 - 14:04 | 120995 Anonymous
Anonymous's picture

"Telegpraghed this to me..." More like explicitly detailed what it was doing perhaps? Everyone knows that TALF is being loaded up with CMBS, which is generally illiquid these days. Not sure why Captain Obvious had to write a report about it.

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