New York Fed Adjusts TALF Guidelines, Promotes Rating Shopping
The New York Fed, concerned about what happens when it can no longer monetize treasuries, has decided to adjust its TALF fall back plan which so far has seen virtually no use, compliments of a free-liquidity guzzling equity market. So Messrs Bill Dudley et al are taking appropriate steps for the next part of the move higher, and have just issued an announcement, changing the "procedures for evaluating asset-backed securities pledged to the TALF." The reason: to "enhance the Federal Reserve's ability to ensure that TALF collateral complies with its existing high standards for credit quality, transparency, and simplicity of structure." It is refreshing that the NY Fed actually cares about lending taxpayer money where the collateral will presumably cover losses, courtesy of the upcoming CRE crunch.
From the NY Fed:
First, the Federal Reserve Board announced that it has proposed a rule that would establish criteria for the Federal Reserve Bank of New York to determine the Nationally Recognized Statistical Rating Organizations (NRSROs) whose ratings are accepted for determining the eligibility of ABS to be pledged as collateral at the TALF. A Notice of Proposed Rulemaking, attached, will be published in the Federal Register for public comment. The proposed rule, which would require a certain minimum level of experience in rating deals of any particular type, would likely result in an expansion of TALF-eligible NRSROs for ABS. It is intended to promote competition among NRSROs and ensure appropriate protection against credit risk for the U.S. taxpayer.
Second, starting with the November subscription, in addition to continuing to require that collateral for TALF loans receive two triple-A ratings from TALF-eligible NRSROs, the Federal Reserve Bank of New York will conduct a formal risk assessment of all proposed collateral--ABS in addition to CMBS, which are already subject to a formal risk assessment. The change to the collateral review process will enhance the Federal Reserve's ability to ensure that TALF collateral complies with its existing high standards for credit quality, transparency, and simplicity of structure.
To facilitate the risk assessment, each issuer wishing to bring a TALF-eligible ABS transaction to market will be required to provide, at least three weeks prior to the subscription date, information including, but not limited to, all data on the transaction the issuer has provided to any NRSRO.
So in a nutshell the Fed will now promote rating shopping, and advance looks at ratable data so it can go back to the issuer and tell them what needs to be "adjusted" in order to get that ever prevalent AAA rating, the very same one that the legacy rating agencies had specialized in dispensing to anyone who would pay them $100,000 a pop, and brought the financial system to the brink of ruin.
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