The Next Crisis – Mark your calendar

Bruce Krasting's picture

The Next Crisis – Mark you calendar

The date will be on or about September 30th. The issue will be the need to pass a Continuing Resolution by the House.

For more than 850 days the US has gone without a budget. The House passed one not long ago; the Senate tabled it. The Administration has not offered up one either. The absence of an approved budget means that the only way the country can continue to operate is through a series of temporary extensions.

The last time we went through a vote on a continuing resolution was just four months ago. That fight went down to the wire. At the time it was 50-50 that the government would be forced to shut down. In the end a deal was reached to extend things to the end of this fiscal year. That happens to be just six weeks from today.




The fight back in April was the opening salvo of the war between Democrats and Republicans. I think this was the first definitive evidence that our government was so deeply divided that it had become dysfunctional.

It was the debt ceiling catastrophe that drove S&P to cut the US credit rating. The seeds for that ratings cut came from the Continuing Resolution debacle.

To get a new Resolution through the house the Democrats and the WH will have to make concessions. We’ve seen where this takes us. Crisis.


On AAA’s

We lost ours a week ago. I’m not sure how important that was for the violent markets this week. It played into the mix of crazy things that happened.  

A new AAA was created this week. A country rises to this lofty rank? No, that’s not going to happen. One of the strong global companies gets a higher rating? No, that’s not likely either. Is this a name we all know? No, not unless you trade CRE CDOs for a living. This AAA goes by the moniker of:


This is a Commercial Real Estate Collateralized Debt Obligation. (Remember those ugly things?) The total deal is $685 million. The security for this borrowing? $685mm of mortgages on 168 hotel properties in 33 states. (Note: 100% leverage, O% equity). The average loan size behind the deal is $4mm. This means we are not talking big properties. I call this the “Red Roof” deal.

The CDO is structured with (get this) six tranches. The bottom of the credit pile is therefore just swill. The most subordinate piece is a $110mm. Somehow this junk managed to get a BB from Fitch.

The most senior tranche came to $350mm. (Note: This does not even have 2X coverage). Fitch took a quick look at this and gave it AAA.

My guess looking at some of the details is that the senior tranche has a very good chance of getting their money back. But this is by no means a sure thing. It was just three years ago when we last had deals like this. The vast majority of those AAA's got smoked. (Note: Only “Sophisticated” investors can participate in this deal)

I’m scratching my head. If a bond secured by a bunch of so-so hotels can get a AAA just what the hell does a AAA mean?

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Barnaby's picture

Seems simple to me. The Trust is made of six certificates all rated as outlook stable; the largest is $350 million rated AAA in itself.

Anybody else get the sneaking suspicion these are "extended-stay" properties and Squatters' Rent is about to become Actual Rent very soon?

Augustus's picture

I don't have the list of the properties.  However, the loan per property is probably not more than twice the land value.  What type of security would you consider worthy of a AAA rating?

snowball777's picture

Completely Reticent Effluence Combining Detritus Obfuscator

Kudos for choosing yet another Banksy, BK.

Bruce Krasting's picture

One of the great artist of our time. What is the perfect image for the New Millennium?

A rat, of course.


Cpl Hicks's picture

"The fight back in April was the opening salvo of the war between Democrats and Republicans. I think this was the first definitive evidence that our government was so deeply divided that it had become dysfunctional."

Was that April 1930 or 1931? Or maybe it was another year.

Eugend66's picture

I hope there will be an non-violent transition. Kind of: It`s so true, nobody will fight it. One can hope.

vatrexx's picture

The US Government needs a good mini-bar and there all set - back to AAA!


"Bernanke gets mini-bar for Fed - restores AAA....."

cramers_tears's picture

Fuck the mini-bar.  The Bernank's gotta get with it.  Bruichladdich Forty, Glen Garioch, Chivas Regal Royal Salute, Glenfiddich Rare, and of course some Frapin Cuvee 1888 for Sarkozy and DSK when he gets his clubpass back.  Oh yeah and some Altadis’ Behike in the humidor.

Peter Pan's picture

From this day on, hotels will NOT be known as three star, four star and five star hotels. They will be known as AAA, AA, BB etc etc etc.

What has me worried, is if this CDO is truly AAA, then how bad is the USA for her to be given a AA+ ?

HungrySeagull's picture

Fuck the ratings.

Rate the places by the cockroaches. If they are not too scary and you get a good night's sleep.. all the better. I like the big ones that hiss.

John_Coltrane's picture


I'm thinking Moody's might know of some hidden assets (or asses?)-perhaps hookers in the lobbies, which add both collateral value and a real cash flow stream to these hotel properties.  Either that or hookers from the hotels were sent to Moodys to ass ist in obtaining the AAA rating?

Enough puns for the night.  You got to keep laughing or you'd go insane!

CH1's picture

Ratings agencies do "intensive reviews" (or words to that effect) for extra fees.

Your company pays them to conduct a review and (surprise!!) they give you a higher rating than you had before.

Been this way for a long, long time. That's how they make their money.

BlackholeDivestment's picture

...simple, Triple A means ''AAAh!'', you just pronounce ''AAA'' spelled with an ''h!''.

badgerman67's picture

Not sure how Moody's gets a 3.45 dscr? That has to be one bullshit pro forma they are working with to achieve that coverage.  1.59 would be a good dscr. 3.45 is not very believable based on the LTV unless the rates are close to 0.  Have to wonder if their stress case includes a spike in rates? More than likely it is just some marginal decline in NOI.

KTV Escort's picture

Speaking of crisis, how about the crisis of moral decay. Sorry to be OT here, but maybe someone can get this up at ZH as a guest post... seems to be gaining traction elsewhere (inspired by the looting/riots in the UK)

Peter Oborne is the Daily Telegraph's chief political commentator

over 3,500 comments so far, the vast majority favoring it

linrom's picture

Excellent article, with 4500 comments now!

electronpaul's picture

"If a bond secured by a bunch of so-so hotels can get a AAA just what the hell does a AAA mean?"

I guess that just goes to show you what they think of the USGov situation...

or Moody's got a big fat check in the mail from the issuers? Time to abolish ratings agencies for the farce they are.

old naughty's picture

Why not? Keep that music going, until it stops.

There's still folks believing in ratings...

Another good piece, BK, thanks for sharing.

badgerman67's picture

Not sure how Moody's gets a 3.45 dscr? That has to be one bullshit pro forma they are working with to achieve that level.  1.59 would be a good dscr. 3.45 is not very believable based on the LTV unless the rates are close to 0.  Have to wonder if their stress case includes a spike in rates? More than likely it is just some marginal decline in NOI.

scratch_and_sniff's picture

Weren’t you trying to remain ambivalent and unbiased towards rating agencies the other day Bruce when they downgraded the US?

Bruce Krasting's picture

I go both ways. I take a shot at everyone.

IQ 145's picture

Very sobering post. It looks to me, I don't know much at all about this subject, that the same characters, and similar actors, are doing the same kinds of things that worked out so well in 2007-2008. Is this what happens to you when you buy into a Bond Mutual Fund? The Fund manager buys this shit for you and you never even know it? In the face of even slightly recessionary business climate this seems like exactly the kind of "AAA" that could go very bad very fast.

JW n FL's picture

how about a story on who really owns the Lobby Whores in DC Bruce?

JW n FL's picture


Amidst a financial and economic crisis, Congress has reached its summer recess and many representatives are going to Israel.


Altogether, 81 Congressmen and women have announced their one-week trips, paid for by the American Israel Education Fund, a non-profit affiliate of the American Israel Public Affairs Committee.

sgorem's picture

What's RIGHT with this picture, I take worthless, devaluing pieces of green paper, and trade them for a  shiney gold metal that increases in value and has been on the face of the earth long before paper was even discovered, and will still be here long after WE and the paper are all gone. Just askin..........................................

JW n FL's picture

The White House should cut social securityand medicade.. even though there are $2.5 Trillion in I.O.U.'s!


The President should go along with Austerity ALL THE WAY TO THE BONE!

that way the riots can start and be over just that much more quickly!

Lets hope Bruce that the hungry armed Americans stop by your house before anyone elses.. as you think it is such a wonderful idea to starve an armed nation!

good luck!

Bruce Krasting's picture

I'm starving the nation? How? Blogging?

Give it a rest.

virgilcaine's picture

the mkts are telling the usa (via s&p) your rate$ are not high enough for the risk they carry. But money keeps pouring into treasuries ©2%, saying the downgrade was meaningless.

This is the deflation scenariio' which keeps the fed up at pouring Into the US Dollar.

Common_Cents22's picture

Not to mention $850 billion in student loans, 60% not performing.   Ahhhh what's another half trillion!   Remember obama's civilian army?  The student loan slaves!

PulauHantu29's picture

You mean the next Bailout Boondogglepalooza is at the end of Septemeber, right?

steve from virginia's picture


Question for perceptive ZH'ers: is stealth Bernanke QE taking place in the EU?

He could do so by way of the Fed's swap lines. Impaired debt has been available to buy. The ECB lacks the horsepower to kill the bear market. This 'rally' has Bernanke's fingerprints all over it.

Very fishy about how the dying stock markets have been brought back to life like Lazarus:


It takes more to move the credit markets against the surging tide of default risk than a measly five- or ten billion euro bond purchase. Purchases in hundred-billion euro increments are necessary. The total euro debt at risk by Spain and Italy — in addition to the impaired sovereign debt of the current wards Eire, Portugal and Greece — is over two trillion euros. Where does the peewee ECB get that kind of money? Trichet isn’t going to go out on a limb and simply print the money without something or someone covering his butt. That ‘someone’ isn’t Angela Merkel or Nicolas Sarkozy: for one reason, they don’t have the money!

The Bundesbank isn’t going to print up trillions of fiat euros. It and the French central bank could and probably should in the short term but they won’t. The Eurobankers possess neither the scope nor the ambition, that inflationary “Sun in the belly”.



cramers_tears's picture

Top of the line Cheater Analysis.  I read something here at zerohedge regarding the fed and their new swaplines...  why print money at home when you can do it in europe?  You know they've got great chocolate over there.  Nestle's is just too good.  No reason those Nestle's bars shouldn't cost €500,788 now and €505,228 twenty minutes from now..

How the hell do you search inside ZH?  Where's the search?

I'm seeing orders?  track?  Have my excellent broker type friends finally found a way to get money from me?  I'm definitely considering it.

And has anybody seen ZH in the MSM?  I smell a friggin' 20 minute segment w/ John Stossel.  W/ a guest appearance by Paul.  Keep Tyler in shadow and change his voice while he answers Stossel's Interview from an undisclosed remote location via Link.  Hell, even a frontline world 10min would be ok.  When will the MSM come around?  I think at some point the MSM has to start sniffin' around...  Tyler's just too compelling and has that rough-hewn animal magnetism, especially in shadow.  Maybe you could get Brad to step in and wear an earpiece to Tyler's mic.  I tell you what... I'd be very interested in that program.  C'mon Tyler - think about it.  You could have a whole new career as "the coolest talking head" in history.  I could see you as a regular on Imus.  Stewart, Mahr, O'Reilley, CNBC - hell anything.  We've got to start seeing this stuff in the MSM.  C'mon Tyler.  You're tough.  I've seen the movie.  Hell, I'd never fuck with you.  I'm callin' you Mr. Tyler til you tell me otherwise.  Take one for the team.

We've got to get people to start understanding this shit.  I'm explaining shit all the time.  Sometimes they get it.  I figure I'll just keep hammerin' until that light-bulb goes off.  I just explained the "stub quote issue" to my wife and she squinted her eyes, and said, "oh, those bastards..."  Just keep preachin' the word of ZH.  People are interested in this stuff.  Hell I just convinced one of my employees to take his pay in silver.  Like he said, "one way or another I got to pay a fee to get my paycheck cashed."  He finally got it.  "Fuck the banks. I'll take the silver."  Then it's off to the bodega for a cold one.  Ahhhhhh.

cramers_tears's picture

Oh yeah, today, 8/12/11, down at the bodega, 4 Roosevelt Dimes will buy you a pack of smokes and a six-pack.

Bolweevil's picture

It's true Mr. Durden, I'd pay-per-view to see that.
(where is "search")

PulauHantu29's picture

Steve, good point. It may be the same method thet the Fed used to bail out Mexico in 1994 via the Fed as described in detail by Andrew Guase in his book, The Secret World of Money.

Here is his web site:

His radio show is well worth listening to.

Buck Johnson's picture

It means that we are up the creek, and everyone in Washington knows it.

spinone's picture

Backstopping has turned into crony capitalism

spinone's picture

Backstopping has turned into crony capitalism

ghostfaceinvestah's picture

AAA on SF deals is meaningless.  The RA models can't hope to capture an appropriate stress scenario to justify giving anything a AAA.

I would love to see the pricing on those AAA - whoever bought those is a sucker.

Widowmaker's picture

Obviously the ratings agencies have no doubt that every loss on this garbage will be bailed out by the US taxpayer.

History reflects they are absolutely right! 

Cue the next bonus crisis, we need some systemic risk dripping with moral hazard!

Rainman's picture

I wonder if Skinny Dick's Halfway Inn made it into the senior tranche. These sell-side fukkers will never give up on the con....never.

Eagle1's picture

My wife and daughter stayed in a American Automobile AAA rated motel once many years ago in Cheyenne Wyoming that turned out to be in a not so nice area and was dirty. I guess a AAA rating is in the eyes of the rating agency and rather subjective just like our friends on the Street today!!!

RockyRacoon's picture

Whaddaya mean what is a AAA rating worth?  It's worth just what you pay for it.

Stax Edwards's picture

Bring out the Malcontents : )

Alea Iactaest's picture

This will be on the Fed balance sheet before you know it...

NickyG's picture

The government isn't divided. It's united in screwing and selling out the public.

i-dog's picture

+1. You and I get it!

Yet comments like this one from Bruce show just how blind the rest of the country is:

"I think this was the first definitive evidence that our government was so deeply divided that it had become dysfunctional."

Exactly how many fucking times do they need to be told  that the government is not divided - it is working as a tag team to achieve certain objectives on behalf of the globalists that finance and control it. The stand-off is kabuki ... the handover of law-making to the Super Congress is planned ... the tough talk by Obomber is externally scripted ... the eventual collapse into a martial law police state is progressing on schedule.

However, some brain-dead morons are still expecting that Ron Paul, or the Tea Party, or Obama, or the Democrats, or  the Republicans, or some other figment of their imagination, will suddenly snap their fingers and undo a 50-year plan that is now in its 49th year and steam-rolling all in its path.

There is no solution while a bought, paid-for, and closely controlled, federal government -- of both politicians and career bureaucrats -- in Washington (or Brussels) is directing the play.