Tuesday, May 26, 2009

Back to The Fed: Bigger and Badder......

....that's bad meaning bad, not bad meaning good....that is.

The Term Asset-Backed Securities Loan Facility (TALF) was recently expanded to include commercial mortgage backed securities (CMBS). These loans are to be made on a a non-recourse basis: The Fed can't go after any other assets of the borrowing institutions aside from the pledged assets. In other words, if the assets that the borrower is funding tank, they can walk away and let The Fed clean up the mess. The Fed has all of the credit risk but limited profit potential. This is not what a central bank should be up to.


As a result, CMBS have rallied off their lows since there will be a lender of last resort. However, there is smoke on the horizon:

Coming soon: a wave of CMBS downgrades



In order to be eligible, the CMBS must have a AAA rating from at least 2 rating agencies. From the way it sounds, S&P is prepared to dramatically reduce the number of AAA ratings they have assigned. So much for the TALF......


buchlajoe said...

S & P showing a little integrity ... will wonders ever cease? Big Ben will allow the crap in anyway :(

MK said...

You're right, they'll have to think of something. It was only a few months ago when banks were forecasting a worst case scenario of 8% unemployment and GDP growing in the 2nd quarter. With Chrysler & GM dealers closing by the dozens, there will be more commercial real estate than the market can handle.

MK said...


link to a recap of CMBS pricing