Monday, September 21, 2009

Whiskey Tango Foxtrot - Did Wachovia truthfully securitize any CMBS?

It’s not clear to me how much of this story is simply being misunderstood by the blogger/journalists writing about it, and how much is accurate. It doesn’t sound good for Wachovia/Wells either way. According to the article, Wachovia had trouble selling some of their CMBS new issue deals, basically everything below a 20% subordination rate. So, they sweetened the pot – buy our new issue cash bonds, and we’ll keep all the risk on our books by also selling you a CDS on the bond (at no cost). Effectively, the sold the cash bonds, and kept all the risk on their books. Does this violate true sale agreements?

It’s not really clear to me. Enron’s SPEs were blown up because they effectively maintained control of the assets after the ‘true sale’. At the end of the day you can see the deal where Wachovia was the primary originator, the lead manager, the servicer, the trustee (via Wells, although most of these have been changed), and in the case described by, Wells now also holds all the credit risk associated with the bond. In reality they probably don’t have any real control, which should be scary to them, because they don’t hold the voting rights with the cash bonds and they don’t exert any real control as servicer or trustee.

I don’t know what’s worse – their credit exposure, or the risk that all of their CMBS deals get consolidated onto their balance sheet (>$50 billion outstanding just on their WBCMT shelf). Is this even a risk? Any lawyers out there care to chime in?

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