Wednesday, November 11, 2009

TALF changing to SUC OFF

Anonymous Banker has a good point. TALF doesn't really solve any problems. It doesn't matter if you're talking about new issue or legacy, TALF will not be the savior. It is riddled with issues that hinder its own success.

A) Diverse Collateral - unless the FRBNY looks the other way, the DDR deal is simply not diverse. It is 100% one sponsor, and 100% retail. The deal makes sense - we should support loans to institutional quality collateral, even when the sponsors have a BB+ rating, but this deal does not pass the diversity test. (Fortress likely passes, but the other deals in the pipeline don't pass this test either)

B) Failure to Specify TALF Eligibility Requirements - They've basically said, hey, we'll fund it as long as it is AAA and diverse, but we may reject it anyway. So, investors have to buy the bond with the added risk that they may be stuck with it and no TALF loan to leverage it (and a lower price b/c the NYFRB will immediately tell everyone they rejected it). It's the equivalent of telling your assistant to get you a triple-venti non-fat latte, and then throwing it in her face when she gets back from running down the street in the rain because the cup had a black lid instead of white one.

And more specifically to AB's point - what does TALF do to restart the loan market? CMBS was only about a quarter of the CRE lending market to start with, and it's maturity problems are mostly down the road 7+ years, unlike banks. Someone needs to step up and provide some very concrete guidelines and give the market some confidence.

-Stop all this FASB nonsense - just come up with a set of rules and implement it. Preferably stick to rules that aren't stupid like most of your recent changes.

-Stop all this talk about requiring issuers to retain an interest in securities - this already existed (see ABS Auto deals, or Specials on CMBS deals) and it doesn't solve the problem. "Hi, I'm XYZ 2009-1 and the government requires me to retain 10% of the deal on my books, so I'm going to increase some other costs by 10% and value that at near $0.00. Worst-case, we lose nothing and likely case is that value increases to something more than $0.00." "Oh yeah, and because of the new stupid FASB rule, I'm still going to have to put 100% of the deal on my balance sheet, even though I only actually have 10% on there)!"

-If you're going to give investors cheap leverage, how about giving very defined rules on how bonds will be eligible (or just publish a list of CUSIPs you nimrods). While you're at it, how about letting us use our Social Security savings and letting us leverage up on the assets. These aren't 144a. Plop them in a public fund and give us an option - hell, I'll take an $8,000 tax credit, or the clunker value of my primary vehicle, and put it in the fund out of the kindness of my heart to get things started. My tax rate next year is going to be 57% all in, I'm paying 100% of my insurance, rent, mortgage, vehicle loans, etc. - it's time for me to get something back for that, and I want control over as much of my money as possible. Why should some douche managing a fund get to benefit from my tax dollars (my 57 cents of every dollar I earn)?

-Instead of some useless scheme such as TALF, why not sell CDS on the new issue deals. This way an investor can offset their risk, at their own free will, and the government will receive a market-based fee for taking on that risk (a risk that will be far less than 3 or 4 times the purchase price, which is TALF). Structure it to benefit the taxpayer - I'm sure you guys have some great thoughts on this.

-Workout some reinsurance scheme. You can even support a third party to do it to keep the risk as far away from the taxpayer as possible. Offer it on whole loan portfolios, not just securities like CMBS - let an insurer offset some of their risk so they'll underwrite new portfolio loans (they still have money coming in that they need to put to work).


Dark Space said...

Further, you read stuff like this
""The Fed is being very conservative, very diligent in reviewing collateral and very risk-averse," said Frank Innaurato, managing director at Realpoint LLC, a credit-ratings firm."

They're not being diligent. They don't know what they're doing. You'll just have to trust me on that one - I'm not going to name names.

kfunck1 said...

What FASB rule is requiring companies to consolidate CMBS?

Dark Space said...

Folks have been ignoring it, but it's already here. 46r and 140, and the amendments that started going into effect this week, 166 & 167.

Scroll about half way down to the underlined part, here, and read from there down.

kfunck1 said...
This comment has been removed by the author.
kfunck1 said...

After reading some other stuff, I see what you are saying now.

Dark Space said...

Historically, all securitizations have "qualified" for the exemption by being QSPEs. 140 states that QSPEs will no longer exists (they'll all be VIEs), ergo no exemption, ergo the issuers and even some of the investors will have to regularly prove they do not have a controlling interest.

It's a pretty big deal, but you don't hear much about it even from CMSA - I guess they're focused on dousing so many fires at once.

kfunck1 said...

I pay attention to this stuff, I'm just burned out and have not been able to keep up on it recently. So, in your opinion, which cmbs participants are most likely to be the ones that have to consolidate? Is there a retained interest percentage limitation to go along with the control provision?

Dark Space said...

You know, I really haven't paid close attention to it lately either. I get regular notices from both accountants and attorneys though regarding it - on 1/1/2010 we could effectively see the entire securitized universe get consolidated on someone's balance sheet. That would be bad CMBS outstanding is around $900bln, ABS has got to be over that (including subprime & CDO), Resi has to be several multiples of that...

When BOA and Wachovia (Originator/Servicer/Bookrunner) merged operations with LaSalle and WFC (Trustee), there was some quick reassigning of roles on some deals. Half the time if BBG shows you a WBCMT deal with WFC as the Trustee, you just automatically know you need to call LaSalle instead. I think the link between deals where, say, Goldman was the originator, bookrunner, and servicer could be argued that the variable interest remains and the the deal needs to be consolidated.

Does the Special have to consolidate? They own the b-piece and have the most control. What about Hartford, maybe they own the entire super senior piece. These don't make logical sense to me, and its probably because I'm the wrong person to ask, but just reading through what FASB has published (and the MBA and CMSA responses), those all seem plausible on some level.

kfunck1 said...

I know that the major banks have indicated their expected consolidations for 2010 in their Qs, and that is kind of what confuses me. WFC has said they're only consolidating ~20B of assets, while BAC is several fold that number.

I understand how some things, like cc ABS, which seem to routinely get put back to the originator (BAC/ML, make sense to consolidate, but I didn't think that was typical of CMBS (or RMBS).

Dark Space said...

No its not typical to put collateral back to the issuer except for in CC ABS, and slightly less often in dealer floorplans (think substitutions are allowed here) and Equipment ABS (substitutions are allowed in some deals).

Anonymous Banker said...

Dark Space
I'm sorry. But I'm having a hard time mustering up sympathy for the Wall Street Firm who goes out and buys up a bond issue for the sole purpose of borrowing against it through Legacy CMBS TALF and getting my taxpayer guarantee.

They should not be buying ANY investment that they think doesn't have value, absent the government guarantee.

Additionally, how about the investors that own that same cusip number but held it and didn't sell to Wall Street. Their bond doesn't get guaranteed. All the benefits of this TALF program go to those Wall Street investors and none of it comes back to either the other bond holders of the same class bond or the economic recovery.

I've been told that a residual effect is in providing "market pricing" for CMBS. I think that argument has no merit. There is no correlation between how a bond is priced that comes with our government guarantee and how a bond is priced that carries all its own risk of failed cashflow.

Legacy CMBS TALF is doing something quite underhanded for a very small group of Wall Street firms.

To hand them a list of eligible CUSIP numbers that they will simply buy up from other bond holders is unconscionable.

Can you email me your email address. I have a question for you that I'd like to take off-line.

Thanks for the comment and thoughtful response.


Dark Space said...

I'm not sure I follow exactly. Feel free to email me at

TALF is not a guarantee - it's a very low interest loan funded by the taxpayer. I'm not sure if that makes it better for us as taxpayers... Most of the TALFable assets do have value - I'd argue they have a very high liklihood of maturing at Par in every single case. Leverage it up, and the value is even higher. Anyone that argues the TALFable super senior CMBS bonds have a negative unlevered yield, is missing some piece of the puzzle. However, even with the leverage, the yields are in the low teens now.

I agree - letting the hedge funds use TALF doesn't solve the problem. It gets the dealers money, it makes the funds money (and their investors), and it doesn't (to your point) make loans cheaper. Historically, CMBS loan rates were correlated to where the deals were pricing in the secondary market - but obviously deals done post-2009 will bear little correlation or resemblance to legacy deals.

Why would handing out a list of CUSIP numbers hurt anyone? I'm completely confused by this comment. Lack of transparency is the root of the problem.

Thanks for the feedback - talk soon.

In Debt We Trust said...

You answered your own question - giving out the list of CUSIP #s removes the middleman (fund mgr's).

After all, how else do you expect brokers and fund managers to justify their high fees (when all they do is press a button on their Bloomberg terminals)? Are you suggesting that they (gasp) actually do some work?

PS Keep up the good work!

In Debt We Trust said...

This is not my posting. But the author has some interesting ideas on the sunshine acts:

"To combat, I've an indecent proposal. which goes as follows: The exchanges and DTC & clearinghouses should be required to create and release the entire trade-by-trade data-set with ultimate customer delineation in some anonymized form. ALL shorts will be tagged as such.

It can be lagged by a sufficient amount to prevent predatory short-squeezing, but it should be released in timely fashion. Options and Futures included. It should be available to any all who desire it.

Researchers all over the world will be permitted to find the patterns and submit the likely errant violations to SEC, and if egregious and prosecuted, the finders would be entitled to an incentive fee of the disgorged profits, say 20% (50% in SAC's case). This would allow the market to recapture some of their lost profits."