Epic Fail

Last week it was reported the first AAA CMBS in Europe took a principal writedown. However, keep in mind that the EPICP INDU deal was a single floating-rate loan on a portfolio of 119 properties in the UK. It originally matured on 4/20/2011, but the loan terms were modified to extend it to 4/20/2014. Still unable to survive, it ultimately 65% loss on the senior note and 100% on the junior and mezz pieces.

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B Students

The rating agencies have obviously fallen down on the job, and no one disputes that. However, the most troubling comment you hear over and over are ones like this:

"It's clear to me we can no longer rely solely on the ratings agencies," Sean Dilweg, Wisconsin's insurance commissioner, said following the hearing of the National Association of Insurance Commissioners on Thursday in Maryland.

Dilweg is talking from the perspective of a regulator, not an investor, but NO ONE should ever have been relying solely on a rating agency to measure risks without a more transparent process in place (so you could further rate the rating agency's process). If he were an investor, rather than a regulator, he would be immediately fired for such a comment.

Mark to Market Changes - April Business

In the CMBS world, we have very tangible examples of how Mark-to-Market rules (FAS 157) are putting undue pressure on the market. It is easy to point to a CMBS deal with a single asset trading at 60 cents on the dollar, while a non-cusip loan with essentially the same collateral trades at 98 cents on the dollar. Obviously there is something wrong with that valuation. You'll find folks have very strong opinions on both sides of the issue, and I will not argue its fallibility or utility, except to state the obvious - it doesn't work in its current form.

Robert Hertz, the FASB Chairman, indicated yesterday in front of Rep. Kanjorski (and the rest of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises) that there would be significant changes within the next 3 weeks.

The same folks that have strong opinions regarding the FAS 157 rule, also have strong opinions about the impact of any changes. Numbers are quoted, arguments are made regarding the relatively small portion of held-for-sale assets that are affected, etc., etc. It is a broad issue, no matter what numbers you're looking at. Any change could substantially move markets.

Full disclosure: I try to be somewhat non-biased about things, but I think FASB is full of idiots.

Extended Stay

Extended Stay started creeping back into the news...

It has never been clear how this loan was expected to survive, even at origination. I previously went into it at length, here and here.


Image from Hans Van DeVorst (.com)

Moody's completed downgrades

Following 7 days of correcting their ratings on 1,422 bonds worth over $50 billion, Moody's stated it was done with its review. The actions were highly anticipated for some time, and made for a volatile market the last two weeks.

Obviously, Moody's made a huge mistake - they are not downgrading these due to deterioration in quality, but rather due to changes in their model. And their new model is only calling for 5% losses on recently issued deals with the weakest credit profiles. Historical losses when times were good are 3%! I don't know how they are still in business.

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