Baaaaaaaaaaaa.
Here’s some perhaps unexpected news from the Fed — the central bank appears to be getting more selective, at least when it comes to Talf legacy CMBS.
According to a release by the Federal Reserve Bank of New York, which is running the asset-purchase programme, the government accepted 83 legacy CMBS bonds as collateral for loans in the latest Talf subscription and rejected three. That’s a rejection rate of circa 3.5 per cent.
By comparison, the Talf’s last subscription generated a rejection rate of about 2.8 per cent, after accepting 35 bonds and refusing just one — the lonely JPMCC 2007-LDPX A2S. That particular bond, while chock full of risky stuff like loans sponsored by the bankrupt General Growth Properties, wasn’t necessarily more risky than some of its peers, which had exposure to things like the Peter Cooper & Stuyvesant Town Loan.
The three latest deals to be rejected are #07388YAE2, #362332AE8, #46625YSG9.
From what we can tell on Bloomberg, while not exactly shining examples of their sector, these are pretty unremarkable bonds. #07388YAE2, for instance, is a Bear Stearns-issued bond made up of 2007-vintage loans. #362332AE8 is (shock) a Goldman Sachs/Greenwhich Capital-issued bond — about half composed of office loans from 2006. #46625YSG9, meanwhile, was issued by JP Morgan Chase and is pretty evenly split between office and retail loans from 2005.
All of these bonds are, as per the Fed’s Talf rules, triple-A rated.
So, in addition to posing some questions about the usefulness of ratings, the mystery over the rejected bonds also generates a sizable amount of confusion as to the Fed’s methodology for Talf-selection. Here for instance, is a bit more info from Structured Finance News:
Each rejected bond either did not meet the requirements of the TALF program or it was rejected based on the NY Fed’s risk assessment. The Fed did not list bonds rejected for what analysts would describe as operational reasons, which include incomplete request form, inadequate sales confirm, borrower ineligibility or reasonableness of a secondary market price.
Last month, analysts “struggled with understanding’ why the sole bond that was not accepted was rejected. Their best guess was that it was mainly based on structural complexity. Likewise, this month, analysts were surprised at certain rejected bonds. This is because, in their assessment, some of these were not necessarily worse, in terms of risk, compared with others that were accepted.
Related links:
An ode to JPMCC 2007-LDPX A2s – FT Alphaville
Re-Remic-ing the Talf – FT Alphaville