Fed Has Short Term Memory Loss

This is priceless. The Fed announced today that it was potentially expanding its balance sheet and the Term-Asset Backed Securities Loan Facility (TALF) to include toxic ("legacy") CMBS. The Fed hopes to jump start the CMBS market with this move.

On March 23, 2009, the Federal Reserve announced that it would evaluate extending the list of eligible collateral for TALF loans to include certain legacy securities. The objective of the expansion is to restart the market for legacy securities and, by doing so, stimulate the extension of new credit by helping to ease balance sheet pressures on banks and other financial institutions. Tuesday’s announcement marks the first addition of a legacy asset class to the list of eligible TALF collateral.

Federal Reserve Bank of New York will review and reject collateral that does not meet term sheet requirement or is otherwise poses an unacceptable risk. That is very comforting to know especially since FRBNY is owned by the financial conglomerates offering up the collateral. But here is the priceless part:

Eligible newly issued and legacy CMBS must have at least two triple-A ratings from DBRS, Fitch Ratings, Moody’s Investors Service, Realpoint, or Standard Poor’s and must not have a rating below triple-A from any of these rating agencies. More broadly, the Federal Reserve is formalizing procedures for determining the set of rating agencies whose ratings will be accepted for various types of eligible collateral in the Federal Reserve’s credit programs.

Wow, Fed is relying on the ratings of CMBS by rating agencies that have had a horrendous record and no credibility when it comes to rating such securities. This is another example of how the Fed and Treasury are trying to reconstruct the House of Cards. Nothing has changed.

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Nice find RebelC

And who do they think the suckers will be this time? What a waste of energy. There isn't an entity in the world that is going to buy that AAA rated crap that permeated every investor, pension fund, hedge fund, etc.
They must really need that sideline money to clear the books. Much like the PPIP the suckers are not ready to be taken again.

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Do you mean Loss?

What is CMBS?

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Oops.

CMBS - Commercial Mortgage Backed Securities.

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Because of BlackRock

Could this be due to BlackRock's management of the bailouts? After all, it was Larry Fink who was crucial in the development of mortgage-backed securities when he was with First Boston, right?

And not to get off-topic, but why would those Bretton Woods guys be so interested with the re-funding of the IMF?

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You raise an interesting point about BlackRock.

They have ensconced themselves in all facets of this bailout. I am not sure about Larry Fink but someone at BlackRock is well connected. Fed and Treasury certainly have a lot of faith in one company.

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Note that Bernanke has been playing games since 2007 ...

... with the Fed balance sheet. It was one of his theories as an academic that the Fed should not restrict itself to Treasury securities, but should buy a range of "assets".

Of course, as a "New Keynesian", Bernanke is trained to work with models that assume that in the "long run", everything slides to a full employment equilibrium ... but unlike other branches of the mainstream church, that the "short run" can last long enough for some quasi-Keynesian models to work.

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OK, now, the basic functioning of a reserve bank ...

... is to buy assets when needed to inject reserves into the system and to sell assets when needed to drain reserves from the system.

Ahem ... With their balance sheet full of crap, what happens when the last Treasury Note has been sold ... who is going to buy the crap?

Indeed, before that point, when the Fed's income drops below its cost of operations, because the bulk of its balance sheet is non-performing assets ... how are they going to talk the Congress into funding them and at the same time maintain their vaunted mushroom farmer policy toward Congress ... that is, keep them in the dark and feed them bullshit.

Well, OK, the answer to the second question is probably, "with the connivance of Congress, who don't want to actually be responsible for Monetary policy, but only want to complain and grandstand".

But, still, what about the first question? How does a reserve bank function as a reserve bank if it fills its balance sheet full of crap?

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