In Global Coordinated Panic we discussed actions being taken by the Fed, Bank of Canada, the Bank of England, the European Central Bank, and the Swiss National Bank to address “elevated pressures in short-term funding markets”.
One of the actions by the Fed was the establishment of a Term Auction Facility (TAF) program, whereby the Federal Reserve will auction term funds to depository institutions against a wide variety of collateral that can be used to secure loans at the discount window.
Of course the Fed wants this all kept a secret so it will not disclose who is going to this special window. In addition, (and not that this is any kind of surprise) but the collateral the Fed is willing to take for these temporary loans is rather suspect to say the least. It turns out the Fed Is Using Very Old Valuations For The Term Loan Facility Auction.
Perhaps the most surprising discovery we made today was the high value the Federal Reserve is willing to assign to some of the asset classes that have lately been causing so much turmoil in the markets. Even as some banks have said that the value of their CDO portfolios is unknowable and the ratings agencies have been mercilessly—if belatedly—downgrading formerly highly rated debt securities, the Federal Reserve has announced it will pay 85 cents on the dollar for CDOs with no market price available. That sounds like a pretty sweet deal in today’s markets.
It’s almost as if the Fed hadn’t been paying attention to the recent turmoil in credit markets. Don’t they know there is widespread skepticism about even triple A rated debt paper these days?
And, apparently, they haven’t been paying attention. The documentation the Fed has provided for collateral values became effective on September 22, 2006—over one year ago! Aside for some minor changes and the addition of some explanatory material at the bottom of their collateral valuation chart, the spreadsheet has not been changed to reflect the repricing of debt in the market place.
Basically, the Fed is turning back the clock on the CDO market. It’s 2006 all over again, boys and girls.
Here is a link to the Collateral Spreadsheet for the TAF.
TAF Collateral Table
click on chart for sharper image
The above is only a small portion of the entire spreadsheet.
Although this is a bad policy decision, this is not a capital infusion. This is a loan, with the Fed knowingly and willingly taking suspect assets as collateral. Unfortunately for the Fed, the problem is not going to go away via delay tactics. Home prices are not about to rise, nor is the value of the collateral in question. It will be interesting to see how much paper the Fed is willing to take and for how long.
Mike “Mish” Shedlock
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