We're not sure if New York Fed President Bill Dudley was trying to be sarcastic or just completely out of his mind when he tried to reassure participants at a SIFMA summit that the Fed's risk of loss from the TALF program was remote due, in part, to the fact TALF assets are required to be AAA. Has he learned nothing from the past couple of years about the rating agencies' ability to accurately measure the risks in ABS land? No doubt Dudley's description of agency models as "reasonably robust" calmed everybody's nerves and set the stage for a banner summer when "legacy" CMBS are added to the program. Of course at the current rate of recent vintage AAA CMBS downgrades by S&P, there may be none eligible when they become part of the program in July and the Fed will then rely on those reasonably robust AA rated securities. http://dealbreaker.com/2009/06/dudley-says-talf-assets-totall.php LOL !!!
The Federal Reserve is 'off the reservation' completely mad, and has lost all credibility. Bernanke gave a warning yesterday regarding our borrowing as a % of GDP to bolster government spending as of late, but sorry Helicopter Ben, you are way too little, way too late, bud. Your horse left the barn a couple years ago.
Guys, I ain't a fan of these handouts, but let's try to be objective for a sec... Firstly, Dudley didn't just claim these assets are completely safe. He said that, with the haircut that the Fed is charging, the rating and the funding available, losses would be limited (the Fed would be perfectly capable of carrying the collateral to maturity if need be). Secondly, it's true what he says. Don't confuse consumer ABS with CDOs etc. Ratings agencies actually do a reasonably good job with ABS, so their ratings are a lot more meaningful. I actually have a lot of respect for Dudley as he's a lot less political and a lot more technical. He does know what he's talking about and it's worth reading the actual speech, instead of putting blind faith in some blogger's digest/opinion of it.
Of course ABS is a different story then CDO´s, but given the fact that already 11 % of outstanding mortgage debt is delinquent - it´s a different this time, isn´t it ?
Firstly, this is consumer ABS we be talking about, not RMBS, so it's not directly about mtges. Secondly, yes, it's bad, but the ratings agencies have been a lot more rigorous with this stuff. As a result, AAA-rated ABS is meaningfully AAA, not a stuff of fiction (which is why there's not that many AAA-rated paper out there). Thirdly, the Fed's charging 10% haircuts, so they're overcollateralizing their lending. Finally, Dudley doesn't say that the program is completely risk-free. He says "...from the Federal Reserveâs perspective, the risk of loss is very low." Now, as I mentioned, I am not saying that all the Fed does is right and proper. All I am suggesting is that you should consider things carefully on a case by case basis. In this case, in my judgment, the Fed is not getting into a bad risk/reward trade.