BruceKrasting on Stuy Town/GSE.S

the blog doesn't exist and i wish i knew what you were talking about because when it comes to stuy town i am always interested.

its just trying to provoke. anything that comes out of its mouth it useless.

Tuesday, June 22, 2010
Stuy Town – Who Got “Stuffed”?
Stuyvesant Town in NYC is possibly the worst RE deal in US history. This 2006 vintage mega ($5.4b) deal finally went bust in January. Fannie and Freddie together hold $1.5 billion of the $3.0b senior mortgage bonds. The equity and mezzanine lenders have been wiped out. The WJS did a piece on this horrible deal back in January. In that article they had an interesting quote from a Freddie Mac spokeswoman:

"Freddie Mac doesn't expect any losses"

I thought at the time that this was one of those things that might come back and bite them in the ass. It was not clear to me that the senior mortgage was money good. If it were, then the mez. and equity guys would not have folded as fast as they did.

The Fannie and Freddie mortgage bonds were equal in legal status (parri passu) to a $1.5 mortgage loan provided by Wachovia. After the deal closed Wachovia put this debt into a much larger CMO. Fitch did an analysis of the CMO in April. The report concluded that the Wachovia/Stuy Town mortgage was not money good. I called Fitch and got a confirmation. The Fitch assessment of the property value is $1.8b. This value was based on a discounted analysis of the rent and future Capex requirements. (See 4/1 Fitch report, Wachovia C-30)

This information was in direct conflict with the Freddie claim back in January that they expected no loss. I thought I had a “gotcha” story. To confirm it I asked the FHFA some questions. Consider this exchange:

BK: Comment on Fitch value of 1.8B?
FHFA: This is Fitch’s estimate. Other firms estimates place the values between $1.6 and $2.2 billion depending on the cap rate.

BK: Did F/F put the securities in a larger CMO transaction?
FHFA: No, they did not put the securities into a CMO. The GSEs approached this as typical investors.

BK: Did F/F have other credit enhancement?
FHFA: F/F had enhancements for this deal that were typical for large loan deals. Other investors had the same enhancements.

BK: Did F/F do this to get low-income housing credits?
FHFA: They did receive housing goals credits and did so in the context of meeting their standard securities investment criteria.

Some thoughts on this.

-The market will ultimately determine the value of Stuy Town, but for the FHFA to provide a range of estimates that are all below the mortgage value is a confirmation that this deal is upside down.

-Consider the second and third comments together. They did not put the bonds in a CMO transaction where they would take back the highest rated tranches. They chose instead to obtain other “enhancements”. This means they bought a form of single name CDS protection. This information confirms the Freddie statement that they would not incur a loss. Color me shocked at this.

-F/F were arbitraging their balance sheet. They were able to borrow at spreads over treasuries back then. They bought risky Stuy Town bonds that had a fat coupon with taxpayer guaranteed money. But then they paid away most of that premium buying CDS protection. They did not trust the deal from the get go. So why did they do it? The answer is in the last response. A motivating factor for Fannie and Freddie to participate in a highly leveraged RE deal was to get housing credits. There is a lesson in this. These housing credits are ass backwards. They do not encourage low-income housing. They encourage speculation.

-The statement, “Other investors had the same enhancements” is interesting. The question comes to mind, “What other investors had the credit enhancements”? This is the list of suspects.

Wachovia Bank
Government of Singapore
CALPERS
CALSTERS
Florida State Pension Fund
Church of England
S/L Green
Black Rock
Tishman Speyer
DG Hypo Bank
Hartford Financial
Allied Irish Bank

I am willing to put long odds that it was not Wachovia that bought the protection. They tried to enhance their position by putting the mortgage and a bunch of other crude in a CMO. It was not the Government of Singapore (GIC). They have confirmed that they have written off their investment of $675 million.

Someday we will know who those “other investors” are. I wonder if Singapore was aware of the fact that F/F was buying enhancements on their senior position at the time the deal was struck. If the senior guys were nervous, then the mez. guys should have been quaking. But that is not they way this played out. This disclosure issue is somewhat like the problem Goldman has with Abacus. Did everyone in the deal fully understand the interests/objectives of the other participants? Would any of the other investors have backed out if they understood F/F were hedging their bets? Did everyone have the same objectives for participating?

-Having two government agencies provide $1.5b (25%) to a transaction gives the deal credibility. But the evidence suggests that the anchor lenders did not believe in the transaction. I’m sure the Singapore government is upset with the results. One can guess how they will feel knowing that some of the investors are getting out whole while they took a bath.

-I would love to know who was the provider of the CDS that enhanced the F/F Stuy Town bonds. Back in 2006 it could have been anyone. One name that comes to my mind is AIG. I hope it's not them. We have had enough financial Greek tragedies.

-F/F have no loss. Wachovia split its share of the mortgage up and sold it a hundred ways. The old mez debt and equity have tossed in the towel. A question to ask at this point is: why not resolve this problem by condoizing Stuy Town? The pricing would reflect the current value of ~$2b. The long-term renters would be able to benefit from this. Others would be able to find housing at an acceptable cost. Stuy Town was never worth $5.4b. F/F should move to get this off their books without loss. That way the people of NYC would be the beneficiaries of the worst RE deal ever.

Posted by Bruce Krasting at 10:15 AM 2 comments Links to this post
Friday, June 18, 2010
SNB Loses 8b on Euro Intervention. Folds.
The Euro/CHF cross closed in NY at 1.3732 Friday. I believe that is an all time low close. I am still scratching my head how this could happen during a week where the Euro did a five big figure move to the upside.

The Swiss National Bank has been actively intervening in the FX market to slow/stop the appreciation of the CHF against the Euro for the past six months. This week they threw in the towel and will let the Franc float higher. It cost them a bundle.

Philipp Hildebrand took over as the head of the SNB on January 1, 2010. He inherited a policy of defending the strong Franc. He continued the policy from the day he took office. He will suffer the biggest loss in FX history. Hildebrand publicly defended his actions on numerous occasions. He always hid behind the threat of deflation in Switzerland as the justification for his massive purchases of Euro’s. A chronology of this. Note the dates:

Reuters:
Swiss Central bank repeats will fight franc appreciation
Sun Jan 17, 2010 9:08am EST
* SNB will fight excessive franc appreciation resolutely
* Deflation continues to pose risk to Swiss recovery

Reuters:
SNB says FX intervention a success, sticking to policy
Tue Mar 23, 2010 8:15am EDT
* SNB chairman repeats cbank's intervention threat
* Says will not allow deflation risks from franc rise

This is from an important annual presentation. There is no equivocation here regarding the threat of deflation in Switzerland.

Speech by Mr Philipp M Hildebrand,
30 April 2010.

Any threat to this currency stability would, by definition, have a negative impact on Switzerland, above all if the Swiss franc were to appreciate sharply due to its role as a safe haven currency. The SNB will not, however, allow such a development to turn into a new deflation hazard for Switzerland. For this reason, it is acting decisively to prevent anexcessive appreciation of the Swiss franc.

HILDEBRAND, MAY 11
"We will not allow any excessive appreciation that might generate deflation risks".

Okay, we got that message. Deflation was to be avoided at all costs. But actually those cost got too high. The SNB has foreign reserves of CHF230 billion. Nearly half of total GDP. It comes to CHF 30,000 for every citizen. The policy got out of control.

The SNB has reported a CHF 3b loss from Euro holdings in March. Based on the close today and an estimated Euro 50b intervention in the past 75 days and you have a mark to market loss of CHF 8.4b. That may not sound like a big number but you have to consider this in the context of Switzerland's GDP which is small. The 8.4b loss for the SNB would be equivalent to a $200 billion loss for the Fed. So actually this is a very big deal.

What does Mr. Hildebrand do? He does a u-turn on the fight against deflation. His words from Thursday:

“The deflationary risk in Switzerland has largely disappeared.”

What? In the past 60 days the risk of global deflation and particularly deflation in Switzerland have increased. With the Euro/Franc at 1.37 and now obviously headed lower deflation is a very real risk for the Swiss. The decision to discontinue the policy of holding down the franc had nothing to do with a risk analysis of deflation. It was about the money. The losses were too big. The impact on the money supply was undesirable.

So Hildebrand went to the big casino on his first day on the job and lost a bundled and continued to double up until he had no chips. The FX market ate his lunch for the biggest ever FX loss that I am aware of.

It is true that some Swiss exporters, farmers and the tourist industry got some benefit from Mr. Hildebrand's efforts. My guess however, is that 80% of his losses went into speculative hands. A nice win for some folks.

Posted by Bruce Krasting at 5:53 PM 5 comments Links to this post
Sheila Talks Tough
Sheila Bair spoke at the Wharton School today. She laid it on the line regarding what she thinks should be done to reform the nation's mortgage market and the role that the government plays. Everyone should read this speech. Especially the current crop of “deciders” in Congress and the Administration. I agree with Ms. Bair on almost all of her points. Her speech confirms to me that she has a vision of what must be done. She is the only one in Washington who has the guts to spell it out for us. I have said in the past and will say again now that Sheila Bair should be our Treasury Secretary. We need leadership. We have none.

I am convinced that what Sheila describes will happen in one form or the other. It is not a question of “if” the government’s role in the mortgage market will change. It is a question of by how much and how fast it will change. We can do this over the next 10 years and suffer a lost decade or we can accelerate the process. Ms Bair is in the sooner versus later camp.

As you read through the speech (or the few snippets below) consider what she is saying in the broader context of the US housing market. It is clear to me that the changes to come will have a long-term deflationary impact on the housing market and the related industries. Should that be what’s in store, I am left wondering where the economic growth will come from.

A critical task lies before us: rebuilding U.S. mortgage finance on a sounder footing, not only to restore the confidence of homeowners, investors and lenders, but more fundamentally to restore balance to our broader economy.

If we are willing to take bold steps, and return to the fundamentals we can get back to a more rational world.

We must recognize that the financial crisis was triggered by a reckless departure from tried and true, common-sense loan underwriting practices.

Traditional mortgage lending worked so well in the past because lenders required sizeable down payments, solid borrower credit histories, proper income documentation, and sufficient income to make regular payments.

All told, over $2.1 trillion in private securities backed by risky subprime and Alt-A mortgages were issued between 2004 and 2006.

Market discipline was tossed to the wind. It explains why trillions of dollars in faulty mortgage paper was issued before the home price bubble finally collapsed.

We need to have some basic underwriting guidelines that apply to all mortgages. Basic limits on loan-to-value and debt-to-income ratios, and consistent documentation requirements should be set for any loans held by a depository institution or sold to a securitization trust.

In 2009, the FHA and the GSEs accounted for 95 percent of total U.S. mortgage originations.

Does it make sense for the federal government to subsidize homeownership in an amount three times greater than the subsidy to rental housing? In the end, these subsidies have helped to promote homeownership, but have failed to deliver long-term prosperity.

Homeownership was once regarded as a tool for building household wealth, in the crisis it has instead consumed the wealth of many households.

The financial crisis and the Great Recession it spawned threw 8 million people out of work, reduced our GDP by about 3 percent, caused a huge increase in federal debt, and virtually wiped out the entire net income of FDIC-insured institutions for at least a two-year period.

We need to get back to a world where our financial sector supports the functioning of our economy, and not the other way around.

see what i mean?