Commentaries
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German covered bonds under scrutiny
Fitch Ratings seems to be getting nervous about the amount of commercial real estate loans included in German banks’ covered bond pools.
The agency today affirmed 17 covered bond programs as part of a review, but kept nine German banks programs `under analysis.’ The rating firm now wants more information from the banks on the kind of real estate debt they use as collateral for their covered bonds.
Covered bonds are a kind of secured debt issued by banks in which bondholders have recourse against both the issuer and a segregated pool of assets, such as mortgage or public sector loans. German banks include large amounts of commercial real estate debt in the covered bond pools, alongside more granular and lower risk residential and public sector loans. Investors were happy to keep funding the banks and rating agencies gave the debt AAA ratings because the loans included in cover pools were required by law to be backed by a minimum amount of collateral, giving the loan a cushion in case the borrower defaulted.
The rules state that loans can only be included in covered bond pools if the principal is no more than 60 percent of the value of the property. However, given the sharp fall in commercial property values in recent years, Fitch is no longer comfortable relying on just this rule.
Is the Fed having trust issues with rating agencies?
The Fed published changes to its TALF facility that provides financing to investors buying eligible asset-backed securities. One, the Fed is looking to expand the number of rating agencies issuers could use to evaluate the AAA-worthiness of their debt offerings.
The second one looks more interesting though.
Starting with the November subscription, in addition to continuing to require that collateral for TALF loans receive two triple-A ratings from TALF-eligible NRSROs, the Federal Reserve Bank of New York will conduct a formal risk assessment of all proposed collateral–ABS in addition to CMBS, which are already subject to a formal risk assessment. The change to the collateral review process will enhance the Federal Reserve’s ability to ensure that TALF collateral complies with its existing high standards for credit quality, transparency, and simplicity of structure.
What did rating agencies know about AIG?
It’s time to start asking the big credit rating agencies just when they realized that American International Group might pose a systemic risk to the global financial system.
And what, if anything, did the rating agencies do to warn financial regulators of the global crisis that might ensue, if AIG’s debt ratings were suddenly slashed.
Forecasting takedown
It’s a wonder that anyone has any faith in forecasting anymore. The failure of ratings agencies to see the storm brewing in subprime and economists to fully grasp the vulnerability of the financial system should be making cynics out of all of us. Paul Krugman devoted 8 page screens over at the New York Times explaining what went wrong with economists. I must admit, I stopped reading after this line:
As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth.
Banks face commercial real estate stress tests
One of the big uncertainties left at this stage of the credit crisis is the amount of losses banks will have to take from foreclosing on defaulted commercial real estate loans. The question is both how bad those losses will be and when they materialize, and how much money banks can make in the interim to absorb them.
Fitch Ratings is obviously sufficiently worried about the issue to launch a new review, looking at banks’ loans books and underwriting critieria, and conducting its own stress tests. Â
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The Wall
