Fed Using Very Old Valuations For The Term Loan Facility Auction

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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.

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