Tuesday, June 16, 2009

One More for the Road: Yes We Can? No, We Cannot

I thought that I was finished for the night, but in keeping with the hair of the dog debt-upon-debt strategy of the Bushbama-Bernanke Continuity, here is one more for the road: the entirety of a post from Calculated Risk that you should read with consideration of some alcohol or prescription benzodiazepine in your system first. Basically, because some leveraged buyout of Extended Stay America was done on terms that were crazy even for a crazy time, "your" Federal Reserve Bank is taking a not inconsiderable hit (see bolded section):

Federal Reserve Appears to be Big Loser in Extended Stay Bankruptcy
by CalculatedRisk on 6/15/2009 09:29:00 PM
A few more details on the Extended Stay Bankruptcy (ht Brian):
Purchase Price in April 2007: $8 billion.
Source WSJ: "Wachovia, Bear Stearns and others lent Lightstone founder David Lichtenstein $7.4 billion so he could buy the 684-hotel chain from Blackstone Group for $8 billion in April 2007."
Current Value: $3.3 Billion.
Source WSJ: "The hotel chain is now valued at $3.3 billion, according to its filing. That figure isn't even 60% of the buyout price and even lower than the amount of the first mortgage, $4.1 billion."
Capital structure:
Source WSJ: "The hotel chain has $4.1 billion in a senior first mortgage that was mostly sold to investors as CMBS. Behind those secured creditors is the $3.3 billion of mezzanine debt divided into 10 classes ranked one through 10 in seniority."
Federal Reserve has Bear Stearns share.
Source WSJ: "U.S. taxpayers also have had an interest in the talks because another lender in the buyout was Bear Stearns Cos., whose stake was taken over by the Federal Reserve after Bear collapsed in March 2008."
Federal Reserve Losses: If the Bear Stearns held only the senior debt, the Federal Reserve appears to have taken a 20% haircut. If the Fed owns any of the Junior debt - that is probably worthless.

And from the NY Times Dealbook (April 2008)
Under questioning from Robert Casey Jr., a Democratic Senator from Pennsylvania, Mr. Bernanke said Wednesday that the assets making up the Fed’s collateral were “entirely investment grade, entirely current and performing.” He said BlackRock, which the Fed has hired to manage the collateral, is “confident, or at least reasonably confident, that we would be able to recover the full amount.”

But, he was asked, what if BlackRock concludes that the collateral is worth far less than $30 billion? Can the Fed go back and ask for more?
Mr. Bernanke’s answer was brief: No, we cannot.

DoctoRx here. If anyone is wondering how Robert Prechter (see prior post below this one) could be correct that much lower stock market lows are coming by next winter, please consider what worries about the failure of the Federal Reserve Bank would mean to stock prices.

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