News&Notes: CMBS Meltdown, Quantitative Easing, Future of FNM&FRE & Citigroup Fund Failure

Fed's Kohn says that the Fed should look at additional forms of quantitative easing if deflation becomes a possibility. RCM Comment: Whenever you hear the term "quantitative easing" just remember this simple equation: QE=US$ devaluation=higher gold prices.

CMBS market begins to show fissures - WSJ
WSJ reports the market for debt used to finance hotels, offices and shopping malls tumbled Tuesday on worries that the long-feared rise in defaults for commercial mortgage-backed securities had begun, possibly ushering in the next phase of the financial crisis. Analysts at Credit Suisse said two big commercial mortgages that had been packaged into securities in the past year were likely to default. The rapid deterioration of these loans fed worries that the weakening economy and higher unemployment rate would drag down the $800 billion market for commercial-mortgage-backed securities, or CMBS, which so far has withstood the credit crisis with low delinquency rates. It's pretty unheard-of for two large loans to go bad this early on," said Richard Parkus, head of CMBS research at Deutsche Bank Securities. "This has shaken up the market" for CMBS, he said. The analyst report pushed the index that tracks these securities, the Markit CMBX, to record levels compared with Treasurys... The loans that sent the market down Tuesday were worrisome because they were made at what it now looks like was the top of the real-estate market and were based on assumptions that the cash generated by the properties would rise. Both loans were made by J.P. Morgan (JPM): a $209 million mortgage backed by two Westin hotels in Tucson, Ariz., and Hilton Head, S.C., and a $125 million loan secured by a retail center, called Promenade Shops at Dos Lagos, in Corona, Calif.


Future shape of Fannie, Freddie stirs debate as losses mount - WSJ
WSJ reports debate is heating up over the future of Fannie Mae (FNM) and Freddie Mac (FRE) as the two government-backed mortgage companies struggle with heavy losses and investors continue to shy away from their debt. Fannie and Freddie "are teetering on the brink" as losses increase and borrowing costs rise, Jerry Howard, chief executive of the National Association of Home Builders, said in an interview. He called for the government to explicitly guarantee their debt and for Congress to quickly come up with a new structure and better-defined role for Fannie and Freddie. Some banks, which have long had an uneasy relationship with Fannie and Freddie, would like to see them disappear, at least in their current form. One idea being discussed among bankers is to replace Fannie and Freddie with several lender-owned cooperatives that would package loans into securities. Under this idea, the U.S. Treasury would get fees for backing up those securities if losses reached catastrophic levels.


Disclosure demands for credit-default swaps said to increase - Bloomberg.com
Bloomberg.com reports U.S. regulators may require banks and insurers to disclose data about all credit-default swap trades to a central registry to boost transparency in the $47 trillion market, a person with knowledge of the talks said. The Federal Reserve Bank of New York and the U.S. Securities and Exchange Commission want information about credit-default swaps that don't meet standard terms to be disclosed to a warehouse that would record all trades. The rules would offer details about the types of contracts that almost drove American International Group (AIG) into bankruptcy. While information on $33 trillion of credit-default swaps is kept by the Depository Trust & Clearing, which operates a central registry, the market may be as much as $14 trillion larger, according to data compiled by the International Swaps and Derivatives Association. Regulators are demanding more oversight after speculation in the unpoliced market contributed to the bankruptcy of Lehman Brothers Holdings and forced the government to take control of New York-based AIG.

C Citigroup liquidates fund that fell 53% in a month - Financial Times (8.36 )
Financial Times reports Citigroup (C) is liquidating its Corporate Special Opportunities hedge fund after it lost 53% of its value last month, marking the ninth time in recent months that the bank has had to close or rescue a fund in its alternative investment unit. CSO, which managed almost $4.2 bln at its peak, has a net asset value of about $58 mln and debt of about $880 mln, investors say. People familiar with the matter say investors in the fund are likely to receive no more than $0.10 on the dollar. The fund faltered even though Citi supplied it with $450 mln in credit lines and equity infusions of about $320 mln. It also bought assets with a notional value of $1 bln that it placed in the fund. Investors in the fund -- which invested mainly in debt backing European private equity deals -- have not been allowed to withdraw their money for about a year as performance deteriorated. Losses for Citi could total hundreds of millions of dollars, people familiar with the matter said.