The (Attempted) Return of Leverage, and Why

Here are two articles worth reading which, when read in sequence, explain quite clearly 'why' and 'for how long' the Federal Reserve will pursue its unconventional lending programs.

Why? Because it fears renewed debacles in a number of credit market segments, one of which is highlighted in the second article below.

For how long? As long as it takes, baby-- inflation be damned! Really, these are great for context in today's world:

Leverage Rising on Wall Street at Fastest Pace Since '07 Freeze

"There is a lot of political pressure on banks to lend and this is one form," said Ratul Roy, head of structured credit strategy at Citigroup in New York.

A not-so-stunning revelation from the article.

But look at just one good reminder of what we're still up against in, say, the commercial real estate market:

Tishman Speyer's 2006 acquisition of Stuyvesant Town for $5.4 billion apparently is about to turn terminally sour. The "biggest deal for a single American property in modern times" which never managed to be profitable from day one, is on the verge of completely exhausting reserve accounts tied to $3 billion of securitized accounts.The premise - take the 11,227 rent-stabilized u,nits apartment complex and convert them to market-rate. Alas, the timing could not have been worse due to an implosion in the NY rent market, coupled with legal difficulties - to date only 4,350 of the units have been converted to market rate, while the remaining rent-controlled units will likely increase in number due to a recent court ruling.

According to RealPoint the original reserve fund which had a balance of $650 million in 2007 when Stuy Town's debt was first securitized is down to a meager $49.7 million. The origianal reserve fund set consisted of a $190 million general reserve as well as a $60 million replacement reserve, both of which have been depleted, as well as a $400 debt-shortfall service fund, which has now declined to just over 10% of its initial balance.

The reserve fund was drawn down by $7 million month to date, versus $13.3 million in July and $19.6 million in June, with an average decline in the reserve fund of $11.3 million per month. At this rate Stuy Town's reserves will be completely wiped out in four months, sometime in December.

And the rest of this terrific article goes on to detail more NYC real estate horrors beyond this one.

The Fed realizes it has one of two choices: defend the value of the dollar or try to artificially prop up the economy. It has chosen the latter; in so doing, it will probably get neither.