Thursday, May 21, 2009

“Legacy” CMBS?

What is a “Legacy”? From Merriam Webster:

Main Entry: 1leg·a·cy 1 : a gift by will especially of money or other personal property : bequest 2 : something transmitted by or received from an ancestor or predecessor or from the past <the legacy of the ancient philosophers>

Usually a legacy is good, but sometimes you inherit something really screwed up. When WAMU tanked 18 days after Alan Fishman took the CEO job, no one blamed Fishman (although some thought the $7.5M he was paid for the 18 days was a little excessive). The key point here is that it’s only a legacy if you inherited it. It’s not a legacy if the problem was created on your watch.

So, when the Federal Reserve says “Legacy CMBS” is now eligible collateral for the TALF program, I think they’re misapplying the word. These securities would be legacy securities if the management responsible for buying and/or originating them had been replaced, and new management was cleaning up the mess. But, in most cases that management change hadn’t occurred. Perhaps in their own minds management has changed (“That was the old me – the new me would never do those deals”), but I don’t think that counts.

Granted, calling the securities what they are - “wish we were never involved with these CMBS” – is clumsy. We need something short and catchy to describe them. I propose “Whoops CMBS”, in honor of the WPPSS bond default back in 1982. Of course, that was just a $2.25B default; maybe we should call them “Big Whoops CMBS”. Or maybe we could call them “Do-over CMBS.”

Although the misuse of the word ”legacy” in this financial crisis has been irritating me for a while, the impetus for this post actually came from a non-real estate story (yes, I do have other interests). Ian Media Networks filed bankruptcy yesterday, and this quote caught my eye:

“We are pleased with the support from our first lien senior debt holders to resolve the company’s legacy debt issues and fund our television growth plans,” said Brandon Burgess, Ion’s chairman and chief executive officer, in a statement.

Out of curiosity I took a look at Mr. Burgess’s bio, and it turns out he joined ION in November, 2005. Even if the “legacy debt issues” were the result of debt taken on before then, the debt and equity markets were available on pretty favorable terms until last year. Instead of “legacy debt issues”, I think this is more like “didn’t deal with it when I should have debt issues.”

Recommended reading for more on the way people distance themselves from their mistakes: Carol Tavris and Elliot Aronson, Mistakes Were Made (But Not by Me).