With the notable exception of Lehman Brothers, it has seemed that there wasn’t much that the Fed wasn’t willing to bailout, backstop or guarantee.  Friday however, the Federal Reserve released a Policy Statement On Prudent Commercial Real Estate Loan Workouts.  Tyler Derden of Zero Hedge had an interesting read of this statement.  He said of one section:

[This] seems to imply that the Fed is now encouraging active loan workouts as a matter of policy. The other implication is that firms with CRE exposure can no longer rely on the Fed as a perpetual guarantor of risky exposure. Not only that, but in adopting a new policy strategy, the Fed is acknowledging the major problem that CRE writedowns will represent for banks, yet is telling banks to resolve problems on their own, while subsequently they will "not be subject to criticism for engaging in these efforts."

The implications of this Fed action for the economy could be staggering as the $3.5 b,quadr,trillion CRE market will likely not receive the same largesse that residential real estate has been the recipient of ever since the conservatorship of the GSEs. And the biggest loser in all of this will be banks that still have not used the massive risk rally to offload whole loan and CMBS CRE holdings, and moreover, still have these marked at par or close thereby.

Treasury Secretary Timothy Geithner discounted the potential problems in CRE:

U.S. Treasury Secretary Timothy Geithner expressed confidence Thursday that the woes of the commercial real-estate sector would not drag the economy back down.

Geithner acknowledged that it was difficult for policymakers to tackle the problem of sliding asset values and write-downs.

However, he said, "I think the economy can handle it" when asked if commercial property could reverse a domestic recovery.

"I think you can say with confidence that the financial system is stable [and that] the economy has stabilized," he told an audience of the Economic Club of Chicago.

Not everyone share’s his confidence however:

As Wilbur Ross and George Soros pointed out earlier, the trouble for CRE is just starting. If the Fed is unwilling to recreate QE [Quantitative Easing] for CRE, in the same way that it continues to bail out residential exposure, then look for a major double dip in the economy. The only wild card is why the Fed is letting this happen…]

Perhaps the Fed is doing this because it believes "extend and pretend" is cheaper and politically more palatable than bailouts. Perhaps because it doesn’t really have any choice.  If it is a case of not having a choice, it does beg the question of what happens when CRE really starts to head south.