March 4, 2009
The Fed's TALF Program: Another Surprise in the Details
The Fed announced the details of its new $1T TALF lending program yesterday. It was another unpleasant surprise. The Fed is acting as a prime broker (investment banker) for private investment funds (hedge funds), in essence, for free. Here is how it works. The Fed loans money to hedge funds who use the money to leverage purchases of the AAA tranche of asset backed securities from SPV pools of assets. The backing will encourage other investors to buy other tranches, will give SPVs money to buy income producing assets (loans) from originators who will then be encouraged to place loans with consumers who will then buy on credit from American manufacturers. Several problems: 1) Who will buy the "junk" tranches? 2) Consumers are credit wary. 3) The Fed is, very quietly, backing securitization, leverage, and hedge funds, three of the primary targets of Congress and the media. Moreover, hedge funds will make a killing in profits and not share them with the Fed. 4) Obama, in his budge bill, is attempting to impose higher taxes on hedge fund manager's share of the profits ("carried interest"), however. Good golly Miss Molly.
March 4, 2009 | Permalink
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"The Fed is, very quietly, backing securitization"
Without really looking into it is my understanding that the securitization markets are still broken. I also believe that nobody is in favor of never restarting securitization. And, I believe that securitization didn't really go off the rails until the securities were made of junk.
So, I'm in favor of the government kick-starting the private sector to reinvigorate the private marketplace for high quality securities, where the high quality requirement seems to be the key point.
And there seem to be some self defeating aspects to your numbered points. 1) The "junk" from Wall Street is what blew up and it is what the public and congress didn't care for, as you note in point three, so it seems like this stuff should be abandoned. 2) If there aren't very many high quality consumers ready to borrow, then, as you note in point one, this new program will be of no cost to the gov or benefit to the private sector--so it's no big deal. But, if there are high quality consumers out there who are tempted by the increasing "deals", now they'll have access to financing that would have been otherwise inhibited because the junk has torn apart the system as a whole. 3) As you note in points one and two, if there are no high quality borrowers this program won't do anything, so there will be no gov cost or private sector benefit. But, if there is this now unserviced demand for very high quality borrowing, now those folks will be able to borrow. At this point, a more or less net-zero cost for the government is about as good as we can expect. In other words, I'd take the gov setting up a quasi Fannie/Freddie (with screens for junk) for consumer loans because it seems like the cheapest way to get things moving for quality borrowers. 4) That the hedge funds participating in this program (or not) would need to pay tax rates on their income similar to those rates paid by everybody else seems fair because this is their income. Yes, this money is generated by getting folks in the free market to pay them 2 and 20 for their talents, but it is their income, and it isn't even their capital that they risk to generate this income/compensation for work done. And, creating this tax equality for hedge funds should help to ease the concerns regarding their profits which you noted in your third point. Of course, this proposed income tax equality is proposed to take effect in 2011, when hopefully some of these investments are ripening. (BTW, wouldn't it be fun to see if these hedge funds sell assets earlier than the ideal time so that they can avoid a change in their personal tax rates, rather than because they're doing the best thing for their clients--we may see that in practice they truly don't understand the difference between risking their own capital and that of a client, i.e. they may choose to move their clients money for their own personal gain, as if if was their money, hopefully most of them actually realize that it is not their money.)
Posted by: 1jpb | Mar 4, 2009 2:14:02 PM
I am a single person who has invested all of my personal moneys into this market so that maybe I could have something more to live on. Now I find out that all of it is worthless. I hope that all these people who have sucked me and many others like me will pay for this scam, they should be made to live in the streets of n.y. & everyone kicks them in yhe head when they walk by. All of us have sold our souls to the people we trusted to help build our furture in this country. I was raised in the streets of Chicago, I changed my life of crime to be a better person just to find out that if I didnt maybe I would be rich now, dont really know, but you sure can bet in my old days they would pay me for thier scam. Its to bad that nothing will be done to these people and now they will get even more money, these people will pay when they die, I know the be punished by god.
no if buts about it. We real americans our weak ,we gave our selfs up to the evil goverment and everything the tells us to do, even if we know that there,we say nothing and do nothing to stop them. This will be the end of our society, just like the evil govermants in the past. I hope that this doesnt happen ,but nobody stands together and fight for what right,these people should be punished to the exteme,without mercy like they did us, when the scammed the world into there game.
Posted by: Randall | Mar 5, 2009 3:20:57 PM