TALF Update
When I first posted about the TALF plan, not much was out there in the news or on the blogs, but now the opinion columns are rolling in. You know it’s scary when even Paul Krugman doesn’t like it, and he doesn’t. He calls the plan “cash-for-trash” because he doesn’t understand how the government could sell worthless assets and not lose:
“…the real problem with this plan is that it won’t work. Yes, troubled assets may be somewhat undervalued. But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus — for that is what the Geithner plan amounts to — will change that fact.”
According to Mike Shedlock,
“Geithner’s plan is sheer hocus-pocus idiocy. . . . Looking at the details of the program, one might easily assume the sole plan was to enrich executives and shareholders at taxpayer expense.”
The stock market is alternately “leaping” and “plunging” in a spastic reaction to the plan.
My feeling is that the plan is not going to work, the government will shut it down, and the only alternative will be to “go Swedish” and nationalize the banks. Obama’s crew lacked the political will to nationalize, because — duh! — we all know how unAmercan that is. The TALF plan, the private-public partnership plan, certainly is American: leverage taxpayers money to help the really super rich get really super richer, and since the loans are non-recourse, only taxpayers lose.
Another alternative proposed at Marginal Revolution would be to force the banks to close until examiners have hashed out the good banks from the insolvent ones:
“…once all the remaining banks are good and known to be good, the problem of toxic assets no longer seems so paralyzing.
I’m still not sure that the Treasury buying bank assets is to best way to make this sorting, and that’s leaving aside the price tag. In fact maybe Treasury buying postpones this revelation of information.
Of course if eight of the ten banks are bad…”
TALF: Our Government Bribes Hedge Funds to Return Money to the System
What I don’t understand at this point is why the Obama administration and the Treasury are not instituting a MASSIVE OVERHAUL OF DAMAGING INVESTMENT PRACTICES. Well, I do know why. The entire Federal government is in bed with the ultra-wealthy, who in fact are the very investors that average Americans are now suffering under. They made millions, they lost millions; everyone else lost jobs.
The latest government program, called TALF, offers super low-risk loans to hedge funds and private equity firms to re-invest in America. Did I say hedge funds?! I did. Because, let’s face it, they’re the only ones with any cash around here. And I can’t understand why no one is making a peep about this. Here’s an excerpt from a WSJ article that outlines the program. I’ve added some bold bits:
Hoping to jump-start the financial system, the Obama administration is considering turning to a new program run by the Federal Reserve that has been a challenge to launch and depends heavily on hedge funds. The Term Asset-backed Securities Loan Facility, or TALF, was announced in November after investors stopped buying securities backed by consumer debt. Under the $200 billion program, the Fed will make loans to almost any U.S. firm that is willing to use the government financing to buy securities tied to credit-card, small-business, student and auto loans.
Some hedge funds, which often use borrowed money to boost returns, are lining up to get in on the Fed program, seeing a chance to make high double-digit-percentage returns with little downside using low-cost loans made on easy terms. Some officials inside the Fed are nervous about relying on unregulated hedge funds. But they see it as a trade-off in order to get capital to consumers.
Broader philosophical issues could arise if the program is expanded. The White House has promised more transparency in how its funds are used. But lending to hedge funds may be problematic because their operations are opaque. Moreover, the program depends on many of the practices that helped to fell Wall Street firms in the first place, such as leverage, structured-debt investments and a dependence on credit ratings. Depending on the different types of collateral, investors will get roughly $100 of lending for every $5 to $16 of cash they put up to invest. The rate investors will have to pay will be set at one percentage point over interest rates based on London interbank offered rates.
The loans the Fed makes to investors are nonrecourse, meaning investors can’t lose any more than the money they put upfront on the security. If a hedge fund defaults to the Fed, its collateral is the securities themselves. There also are no margin calls, meaning the Fed can’t demand additional payments of cash from borrowers if the underlying securities fall in value. Investors see these as important inducements to the program. But a Treasury Department inspector general warned that the program was vulnerable to fraud by the private sector.
The activities of hedge funds are another potential issue. Some investors have privately expressed worries that hedge funds could game the system to use cheap Fed financing to fund other trading positions that run counter to U.S. goals. A firm might, for instance, buy debt backed by car loans with Fed financing and use the cash flows from the investment to fund short positions on auto makers that pay off if they struggle.
We are over a barrel here for the very reason that the hedge funds (the ultra-wealthy) still have all the money. In our country, it’s pure blasphemy to suggest that these private persons have too much money. That would be socialist and evil. We’re supposed to support the ultra-wealthy since they are kind enough to open factories and high-tech companies and give us jobs. But let’s call a spade a spade. The government is now offering bribes to these hedge funds to get them to return all the money they’re hoarding so we can have it back in the system, please, pretty please!, to fund our student loans and auto loans. And we’re trusting them not to short-sell on the investments, which they will be horribly tempted to do to hedge their investments. Yeah, hedge-funds.
Hmmm, something is not working here.
p.s. Great write-up about the TALF plan from a blog called Automatic Earth.
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