The biggest gamblers on Wall Street are now to be rewarded with low cost loans from the Fed.
Hedge Funds will be able to borrow from a $200 billion kitty to spur the consumer loan industry. And just what will these funds be doing? Spreading the risk, of course - to us the taxpayer:
The Fed said on Friday it would offer low-cost three-year funding to any US company investing in securitised consumer loans under the Term Asset-backed Securities Loan Facility (TALF). This includes hedge funds, which have never been able to borrow from the US central bank before, although the Fed may not permit hedge funds to use offshore vehicles to conduct the transactions.
The asset-backed securities to be funded under the programme are pools of credit card receivables, automobile loans and student loans.
The idea is to increase the supply of these loans and reduce borrowing rates by ensuring that the companies that make the loans can sell them on to investors who have guaranteed access to low-cost funding from the Fed.
The TALF is a key plank of the unorthodox strategy set out by the Fed last week as it cut interest rates virtually to zero. Washington insiders expect the programme will be dramatically expanded next year with further capital support from Treasury once the Obama administration takes office.
A senior official in the outgoing Bush administration told the Financial Times it could also be broadened to include new commercial and residential mortgage-backed securities.
I am no financial whiz. In fact, I am fairly ignorant of all this stuff. And I'm sure (?) the Fed and the Treasury Department know what they're doing.
But isn't this sort of the way we got in this mess in the first place? Easing credit by packaging risky loans - including mortgage backed securities - into "asset backed securities" and then selling them to investors to spread the risk?
Only this time, taxpayers are taking a risk too. And the biggest dice rollers on Wall Street will be able to take us down with them if they go. And get a load of their reasoning:
Making the scheme open to all US companies is a radical departure for the Fed, which normally supports financial market liquidity indirectly by ensuring banks have adequate liquidity to make loans to other investors.
However, the liquidity the Fed is providing to banks is not flowing through to financial markets, because banks are balance-sheet constrained and risk-averse. So it is channelling funds directly to investors.
That's right. Because banks are acting responsibly with money, the Fed sees fit to get potential irresponsible parties involved. And the loans that will be offered to investors in these asset backed securities are among the riskiest loans out there.
This may be the first time in financial history where "risk averse" is bad for the economy.
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