While the Wall St. shills are screaming about the government spending millions to help struggling homeowners avoid foreclosure the Fed is quietly planning to give a trillion dollars through hedge funds to back up secondary loan markets. These deals are being cut to allow hedge funds to make up to 20% profit off of taxpayer money. That's $200 billion in Wall Street profits.
The Obama administration hopes to jump-start this crucial machinery by effectively subsidizing the profits of big private investment firms in the bond markets. The Treasury Department and the Federal Reserve plan to spend as much as $1 trillion to provide low-cost loans and guarantees to hedge funds and private equity firms that buy securities backed by consumer and business loans.
The hedge fund bailout program is called TALF.
The central bank has already made clear that the programme may be expanded beyond the original target of financing car loans, credit cards and student loans, to fill the huge gap in financing that is hurting the economy as banks and investors continue to struggle with toxic assets and losses.
The Talf could offer a way for hedge funds to borrow money, which they would have obtained from banks in the past, but encourage them to finance parts of the economy that the Fed has prioritised, such as consumer finance.
The Fed will be balancing the need to inject credit into the system with the amount of losses taxpayers could potentially take if the investments turn sour.
The deal is being sold as a way to help auto companies sell cars. However, it's not automakers who will get rich off of this program. It's the Wall Street vultures who shorted the markets, profiting from the financial catastrophe they caused, who will get billions from this program.
Simon Johnson, an economics professor at the Massachusetts Institute of Technology and a former chief economist at the International Monetary Fund, said many people might take a dim view of the TALF program because it provided government subsidies to investors like hedge funds. Investors who borrow from the Fed could enjoy annual returns of 20 percent or more.
This may make it easier to get student loans from banks. However, the government has run a successful direct student loan program with no middleman and very low overhead. Taxpayer dollars could be spent far more effectively by expanding direct lending programs. The TALF has a huge overhead cost that subsidizes hedge funds.
Wall Street and the cable finance shows are like a team of pickpockets to the American taxpayer. CNBC gives the public a hard bump while Wall Street picks the taxpayers' pockets. Nothing will be done to change any to the rules and regulations on hedge funds or Wall Street before this money is handed out. Nothing is being done to improve disclosure. Nothing is being done to stop fraud.
But $200 billion will begin flowing from our pockets to hedge funds in a few weeks.
The Fed is expected to start the first phase of the program, which will provide $200 billion in loans to investors, in early March.