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If this were Bush-Paulson we would be storming Washington.  The Times explains it in full here, complete with diagrams, but this is the key:

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.

Now there are two ways that Geitner and Obama could have done this.  They could have created a new Treasury Vehicle, something like a Treasury Bill or Treasury Inflation Protection bond (Tips)  And they could have auctioned these off to the public, which could have brought in vast funds based on the probability of gain, just like every other treasury vehicle.

This could be done fast, in a matter of weeks, and the auction held.  And of course every hedge fund manager would have the same opportunity as you and I to evaluate and purchase it.

But they decided to give this amazing deal only to this small group of people, and quite a group this is as defined in this article. Top Hedge Fund Managers Earn Over $240 Million

Yes, the Democratic administration that we elected is choosing to only allow this to be purchased by a group of people who are defined this way:

To make Alpha’s list, a manager needed to earn at least $240 million last year, nearly double the amount in 2005. That is up from a minimum of $30 million in 2001 and 2002. Combined, the top 25 hedge fund managers last year earned $14 billion — enough to pay New York City’s 80,000 public school teachers for nearly three years.

And guess who is taking 92% of the risk on these new financial entities, well you know the answer to that one don't you.  It's we taxpayers, otherwise known as "the treasury."  

From today's Times article:

The program also does not try to change securitization practices that, many investors say, spread risks throughout the world and destroyed financial institutions. Policy makers acknowledge that for now, fixing credit ratings, reducing conflicts of interest and improving disclosure can wait.

Under the program, the Fed will lend to investors who acquire new securities backed by auto loans, credit card balances, student loans and small-business loans at rates ranging from roughly 1.5 percent to 3 percent.

Depending on the type of security they are borrowing against, investors will be able to borrow 84 percent to 95 percent of the face value of the bonds. Investors would not be liable for any losses beyond the 5 percent to 16 percent equity that they retain in the investment.

So, that's it.  Those who make hundreds of millions, and BTW only pay 15% income tax on it thanks to Chuck Schumer, will get to buy these entities that we guarantee.  I wish I could get a few, but it's only for the elite, and I'm not in it.

Are you?

Originally posted to ARODB on Thu Feb 19, 2009 at 09:24 PM PST.

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Comment Preferences

  •  Um...you guys do understand the plan right? (5+ / 0-)

    It's essentially insurance for them buying up the bad or toxic assets.  Basically, we're having them buy up crap by making it appealing.  It's still crap.  There's no other way to sell it.  Please calm down and think about it.  

    •  We all know the crap is (5+ / 0-)

      worthless, so the taxpayers will on the hook for over a trillion dollars. That is a hell of alot of money.

      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.

      Republicans : Socialism for the rich, capitalism for the poor

      by ctsteve on Thu Feb 19, 2009 at 09:34:40 PM PST

      [ Parent ]

      •  Do you want the banks cleared up or not? (6+ / 0-)

        I'm really tired of this hyperventilating with people not thinking things through.  Maybe this will work, maybe it won't.  The nuclear option?  Nationalization.  I still think that's in the works despite this, and I agree with what Andrew Sullivan said, that basically Geithner's stress tests are nothing more than a charade to Nationalize.  It'll happen one way or another.  The point is to solve a problem.  At this point, I couldn't give a damn how they do so.  

          •  Because Hedge Funds have money? (4+ / 0-)
            Recommended by:
            sgilman, gchaucer2, Gemina13, jem286

            Just a thought.

            "You Can't Piss on Hospitality... I WON'T ALLOW IT!" Michael Waits, Troll 2

            by Larry Madill on Thu Feb 19, 2009 at 09:41:03 PM PST

            [ Parent ]

            •  So does the public.... (8+ / 0-)

              that's why we invest hundreds of billions a month in treasury bills and bonds.

              •  Yes, the public has money (4+ / 0-)
                Recommended by:
                sgilman, gchaucer2, Gemina13, no puma

                What is your point though?

                Do you want people to be able to go and buy a CDO that's worthless? I honestly don't get what you are drilling at other than, "THere are rich people in the world that aren't me, therefore I am mad!"

                "You Can't Piss on Hospitality... I WON'T ALLOW IT!" Michael Waits, Troll 2

                by Larry Madill on Thu Feb 19, 2009 at 09:47:31 PM PST

                [ Parent ]

                •  Do you think that hedge fund managers are... (1+ / 0-)
                  Recommended by:
                  0wn

                  going to buy something that has less than a high probability of profit.  If you do, then you don't understand how those operators make the quarter billion a year.

                  There is no justification to only make this offering to a closed elite group.

                  •  These aren't the kind of over the counter (1+ / 0-)
                    Recommended by:
                    gchaucer2

                    products an average investor would buy or could buy. You are talking stuff that's in the tens or 100k to one million dollar range. Again, I don't see your point.

                    "You Can't Piss on Hospitality... I WON'T ALLOW IT!" Michael Waits, Troll 2

                    by Larry Madill on Thu Feb 19, 2009 at 09:51:46 PM PST

                    [ Parent ]

                    •  I take it that the general complaint is this: (6+ / 0-)

                      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.

                      "The TALF," he said, "raises a lot of questions."

                      . . . combined with the assertion that there was just no way to make this sort of freakish deal available to anyone else.

                      Space. It seems to go on and on forever. But then you get to the end and a gorilla starts throwing barrels at you. -- Fry, Futurama

                      by LithiumCola on Thu Feb 19, 2009 at 09:56:17 PM PST

                      [ Parent ]

                      •  But what about this? (3+ / 0-)
                        Recommended by:
                        sgilman, quotemstr, JerichoJ8

                        Last year, investors bought $313.9 billion of these securities, down from $1.6 trillion in 2007 and $2.1 trillion in 2006, according to Dealogic.

                        Last month, banks issued just $1.6 billion worth of such deals.

                        Seems like the private market for CDOs has dried up. And why shouldn't they. It's hard to trust the rating agencies anymore, and with the economy in such a tailspin, who knows who can pay what back in a year.

                        http://www.lavidalocavore.org/frontPage.do Food/Health Issues! http://2009.bloggies.com/ Vote on Best Blog 2009!

                        by CornSyrupAwareness on Thu Feb 19, 2009 at 09:58:55 PM PST

                        [ Parent ]

                        •  Well, the point would be (5+ / 0-)

                          that the government is making the purchase of mortgage-backed securities a near-sure big money maker (that's the whole point) and insulating the investor from losses.

                          There is no reason, in principle, why only people with the words "hedge fund" tatooed on their foreheads could purchase such sweet things from the government.  As long as the banks get the securities off their hands, it shouldn't matter who is buying them.  So why shouldn't the government be giving you, for example, a shot at this is easy 20% annual return?

                          There may be good reasons for this, I am just stating what I take to be the worry.

                          Space. It seems to go on and on forever. But then you get to the end and a gorilla starts throwing barrels at you. -- Fry, Futurama

                          by LithiumCola on Thu Feb 19, 2009 at 10:02:33 PM PST

                          [ Parent ]

                          •  Good point (1+ / 0-)
                            Recommended by:
                            LithiumCola

                            I just don't see the other option being a viable plan.

                            How would they determine who was a viable option to lend to? If they didn't check into that, then we'd be covering the default and not ensuring that the loans get paid back. That sounds like a massive operation, the kind the Fed and Treasury have been proven inadequate for as of late. Also, sounds more risky for the Fed than what's proposed here.

                            I take your point, thanks for clearing it up.

                            http://www.lavidalocavore.org/frontPage.do Food/Health Issues! http://2009.bloggies.com/ Vote on Best Blog 2009!

                            by CornSyrupAwareness on Thu Feb 19, 2009 at 10:22:32 PM PST

                            [ Parent ]

                    •  Are TIPS? (2+ / 0-)
                      Recommended by:
                      mataliandy, arodb

                      BTW - These will almost be turned into vehicles that can be sold on the market, likely through iShares, and these folks will make a pretty penny...

                      The idea that the crowd is unable to handle sophisticated investment vehicles is relatively elitist, and exactly what brokers would have the public believe...

                      Do not become the sycophants we have despised for 8 years.

                      by justmy2 on Thu Feb 19, 2009 at 10:11:07 PM PST

                      [ Parent ]

                •  So you think hedge fund managers would (1+ / 0-)
                  Recommended by:
                  mataliandy

                  buy something worthless....go tell that to their clients...

                  Do not become the sycophants we have despised for 8 years.

                  by justmy2 on Thu Feb 19, 2009 at 10:07:41 PM PST

                  [ Parent ]

            •  Right.... (1+ / 0-)
              Recommended by:
              Gemina13

              Hedge Funds tend to have the most liquidity right now.  There aren't a lot of people and no, the public wouldn't buy the assets.  They're pretty expensive.  

            •  Great, so if they want to make money on this crap (0+ / 0-)

              They can go buy it up on their own.

              This is nothing but a money laundering scheme, using the treasury to launder our money into their pockets to cover their losses.

              Or do you think it was someone else who trashed the entire world's financial system by making bad bets in the trillions of dollars on fancy derivatives and swaps?

              Hey guys! There's a word for bad assets, they're called liabilities!

              by mataliandy on Thu Feb 19, 2009 at 11:34:27 PM PST

              [ Parent ]

        •  "Nationalization" is the only option (4+ / 0-)

          that is fair. And calling it "nationalization" is misleading. Basically, it would be a glorified Chapter 11 event, kind of thing happens ever week (albeit with much smaller banks). "Nationalization" implies that the banks would be indefinetly/permanently taken over by the government, and nobody is talking about that.

          The only other option is basically paying tax payer dollars for worthless assets.

          The choice is clear, IMO.

    •  Calm down? (2+ / 0-)
      Recommended by:
      chuckvw, Terra Mystica

      And think about it?

      If the government came to me and told me to buy ten dollars worth of crap, and that crap lost it's value, they would pay me twenty dollars for my trouble. I would jump on it because it is a win win for me. That is what they are doing here.

      Seems real fair to me. Lmao.

    •  I sometimes think Geithner and friends, (2+ / 0-)
      Recommended by:
      Donna Z, mataliandy

      including Summers, are rolling Obama...he is not an economist or business person by trade...

      I hope they aren't taking advantage of him...we need to get to some town halls...

      Do not become the sycophants we have despised for 8 years.

      by justmy2 on Thu Feb 19, 2009 at 10:06:06 PM PST

      [ Parent ]

    •  The diarist point is why not create (2+ / 0-)
      Recommended by:
      arodb, Terra Mystica

      a vehicle available to all investors, not just a chosen few...

      Do not become the sycophants we have despised for 8 years.

      by justmy2 on Thu Feb 19, 2009 at 10:06:37 PM PST

      [ Parent ]

      •  For the 70th Time (1+ / 0-)
        Recommended by:
        askew

        These types of CDOs are too expensive and too risky for the average investor. These are not OVER THE COUNTER PRODUCTS.

        "You Can't Piss on Hospitality... I WON'T ALLOW IT!" Michael Waits, Troll 2

        by Larry Madill on Thu Feb 19, 2009 at 10:10:51 PM PST

        [ Parent ]

        •  Why are you making the assumption that (3+ / 0-)
          Recommended by:
          mataliandy, quotemstr, arodb

          these are too risky...isn't that a decision for the individual investor to make.  That is a ridiculous argument.  The government is going to use my taxpayer money to offer an investment product to hedge funds with a crazy return opportunity while simultaneously telling me that the product is too risky?  Are you kidding me?

          No one is saying individual main street investors would be buying a specific asset.  There are million way from Sunday to create a product that would spread the cost and risk on a broader scale such as a new type of bond or iShare type vehicle.  

          The idea that only hedge fund managers are sophisticated enough to do their due diligence is crazy...

          Do not become the sycophants we have despised for 8 years.

          by justmy2 on Thu Feb 19, 2009 at 10:19:31 PM PST

          [ Parent ]

        •  NONSENSE.... (1+ / 0-)
          Recommended by:
          mataliandy

          you are an apologist for hedge funds, which are not high risk, but low risk high profit ventures.

          You seem to revere wealth under the guise of a type of pseudo elitism.   I am quite able to evaluate and take financial risks.

          You have interrupted this diary quite successfully without answering why one single group that most people feel have amassed too much unregulated power should be given even more exclusive rights.

          If you are a progressive, then Greenspan is Mao.

    •  Yup. We're being coerced into buying crap (3+ / 0-)
      Recommended by:
      irmaly, arodb, JerichoJ8

      The administration is forcing us, through the treasury, to buy worthless crap indirectly through a 3rd party.

      The 3rd party takes on no risk (but you can bet they will probably charge some kind of fees at purchase time).

      When the crap turns out to be as bad as everyone knows it is, but won't admit; we, the increasingly poor people, then permanently lose all the money that was taken from our pockets to cover the losses of already obscenely wealthy people. Those already wealthy people, are, of course, the ones who f*ed everything up in the first place.

      God, the stupidity, hubris, and audacity of every attempt thus far to address the financial crisis is extraordinary.

      We DON'T NEED to save them from their own bad bets.

      We need to let them take their losses, get knee-capped by the market for being so bloody stupid, and use what little money we, the people, have left to create a new, clean banking system that can step in to fill the void.

      Hey guys! There's a word for bad assets, they're called liabilities!

      by mataliandy on Thu Feb 19, 2009 at 11:30:52 PM PST

      [ Parent ]

  •  Nonsense! And where's Rick Santelli's... (3+ / 0-)
    Recommended by:
    Losty, Inspired By Nature, JerichoJ8

    rant about this?

    Unrelated, guess what: hedge fund assets have fallen by about 50% since the middle of least year, from almost $2 trillion to under $1 trillion as of the end of January.  And their assets are set to keep falling precipitously this year.  As Santelli would say: "losers."  

  •  So whats your solution? (8+ / 0-)

    The government assuming the risk to get things moving does work, what do you think FDIC was created for?  Not to mention the misleading meme that we're giving them 1 trillion dollars, they are loans.

    Everybody around here loves to complain but I've yet to here any real alternative solutions.

    Click here for all your political gear, including new laser etching technology! Don't like mine? Make your own!

    by sgilman on Thu Feb 19, 2009 at 09:33:16 PM PST

  •  This diary is so completely clueless (8+ / 0-)

    it hurts my brain.

    "You Can't Piss on Hospitality... I WON'T ALLOW IT!" Michael Waits, Troll 2

    by Larry Madill on Thu Feb 19, 2009 at 09:34:10 PM PST

  •  I'm not surprised, but who is on the Alpha List (3+ / 0-)

    besides Paulson's friends at Goldman Sachs? Or is that a secret too.

    The program also does not try to change securitization practices that, many investors say, spread risks throughout the world and destroyed financial institutions. Policy makers acknowledge that for now, fixing credit ratings, reducing conflicts of interest and improving disclosure can wait.

    So, it seems the corruption will go on unabated? Is this President Obama's solution to 'those who conducted a era of Profound Irresponsibility'?  

    I'm really starting to get very, very angry.

    "When the house is on fire, it's time for everyone to grab a hose." President Obama

    by Badabing on Thu Feb 19, 2009 at 09:36:35 PM PST

  •  The program makes sense to me... (8+ / 0-)

    Will check out the link, but right now I don't see what the big deal is.

    Looks to me like the Fed will loan to people that can pay it back for sure, and it will get new auto, credit card and student loans out.

    I don't get the outrage but I'll try and find it.

    http://www.lavidalocavore.org/frontPage.do Food/Health Issues! http://2009.bloggies.com/ Vote on Best Blog 2009!

    by CornSyrupAwareness on Thu Feb 19, 2009 at 09:40:31 PM PST

    •  Because Evil Wall Street People X have (8+ / 0-)

      a lot of money and that's bad, basically. I think there is a large contingent of DailyKos that won't be happy with any resolution to the financial crisis that doesn't involved stripping everyone of every cent above $250K

      "You Can't Piss on Hospitality... I WON'T ALLOW IT!" Michael Waits, Troll 2

      by Larry Madill on Thu Feb 19, 2009 at 09:45:16 PM PST

      [ Parent ]

      •  I noticed that earlier this week when I tried to (6+ / 0-)

        have a constructive conversation about corporations. It instantly became corporation=bad.

        I read the article. The only problem I see from it is if the rating system isn't fixed yet. If they are still rating things AAA that will default, then we shouldn't be providing low cost low risk loans. Otherwise this sounds fairly intelligent.

        http://www.lavidalocavore.org/frontPage.do Food/Health Issues! http://2009.bloggies.com/ Vote on Best Blog 2009!

        by CornSyrupAwareness on Thu Feb 19, 2009 at 09:47:55 PM PST

        [ Parent ]

        •  O.K. but why only deal with hedge funds.... (0+ / 0-)

          The Treasury has a process of dealing with the public.  What is described may or may not make sense.  I'm not addressing that.

          This is the first time that I know of that the Treasury only deals with a single financial group,one defined by the top .1 percent of national wealth.

          And also not defined by doing anything less than making the very top profit.

          •  Hedge funds are the only ones willing to buy this (4+ / 0-)
            Recommended by:
            sgilman, gchaucer2, jem286, ml232

            stuff - new CDOs are still very risky. They are the ones with the risk capital right now.

            RebelCapitalist - Financial Information for the Rest of Us.

            by dennisk on Thu Feb 19, 2009 at 10:00:44 PM PST

            [ Parent ]

          •  Because these types of CDOs aren't (1+ / 0-)
            Recommended by:
            CornSyrupAwareness

            the kind of over the counter products the "public" would or even could invest in. It requires organizations with large amounts of cash (i.e. hedgefunds).

            "You Can't Piss on Hospitality... I WON'T ALLOW IT!" Michael Waits, Troll 2

            by Larry Madill on Thu Feb 19, 2009 at 10:00:56 PM PST

            [ Parent ]

          •  I just addressed that above.. (1+ / 0-)
            Recommended by:
            sgilman

            Last year, investors bought $313.9 billion of these securities, down from $1.6 trillion in 2007 and $2.1 trillion in 2006, according to Dealogic.

            Last month, banks issued just $1.6 billion worth of such deals.

            It seems the private market for CDOs has dried up. And for damn good reason. The rating agencies can't seem to be trusted, people are losing their jobs like crazy. Six months ago few thought we'd be here, so I imagine it's hard to make contracts for six months, a year down the line right now.

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            by CornSyrupAwareness on Thu Feb 19, 2009 at 10:01:43 PM PST

            [ Parent ]

            •  The credit rating agencies are (0+ / 0-)

              the real problem in all this. No one really knows what a Moody's rating is anymore, or how far they can trust it. I don't see how they can postpone fixing the bond rating and still encourage hedgefunds to buy this junk.

              "You Can't Piss on Hospitality... I WON'T ALLOW IT!" Michael Waits, Troll 2

              by Larry Madill on Thu Feb 19, 2009 at 10:04:48 PM PST

              [ Parent ]

            •  Great...open it up to the public (1+ / 0-)
              Recommended by:
              arodb

              and those willing to take the risk will do so...how do you know that there is not a private investor with similar access to capital that doesn't want the opportunity to take that risk...

              it is extremely elitist to assume that ONLY hedge funds would want to participate...

              Do not become the sycophants we have despised for 8 years.

              by justmy2 on Thu Feb 19, 2009 at 10:26:48 PM PST

              [ Parent ]

              •  It's more complicated than that (0+ / 0-)

                The FED is making loans, if you open it up to everyone that's a lot of research the FED has to do to insure that these loans get paid back. That brings the scale of this operation to a whole nother complexity. No?

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                by CornSyrupAwareness on Thu Feb 19, 2009 at 10:33:33 PM PST

                [ Parent ]

                •  Ok, I understand your point. but help me out here (2+ / 0-)
                  Recommended by:
                  quotemstr, arodb

                  Depending on the type of security they are borrowing against, investors will be able to borrow 84 percent to 95 percent of the face value of the bonds. Investors would not be liable for any losses beyond the 5 percent to 16 percent equity that they retain in the investment.

                  Why wouldn't the same process be set up outside of a loan process?  They are paying for the 95% of the assets either way right?  They are expecting interest on the loan right?  So why not give the public an opportunity to make the investment by lowering the guaranteed return rate...

                  This just sounds like a show to get some private investment in the game...well, why should that private investment opportunity be limited to a chosen few...

                  btw-those low risk hedge funds could be run by guys or gals named Madoff or Stanford?  Wouldn't it be better to diversify the risk as much as possible?

                  Do not become the sycophants we have despised for 8 years.

                  by justmy2 on Thu Feb 19, 2009 at 10:47:32 PM PST

                  [ Parent ]

                  •  I don't know how you'd set up that process (0+ / 0-)

                    It seems to me to be immensely easier to determine if these millionaire/billionaire hedge funds and p-e firms have the ability to pay back, than ten million Americans of various wealth and employment. Then if you open it up to non Americans well then it's an even bigger operation. This seems like a quick plan that can be executed, and have some benefits.

                    I think we all need a little more information before we get too worked up.

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                    by CornSyrupAwareness on Thu Feb 19, 2009 at 11:00:32 PM PST

                    [ Parent ]

                    •  I understand your point...but I am asking (1+ / 0-)
                      Recommended by:
                      CornSyrupAwareness

                      a deeper question...

                      If the only way to do this is to hand out huge loans, your supposition is generally true (although I still disagree that only hedge funds fit this profile, and I strongly disagree with the fact that the selection will not be transparent and open to any meeting a specific criteria).

                      But, my point is why is a loan the only option.  I am stating that I believe the loan is kabuki to insulate the government from looking like the vast, vast majority of the risk.  If you are willing to take this position, which I know you don't, you could then make the argument that their are better, more open, and transparent ways to diversify this risk on a broader scale.  Essentially ask the public for an investment, and tell them the returns are not guaranteed like a bond, but the upside is potentially more.  Basic risk reward principles.  If it is a good deal people will flood in.  

                      My question for you is if it is a bad deal, do you think hedge fund managers, with specific clients expecting a large return beyond the market average, are going to buy in to this out of their patriotic duty?  That is the part that I don't get.  My assumption would be they would do their due diligence just like anyone else.

                      BTW-Where did you see that foreign hedge funds are not allowed t participate?

                      Do not become the sycophants we have despised for 8 years.

                      by justmy2 on Fri Feb 20, 2009 at 06:12:57 AM PST

                      [ Parent ]

                    •  Oh...and if I wasn't clear in the post above (1+ / 0-)
                      Recommended by:
                      CornSyrupAwareness

                      I am asking why go through the show of pretending to give a loan...why not request private money and lower the return rate based on the assumption the government is assuming most of the risk...this would eliminate the loan qualification issues you are mentioning...

                      Do not become the sycophants we have despised for 8 years.

                      by justmy2 on Fri Feb 20, 2009 at 06:15:52 AM PST

                      [ Parent ]

                      •  I tip'd both your comments (1+ / 0-)
                        Recommended by:
                        justmy2

                        because they're good questions.

                        If the only way to do this is to hand out huge loans, your supposition is generally true (although I still disagree that only hedge funds fit this profile, and I strongly disagree with the fact that the selection will not be transparent and open to any meeting a specific criteria).

                        Handing out isn't the word I'd use. If I got a loan from the bank I wouldn't be thrilled, that's an obligation/responsibility to pay it back in the future.

                        But, my point is why is a loan the only option.  I am stating that I believe the loan is kabuki to insulate the government from looking like the vast, vast majority of the risk.  If you are willing to take this position, which I know you don't, you could then make the argument that their are better, more open, and transparent ways to diversify this risk on a broader scale.

                        I'm willing to take that position, when I believe it. But this being the first I've heard of this plan, I don't feel like I have enough information to say the loans are kabuki. Believe me, my position is not set in stone. This complex and I'm trying to figure it out.

                        Diversification of risk is not their #1 agenda. They want to get loans going and they want to restart the CDO market. From my view this will help to do that.

                        My question for you is if it is a bad deal, do you think hedge fund managers, with specific clients expecting a large return beyond the market average, are going to buy in to this out of their patriotic duty?

                        No, I don't think they will. It's been proven that these hedge fund managers and p-e firms are out for their own self-interest. I assume that's why the loan program and the CDO default guarantee is in here. To entice them to try their hand at CDOs again, this time with an insurance that will actually be capitalized.

                        Question for you:
                        Do you want the CDO markets to just dissolve? Would you prefer that they scrap this whole system and let what happens happen?

                        BTW-Where did you see that foreign hedge funds are not allowed t participate?

                        I was discussing the alternative that this diarist wants. To have a mechanism to loan individuals money so that they can buy these CDOs too. I really don't think we have such a mechanism at either the Fed or the Treasury. The Treasury sells t-bills. The Fed makes loans but it's to other banks and large institutions. So a whole new system would have to be created, and it would get messy. It might work, but I see it as much more complicated than this process.

                        PS: I love your tag line. We got to keep them honest.

                        http://www.lavidalocavore.org/frontPage.do Food/Health Issues! http://2009.bloggies.com/ Vote on Best Blog 2009!

                        by CornSyrupAwareness on Fri Feb 20, 2009 at 11:43:38 AM PST

                        [ Parent ]

            •  So did they ask everyone who could afford to (2+ / 0-)
              Recommended by:
              arodb, CornSyrupAwareness

              buy in if they wanted to?

              No- it sounds like an exclusionary process.

              Drug test Congress and Invade the Caymans.

              by JerichoJ8 on Fri Feb 20, 2009 at 12:32:29 AM PST

              [ Parent ]

              •  It is an exclusionary process (1+ / 0-)
                Recommended by:
                arodb

                but I believe that's for a reason. I see what the other side is saying here, this stuff is quite complex. They are loaning money to people that will buy derivatives that are based on new loans to people. If they were just selling the derivatives then I could see them including everyone, but there's this loaning of money that's going on. For that reason it seems like to offer loans to everyone they'd have to have a process to determine the ability of those people to pay the loans back. It's the CDO that's guaranteed not to default. I'm not sure they are guaranteed to make money are they?

                Also, it's not clear that step 2 isn't what the diarist suggests. More information is needed about how to make good loans in the first place that will make up the CDOs which will be guaranteed and sold to those taking loans under this program.

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                by CornSyrupAwareness on Fri Feb 20, 2009 at 12:39:06 AM PST

                [ Parent ]

                •  If the CDO's don't make money the govt. covers (2+ / 0-)
                  Recommended by:
                  arodb, yellow dog in NJ

                  most of the loss.

                  Drug test Congress and Invade the Caymans.

                  by JerichoJ8 on Fri Feb 20, 2009 at 12:43:36 AM PST

                  [ Parent ]

                  •  Are you sure about that? (2+ / 0-)
                    Recommended by:
                    arodb, yellow dog in NJ

                    A CDO is a security it's going to be traded so the value moves up and down. Default only occurs when it becomes worthless. Which has happened a lot lately because the underlying loans were trash. This plan calls for good loans to be made. Whether that can be accomplished or not is another question.

                    It is the CDO that is guaranteed not to default right? So that's basically a government provided CDS.

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                    by CornSyrupAwareness on Fri Feb 20, 2009 at 12:58:00 AM PST

                    [ Parent ]

                    •  Eventually, they'll be worth less as the economy (1+ / 0-)
                      Recommended by:
                      arodb

                      cycles and underlying defaults occur. Like now.

                      Why promote the continuance of the very thing which has destroyed us?

                      If we know that a recession will snowball because of these instruments, why continue?

                      Drug test Congress and Invade the Caymans.

                      by JerichoJ8 on Fri Feb 20, 2009 at 01:05:39 AM PST

                      [ Parent ]

                      •  I think thats faulty logic (0+ / 0-)

                        first it assumes that these CDOs will be like the last set of CDOs, which is not true. In this case the Fed will be the one offering CDSs rather than the company that issues the CDOs. I doubt the Fed will issue their own CDOs. That will remove the conflict of interest that has stunk up the unholy merger of banks + investment firms.

                        second it assumes that by discontinuing the policies of the past we will fix the problems they created. That's not always true either. Especially with a system this complicated.

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                        by CornSyrupAwareness on Fri Feb 20, 2009 at 01:16:22 AM PST

                        [ Parent ]

                        •  First - You assume the Fed is operating on behalf (0+ / 0-)

                          of what's best for the American citizen. I don't assume they're the same loans, but I do believe they can cause the same damage, especially, seeing as how they are still unregulated and the credit rating agencies are still the same.  If people lose their jobs they default. The CDS values drop and CDS get swamped. If I understand correctly.

                          Second, my point is that discontinuing bad practices will prevent the same problems from occurring not fix the ones already created.

                          "Especially with a system this complicated." Yes, it's very hard to see what's what in a cess pool.  

                          Drug test Congress and Invade the Caymans.

                          by JerichoJ8 on Fri Feb 20, 2009 at 01:36:09 AM PST

                          [ Parent ]

                          •  Last response until morning (0+ / 0-)

                            You said

                            Why promote the continuance of the very thing which has destroyed us?

                            This is a different thing. That's my contention. If you disagree we have to agree to disagree until there's further information available.

                            If we know that a recession will snowball because of these instruments, why continue?

                            That seems to assume that these CDOs will default, and I'm not sure that history will repeat itself here.

                            Secondly, they are regulated, because now everyone and their mother is interested in this stuff. Once we have a chip in the game it's a whole different ballgame. As the executives who took TARP money are starting to find out.  

                            The underlying principle, getting loans out to those who need them and can repay them should help this recession. It sounds good to me even if it means hedge fund managers get gov't provided insurance on the majority of their new CDO purchases.

                            http://www.lavidalocavore.org/frontPage.do Food/Health Issues! http://2009.bloggies.com/ Vote on Best Blog 2009!

                            by CornSyrupAwareness on Fri Feb 20, 2009 at 01:50:39 AM PST

                            [ Parent ]

                          •  I guess, I don't see why we need CDO's. You (0+ / 0-)

                            can regulate them all you want, but when the economy goes bad, their value plummets, regardless of the credit rating of the debtors, when they have no money, they have to borrow more to pay and when they can't - these go boom again.

                            I can see why getting loans out will help. I don't see why CDO's are necessary.

                            I'd also like to a link to any evidence of new regulations.

                            Drug test Congress and Invade the Caymans.

                            by JerichoJ8 on Fri Feb 20, 2009 at 07:35:58 AM PST

                            [ Parent ]

                          •  We're regulating them right now (0+ / 0-)

                            by trying to figure out what they're doing and then by media pressuring them into doing the right thing. That's what I meant by regulating.

                            You're right to be skeptical of CDO's, we shall see how this thing turns out.

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                            by CornSyrupAwareness on Fri Feb 20, 2009 at 11:20:30 AM PST

                            [ Parent ]

                          •  That's inspecting and media pressure is not (0+ / 0-)

                            regulation.

                            Drug test Congress and Invade the Caymans.

                            by JerichoJ8 on Fri Feb 20, 2009 at 12:40:28 PM PST

                            [ Parent ]

                          •  Not inspecting - trying to figure out what they (0+ / 0-)

                            are doing? How is that regulating?

                            Drug test Congress and Invade the Caymans.

                            by JerichoJ8 on Fri Feb 20, 2009 at 01:56:46 PM PST

                            [ Parent ]

          •  I'm just throwing ideas around (0+ / 0-)

            I'm as interested in finding the truth here as anyone.

            Why not loan money to the public so that they can buy CDOs of loans to the public of which 85-94% of the risk will be guaranteed?

            Does the Treasury really have an appartus to loan money? I know they sell t-bills, and pay out interest. But they don't make loans do they? The Fed makes loans but not to individuals. So a whole new process would need to be fashioned to determine which individuals are loan worthy. Because the loan is not guaranteed. The CDOs are guaranteed from default. Correct?

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            by CornSyrupAwareness on Fri Feb 20, 2009 at 12:12:16 AM PST

            [ Parent ]

      •  You are assuming that anyone (0+ / 0-)

        discussing this particular item has similar views about all other parts of the solutions being offered up.  And you know what assumptions do...

        why not stick to the topic in this diary and not make grand projections of intent...

        Do not become the sycophants we have despised for 8 years.

        by justmy2 on Thu Feb 19, 2009 at 10:23:57 PM PST

        [ Parent ]

  •  Interesting. (2+ / 0-)
    Recommended by:
    LordMike, Losty

    Those were a Chorus of Bond Traders at the CME egged on by Rick Santelli who were booing the President's Mortgage Relief plan.

    The GOP has resorted to Cannibalism. Please send Condiments to GOP HQ

    by JML9999 on Thu Feb 19, 2009 at 09:45:51 PM PST

  •  This is not the private/public fund that will buy (2+ / 0-)
    Recommended by:
    ctsteve, CornSyrupAwareness

    the toxic assets.  But this program still assumes people will borrow.  I don't think the activity is there to make much of an impact.

    But there is no question with this program and private/public fund, taxpayers are assuming too much downside risk.

    Better solution - "financially reorganize" insolvent banks and be the bank - lend directly to people and businesses.

    RebelCapitalist - Financial Information for the Rest of Us.

    by dennisk on Thu Feb 19, 2009 at 09:46:59 PM PST

  •  Un "no globos" (1+ / 0-)
    Recommended by:
    chuckvw

    have been warning about letting these neoliberals run out of control since the early 90s.  But once again, it's been the same old thing, the neo-libs are connected, wealthy and powerful, we no globos are on the margins, weak and "different".  Even now, even with the consequences of neo-liberal globalization slapping us in the face every day, with governments falling and masses in the streets all around the world, people in high places are still placing all their national chips on the squares the neo-libs are calling as the roulette wheel of unbridled capitalism gets spun one more time.

  •  Don't forget that ANY PROFITS hedge funds make (2+ / 0-)
    Recommended by:
    chuckvw, arodb

    will be taxed at the capital gains rate instead of the standard income tax rate...

    pretty good scam if you can participate...

    Do not become the sycophants we have despised for 8 years.

    by justmy2 on Thu Feb 19, 2009 at 10:01:32 PM PST

    •  Taxed?...are you like an Idiot? (0+ / 0-)

      Taxed? Do you think that Hedge funds do not use numerous backroom deals and loopholes to still pay taxes? You've got to be kidding me. Are you serious? Hedge funds or their managers pay taxes? Right... yeah right?... Even when they do, the tax rate is not near as high as the rest of us.

      "The people have only as much liberty as they have the intelligence to want and the courage to take." - Emma Goldman

      by jvackert on Fri Feb 20, 2009 at 12:14:55 AM PST

      [ Parent ]

  •  I sometimes think Geithner and friends, (2+ / 0-)
    Recommended by:
    arodb, dennisk

    including Summers, are rolling Obama...he is not an economist or business person by trade...

    I hope they aren't taking advantage of him...we need to get to some town halls...

    Do not become the sycophants we have despised for 8 years.

    by justmy2 on Thu Feb 19, 2009 at 10:05:37 PM PST

    •  And you are an economist by trade? (0+ / 0-)

      Thanks for the laugh

      "You Can't Piss on Hospitality... I WON'T ALLOW IT!" Michael Waits, Troll 2

      by Larry Madill on Thu Feb 19, 2009 at 10:07:15 PM PST

      [ Parent ]

    •  I don't think they are rolling Pres. Obama. They (0+ / 0-)

      want to succeed.  I disagree with their approach and they may be playing some internal politics such as Summers being a gate keeper to what advice Pres. Obama is hearing.

      RebelCapitalist - Financial Information for the Rest of Us.

      by dennisk on Thu Feb 19, 2009 at 10:10:07 PM PST

      [ Parent ]

      •  I hope not...but I simply don't trust (0+ / 0-)

        that our interests as the public have a voice in the room right now, and that concerns me.  I hope Obama is able to cut through the nonsense, but it is obviously harder without an economic background...

        Do not become the sycophants we have despised for 8 years.

        by justmy2 on Thu Feb 19, 2009 at 10:30:08 PM PST

        [ Parent ]

        •  It concerns me to but they way I try to look at (0+ / 0-)

          is that we are truly in unchartered waters.  No one really knows what will work.  We have philosophies and beliefs as to what we think will work.  But we don't know.

          Pres. Obama is very intelligent and has good judgement.  Don't be too concerned about the lack of economic background.  They are not going to pull the wool of his eyes.

          RebelCapitalist - Financial Information for the Rest of Us.

          by dennisk on Thu Feb 19, 2009 at 10:36:48 PM PST

          [ Parent ]

      •  "They want to succeed" (1+ / 0-)
        Recommended by:
        yellow dog in NJ

        Yes . . . but . . . succeed at what?

        Their goal seems to be to preserve the monied class, and let the crumbs "trickle down" to the rest of us.  It is all about keeping what wealth there is in the hands of the few.

        In effect the government lends to them that have at low interest so them that have can lend to us at higher interest and pocket the difference.  

        We need the middle-man for what?

  •  HORSE SHIT (3+ / 0-)

    My tax dollars are going into the very hedge funds that fucked us in the first place by printing funny money, which is what CDS basically are???

    Geitner is more of the same problem I thought we were curing last November. What the heck is Obama doing here?

    I'm an Emersonian Transcendentalist. What's your excuse?

    by Stranded Wind on Thu Feb 19, 2009 at 10:30:14 PM PST

    •  I'm not sure that these are your tax dollars (1+ / 0-)
      Recommended by:
      no puma

      CDS is insurance on securities.
      CDOs are collateralized debt obligations: which if the underlying product is good, are not the problem. We got into the trouble we're in because the CDOs were full of shit and rated like they were solid gold.

      This proposal suggests to create new CDOs from newly issued car loans, student loans, etc. Hopefully they will be rated appropriately and the Federal Reserve and Treasury will get paid back for their loans. And in so doing, this will lower interest rates and provide incentives for small loans to be made to individuals and small businesses.

      Most of the $$ comes from the Federal Reserve which is a private bank, and has a balance sheet. They won't be pulling money from your pocket.

      http://www.lavidalocavore.org/frontPage.do Food/Health Issues! http://2009.bloggies.com/ Vote on Best Blog 2009!

      by CornSyrupAwareness on Thu Feb 19, 2009 at 10:39:59 PM PST

      [ Parent ]

      •  If it is coming from treasury dept. then it is (4+ / 0-)

        our money.

        RebelCapitalist - Financial Information for the Rest of Us.

        by dennisk on Thu Feb 19, 2009 at 10:42:25 PM PST

        [ Parent ]

        •  I stand corrected - 10% is from the Treasury.. (1+ / 0-)
          Recommended by:
          quotemstr

          So I guess some of it is our money.

          I think what many of these posters are missing is that they have this sense that whatever was done wrong in the past, we must now do the opposite. Sometimes you make a mistake, and you can point out the mistake, and yet still doing the opposite will not return one to whole. This is going to be a tricky fix and now is not the time for ultra purity.

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          by CornSyrupAwareness on Thu Feb 19, 2009 at 10:48:17 PM PST

          [ Parent ]

      •  Right the CDOs arent the problem (0+ / 0-)

        The absurd loans to broke ass people were.

        If people can pay their loans everything goes back to normal

        •  Wall Street buying mortgages they knew or should (0+ / 0-)

          have known were garbage from banks who removed lending documentation requirements because Wall Street was assuming the risk was the problem.

          House flippers were the problem.

          Broke ass people form from many causes and may not have been broke ass when they bought their house.

          If wall street and the banks had gotten in front of this and dealt with righteous homeowners with a good faith effort, we wouldn't be having this discussion.

          But then, they wouldn't be stealing trillions more from us.

          Drug test Congress and Invade the Caymans.

          by JerichoJ8 on Fri Feb 20, 2009 at 12:41:24 AM PST

          [ Parent ]

        •  Two words (0+ / 0-)

          Alt-A and Option ARMs

          Due to reset in March 2009.

          The goal of life is living in agreement with nature. - Zeno

          by yellow dog in NJ on Fri Feb 20, 2009 at 02:28:22 AM PST

          [ Parent ]

      •  What happens with the old CDO's? n/t (0+ / 0-)

        Drug test Congress and Invade the Caymans.

        by JerichoJ8 on Fri Feb 20, 2009 at 12:35:48 AM PST

        [ Parent ]

        •  I don't think that's addressed with this plan (0+ / 0-)

          This plan is to lower rates for the new loans that are needed for small businesses, students, people that want cars.

          I'm with all the populist anger over the handling of TARP. But I think we should look at this plan carefully before we call our Congresscritters and complain.

          http://www.lavidalocavore.org/frontPage.do Food/Health Issues! http://2009.bloggies.com/ Vote on Best Blog 2009!

          by CornSyrupAwareness on Fri Feb 20, 2009 at 12:41:12 AM PST

          [ Parent ]

          •  If the Old CDO's are still there how does that (0+ / 0-)

            clear the books?

            Drug test Congress and Invade the Caymans.

            by JerichoJ8 on Fri Feb 20, 2009 at 12:42:11 AM PST

            [ Parent ]

            •  That's not addressed with this plan (0+ / 0-)

              Except in as much as this helps the economy continue to function to give us time to deal with the toxic assets.

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              by CornSyrupAwareness on Fri Feb 20, 2009 at 01:03:29 AM PST

              [ Parent ]

              •  Are new securities backed by rebundled crap? n/t (1+ / 0-)
                Recommended by:
                CornSyrupAwareness

                Drug test Congress and Invade the Caymans.

                by JerichoJ8 on Fri Feb 20, 2009 at 01:19:13 AM PST

                [ Parent ]

                •  Absolutely not (0+ / 0-)

                  Finally a question I can answer with certainty.

                  They will be composed of entirely new loans. That's the purpose of this to get new loans going to small biz, people interested in school and cars. These new loans may even help people with current loans renegotiate. (which would make old crappy CDOs stronger and less likely to default)
                  http://www.nytimes.com/...

                  Credit cards, home equity lines, student loans, car financing: none come cheaply or easily in these credit-tight times. The banks, the refrain goes, just will not lend money.....

                  Under the program, the Fed will lend to investors who acquire new securities backed by auto loans, credit card balances, student loans and small-business loans at rates ranging from roughly 1.5 percent to 3 percent...
                  For one thing, the Fed will make loans against only triple-A rated securities, not lower-rated bonds, which are first to suffer losses when borrowers default on loans.

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                  by CornSyrupAwareness on Fri Feb 20, 2009 at 01:25:55 AM PST

                  [ Parent ]

                  •  Sounds all well and good EXCEPT (2+ / 0-)
                    Recommended by:
                    Losty, JerichoJ8

                    it is based on faulty assumptions - just like the I Banks.

                    Assumption 1: That the price of the assets will not continue to decline. All the forecasts point to housing prices declining to 1998 prices - with perhaps a temporary overshot that put housing costs below that for up to a year.

                    Assumption 2: That people will be able to payback the loans. If you are unemployed with no employment in sight for the next nine months - how do you re-negotiate terms? 31% of 0 is 0.

                    Assumption 3: The the U.S. Government's borrowing power will not falter - no debt downgrade.Well, we'll see what happens next week when the Treasury dumps a record # T-Bills in the market.

                    Assumption 4: No inflationary factors At the rate the Fed is printing dollars to offset deflation - we'll see how quickly they can pull all the $$ out when the economy turns- serious risk of hyperinflation and stagflation on the other side. Additionally, the Treasury will be forced to increase the T-Bill rates to entice investors and the U.S. credit-worthiness declines.

                    A final thought - It is the AAA - Investment Grade CDO's that the IBanks kept. This is a large part of the anvil on their balance sheets.

                    The goal of life is living in agreement with nature. - Zeno

                    by yellow dog in NJ on Fri Feb 20, 2009 at 02:50:35 AM PST

                    [ Parent ]

                    •  Hmm (0+ / 0-)

                      Assumption 1: They could decline or incline, these are new assets.

                      Assumption 2: This isn't going to fix everyone if you don't have a job you probably won't renegotiate your loan.

                      Assumption 3: This diary is built upon the fact that the private US market has plenty of room to absorb gov't bills. Now you're saying they don't. It's clear from the facts that the private market has dried up for CDOs. That's why this plan is designed to loan to hedge funds and p-e firms. They've got the $.

                      Assumption 4: The Fed doesn't print dollars out of nowhere. They have a balance sheet. I really don't feel like inflation is going to be the problem that you do.

                      Conclusion: We will see. I can't predict the future anybetter than you. But when I see a good plan, I'm gonna step up and defend it. That's what I'm doin..

                      What do you suggest instead?

                      http://www.lavidalocavore.org/frontPage.do Food/Health Issues! http://2009.bloggies.com/ Vote on Best Blog 2009!

                      by CornSyrupAwareness on Fri Feb 20, 2009 at 11:26:58 AM PST

                      [ Parent ]

                •  G'night friend (0+ / 0-)

                  I'm gonna call it a night. I hope my intentions here have come out well. I want to learn more about this, and am interested in this stuff. I want to get it right and find and support programs that will help. I hope all that was obvious.

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                  by CornSyrupAwareness on Fri Feb 20, 2009 at 01:28:37 AM PST

                  [ Parent ]

      •  A private bank that spins trillions out of thin (0+ / 0-)

        air?

        Drug test Congress and Invade the Caymans.

        by JerichoJ8 on Fri Feb 20, 2009 at 12:51:21 AM PST

        [ Parent ]

      •  Federal Reserve is funded through buying (0+ / 0-)

        Treasuries.
        So it is taxpayer $$

        The goal of life is living in agreement with nature. - Zeno

        by yellow dog in NJ on Fri Feb 20, 2009 at 02:26:50 AM PST

        [ Parent ]

        •  Federal Reserve is funded through buying (0+ / 0-)

          Federal Reserve is funded through buying Treasuries.

          They're not handed your money. They don't just trade wooden nickels for those t-bills.

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          by CornSyrupAwareness on Fri Feb 20, 2009 at 11:47:08 AM PST

          [ Parent ]

  •  Essentially.... they are spreading the RISK (0+ / 0-)

    They are buying up the bad assets and are going to create a market for them by backing them.

    Its a Fannie Mae for CDOs....

    Eventually these houses will be worth $$ again and we will get money back. The problem with the instruments isnt what they are no matter how mad you want to be, they were just stretched to a stupid limit and let shitty people into stupid loans and muddied the waters.

    Its a good idea

  •  Why don't we nationalize the Fed? n/t (0+ / 0-)

    Drug test Congress and Invade the Caymans.

    by JerichoJ8 on Fri Feb 20, 2009 at 12:56:03 AM PST

  •  This diary misinterprets the TALF plan. (1+ / 0-)
    Recommended by:
    arodb

    The two main criticisms in this diary are that the TALF plan is restricted to hedge funds and that the TALF plan allows these hedge funds to "buy these entities that we guarantee."  Both of these criticisms have their basis in the NY Times article and in that context, are not unreasonable, but they do not match the details of the actual TALF plan.

    The NY Fed has provided a FAQ on the plan and is likely one of the sources for the article.  This FAQ provides several descriptions of who is eligible to be a borrower.  I think this is the most appropriate description for this diary:

    What is an "investment fund" for purposes of the TALF eligible borrower definition?
       
    An investment fund is any type of pooled investment vehicle, including a hedge fund, a private equity fund, and a mutual fund, or any vehicle that primarily invests in eligible collateral and borrows from the TALF.  

    Note that individuals are not necessarily excluded from being eligible.  They simply need to participate through an eligible investment fund.  Note also, however, "A borrower must request a minimum of $10 million for each fixed and floating rate loan."

    The second criticism is really the heart of this diary and also inaccurate.  The perception here is that this plan will guarantee the value of an ABS purchased by the investment group and that, as a result, the gov't will absorb the majority of any loss that results from an ABS default.  This is likely the result of the last paragraph in the final blockquote of the diary:

    Depending on the type of security they are borrowing against, investors will be able to borrow 84 percent to 95 percent of the face value of the bonds. Investors would not be liable for any losses beyond the 5 percent to 16 percent equity that they retain in the investment.

    The key sentence is the last one, but before I explain it, I'd like to stress that the idea of this plan is for the gov't to allow investors to use ABSs as collateral for loans provided by the Fed and Treasury.  In doing so, the gov't hopes to encourage the purchase of these securities by investors so that capital flows to the issuers of these securities.  These issuers will, hopefully, then use this capital to provide more loans to consumers, students, and small businesses.  The reason I want to stress this is to point out that the plan provides loans and that's it.  It does not provide any explicit guarantee for the value of any ABS, although it could be used in a manner that does so.

    The numbers in that NY Times paragraph are likely the result of the "haircut" rates applied to the ABS values.  Once again, the ABS serves as collateral for the loan provided by the TALF plan.  The "haircut" rate limits the value of that collateral by 5-16% and depends on the type of loan supporting the ABS.  For example, if the ABS is based on the bundling of the income stream from small business loans, the haircut rate may be 5%.  The maximum value of the TALF loan is then 95% of the value of the ABS.  This explains the first sentence.  The second sentence comes from the worst case scenario of how an investor might utilize the loan.  Continuing the example above, as an investor I apply for and receive a TALF loan using a small business based ABS as collateral that I am purchasing for the specific purpose of acquiring the TALF loan.  The value of the ABS is $20M ($20 million) and this is what I pay for it.  At the end of the term of the ABS, I will receive this amount back, but during the term of the ABS I will also receive periodic payments based on the coupon rate of the ABS.  Let's say that rate is 3%.  I use this ABS as collateral for a TALF loan of $19M with 2% interest.  As a result, I have an approximate 5% equity stake in the ABS I purchased, since I owe 95% of the ABS's value back to the gov't.  If the ABS matures I've essentially invested $1M of my money and in return receive the difference between the loan cost and ABS return (I'll let you do the math on this.)  The only way the last sentence is true is if both the investor and ABS default on their obligations, which obviously could happen.  Since the loan is a non-recourse one, the only recourse the gov't has on a loan default is to seize the collateral.  As a result, if the borrower's confidence in the ABS drops low enough, it may simply decide to default on the loan.  The loss to the borrower is its equity stake in the ABS.  The loss to the gov't only occurs if the ABS actually does default.  If it doesn't, the gov't actually makes money.

    The accuracy of that last sentence in the NY Times quote depends on your perception of how borrowers may respond to the risk level of an ABS.  If you believe that borrowers will default on their loans once they become uncomfortable with the risk from the ABS then the statement is accurate.  The modern finance system, however, depends on the existence of good faith relationships between its participants.  Such actions will likely affect that borrower's ability to participate in the system.  This in no way protects against abuse of the TALF program, but hopefully will provide enough of a disincentive not to do so.

    •  Thanks for the clarification..... (1+ / 0-)
      Recommended by:
      guyeda

      the N.Y. Times appears to have mischaracterized the limits of who could participate, since mutual funds are neither "Hedge funds or Private Equity firms"

      I don't have the background to evaluate the merits of this offering, but the report that mutual funds were excluded is what seemed blatantly unfair.

      The N.Y. Times should issue a clarification, or at least a reference to the FAQ.  I won't pursue this, since I don't have the financial background to be persuasive, and have been burned by the AP falsely reporting another story....nothing to do with finance.

      Let's see if anyone else picks up their error.

      Thanks again.

      •  They did something similar (1+ / 0-)
        Recommended by:
        arodb

        with their early reporting on the mortgage relief plan(Homeowner Affordability and Stability Plan) as well.  It's not so much that their reporting is wrong, just incomplete.  During this whole crisis I've found that the media treatment of economic/finance issues is similar to their treatment of scientific ones:  commonly incomplete and misleading.  I now take both types of reports with some skepticism until I can get information from a more primary source.  This isn't always easy though.  That FAQ was thick!

        Best regards

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