Hedge funds will be allowed to borrow from the Federal Reserve for the first time under a landmark $200bn programme intended to support consumer credit.
Read that again! Hedge funds will be able to borrow from the Fed. That's right hedge funds! We can't lend money to companies that actually produce stuff, but we can lend to HEDGE FUNDS. Give me a %^&&%$ break.
This is flat out insane.
The basic idea is to find another channel to get money into the market to buy up existing loans, or fund new ones, providing more credit to consumers (a noble but flawed goal).
Now you may be one of those people that agrees that hedge funds are scum, but are wondering why it is such a bad idea to let them actually borrow from the Fed (instead of relying on investors to provide the risk capital). Here's why.
Over the last few months the Fed has been desperately trying to pump back up the financial system. To do this it has been printing money, expanding its balance sheet to almost $2.5 trillion. But it only has about $50 billion in capital. That makes it a massively leveraged hedge fund itself (with the extra special benefit of having a printing press in the basement).
So the Fed has decided that it can't leverage itself that much more for the moment, so it is asking the "experts" in leveraging to take on part of the job. Out of the "goodness of its heart" (or because Ben's helicopters are not yet ready to drop cash from the sky for you and I) it is going to lend money to hedge funds knowing full well that they will leverage this many times over.
By the way ... excessive leverage is what got us into this mess ....
Since the credit crisis erupted, hedge funds have complained that they cannot get the leverage they need to arbitrage away excessive spreads and meet high hurdle rates of return.
"Demand is there for leverage but not supply," said Sylvan Chackman, head of global equity financing at Merrill Lynch.
Oh and don't worry about the hedge funds taking on too much risk by borrowing form the Fed. You see...
The loans will be secured only against the securities and not the borrower. However, the Fed will lend slightly less than the value of the securities pledged as collateral. The Treasury has committed $20bn to cover potential losses.
So the Fed will lend the money, with no claim against the borrower, except on the collateral, and has already put aside $20 billion to cover "potential losses"!
Geesh!!!! their "potential" losses to hedge funds are already more than has been lent to GM and Chrysler, companies that actually make stuff.
I'll leave it to Jim Sinclair to put in the final word.
I am Outraged. This is simply too much. This is too far over the top and too much to bear. These sub humans should be throttled and locked up, not coddled.
You or I go bust and the attitude is the same as if we were Motors. Go belly up you jerks. Let them eat cake!
In fact in today’s market the US Fed and US treasury seem to almost enjoy watching the hedge funds break the law
Update: We'll add one more piece of insanity
With a record amount of commercial real-estate debt coming due, some of the country's biggest property developers have become the latest to go hat-in-hand to the government for assistance.
Yup...everyone wants a bailout. Property owners/speculators too. I thought I had heard it all.