Today I read and then re-read a seemingly innocuous story in the WSJ about the delays in getting the Treasury's Term Asset-Backed Loan facility launched: http://online.wsj.com/...
You remember the TALF - the program announced by Paulson last fall that was going to get the credit market for asset-backed securities in student loans, credit cards, automotive loans going again so that companies could get operating capital and lenders could have funds available to loan to potential customers/borrowers?
Then I read closer and wondered, "Isn't the way they're structuring this just a repetition of the same practices that got us into this whole mess to begin with?
Maybe I'm missing something, but after reading bebswern's recent diaries on this subject, I tend to think he's onto something: http://www.dailykos.com/...
The gist is this: companies selling goods/services in large volumes (think automobiles or mortgages or student loans) can use these promises to pay as collateral to borrow money to fund their operations, rather than borrowing from a bank. The company as borrower sells debt securities ('asset backed paper') to lenders (such as investment funds, insurance companies, retirement funds) who receive interest on the amount they loan and eventual repayment of the loan, at which time the 'paper' is canceled. Financings of this sort are bundled to run in the hundreds of millions of dollars and using this sort of loan facility is more cost effective and feasible than seeking a loan from a consortium of banks. When the economic meltdown started to accelerate last autumn, the underwriters (banks) who helped sell this paper could no longer find buyers and companies that depended on this type of financing to operate their business could no longer access capital.
So, the Treasury determined that if it could devise a mechanism to get the existing paper off the books of the banks, it would re-open the market and companies would once again have access to this source of working capital. That assessment on its face seems reasonable enough, but...
The way the Treasury is structuring the program strikes me as ironic or perhaps as bobswern suggests, a further fraud. On March 11, Liz Rappaport wrote in the WSJ:
"Through the Term Asset-Backed Loan Facility, or TALF, program, an investor can put down $5 to $14 for every $100 it will put up, borrowing the remaining $95 to $86 cheaply from the Fed. They agree to buy eligible, highly rated securities issued by lenders making loans to businesses and consumers to buy cars, pay for their educations or use credit cards.:
This week, she reported further: http://online.wsj.com/...
"The Fed delayed the program's launch by two days, until Thursday. Wall Street dealers, including J.P. Morgan Chase & Co. and Barclays PLC's Barclays Capital, have created vehicles to participate in the TALF that would allow investors in the program to circumvent many of the restrictions laid out by the Fed. The vehicles resemble collateralized debt obligations, or CDOs, and use some of the financial engineering that was partially responsible for the collapse of the credit markets."
Circumventing?
CDOs?
Financial Engineering?
Aren't these the same approaches that got us into this mess? Yes, operating businesses need access to operating capital (and the numbers are big - $10 billion is expected to be netted by companies like Ford Motor Credit and others). However, it's not clear to me how getting the American taxpayer on the hook through the Fed's issuance of cheap debt so that hedge funds can buy up ABS at a discount is going to in fact result in a freeing up of the general credit markets.
"Under the new proposal, a bank such as Barclays or J.P. Morgan would set up a trust to buy securities with money borrowed from the Fed. The trust would then sell investors securities in the trust. Those securities would give returns similar to the TALF loan, but without the strings attached.
The dealers say they could create markets for these derivative securities to trade, and a presentation by Barclays says they may be rated by credit-ratings companies and listed on the Irish Stock Exchange, a home for many CDOs.
The vehicles also would make it easier for investors that aren't eligible for TALF loans to buy into the program, like investors that are restricted by their investment guidelines from using borrowed money to buy securities. Smaller hedge funds that can't vie for large allocations of deals could also buy in through these vehicles.
Some investors have raised concerns, however, noting that the structure puts these dealers at an advantage in bidding and influencing the price of new offerings. They also say the derivative securities present old and familiar problems, such as keeping the end holder of the risk of the TALF securities several steps away from the pricing of that risk."
Isn't it possible (perhaps even likely) that we are going to see another bubble being created by using this sort of elaborately structured mechanism? The feeling that Geithner just doesn't have what it takes is growing stronger and stronger for me. Others?