Under the new facility, the Federal Reserve Bank of New York will lend up to $200 billion on a non-recourse basis to holders of newly issued AAA-rated ABS for a term of at least one year. The Federal Reserve will lend an amount equal to the market value of the ABS less a haircut and will be secured at all times by the ABS.
Um, is "haircut" also some financial term that I'm not familiar with?
It basically means a discount. You give the Fed ABS worth $100m and they give you, say, $80m in cash. One problem with this scheme, of course, is that the securities don't have a discernible market value.
So much about what the government is doing and proposing is lending money so that more credit is available to borrowers, and in this new announcement, more regular people. But what has so many average people worried isn't not being not able to get a loan now, but being able to make payments on the loans they already have. Why not pay off those loans in part or in full--the banks and other lenders get an injection of cash with which they can make new loans, borrowers have their debts relieved and are free to buy other things without worrying how they're going to pay for their current debts.
I know that lenders are happier if people are strung along, paying off their debts for years because of interest, but is there any other reason why this isn't a good idea?
In broad principle, no. In practice, because this way most of it can be done in the form of collateralised lending from the Fed rather than direct budgetary outlays. For instance, this consumer ABS bailout has a headline figure of $200bn, but the Treasury is only stumping up $20bn upfront from the TARP.
Basically it's bailouts on the cheap, without taking over the institutions involved or even diluting the shareholders in Citi's case. And that choice is looking uglier every day.
Now there are reasons not to do it all in the form of direct outlay - the sums we're talking about are fucking enormous, there are big inflationary risks in doing so, it would increase the cost of government borrowing etc. But the Treasury seems to be making things up as it goes along and going out of its way to do it on the sly, to the extent that I'm very worried that it's greatly reducing the potential efficacy of the bailouts. The parallels with Iraq are getting hard to ignore.
Well, there's the argument that the government shoouldn't be providing subsidies to the spendthrift. If the govt. started paying off people's consumer or housing debts, people who were thrifty and saved would say: "hey! where's my share?"
It's only taking equity stakes in a few cases. The $2.4 trillion CP purchase programme and the FDIC's $1.4 trillion guarantee programme come with pretty much no strings attached at all, just a haircut or a (way below market market rates) fee. The only strings on this latest bailout are to do with executive compensation.
Indeed, it's been a while since the moral hazard argument has been given serious attention.
Another thing that is driving the current set of programs is a sense that the credit market freeze is directly related to the uncertainties associated with the very large volume of illiquid assets on bank's balance sheets. By buying those up, the government is trying to eliminate the fear that a counterparty will go bust without warning.
All of the headline figures strike me as being massively inflated for PR reasons (which is something that has characterised US "aid" programs for years).
So the space program and the Manhattan Project, combined, cost considerably less than the mortgage crisis.
Imagine how much stuff they could have invented with this money. Green energy, solar cars, cures for illnesses, clean water for everybody in the third world. But no, lets use it to speculate on houses.
It's already arrived, TG. It's just that in Europe there seem to be a lot more strings and much more of a consumer focus. Much of the UK high street is going to end up nationalised. In Spain, unemployed people have had their mortgage payments halved by law.
The deferred payments (up to Eu500 a month) get capitalised and paid by the borrowers after 2011, at which point the government is underwriting them. In the meantime the banks suffer the cashflow consequences
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