Holy poop! Fed to bailout Hedge Funds

[J]

Financial Times link

Hedge funds gain access to $200bn Fed aid
By Krishna Guha in Washington

Published: December 20 2008 05:01 | Last updated: December 20 2008 05:01

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.

The Fed said on Friday it would offer low-cost three-year funding to any US company investing in securitised consumer loans under the Term Asset-backed Securities Loan Facility (TALF). This includes hedge funds, which have never been able to borrow from the US central bank before, although the Fed may not permit hedge funds to use offshore vehicles to conduct the transactions.

The asset-backed securities to be funded under the programme are pools of credit card receivables, automobile loans and student loans.

The idea is to increase the supply of these loans and reduce borrowing rates by ensuring that the companies that make the loans can sell them on to investors who have guaranteed access to low-cost funding from the Fed.

The TALF is a key plank of the unorthodox strategy set out by the Fed last week as it cut interest rates virtually to zero. Washington insiders expect the programme will be dramatically expanded next year with further capital support from Treasury once the Obama administration takes office.

A senior official in the outgoing Bush administration told the Financial Times it could also be broadened to include new commercial and residential mortgage-backed securities.

The Fed thinks risk premiums or “spreads” for consumer loans are much higher than would be justified by likely default rates, even assuming a nasty recession.

It attributes this to a lack of buying interest in the secondary market where the loans are sold on to investors. By making loans to these investors on attractive terms it aims to increase market liquidity.

Making the scheme open to all US companies is a radical departure for the Fed, which normally supports financial market liquidity indirectly by ensuring banks have adequate liquidity to make loans to other investors.

However, the liquidity the Fed is providing to banks is not flowing through to financial markets, because banks are balance-sheet constrained and risk-averse. So it is channelling funds directly to investors.

The scheme is not designed specifically for hedge funds and a wide range of financial institutions are likely to participate.

Nonetheless, Fed officials hope that hedge funds will be among those investors that take advantage of the low-cost finance to drive down spreads.

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.

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.

In effect, the Fed will now take on the role of prime broker – the lead bank that lends to a hedge fund – for specific assets.

Bernie Madoff would've been a made man if he had a means of holding out just one more week. This has passed the point of absurdity and I'm honestly at a lack of words here, bailing out hedge funds to get the economy going, seriously, how does that compute? Where does it end? Do I get a bailout for speculating in the stock market?

[Bilbo]

Even better, when do I get bailed out by the Feds the next time my speculations in Vegas do not pan out.

[Fingolfin_Noldor]

Aren't Hedge funds like one of the most unregulated parts of the market? Why are they getting anything? It's almost as if the Fed is paying people to prop up a deflated stock market.

[Edi]

There are just no words for this fucking insanity. The car manufacturers were tied hand and foot to get any kind of support at all and they at least have some actual, physical infrastructure and assets. But whenever it's about rescuing anyone who gambled with stupid fucking assumption in the financial instruments market, full steam ahead.

It's starting to look more and more like a deliberate attempt to drive the entire US into the ground just to guarantee stock market speculators no loss. And it's all going to be taken from the ordinary people's hides. This is risk socialism at its worst. And these fuckers are bound and determined to take the rest of the world with them, because everything is so damn interconnected these days.

[Admiral Valdemar]

I hear in America you can get refunds on gambling debts so long as you have "Inc." or related business suffixes after your name.

Manufacturing cars and goods? We don't want that! Imagining new Ponzi schemes is far more profitable.

[Bilbo]

I hear in America you can get refunds on gambling debts so long as you have "Inc." or related business suffixes after your name.

The IRS will tax money made gambling as income so why shouldnt one take a loss as a tax deduction?

[Thanas]

^Sarcasm or lack of braincells?

[Gerald Tarrant]

Bernie Madoff would've been a made man if he had a means of holding out just one more week. This has passed the point of absurdity and I'm honestly at a lack of words here, bailing out hedge funds to get the economy going, seriously, how does that compute? Where does it end? Do I get a bailout for speculating in the stock market?

Did we read the same article?

The Fed said on Friday it would offer low-cost three-year funding to any US company investing in securitised consumer loans under the Term Asset-backed Securities Loan Facility (TALF). This includes hedge funds, which have never been able to borrow from the US central bank before, although the Fed may not permit hedge funds to use offshore vehicles to conduct the transactions.

The asset-backed securities to be funded under the programme are pools of credit card receivables, automobile loans and student loans.

The idea is to increase the supply of these loans and reduce borrowing rates by ensuring that the companies that make the loans can sell them on to investors who have guaranteed access to low-cost funding from the Fed.

Did we read the same article? This looks like a carrot approach to get people to buy some types of securitised assets. The difference between Fed TALF rates and market rates will basically be profit for the asset holders. The reward for investing is cheaper (in the form of TALF funds) credit. It's an added premium on the top of whatever profit someone can get from the assets. And note the bolded in the snip above, it's investors, nothing in this article says crazy uncle Bernie can't get a bit of credit by buying some of those illiquid securities.

[Phantasee]

^Sarcasm or lack of braincells?

I'm pretty sure he was being sarcastic.

Although, it is a pretty good idea...

1. Incorporate as a numbered company.
2. Head to the Casino.
3. ???
4. PROFIT!

[J]

Did we read the same article? This looks like a carrot approach to get people to buy some types of securitised assets. The difference between Fed TALF rates and market rates will basically be profit for the asset holders. The reward for investing is cheaper (in the form of TALF funds) credit. It's an added premium on the top of whatever profit someone can get from the assets. And note the bolded in the snip above, it's investors, nothing in this article says crazy uncle Bernie can't get a bit of credit by buying some of those illiquid securities.

Well, let's look at the record to date. The TARP was supposed to be program for encouraging banks to lend again. They did not, instead it went into executive pay, hostile takeovers & buyouts, and even more gambling & losses.

The Freddie & Fannie bailout was supposed to stabilize the housing market, put a floor on housing prices and get mortgage lending going again. Instead it's become an endless black hole, to the tune of over $20 billion a month.

The ABCPMMMFLF was supposed to free up lending in commercial papers and money market mutual fund programs. This program worked about as well as TARP.

Every time the Fed or Treasury has tried to step in and "free up lending", it's completely screwed up the sector which it claims to be helping. The Fed become the first, last, and only lendor as everyone unloads their bad assets on it and runs, creating a liquidity trap which locks up money even tighter than before.
With a record of 100% utter failure, you'll pardon me if I believe this latest scheme will not only fail, but be abused to high heaven in the process.

[Admiral Valdemar]

Bernanke and Paulson are turning into Pinky and the Brain thanks to these endeavours exploding in their faces. If their goal is to support the cronies they mingle with, then they've succeeded valiantly. If it's to actually solve any problems, not so good. Saddam, for instance, raided the treasuries of Iraq on his way out.

"What do we do tonight, Hank?"
"Same thing we do every night, Benny. Try to takeover the world!"

[Bilbo]

I hear in America you can get refunds on gambling debts so long as you have "Inc." or related business suffixes after your name.

The IRS will tax money made gambling as income so why shouldnt one take a loss as a tax deduction?

Yes I am being sarcastic here. But there is a certain level of perverse logic. When a casino pays taxes they are taxed on their total profits which will be income from rooms, restaurants, entertainment, and the casino. Each of these will have expenses.

So is a casino allowed to report only its net profit in the casinos for tax purposes? Why should a business be able to do this but not a person?

Or at least that was the argument made to me once by someone who considered themself a "professional gambler" and thought it was all so unfair.

[Ekiqa]

Bernanke and Paulson are turning into Pinky and the Brain thanks to these endeavours exploding in their faces. If their goal is to support the cronies they mingle with, then they've succeeded valiantly. If it's to actually solve any problems, not so good.

Did anyone honestly believe they were trying to solve problems? They have only been helping thier friends with the bailouts.

As the massive obsession with credit caused the problem, why would trying to get back into that same obsession with credit fix this?

[Admiral Valdemar]

Did anyone honestly believe they were trying to solve problems? They have only been helping thier friends with the bailouts.

As the massive obsession with credit caused the problem, why would trying to get back into that same obsession with credit fix this?

It requires a large leap of faith to believe that many of those pulling the strings are doing these actions for altruistic reasons. The level of incompetence and cluelessness could be down to a naïvety you'd rarely see, but a simpler explanation is that these people want the money and want it before the system collapses. In order for rebirth, there has to be death, and we're seeing that now. The big guns have failed now we're down to practically zero in the US, and likely other central banks will reach that level soon enough. Brown's little talk this past week about the UK's fundamentals being sound because people are adaptable and plucky and blah, blah illustrated to me someone lying through his teeth on epic scale, or someone who actually does believe the bullshit they're spoonfeeding the public. This is after the same guy basically said the UK is recession proof, among other faux pas of recent months.

Still, I am hopeful that when - not if now - but when this system becomes totally unusable, that these people will be the first against the wall and something else comes to replace the edifice that's crumbling around us now. If all you have is a hammer, then everything looks like a nail, and these guys have only ever known eternal growth via debt, so the solution is obvious. I guess even if they did come out with a whole new look at things, saying we need to curb consumption, cut up our credit cards and learn to live off our salaries and not equity or our future generations' wealth fund, then many would balk at the very idea and get in some other politico.