Taibbi takes aim at the Talf | FT Alphaville

Taibbi takes aim at the Talf

Yeah, so — the Talf was a scam. That much we knew from the get-go.

What we didn’t know was that a pair of Reiki-loving Wall Street wives had a crack at it. That nugget’s contained in the latest from Matt Taibi — the hyperbolic Rolling Stones writer of vampire sqid fame.

From ‘The Real Housewives of Wall Street‘ in April’s edition of the magazine:

In the case of Waterfall TALF Opportunity, here’s what we know: The company was founded in June 2009 with $14.87 million of investment capital, money that likely came from Christy Mack and Susan Karches. The two Wall Street wives then used the $220 million they got from the Fed to buy up a bunch of securities, including a large pool of commercial mortgages managed by Credit Suisse, a company [Christy's husband, former Morgan Stanley CEO] John Mack once headed. Those securities were valued at $253.6 million, though the Fed refuses to explain how it arrived at that estimate.

With $220m in-hand the wives were free to do their part in kickstarting the Asset-Backed Securities (ABS). To paraphrase Tim Duy, back in 2008 and 2009 there were no bad assets, just misunderstood ones. The idea of the Talf was to revive demand for, and issuance of, ABS courtesy of Fed-provided funds.

However, as Taibbi notes, a key aspect of Talf is that the Fed doles out the money through what are known as non-recourse loans. Which means if the borrower were to default on the loan, the US central bank would have no recourse against the borrower beyond the collateral they provided. So if the ABS bought by Christy and Susan bought turned sour, in theory they could just walk away.

The wives get most of the upside — the taxpayers get most of the downside.

Taibbi’s style is perfect for this sort of thing  — he calls it “welfare for the rich.” But what’s really galling is how very obvious the intent of the non-recourse nature of the Talf loans was from the very beginning. Brian Sack of the NY Fed said last June that the provision of non-recourse loans “helped to encourage investor participation.” Of course it did. Investors say to the Fed: lend me your balance sheet, give me some subsidised leverage, and protect me against, to use the Fed’s own words, “very adverse economic outcomes.”

And presto — everyone wants a piece of the Talf-backed ABS pie!

Did the Talf help revive ABS issuance? Well yes — but it did so, as central bank policies often do, by throwing money at the problem. It’s the Bagehotian lender of last resort principle on steroids. And it’s kind of distorted too — since (yet again) profits are privatised and losses are made public.

Oh — one last thing.

Back in the summer of 2009, the government’s Tarp watchdog said it wanted the Fed and the Treasury to reveal any borrowers who did walk away from their Talf loans, given that taxpayer involvement:

In TALF, the loans are non-recourse, that is, the lender (Federal Reserve Bank of New York) will have no recourse against the borrower beyond taking possession of the posted collateral (consisting of asset-backed securities (“ABS”)). Under the program, should such a collateral surrender occur, TARP funds will be used to purchase the surrendered collateral. In light of this use of TARP funds, SIGTARP has recommended that Treasury and the Federal Reserve disclose the identity of any TALF borrowers that fail to repay the TALF loan and must surrender the ABS collateral.

As far as we know, the Fed and the Treasury never agreed.

The anonymity of Wall Street’s Talf-takers looks safe for now — except for those two wives, of course.

Related links:
Non-recourse loans = you get shafted – Self-Evident
Treasury needs to strengthen its decision-making process on the Talf - GAO