I think this is correct. I would prefer completely restructuring the financial system, but in the absence of doing something that radical (which clearly isn’t going to happen whilst Geithner is at Treasury), this is the best alternative we have.

And if I am to judge from your email address, your firm might be one of the leading beneficiaries!

Marshall

I don’t think they they are trying to bypass the banking system, they are trying to revive the “shadow” banking system. At the height, banks accounted for roughly 6tr in lending while the shadow banking system accounted for roughly 4tr. The financial crises was, in many ways, simply a run on the shadow banking system. So 40% of lending capacity has been almost entirely wiped out. Getting the shadow banking system up and running again (albeit in a more regulated format) is critical to restoring the economy.

Our governments know this. Every action, every word makes that clear. We are approaching the point of fiat meltdown, currency tsunami. Governments will start buying their own debt, all the while issuing more debt, spending more “stimulus” money, bailing out more institutions. It will not be subtle, nor fair, nor controlled.

There will be a wave of understanding sweeping over the globe simultaneously, that fiat money must be spent and not held. Velocity of money will skyrocket and central bankers will blink, for just long enough to allow the accumulated GDP multiples of looseleaf paper currency to explode into the economy. When that happens there will never be an opportunity to call them back. Absolute anti-deflation is coming.

You said:

Now, is it a good idea to even try restarting this market, especially with this backstop as the bait? That we can debate. (I’d say no.)

We can agree on that. And you are correct: I am being utterly negative. It’s yet another horrible deal for the taxpayer. A form of corruption. As I said before, it appears that AIG and Bear Stearns/Maiden Lane LLC are the templates. This bears all of the hallmarks of Geithner. TALF is his way of restoring the credit creation process to the private sector under the guise of private sector risk taking when really it is the government taking the bulk of the risk but not letting the public know.

So it gives the perception of private sector lending while at the end of the day if there is a bigger loss than the “haircut” the government is holding the bag.

If economy improves then the government may get by without loss but that’s not the issue.

It is another handout and I am not sure the Congress understands or wants to muck up the process if it will get things going (which it won’t, but that’s a separate issue). Why should the taxpayer agree to this egregious arrangement, when there is a vastly superior and more equitable alternative out there?

Granted, the underlying credits in the eligible ABS could have been originated as far back as mid ’07 and there could be some ugly stuff in there. But I’d venture to say some of that late 07 paper is already out, and not covered by TALF. Also, the market for this stuff slowed down quite dramatically from that period until now, meaning, not a lot of junk got floated in 2008. Had they said that any and all ABS was eligible and there was going to be a bunch of 2005-2007 vintage dumped on the FED, then I would howl with you.

Will the taxpayer still be the loser? Yes. Will there be the unscrupulous that abuse TALF? Yes. Is this the intent? No. The intent is to help start ABS origination going again by giving new investors a backstop on losses going forward, thereby lowering the risk to participate from here (technically, January 1, 2009) on out.

Now, is it a good idea to even try restarting this market, especially with this backstop as the bait? That we can debate. (I’d say no.)

Source: http://www.newyorkfed.org/markets/talf_faq.html