Tuesday, March 17, 2009

Invest immediately in Pitch Forks....just in case

Short version: New Fed program will rape you more than you are already being raped, like with bayonets.

TALF details suggest Obama doesn’t get it - Credit Writedowns: "Marshall Auerback here. As Ed lucidly suggested to me by e-mail:

“We see the Fed giving a loan for assets at the price as reported on the institutions’ books. Otherwise, you have to take a write-down just to get the loan. That’s a non-starter. So the Fed is going to take the asset as collateral at its reported value and will administer a haircut of 5-16%. This program is applicable only to certain AAA paper to diminish the possibility that more haircut would be needed (I am sceptical here).

If irrational despondency goes away, the loan is repaid. However, if the asset falls in value, the Fed has no-recourse. Given the fact that they have already mentioned the SPV, it suggests the investment company could then renege and have the collateral seized with no other penalty.”

But a lot of this is not “irrational despondency”. The reality is that large chunks of these toxic “assets” are not “impaired,” or “illiquid,” or “distressed”. They are worthless, now and forever – unless the peak real estate values of the bubble can miraculously be restored and a whole bunch of deceased LBOs can be raised from the tomb. The banks know this, investors know this, Geithner and Co. know"

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