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Sunday, March 22, 2009


gaming TALF 2.0

early examples of TALF have been dismal, but with the pending expansion of the facility to impaired and downgraded assets observant minds are turning over the many loopholes by which banks and hedge funds could game the TALF to transfer hundreds of billions in losses to the government at virtually no risk to themselves.

zero hedge has been among many others a TALF critic from inception, and has one of the more compelling illustrations -- literally -- i've yet seen.

As a result of the TALF's non-recourse nature, a hedge fund X can buy Bank X's [$100mm face value] MBS Portfolio which is marked on the bank's books at 80 cents on the dollar (but has a market price of 20 cents) for the marked price with a 3% equity check and TALF filling the balance. A day later, Bank X repurchases the portfolio from hedge fund X at the 20 cent market price, pays a $5 million fee for the "trouble" and waits for the portfolio to appreciate to 50 cents on the dollar by 2014. Hedge fund X takes a 75% loss on its nominal equity stake but more than makes up in transaction fees. The TALF portion takes a 75% loss with no recourse and no margin to fall back on.

As a result Bank X takes no writedown now, and in 5 years may book an equity profit of as much as $25 million (net of transaction fees paid to the Hedge Fund X), while Hedge Fund X books a profit of $3.2 million for one day's work...

Lastly the U.S. taxpayer loses $54.3 million on a $77.6 million TALF Investment, or 70% (net of 5 years of interest income).

nice work from the goldman sachs ciphers heading up treasury and the national economic council.

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After the AIG bonus brouhaha? They wouldn't dare. Public shame has its privileges, too.

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