Sunday, March 22, 2009
gaming TALF 2.0
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.