Tuesday, March 3, 2009

And The Administration Backpedals Again: Comp Limits Eliminated For TALF Participants

In the latest example of just how half-baked the administration's "economic recovery" ideas are, the Fed and U.S. Treasury just announced that TALF sponsors will not be subject to the same executive compensation limits that all other TARP recipients have to adhere to. As the TALF is essentially a taxpayer backstopped Prime Brokerage service to anyone willing to use it, in which funds and other participants have virtually no downside as any losses over 10% are covered by the government, read taxpayers, it would be idiotic for anyone who has this option not to jump onboard... Especially since now CEOs and traders can again take massive risks in expectation of even more massive compensation, however this time not only with taxpayer TARP money, but also backstopped via the TALF itself. This is another scandal waiting to happen.

As Bloomberg reports:

The change suggests the government doesn’t intend to apply compensation limits beyond firms that receive direct investments from the Treasury’s $700 billion bailout fund. Officials have yet to announce whether such requirements will be imposed on firms participating in a separate effort to remove as much as $1 trillion of distressed assets from banks’ balance sheets.

"Just like salesmen toward the end of the month get kind of worried if they’re not meeting their quota, the Federal Reserve has got to worry,” former Fed monetary-affairs director Vincent Reinhart said. Today’s moves are “an attempt to make the facility more accommodating,” said Reinhart, now a scholar at the American Enterprise Institute in Washington.

The revised terms and conditions of the TALF, posted on the New York Fed’s Web site, omitted a previous section on compensation requirements. The limits were previously instituted because the program is being seeded with funds from the $700 billion financial-stability plan, which has provided capital injections to banks with compensation rules attached.
Seeing how pretty much any security will be eligibile for TALF purchase, this revision in terms, will make rampant risk taking even more pervasive.

The Fed and Treasury “currently anticipate that ABS backed by rental, commercial, and government vehicle fleet leases, and ABS backed by small-ticket equipment, heavy equipment, and agricultural equipment loans and leases will be eligible for the April funding of the TALF,” which is scheduled for April 14, the agencies said. Small-ticket equipment may include office gear such as telephone systems, computers and printers, while heavy equipment includes construction vehicles.
The wholesale government panic to prevent the impending market collapse is becoming ridiculous, and is only just postponing the ultimate crash, while likely making it even more acute when it eventually happens. Sphere: Related Content
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Ian said...

I think "pretty much any security" is overstating it a bit. It has to be a new securitization, and can only include older vintage collateral back to a certain point. Plus it has to still be rated investment grade, no mean feat given the axe that the ratings agencies have been taking to all manner of ABS.

Anonymous said...

Does the TALF let 2 TBTF institutions each do a criss-cross trade where each borrows 300B from TALF non-recourse to buy securities from the other. This way, each TBTF institution swaps their securities for cash and non-recourse obligations secured by trash?