Although some observers are concerned by the prospect of TALF investors achieving relatively high returns, I think that concern is misplaced....The prospect of relatively high expected risk-adjusted returns is precisely what gives investors an incentive to participate in the program. As investors begin to take advantage of the attractive TALF terms, spreads on ABS securities contracts, and rates of return go down, and most importantly, the costs of funds for the issuers of the underlying securities falls. Investors’ actions to seek attractive returns lead to lower borrowing costs for households and businesses....Does the possibility of attractive returns for TALF investors mean that the Federal Reserve is taking on large credit risks? I think the answer is a clear “no,” principally because the returns earned by investors primarily are due to the absence of sufficient private balance sheet capacity rather than underlying credit risk [Oh really Bill, 20% of leveraged companies going tits up this year is indicative of what exactly, swine flu in HY land??]Luckily for capitalism, Bill paints himself into a corner, with regards to CMBS and TALF, which as evidenced by a dramatic reversal (widening), the CRE market has gotten very uncomfortable as a result of the upcoming S&P slew of downgrades. In the statement below, Bill, being disingenuous again, extols the virtues of the AAA rating, and differentiates from those bad, stupid rating agencies and their CDO work, and those great, wonderful rating agencies and their ABS work.
[t]he underlying securities are AAA-rated, which means that losses on the underlying loans have to be unusually large to move that high up in the capital structure. And although some of the rating agency models have not held up well in the crisis, the consumer ABS models have proven to be reasonably robust. In other words, a AAA-rating still means quite a bit in this market. [OH DOES IT NOW BILL?] This is in contrast to the collateralized debt obligation or CDO market , where AAA-rated securities often used subprime and Alt-A mortgage loans as their raw ingredient.[OH YES? AND JUST WHY IS IT IN CONTRAST?]Essentially, at this point the second TALF is readjusted again, to include sub-AAA securities (which is the only thing that can save CMBS now, faced with exclusionary S&P downgrades, to enjoy any benefits from this resecuritization initiative), Dudley's propaganda flies out of the window, and Zero Hedge will be the first to remind him, his SIFMA audience, and our readers of his hypocrisy. Also, Bill, be very careful in praising the rating agencies - ZH has a list of who says what about them, in advance preparation of a Congressional (or Senate) populist hearing. Saying positive things will definitely not land you a place in Barney Frank's witchhunt book.
Of course, all of this is essentially moot - TALF subscriptions have been laughable - over the past month less than $30 billion has been allocated to a program with $1 trillion in capacity. By the time TALF is even presumably up and running to save Chris Hoeffel and his CMSA henchmen, the US will either be in hyper[stag/in/de]flation, underwater (literally), or another province of mainland China.
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