Posted on 02/09/2009 3:05:31 PM PST by Shermy
Hedge funds are showing interest in potentially borrowing money from the Federal Reserve to buy securities backed by auto loans.
In the next week or two, the Fed is expected to announce the terms under which investors can borrow from its $200bn term asset-backed lending facility (Talf), which will determine whether hedge funds will be able to borrow cheaply enough to make investments in the auto loan-backed securities worthwhile.
Bank of America and Barclays Capital are marketing a $500m bond called World Omni backed by recently issued auto loans. Once the Talf terms are set, that deal could be eligible to be financed with Talf funds.
“Haircuts and interest rates have yet to be set and will obviously be crucial to investment decisions,” said Chris Flanagan, head of asset-backed research at JPMorgan.
The success or failure of World Omni and other deals will be very closely watched by the Fed.
The central bank has already made clear that the programme may be expanded beyond the original target of financing car loans, credit cards and student loans, to fill the huge gap in financing that is hurting the economy as banks and investors continue to struggle with toxic assets and losses.
The Talf could offer a way for hedge funds to borrow money, which they would have obtained from banks in the past, but encourage them to finance parts of the economy that the Fed has prioritised, such as consumer finance.
-snip-
The Federal Reserve stepped back from plans to start lending this month under a $200 billion program to prop up consumer and small-business credit, saying it will announce a start date later in February.
...
Under the program the Fed will lend up to $200 billion to holders of AAA rated debt backed by “newly and recently originated” loans. Those include education, car and credit-card loans, and borrowing guaranteed by the Small Business Administration. The central bank announced the TALF in November. ...
Yes, they’re doing it.
Going to back securitized car loans and credit card debt.
Of all the things that shouldn’t be converted into derivatives are credit card debt, and car loans, whose collateral naturally always depreciates.
Not only is the govt. going to bail these out, Paulson indicated so, they expressly are working to keep these derivative markets as an ongoing enterprise, rather than let them die, or ban them altogether. The only things they do is incentivize riskier loans and make Wall Street traders very rich.
These articles about this all have “experts” talking like that if this doesn’t go through there will be no car loans—bad for Detroit.
Not so—GM and Chrysler already getting big money to loan directly, this derivative nonsense is not going to make any American buy a car.
Heck, the TV is full of commercials how the auto cos. are ready to loan.
But this is really about bailing out Wall Street traders, foreign interests who finance our debt, and preserving the idea the derivative system was good in the first place.
Who knows what bull Paulson, completely a compromised person on derivatives, sold Bush on.
1. Hedge funds only make money by making HUGE bets.
2. Any individual car loan, credit card balance, etc. is very small in comparison to the amount of money that hedge funds bet.
Therefore there is no need to slice and dice and then repackage these individual loans and credit card balances in order to create shares that can be bought and sold. The only purpose is to obfuscate the quality of the underlying asset.
If hedge funds want to make bets on car loans and credit card balances they should:
1. Use their own money.
2. Be required to buy entire loans and/or balances.
That way it is easy to determine who is the lessor and who is the lessee and there is less overall obfuscation.
Don't forget that Credit Unions and Community / Regional Banks are doing just fine and have money to lend since they didn't mess with derivatives.
Poor loans got us in this situation in the first place. Good heavens. This is utter national suicide.
Derivatives should be banned...bring back bucket shop laws...no good has ever come from this...really gambling.
These traders just want the good times to roll, they don’t give a darn about the country...Warren Buffet called these things H-bombs.
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