wouldn’t that just prove that it’s a delaying/postponement measure whilst hoping the broader market would bounce back and be willing to be the owners of these toxic instruments?

The only way to weasel out that one would be bankrupcy.

I think Fed’s betting that taking a risk some of the cpties will default is better than if they would default because of the LIBORs being at base+100bp.

Similarly, I’m not sure whether the rate they can repo them with Fed will have any impact on their accounting. Even though legally repos are change of legal ownership, from the accounting perspective the ownership stays (so, the junk stays on the bank’s balance sheet).
Moreover, since the price is pre-agreed (and has no relation to market price), I think it would be a brave bank that would try to use that to value it on their sheets.
Also, note that since the final price is pre-agreed it doesn’t matter if half of the martgages making up the bond defaulted while Fed was holding it, as the cpty has to (subject to it still being able to) pay the full amount they agreed on initially.

In effect, what Fed’s doing here is doing a sort of an usecured loan (which it cannot, under normal circumstances), but pretending for it to be a repo.

That, in my opinion, is the only way how to insert (real) liquidity in the market and in a way this seems a rather neat solution. It’s risky to taxpayers, granted, but then, any solution would be.
It’s better than printing money – as long as the repos won’t roll forever and ever, and would eventually have to be repaid.

This is the danger of the scheme I see – that the take up will be so strong that FEd will not be able to wean the market off it.

BTW, attempts to do similar transactions started to crop up in the market (as large junk-repos, or TRS + buying the asset hedge from the same cpty), but the appetite just wasn’t there, even with rather nice spreads.

http://www.frbdiscountwindow.org/discountmargins.pdf

If I’ve read the schedule correctly the “successful bidders” will be able to lodge toxic waste ABS as “collateral” for these loans. Triple A rated ABs, without verifiable market values, will receive 85 cents on the dollar. “Non AAA” ABS will receive 80 cents loan value on the dollar. This is many times what the ABX indices say this junk is worth.

Question. Is anyone aware of a bank failing to take back, i.e. re-purchase, securities they have lodged with the Fed? What a neat way of getting rid of your stuff that’s maybe worth 25-35 cents on the dollar for 80 cents, just by pledging it as collateral and then failing to take it back at the expiry of the loan. A bailout in disguise???

Written by Giraf on 2007-12-12 18:20:08

What the FED is doing is taking toxic junk paper that can not be valued and is rated tier 3 and will except what the bank says it is worth or very close to what the banks says. This will allow the bank not have to report and write down, as they will use the FED acceptance price as the market price. The banks do not have to turn over all of the toxic waste,but only enough to establish a price. The FED price will be used by the auditors and effectely hide the losss that should be reported. Since the transaction will be not disclosed by the FED, you will not know if the bank has losses that are now hidden from the public. I hope that I am wrong but it appears that the FED is now helping the banks to hide their losses. Part of the FED’s statement is that it is considering continuing tis auction beyond Jan. 2008. So it could be a long time before the truth is known