So where is my bailout? Now even hedge funds can borrow super cheap if they invest in securitized consumer loans.
Really, the Fed is going about this all wrong. Why let hedge fund have all the fun? Private citizens have perilous little to show for all the kazillions thrown at the financial system.
The Fed should launch a Bottom-Fishers Loan Facility. Administration would be outsourced to firms with retail brokerage operations. Every household would be eligible for a loan of up to $100,000, with investments restricted to US securities, mutual funds, and ETFs (except the “inverse” or short ETFs, and ones that play in currencies or commodities). The exact amount is determined by a score that looks at age, how underwater your investment portfolio is, and your FICO (being older, having significant investment losses, and FICOs that are low but short of simply dreadful are viewed favorably). If the Fed really wanted to encourage this sort of activity, it could also forgive the loans for the borrowers who achieved the top 1% performance among all program participants.
But in all seriousness, the Fed is going further and further down the path of buying every and any junky asset to try to stimulte lending. But the more it steps in, both on the funding and the distribution side, the more it crowds out private players and impedes the resumption of normal activity.
In addition, when the Fed finally succeeds in creating inflation, it will need to quickly sell assets from its balance sheet to reduce money supply (when the Fed sells assets, buyer payments have the effect of taking money out of circulation). Jim Hamilton points out that the Fed is going to be hard-pressed to find an exit:
My answer here would be the exact opposite in philosophy of the kind of purchases and loans that the Fed has been implementing over the last year. The Fed has been trying to sop up the illiquid assets that nobody else wants. But I think what the Fed should be doing is instead acquiring assets of a type that would allow it to quickly reverse its position if a sudden shift in perceptions causes inflation to come in above the intended 3% target. The Fed can’t afford to dump the illiquid securities it’s been taking on recently, and that leaves it with substantially less flexibility to ease out of an expansionary policy once it starts to be successful. My goal would therefore be to buy assets for the Fed that won’t lose their value with a reversal of expectations and whose sell-off by the Fed wouldn’t be itself an additional destabilizing force.
What specifically would such assets be? I’d start with those clearly undervalued TIPS. Next I’d buy short-term securities in the currencies relative to which the dollar has been appreciating. Here again if the Fed has to sell these off in a sudden change in perceptions, the Fed will have both made a profit and, by selling, be a stabilizing force. If we’re still seeing no improvement, the Fed can start to buy longer-term Treasuries.
Unfortunately, as when Hamilton warned of a risk that the markets would test the implicit guarantee of Fannie and Freddie, no one seems in the officialdom seems to be listening.
From the Financial Times:
Hedge funds will be allowed to borrow from the Federal Reserve for the first time under a landmark $200bn programme intended to support consumer credit.
The Fed said on Friday it would offer low-cost three-year funding to any US company investing in securitised consumer loans under the Term Asset-backed Securities Loan Facility (TALF). This includes hedge funds, which have never been able to borrow from the US central bank before, although the Fed may not permit hedge funds to use offshore vehicles to conduct the transactions.
The asset-backed securities to be funded under the programme are pools of credit card receivables, automobile loans and student loans….
The Fed thinks risk premiums or “spreads” for consumer loans are much higher than would be justified by likely default rates, even assuming a nasty recession.
It attributes this to a lack of buying interest in the secondary market where the loans are sold on to investors. By making loans to these investors on attractive terms it aims to increase market liquidity….
The loans will be secured only against the securities and not the borrower. However, the Fed will lend slightly less than the value of the securities pledged as collateral. The Treasury has committed $20bn to cover potential losses.
Since the credit crisis erupted, hedge funds have complained that they cannot get the leverage they need to arbitrage away excessive spreads and meet high hurdle rates of return.