Even if the rating agencies have retired hurt, it does seem that there is one organization still prepared to issue guarantees on, say, Option-ARM backed structured finance. Step forward, the collective of good old American taxpayers!
One of my friendly emailers had a complete conniption about an FDIC program, during the week, and I never got time to follow it up:
The FDIC program is obscene. It is deliberately anti-democratic…Because it is a specialized bond product issued by an insolvent entity (the FDIC), the FDIC will have to pay a yield premium (relative to straight Treasury bonds) despite the FDIC bond’s full faith and credit backing. That spread over Treasuries represents pure waste that will add unnecessarily to the ultimate cost to the taxpayers.
I thought he was having some sort of strange flashback at first, because, actually, it sounded like quite an old plan. But nothing ever happened with that; after a while, it started to look like another one of those useless M-LEC type ideas that got touted around at the height of the crisis; so, eventually, I assumed it had been quietly dropped.
But no, it’s baaack. FDIC have actually started issuing this stuff already; they are stuffed to the gunnels with the toxic legacy of all those takeovers of failed banks, and pretty much out of cash to cope with more banks.
Apparently, ditching the pig at market prices isn’t as good an idea as putting a load of structured-finance lipstick on it. I think this has all been tried before, Ms Bair; it went badly.
Reading across from that March program, it looks like they will have two tranches, overcollateralization, and a guarantor (“an instrumentality of the United States”: that would be you, in the end, if you are a US taxpayer). Since the pilot program securities are issued under Rule 144a, they’ll even be able to have a rating, for what that’s worth.
Oh, and FDIC retains the equity tranche. Not sure what the point of creating one is, then. Perhaps they plan on shorting the seniors and resuscitating the Magnetar trade; they might as well go the whole hog with this trip down memory lane.
Deja vu all over again. I hope the guarantors do better out of it this time, though, and I bet you do, too.