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Fed quietly putting taxpayers on the hook for the subprime fiasco

Financial Times:

US banks borrow $50bn via new Fed facility
US banks have been quietly borrowing massive amounts of money from the Federal Reserve in recent weeks by using a new measure the Fed introduced two months ago to help ease the credit crunch.

The use of the Fed’s Term Auction Facility, which allows banks to borrow at relatively attractive rates against a wider range of their assets than previously permitted, saw borrowing of nearly $50bn of one-month funds from the Fed by mid-February.

And what might we mean by "wider range"?

However, the move has sparked unease among some analysts about the stress developing in opaque corners of the US banking system and the banks’ growing reliance on indirect forms of government support.

"The TAF ... allows the banks to borrow money against all sort of dodgy collateral" says Christopher Wood, analyst at CLSA. “The banks are increasingly giving the Fed the garbage collateral nobody else wants to take ... [this] suggests a perilous condition for America’s banking system.”

"Dodgy collateral..." Those Brits! Their humor is so dry!

Needless to say, the banks are finding the prospect of handing the Big Shitpile over to the Fed, and from the Fed to you and me, increasingly attractive:

The Fed has not yet indicated how long the TAF will remain in place.

But the popularity of the scheme is prompting speculation the reform will stay in place as long as the financial stresses last.

“Some Fed officials have expressed an interest in keeping and possibly expanding the TAF,” says Michael Feroli, economist at JPMorgan.

I'll bet.

Hey, I've got an idea! When the "dodgy collateral" turns out to be complete crap, as it certainly will, because if it was performing, the banks wouldn't be handing it over to the Fed in the first place, maybe we can use all that loose cash that's lying around for Social Security to meet the obligations the banks incurred? After all, in a "crisis," everybody has to sacrifice. For the good of the country.

The word of the day is kleptocracy. We really do need to get past the idea that the people who are running the country having anything else in mind besides looting as much as they can, as fast as they can, and getting away clean. Iraq should have taught us that, if nothing else did.

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bringiton's picture
Submitted by bringiton on

"opaque corners of the US banking system" also does not engender confidence.

Like the S&L crisis, only bigger and longer and more expensive. There goes OASDI and UHC and education and environment and everything else you can think of except War on Terror and tax cuts for the rich, because those keep us safe.

sane unaffiliated voter's picture
Submitted by sane unaffiliat... on

Lambert, well said. The federal reserve has to stop with this behavior. The fact that there is no oversight over the federal reserve is ridiculous. It is just not right to reward these fat cat banks and the people that were irresponsible and make everybody else pay for it. Be careful Lambert; you are agreeing with Ron Paul on this matter. Hope you have a vomit bag handy. Yes republicans can be right sometimes.

BDBlue's picture
Submitted by BDBlue on

Because the bailout of the banks cries out for a capitalist approach. If I showed up a Citibank with shitty collateral in desperate need for a loan would I get it? Maybe, but the interest rate and terms would not be favorable to me. Some, lets call them capitalists, would say that this is fair because Citibank is assuming risk on my behalf. Moreover, the unfavorable terms serve as an incentive for me to clean up my act and not allow myself to get into this mess again.

Can someone tell me why the USG cannot apply these principles to the banks. It did to the airlines (see http://www.businessweek.com/magazine/con...) Specifically, when the airlines came crawling for help, the government agreed only if they made certain changes in how they did their business, so it wouldn't happen again, and with terms favorable to the tax payer, ensuring that We the People got our money back.

Why not do the same thing to the banks? Bail them out if we must because of the potential effects on the economy, but set terms that protect the interests of the American people. Otherwise we'll just be doing this again. Because for people who claim to know so much about money, every time we turn our backs, they go and do stupid shit like this and expect us to bail them out. And they are going to keep doing it so long as there isn't any consequences. Capping executive salaries, making them clean up their lending policies, and charging them 28% interest - now those should be consequences any Wall Street banker should love.

Of course, that would mean we'd have a government where the leaders believe in capitalism and not one where capitalism exists only for the poor and middle class, but the risk live in a risk-free socialized state.

Submitted by lambert on

is that like the rest of the libtards, he thinks corporations can be persons.

I think they're fictional constructs, and they can and should be done away with if we don't like how the story is going.

[x] Any (D) in the general. [ ] Any mullah-sucking billionaire-teabagging torture-loving pus-encrusted spawn of Cthulhu, bless his (R) heart.