Pennies from heaven: how the bailout worked
Posted by Charles II on December 3, 2010
But the big news is what the Fed did, namely bail out the entire world. We only know about this thanks to the persistence of Senator Bernie Sanders in forcing a partial audit of the Fed through the Dodd-Frank legislation. Annie Lowrey, Slate:
The cache also shows that a much broader range of companies used the Fed facilities than previously imagined. For instance, the Fed, via its commercial paper facility, aided hog-builder Harley Davidson, Japanese carmaker Toyota, and construction equipment giant Caterpillar. It also helped a plethora of foreign banks, from the Swiss bank UBS to the government-owned Korean Development Bank.
Supersecret hedge funds also availed themselves of the Fed’s help. Indeed, firms like Magnetar—of the infamously skeezy Magnetar trade—borrowed billions from the government via the Term Asset-Backed Securities Loan Facility. The main purpose of TALF was to help ease the market for assets backed by things like student loans and credit cards, with the goal of restoring the flow of credit to consumers. Now we know that TALF also provided low-cost loans to firms like Magnetar and Pacific Investment Management Co., or PIMCO.
Luca Di Leo and Maya Jackson Randall of the WSJ add some detail on how we bailed out foreign institutions (if “foreign” has any meaning in globalized finance):
When Lehman Brothers failed Sept. 15, 2008, borrowers started to line up for the PDCF. That day, the single-biggest loan went to Barclays Capital, the investment bank of U.K. lender Barclays PLC that eventually bought a big piece of Lehman out of bankruptcy. Several foreign banks benefited from the program, including Deutsche Bank, BNP Paribas and UBS. …
Companies outside the traditional banking world also sold commercial paper. Apart from banks, the Fed also bought short-term debt from McDonalds Corp., Verizon Communications Inc., Harley-Davidson Inc., and state-owned Korea Development Bank….
Some of the largest players in the bond market, such as Allianz SE’s Pacific Investment Management Co., also used the Fed’s programs. California-based Pimco borrowed $7.1 billion from the Fed’s Term Asset-Backed Securities Loan Facility, or TALF. …
The ECB used this facility 271 times from December 2007, with loans picking up again this year following Europe’s debt crisis, in a reminder that the effects of the financial crisis are still being felt.
Lowrey links to Caroline Salas and Matthew Leising at Bloomberg on the key question of what the Fed got as collateral. The Fed refused to supply information on the specific securities that were supplied, which means that we do not get a meaningful audit of the Fed:
It is “specifically impossible” to know how much risk taxpayers were taking by looking at pools of collateral grouped by asset class and rating, said Sylvain Raynes, a principal at R&R Consulting in New York and co-author of “Elements of Structured Finance,” published in May by Oxford University Press.
“I need to know the individual composition because a $2 billion pool can be one asset of $2 billion, which would be very risky, or 2,000 assets of $1 million each, and that’s not risky at all,” Raynes said. “The spirit of Dodd-Frank was not respected, and they used the vagueness in the wording of the law to weasel out of fulfilling their duty to the American people.”
With the change in power in Washington, it’s unlikely that the Congress will force the rest of the disclosure necessary to understand just how much corporate socialism is involved.
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