Monday, March 23, 2009

The Legacy Loans and Securties Program

Obama's plan to purchase $1T in toxic securities, after being leaked over the weekend, was formally announced today.

Initially, the program will use the last of the remaining $75-100B (of an initial $700B) in troubled asset relief program (TARP) money for the purchase of these toxic assets. So far it has mainly gone to purchase preferred shares in banks, automakers, and AIG; and then to help fund Obama's mortgage renegotiation attempt.

To review bailout efforts so far:
*JP Morgan acquired Bear Stearns with the assistance of $44B in backing from the Treasury Department. This is more a bailout of Bear Stearns bondholders than the general economy, but one wonders who those bondholders were. Goldman Sachs maybe?
*Untold trillions of cheap credit, in a litany of lending facilities coming from the Fed, have been offered to lenders of all sizes and colors to boost liquidity in the system. How much actually has been lent through these facilities I believe is unknown despite attempts from Bloomberg and Fox News to sue for that data under the Freedom of Information Act.
*Three mortgage revision programs have been offered, the first two being complete failures, in other words resulting in not a single loan modification, and the most recent one I've heard has not generated much activity as of yet, but it's still new.
*Fannie Mae and Freddie Mac were seized and taken under Federal conservatorship, rendering the tax base liable to their bondholders, not unlike Bear Stearns.
*AIG got $85B from the Fed even before TARP money became involved, and went into Federal receivership.
*We have the TARP at $700B, which has had a range of uses but mostly went to provide extra capital to Wall Street. I believe AIG is the single biggest recipient at nearly $100B, which has mostly gone to pay off loses to banks.
*There was a doubling of base money from around $850B to as high as $1780B, from September 2008 to January 2009. Suspiciously, the amount of money in banks reserves has adjusted by almost exactly the same trend, suggesting the money isn't doing much.
*Obama's stimulus, at just under $800B, appears mostly headed to state and infrastructure spending, since state taxes are now suffering in particular with declining property values.
*Aside from dropping prime interest rates to 0%, the Fed has just announced over $1T worth of quantitative easing.

Since bailouts began the stock market has fallen by 50%, and real estate by nearly that in the more sensitive bubble areas.

The funding of this new "legacy" program still seems up in the air but as I said there is now still up to $100B in TARP money left for its intended use of taking toxic mortgages off banks balance sheets.

The program supports the private purchase of toxic loans and securities. Its intention seems to be to let the market determine their value, through a competitive bidding process between private investors. But one might easily doubt how truly competitive the bidding will be with the government offering guarantees for most of the investment, or imagine what shenanigans could easily be undertaken to jack up the bidding.

So anyway, this is an announcement, no action yet, not much activity predicted for a month yet, and any number of surprises might still be waiting before it is carried out. Still, the DJIA responded optimistically this morning.

No comments: