Is O(bat)ma a bird or a mammal?

It was announced yesterday that the Term Asset-backed Security Loan Facility will be launched in March. That means the Obama administration will begin providing up to $200 billion of initial financing to financial institutions that would like to hold asset backed securities related mostly to the consumer market on their balance sheets. The plan sounds benign enough, since on paper, it would simply be a reversal of the flow of funding from the private markets to the Treasuries that sparked off tremendous stress in the credit markets ever since Lehman’s collapse. What is terribly misleading is the claim that the entire notional value of the assets will be rated AAA, which is only assigned to the most creditworthy debt instruments. It would only be delusional to assume that the distressed households, where the cash to repay these loans would come from, should be slapped with a trip A rating. There has to be an equity cushion in the loan structure that protects the Triple A tranche of the loan. So who or what is this cushion?

I believe that this equity cushion, or a bad loan provision, whatever you want to call it, is the $20 billion of TARP money assigned to provide credit protection against the asset portfolio. In other words, taxpayer funds from the TARP will take the bullets so that the private equity guys can still get their principal payments for participating in the asset program. If we assume that the $20 billion is only a provision for the first $200 billion of this asset program, then taxpayers could be looking at $100 billion in credit losses if this program expands to $1 trillion like Geithner stated that it might. Triple As indeed.

In the first couple of months in office, Obama has already pledged to forcibly alter mortgage contracts for those who can’t afford the homes that they had speculated on. Everything he has done so far has contributed to a stellar resume as a leftist. So why is this robin hood proposing to use taxpayer money to subsidize   the evil and greedy fund managers’ portfolios? At some point, the bat has to choose sides between the birds and the mammals, or risk abandonment from both camps. Likewise, Obama would be well advised to start picking a mask that he could wear for all next four years.

Advertisements

3 Responses to Is O(bat)ma a bird or a mammal?

  1. anchor says:

    Howdy, this is a pretty cool blog. I like random thoughts. 😀

    I believe that the Mortgage Modification Program will probably not help the greediest (or stupidest) speculator after browsing through the latest guideline. The program will not forgive loans, however, will force lenders to renegotiate new loans with maximum allowed monthly payments fixed. I don’t know how exactly this will work out, but I would guess that those who make $50k annually but laden with 5-year $700k ARM will instead get 70-year $700k fixed at 2%.

    So who is giving the securities rating this time? The scandal riddled Moody’s? In a bear market, any investment needs a “buyer beware” sticker. I doubt the AAA rating holds any water.

  2. fromatwoz says:

    thanks for dropping in anchor.

    I think the idea is that if you modify the terms of the loan, there would be a material effect on the cash flow on the underlying security. In other words, without the legal power to enforce a legal contract anymore, more people are hesitant to enter any contracts (purchase the security for a given price).

    The ratings agencies still provide ratings. But when the government says that there will be a trillion dollars of AAA securities issued, you better believe that it will take ALL the credit losses.

  3. xinhui says:

    Dude, time to update your blog.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: