Is O(bat)ma a bird or a mammal?

March 4, 2009

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.