Sunday, March 22, 2009
The TALF bait and switch
By ZERO HEDGE
The greatest bait and switch of this generation in all its visual splendor. As a result of the TALF's non-recourse/non-margin nature, a hedge fund X can buy Bank X's MBS Portfolio which is marked on the bank's books at 80 cents on the dollar (but has a market price of 20 cents) for the marked price with a 3% equity check and TALF filling the balance. A day later, Bank X repurchases the portfolio from hedge fund X at the 20 cent market price, pays a $5 million fee for the "trouble" and waits for the portfolio to appreciate to 50 cents on the dollar by 2014. Hedge fund X takes a 75% loss on its nominal equity stake but more than makes up in transaction fees. The TALF portion takes a 75% loss with no recourse and no margin to fall back on.
As a result Bank X takes no writedown now, and in 5 years may book an equity profit of as much as $25 million (net of transaction fees paid to the Hedge Fund X), while Hedge Fund X books a profit of $3.2 million for one day's work...
Lastly the U.S. taxpayer loses $54.3 million on a $77.6 million TALF Investment, or 70% (net of 5 years of interest income).
Note: the maximum TALF size is $1 trillion. Will U.S. taxpayers suffer $700 billion in losses from the TALF? Ask your congressman.
And if you don't want the fee for executing a toyal return swap with the hedge funds, just sell him some credit default swaps on the same!
But however the taxpayer is screwed, just make sure it is under cover!
Posted by Palmoni at 1:05 PM