Bernanke`s TALF Con

Fed chief Ben Bernanke's new funding facility is a real doozy. In fact, if the Term Asset-Backed Loan Facility or TALF, which is set to launch on Thursday, doesn't convince the American people that it's time to take a wrecking ball to the Central Bank and start over, than nothing will. Bernanke and his co-conspirator at Treasury, Timothy Geithner, are planning to revive the shadow banking system by dumping $2 trillion into the same over-leveraged, derivatives-based garbage that blew up the financial system in the first place. All the blabbering about a "good bank-bad bank" remedy appears to have been a diversion.

This is how "Geithner's program has three main elements: Injecting fresh government capital into some of the country's biggest financial institutions; establishing a public-private partnership to handle as much as $1 trillion of banks' bad assets; and starting a credit facility with the Federal Reserve of as much as $1 trillion to promote lending to consumers and businesses. 

The Treasury hopes to unfreeze credit markets by providing new incentives to banks and investors to resume trading in mortgage securities and other troubled assets. U.S. regulators are conducting a new series of examinations to make sure banks have enough capital to accept losses when selling these assets, while also planning to provide government financing to the investors who might buy them." (Bloomberg News)

That's right; $1 trillion for Bernanke's TALF and another trillion for Geithner's so called "Public-Private Partnership". That's $2 trillion down a derivatives sinkhole just to preserve the illusion that the banks are still solvent. Bernanke has decided to shrug off the advice of nearly every reputable economist in the country, most of whom are pushing for a government takeover of the failing banks (nationalization), just to toss his shifty banking buddies a lifeline. It doesn't seem to bother him that the public till has already been looted and that his action will leave the next generation of Americans bobbing in a pool of red ink.

Last week, investors backed away from Bernanke's TALF, even though the Fed promised to provide up to 95 percent of the funding (through low interest loans) to investors willing to buy distressed assets backed by student loans, car loans and credit card debt. The potential investors "objected to the level of scrutiny that dealers would have over their books, arguing that the dealers' rules attached too many strings. Dealers were saying they take plenty of risk to facilitate the program and need to be protected in situations where the collateral or the client made mistakes or wound up ineligible." (Wall Street Journal")

This is how crazy it's gotten. Why shouldn't the Fed have the right to look at the books and see if these financial institutions are solvent or not? Should they just take their word for it?

But that's only half the story. When the WSJ says that dealers need to "be protected in situations where the collateral or the client made mistakes or wound up ineligible", what they mean to say is that they expect the Fed to make up for any losses on securities which are explicitly banned from the program. This is no small matter, since the Fed cannot legally buy any asset that is less than triple A, and yet, everyone knows the TALF will end up being a dumping ground for all kinds of toxic waste.

So who will pay when financial institutions sell double A or lower securities that they KNOW are ineligible for the program? As it stands now, the taxpayer, because the Fed caved in to industry pressure. In other words, the interests of the people who put up a measly 5 percent of the original investment will take precedent over those who put up 95 percent. This is the kind of sleazy dealmaking that is going on behind the scenes of this bailout fiasco. The Fed is so desperate to launch its facility and keep these Wall Street scamsters and bank extortionists in business, they're willing to underwrite the fraudulent sale of rotten securities. It's outrageous!

But there's even more to this swindle than that--much more. According to the Wall Street Journal:

"Wall Street dealers, including J P Morgan Chase & Co. and Barclays PLC's Barclays Capital, have created vehicles to participate in the TALF that would allow investors in the program to circumvent many of the restrictions laid out by the Fed. The vehicles resemble collateralized debt obligations, or CDOs, and use some of the financial engineering that was partially responsible for the collapse of the credit markets. The Fed, eager to get what it hopes will be a $1 trillion program up and running, has blessed the vehicles because they open the TALF up to a much larger group of investors." (TALF is reworked after investors balk, Liz Rappaport, Wall Street Journal)

Great. More CDOs. Just what we need.

Keep in mind that the Fed's funding is in the form of "non recourse loans" already, which means that if the dealers decide to walk away, the losses are transferred to the taxpayers balance sheet, no questions asked. But even that is not good enough for the Wall Street crooksters. They want to create a whole new security buffer-zone for themselves by dredging up the Frankenstein of structured debt-instruments--the notorious CDO--so they can "circumvent" the rules and plead innocent when B grade garbage is sold through the TALF. This isn't a financial rescue plan, it's a witness protection program for self acknowledged con artists and snake oil salesmen.

Again, the Wall Street Journal:

"Under the new proposal, a bank such as Barclays or J.P. Morgan would set up a trust to buy securities with money borrowed from the Fed. The trust would then sell investors securities in the trust. Those securities would give returns similar to the TALF loan, but without the strings attached....The dealers say they could create markets for these derivative securities to trade.

The Fed's culpability in this boondoggle is undeniable. Bernanke and his wily friend at Treasury have given their full support to a plan that does nothing but move trillions of dollars of toxic waste from one balance sheet to another while foisting the liability onto the American taxpayer. And don't be misled by the term "trust" in the Journal's report. In this instance, "trust" refers to an Enron-type, off-balance sheets Structured Investment Vehicle (SIV) which is designed to keep investors in the dark about the real condition of the financial institutions that run them. SIV's are the banks sausage-making units which hold hundreds of billions of dollars of undercapitalized complex securities, like mortgage-backed securities (MBS) and collateralized debt obligations (CDO). These are the same debt-instruments which greased the skids for the current downward death-spiral.

Wall Street Journal:

"The vehicles also would make it easier for investors that aren't eligible for TALF loans to buy into the program, like investors that are restricted by their investment guidelines from using borrowed money to buy securities. Smaller hedge funds that can't vie for large allocations of deals could also buy in through these vehicles."

"Sure, what the heck. Why worry about "eligibility" or "restrictions"? We don't need a financial rescue plan that isolates the toxic waste and writes down the losses. We don't need to protect the taxpayer or the depositor. We'll just keep asset prices in the stratoshpere for a while longer by adding a little more helium and pretending that private institutions really want this mortgage-backed sludge. That way, we can keep the public from knowing what's really going on." This seems to be the general line of reasoning at the Fed and Treasury.

Wall Street Journal:

"Some investors have raised concerns, however, noting that the structure puts these dealers at an advantage in bidding and influencing the price of new offerings. They also say the derivative securities present old and familiar problems, such as keeping the end holder of the risk of the TALF securities several steps away from the pricing of that risk."

The economy is sliding headlong into another Great Depression because of the mispricing of risk, the sale of complex and unregulated derivatives, the vast and unsustainable use of leverage, and shadowy and fraudulent off-balance sheets operations. When the TALF is launched on Thursday, all of these same activities will be reignited with the explicit blessing of the Central Bank. It is a reckless, wacky plan to keep the banks in private hands and to keep asset prices inflated beyond their true market value.

Bernanke and Geithner are moving ahead with their plan despite the clearly articulated guidelines set out by the world's finance ministers and central bankers who convened over the weekend in Sussex, England. Number 7 of the G-20's Communiqué reads:

"We have also agreed to: regulatory oversight, including registration, of all Credit Rating Agencies whose ratings are used for regulatory purposes, and compliance with the International Organization of Securities Commissions (IOSCO) code; full transparency of exposures to off-balance sheet vehicles; the need for improvements in accounting standards, including for provisioning and valuation uncertainty; greater standardization and resilience of credit derivatives markets; the FSF's sound practice principles for compensation; and the relevant international bodies identify non-cooperative jurisdictions and to develop a tool box of effective counter measure."

It couldn't be much clearer than that. But don't expect "compliance" from Geithner or Bernanke. They have no intention of reworking their plans to meet the demands of the G-20. No way. Multilateralism and cooperation might sound great in speeches, but it's not what drives policy.

The TALF and the "Public-Private Partnership" are another slap in the face of the international community. They violate the spirit and the letter of the G-20 communique. It will be interesting to see if foreign holders of US Treasurys endure this latest insult in silence or if there's a sudden stampede for the exits. There's a sense that the world is getting fed up with the Fed's financial chicanery and would like to chart a different course. Enough is enough.

Source: Mike Whitney

(Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.)

Gordon Brown and Bernard Madoff are separated by a single detail – Bernie's pleading guilty

What's the difference between Bernard Madoff and Gordon Brown? Answer: one has drained fortunes from gullible victims, plundering their income and savings to create an illusion of prosperity. The other is going to jail.

Mr Madoff has thrown in the towel. His Ponzi scheme, whereby he needed to suck in ever greater quantities of other people's money in order to maintain a semblance of competence, collapsed under the weight of undeliverable expectations. Nobody knows for sure how much has gone missing, but Wall Street scribes are calling it a $65 billion fraud.

Not bad for peddling fresh air. It is, however, a nickel-and-dime swindle when set alongside the

12-year con trick perpetrated by Mr Brown on British taxpayers. That, too, has been a form of Ponzi, but with many more zeroes and little chance of the mastermind ending his days in what Americans call Crowbar Hotel.

The Prime Minister is nothing if not a man of vaulting ambition, with a desire for power which, like Macbeth's, "o'er leaps itself". While Big Bucks Bernie was snaffling billions, Mr Brown had his sights trained on trillions.

Five trillion, to be precise – that's £5,000,000,000,000 – which is how much Labour has taxed and spent since it came to power. In 1998-99 its Budget was £333 billion. By 2008-09, the Government's annual expenditure had grown to £618 billion. Every year, the sums required to shore up the house of cards became bigger and bigger. But while the good times rolled, too few cared to notice what was really going on.

We await with trepidation this year's stab in the dark. On the basis that bad numbers take longer to add up than good ones, it is ominous that the Chancellor has put back his annual showpiece to April 22, the latest it has been for many years. One fears that fiscal discipline has been thrown over the fence, replaced by a confection of guesstimates, wishful thinking and spin.

Though the scale of their operations was very different, the sales techniques of Mr Madoff and Mr Brown were remarkably similar. Mr Madoff persuaded clients that he owned the secret of everlasting growth, a way of defying financial gravity. His unique selling points were, yes, stability and prudence.

So, while the returns of rivals bounced about in line with economic conditions, Mr Madoff kept producing a steady, above-average performance. Or so it seemed. He never claimed to have abolished boom and bust, but invited punters to infer that, thanks to his genius, this was indeed the case.

Over the years, Mr Madoff stretched the credulity of his constituency well beyond what a rational man might have thought possible. Those who tipped cash into his coffers seemed anxious, in some cases perversely determined, not to ask difficult questions. The trompe l'oeil was too delicious to be questioned. For a while, fantasy economics passed for reality in New York and London.

When the elastic finally snapped, so did Mr Madoff's resolve. Rather than conjure yet more elaborate excuses to cover the hole where his clients' investments were supposed to be, the old rogue confessed. He could no longer bear the strain of living a lie. Coming clean, it seems, was a relief.

It's at this point that comparisons to Mr Brown come to an end. For not only is there no prospect of the Prime Minister pleading guilty, he refuses to acknowledge any aspect of his catastrophic mismanagement. It may seem impossible to believe, but Mr Brown, far from recognising that he has ruined Britain, still has plans to save the world.

The astonishing element of Mr Madoff's magic is that, by all accounts, he made the money disappear. Investigators do not expect to find it stuffed under a Manhattan mattress or locked away in a Panamanian bank. They say that it has literally vanished. One minute it was in a Florida savings account, the next it was being propelled through the ether and beyond. Whoosh! Mr Madoff's loyal followers have been left with a whole lotta nuthin'.

For the victims of Mr Brown, it's worse than that. Much worse. His legacy is not an empty box. If only it were that simple. What he will leave behind is a dysfunctional state, stripped of sovereignty, up to its eyeballs in so much debt that not even our children's children will be free from the burden.

The misguided promotion of multiculturalism and open borders that marked the first and second phases of Labour's administration will continue to undermine social cohesion. Children in comprehensives will be handed debased certificates of success, while falling further behind pupils in grammar and independent schools. An unfunded pension system that is, in effect, an inverted pyramid of unaffordability will buckle and crack.

The Prime Minister's shameless blaming of others for this mess has been rumbled. Even senior civil servants are spilling the beans. Hector Sants, chief executive of the Financial Services Authority, pointed to the Prime Minister's complicity in the economic crisis. He said there had been "a prevailing mindset of Government and society promoting the benefits of credit and asset inflation, notably in housing".

Everywhere, there has been scandalous waste. But, as the banking system soaks up unimaginable sums, voters are suffering from "billions fatigue". They find it hard to put into context ministers' depredations of the public purse. When, as happened this week, the Public Accounts Committee calls a £500 million information system for prison officers "a spectacular failure" and "a masterclass in sloppy project management", we are not shocked.

Attempts by critics to stem the flow of government profligacy are met with the predictable response from Downing Street that savings of any sort will mean job cuts, school closures and an abandonment of hospitals. This scare tactic may have worked in the last general election campaign, but looks risible now.

On Newsnight, the ridiculous Yvette Cooper, Chief Secretary to the Treasury, kept a straight face while insisting that the Tories' proposed tax cut on pensioners' investments would mean an end to Britain's apprenticeship schemes. I mean, really! Who is feeding her this claptrap?

The Prime Minister's nightmare is that his credibility is crumbling faster than the nation's finances. His timing is woeful. Between now and the next election just about every indicator of wellbeing will move in the wrong direction. Rising unemployment, bankruptcies and home repossessions will remind an ungrateful electorate how little it owes him.

Bernie Madoff got away with it for so long because his clients wanted to believe in reward without risk, something for nothing. He told a US district judge: "I'm deeply sorry and ashamed for my crimes. I am painfully aware that I have hurt many, many people."

Here, in the Court of Public Opinion, Mr Brown will show no such contrition.

Source: The Telegraph