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Fallout: The Financial Crisis

TALF’s unintended consequences

Jeremy Hobson Mar 20, 2009
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Fallout: The Financial Crisis

TALF’s unintended consequences

Jeremy Hobson Mar 20, 2009
HTML EMBED:
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TEXT OF STORY

KAI RYSSDAL: And we will understand totally if this escaped you in the rush to the weekend, but the TALF is officially underway. That’s the Temporary Asset Backed Loan Facility, of course, the program where the Fed’s going to lend money to investors to help them buy asset-backed securities. Specifically, things like auto loans, student loans and credit cards. And so, hopefully, get the credit markets working again.

Yesterday the Fed tried to give away $200 billion of what the central bank says could eventually be a trillion dollars. They only managed to unload a small fraction of it in actual practice. But if investors do start to show up, there are some companies in position to make a whole lot of money. Companies that aren’t exactly blameless when it comes to explaining how we got into this mess in the first place. Marketplace’s Jeremy Hobson has that story now from New York.


JEREMY HOBSON: To get TALF funds, you’ve gotta have an asset-backed security. So someone’s gotta wrap all that credit card or student loan debt into a nice package. And guess who does that? The big banks like Citigroup and Goldman Sachs. In fact, says Tony Crescenzi, chief bond market strategist with Miller Tabec…

TONY CRESCENZI: An investor can’t invest directly in the TALF unless they go through, as the Fed requires, a primary dealer, which are the big banks that deal directly with the Fed.

Those banks will collect a fee for their service. And there are a lot more fees down the line, says Reed Auerbach, a lawyer who’s working on some TALF deals.

REED AUERBACH: Obviously the custodian who’s acting on behalf of the Fed and is taking possession of the collateral, you need underwriters to underwrite the bonds. There are trustees that get fees on the underlying deals.

And, of course, there are the lawyers. But, before the Fed agrees to lend, the security has to be rated Triple-A by two of the three big rating agencies. Names you might recognize from the mortgage meltdown, like Moody’s and Standard & Poor’s.

The rating agency fees alone could add up to more than a billion dollars. So does this mean the folks who got us into this mess will get paid to get us out?

LAWRENCE WHITE: Ugh, it’s not a happy story.

NYU Economist Lawrence White says it’s ironic but not surprising.

WHITE: Bond markets need help, and the markets are going to pay for that help.

Potentially enriching some infamous Wall Street players yet again.

In New York, I’m Jeremy Hobson for Marketplace.

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