More on the TALF

I got a reply letting me know that I was overstating the pricing of the debt to be purchased by the TALF.

The way the TALF is written, it will not be able to purchase old debt, only newly created debt. It will protect the Taxpayer by buying ABS at a discount to its maturity price and by charging what amounts to a fee each year for lending the money.

Whether or not the TALF purchases ABS at Par or at a Discount is not the issue. The issue is that the underlying holdings of the ABS will be artificially priced too high and the Interest Rate charged on the loans that find their way into the ABS will be at artificially low, relative to the actual risk of the loans.

If the loans were properly priced for risk, then the interest rates charged on the underlying loans would be so high, that the borrower would refuse the to take the loan. This game of using derivatives or rigged "Credit ratings" to artificially lower interest rates is exactly what got us into this mess.

The fact is that the only entities willing to refinance Mortgage ABS are the US Government or banks who have received money from the US Government. The only way to attract Private Capital would be to price the new ABS with really high interest rates, to reflect their true risk.

But if you refinanced new mortgages at 10%, nobody would be able to afford the loan and they would not buy the house.

So the Fed will overpay to refinance Trillions of Dollars worth of crap off the balance sheet of Banks and move the risk of this filth onto the back of the Taxpayer. I don't think that is an exaggeration.

Feel free to email me and I appreciate you taking the time to reply.