Wall Street Journal: U.S. to Use Hedge Funds to Loosen Credit

Submitted By Trader Mark
Yet another story from the department of "I would not believe it unless I saw it with my own eyes" we continue down the path of unintended consequences and the ole run around. There must be some Puritan shame in admitting we are nationalizing our banks - we will do anything to prove otherwise. Such as backstopping the returns of hedge funds so that our shadow banking system (which was large part of what us got us into this mess) revives. All we are doing is using a middle man with these type of solutions - instead of directly supporting the banks with infusions and backstops "the plan" is to use the hedge funds as middle man? So they can profit off US taxpayers and we can claim "hey it's a free market!"

Hoping to jump-start the financial system, the Obama administration is considering turning to a new program run by the Federal Reserve that has been a challenge to launch and depends heavily on hedge funds.
The Term Asset-backed Securities Loan Facility, or TALF, was announced in November after investors stopped buying securities backed by consumer debt. Under the $200 billion program, the Fed will make loans to almost any U.S. firm that is willing to use the government financing to buy securities tied to credit-card, small-business, student and auto loans.
In essence, the government, which doesn't want to buy these securities itself, is lending money to professional investors so they can buy them. In some cases, the government itself is guaranteeing payment on the loans that back these securities.
As the Fed moves toward launching the program this month, Mr. Obama's economic team is exploring ways to expand it to help its financial-rescue efforts.
Some hedge funds, which often use borrowed money to boost returns, are lining up to get in on the Fed program, seeing a chance to make high double-digit-percentage returns with little downside using low-cost loans made on easy terms. Some officials inside the Fed are nervous about relying on unregulated hedge funds. But they see it as a trade-off in order to get capital to consumers. Because the Fed is so eager to attract participants, it has limited restrictions on which firms can participate.
Broader philosophical issues could arise if the program is expanded. The White House has promised more transparency in how its funds are used. But lending to hedge funds may be problematic because their operations are opaque. Moreover, the program depends on many of the practices that helped to fell Wall Street firms in the first place, such as leverage, structured-debt investments and a dependence on credit ratings.
Depending on the different types of collateral, investors will get roughly $100 of lending for every $5 to $16 of cash they put up to invest. The rate investors will have to pay will be set at one percentage point over interest rates based on London interbank offered rates.
The loans the Fed makes to investors are nonrecourse, meaning investors can't lose any more than the money they put upfront on the security. If a hedge fund defaults to the Fed, its collateral is the securities themselves. There also are no margin calls, meaning the Fed can't demand additional payments of cash from borrowers if the underlying securities fall in value. ... a Treasury Department inspector general warned that the program was vulnerable to fraud by the private sector.
Some investors have privately expressed worries that hedge funds could game the system to use cheap Fed financing to fund other trading positions that run counter to U.S. goals. A firm might, for instance, buy debt backed by car loans with Fed financing and use the cash flows from the investment to fund short positions on auto makers that pay off if they struggle.
Among funds that bankers and investors have spoken to about the TALF are Magnetar Capital LLC, a multibillion-dollar Evanston, Ill., fund, which made bets during the housing boom that paid off when mortgage defaults rose. Magnetar also helped to fuel issuance of complex debt instruments known as collateralized debt obligations. Bankers and investors said they have spoken to several funds that may be intrigued by the program, including Citadel Investment Group LLC, and D.E. Shaw & Co., among many others.

Are you kidding me? the government regulators / oversight versus some of the brighest minds in the world? Who do you think is going to fleece whom? All in the name of "providing credit"? Just skip the middlemen and ADMIT what you are doing and provide direct money if this is the path you believe must be taken.

Traditional money managers, including Pacific Investment Management Co., BlackRock Inc. and Prudential Financial Inc. also have been gearing up for the program. BlackRock said it is interested in the program.

Of course they are, I mean PIMCO has been around for the whole ride, buying positions ahead of bailouts while "advising" on what the government should do. And then benefiting when the government listens to their advice.

Reverse Robin Hood in all its glory under the guise of "we won't nationalize" banks. Yes you are - you are just enriching the middle man and their investors off the backs of the common folk.

Shameful.

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