The PPT "Ultimate Bailout" is here
Looks like I picked the wrong week for a business conference. The Federal Reserve unveiled its latest attempt to rescue the economy yesterday through a facility which will lend up to $200 billion in exchange for "high quality" mortgage backed securities:
Under this new Term Securities Lending Facility (TSLF), the Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS. The TSLF is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally. As is the case with the current securities lending program, securities will be made available through an auction process. Auctions will be held on a weekly basis, beginning on March 27, 2008. The Federal Reserve will consult with primary dealers on technical design features of the TSLF.
This sounds like the implementation of the plan devised in the Plunge Protection Team meetings of recent weeks. Will this truly be the "final and ultimate bailout" or just another in a long string of kitchen sink bailouts which will require something even grander in the future. The 400 point rally in the stock market and mini-rebound in the dollar seems to show that markets approve of this plan at least temporarily.
We are seeeing Bernanke's helicopter money drop in action. I wonder if the Federal Reserve will end up having to eat any losses on the securities that are pledged as part of this program? How soon will they be modifying this program to accept even lower quality mortgages?
