TALF in action

It looks like I have a good chance of seeing TALF 2.0 in action this week.  The program is a beautiful work of art in that it disguises a very basic subsidy for the banking industry using the veil of a complex "public-private partnership" arrangement.  I'll hopefully be watching an asset management firm in action this week as they purchase these securities with a small amount of cash down, the remaining value made up of loans from taxpayers.  This comment from a Naked Capitalism entry sums up the situation pretty well:

The Geithner plan is a scam designed to allow the investor to bid for the remaining coupon payments and leave the taxpayer holding all the losses. The key to the scam is the high leverage ratio COMBINED with a non-recourse loan: 

Investor buys a CDO tranche at 50 cents on the dollar that is currently paying a 5% coupon. The investor puts up 20% and the govt provides the remaining 80% via a non-recourse loan. This highly leveraged CDO tranche will stay current on the coupon payments for 3 years and then default with zero residual value. 

The end result is that the investor who pays 10 cents(20% X 50 cent bid) ends up walking away with 15 cents(.05 X 3) over three years and the government ends up losing the entire 40 cents of non-recourse financing. (Note that I haven't included the cost of the low interest financing, nor used present value discounting in order to simplify the point I'm trying to make.) 

The beauty of the scam is that the losses on the govt's books won't show up for 3 years.