The Fed has been in a pickle trying to figure out how to entice private capital to come and buy piles of dog crap wrapped in a bow. Banks do not want to give much less than their "model" pricing even though the market says they are worth much less. The "plan" is to figure out a way to allow private capital to receive a non-recourse loan from the Fed, allowing 9 to 1 leverage with no margin requirements. Well, what happens when these securities are actually worth much less than the models say? Let's pretend 100M gets you 900M piles of dog crap. Considering the market value of these assets are much lower, we are already losing from the start. In the event a 20% loss on the 900M is realized, the private capital loses $100M and the Fed loses $80M. One could easily make a case these assets are actually worth 20% less right now! Ultimately these losses will flow through to the Treasury and without a spending bill this is unconstitutional. Several, including myself, have faxed every single member of congress pointing this out so I imagine now we are seeing the backdoor spending bill to facilitate the scheme TurboTax Timmy and BerTanke are trying for.
Edit: Its possible these two are not directly related, you can bet in order for their plan to work they will have to a) Find a way to hide this from the public. b) Paint a rosey picture about a recovery. c) Say you are going to stress test the banks when you've already declared they have enough capital. On top of this your model inputs into these stress tests are using positive GDP esitmates. d) Claim to have the solution when you claimed sub-prime should not spill over into the broader economy. e) Just get your foot in the door. Once you get some funds all you have to do is claim the economy deteriorated more than your forecast (shocker) that way you can go back to congress asking for more. At this point you'll say that without this help things will be dire. f) Lie some more.
The official, speaking on condition of anonymity, said the White House hasn’t decided whether the $750 billion in additional aid to the financial industry will be needed. He said it will be put in the budget as “placeholder.”...The official said the aid would appear in the budget as about $250 billion because the rules require policymakers to record the plan’s net cost to taxpayers. The government anticipates it would eventually recoup some, though not all, of the money expended to help financial companies...While the federal government has taken over Fannie Mae and Freddie Mac, the Obama administration opted to exclude most of the costs of running the mortgage financiers in its budget plan. The blueprint includes the money the Treasury Department has injected into the companies so far, the official said...
