This sudden manic expansion of the bailouts began with a masterful bluff by Wall Street executives: Once the money started flowing from the Federal Reserve, the executives began moaning to their buddies at the Fed, claiming that they were suddenly "afraid' of investing in anything -- student loans, car notes, you name it -- unless their profits were guaranteed by the state. (Socialism for the rich?) "You ever watch soccer, where the guy rolls six times to get a yellow (penalty) card?" says William Black, a former federal bank regulator who teaches economics and law at the University of Missouri. "That's what this is. If you have power and connections, they will give you a freebie deal -- if you're good at faking and whining."
This is where TALF fits into the bailout picture. Created just after Barack Obama's election in November 2008, the program's ostensible justification was to spur more consumer lending, which had dried up in the midst of the financial crisis. But instead of lending directly to car buyers and credit-card holders and students -- that would have been socialism! -- the Fed handed out a trillion dollars to banks and hedge funds, virtually interest-free. In other words, the government lent taxpayer money to the same a**holes who caused the crisis, so that they could then lend that money back out on the market virtually risk-free, at an enormous profit.
A key feature of TALF is that the Fed doles out the money through what are known as non-recourse loans. Essentially, this means that if you don't pay the Fed back, it's no big deal. The mechanism works like this: Hedge Fund Goon borrows $100 million from the Fed to buy crap loans, which are then transferred to the Fed as collateral. Folks somewhere are supposed to pay off these loans that have been bundled into a mortgage-backed security, and if enough of these folks default, and don't pay off their loans, then the Hedge Fund Goon simply does not repay that $100 million he borrowed from the Fed to buy these mortgage-backed securities, and the Fed simply keeps this pile of crap securities and calls everything even. And how nice that is for the Hedge Fund Goons: No wonder top hedge-fund managers average $540 million in annual income!
In other words, this is the deal of a lifetime. Think about it: You borrow millions from the Fed, buy a bunch of very risky crap securities and stash them on the Fed's books. If the securities lose money, you leave them in the Fed's lap and the public eats the loss. But if they make money, you of course quickly grab them back, happily cash them in, and ever so honestly repay the funds you borrowed from the Fed. It's a clever scheme by which certain people at the Fed are essentially giving out free money -- to their friends and associates in high places -- almost certainly with those favors to be discretely compensated at a later date.
This whole setup -- in which millionaires and billionaires gambled on mountains of dangerous securities, with taxpayers providing the stake and assuming virtually all of the risk -- is the reason that it's insanely premature for Wall Street to claim that the bailouts have actually made money for the government. We simply can't make that determination until the final bill comes in on all the dicey securities we financed during the bailout feeding frenzy.
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In early April, Sen. Chuck Grassley of Iowa wrote a letter to Waterfall -- see Waterfall TALF Opportunity, described earlier in this articled -- asking 21 detailed questions about certain transactions. In addition, Sen. Bernie Sanders has personally asked Fed chief Bernanke to provide more complete information on the TALF loans given to gazillionaires like former Miami Dolphins owner H. Wayne Huizenga and hedge-fund shark John Paulson. But Bernanke bluntly refused to provide the information -- and the Fed has similarly stonewalled other oversight agencies, as well, including the General Accounting Office and TARP's special inspector general, Neil Barofsky. So what's Bernanke covering up, and what laws have been broken?
But even without more information about the loans they got from the Fed, we know that TALF wasn't the only risk-free money being handed over to Wall Street. During the financial crisis, the Fed routinely made billions of dollars in "emergency" loans to big banks at near-zero interest. Many of the banks then turned around and used the money to buy Treasury bonds at higher interest rates -- essentially loaning the money back to the government to collect a somewhat inflated rate of return. "People talk about how these were loans that were paid back," says a congressional aide who has studied the transactions. "But when the state is lending money at zero percent, and the banks are turning around and lending that money back to the state at 3 percent, how is that different from just handing people money?"
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