The the best explanation of the Fed bailout on the web comes from Interfluidity…..
I agree with several commentators (Felix Salmon, Calculated Risk) that the Bair/Paulson Plan, whatever it is, is not a bailout. But this, this is a bailout,. Nearly all government bailouts take the form of subsidized loans, extending credit at low rates to counterparties or against collateral for which the market would have demanded a high premium. That is precisely what the TAF will do. The Fed’s press release claims, of course, that loans will only be available to “sound” banks, and that they will be “fully collateralized”. But no one who can get the same deal from private markets will use this facility. The need for the program arises because private markets are skeptical about the soundness of counterparties and the quality of the assets they have to offer as collateral. The Fed hints at this when it mentions the “wide variety of collateral” that can be used to secure loans. You can bet that whatever it is private lenders are eschewing will be pledged as collateral to the Fed under TAF. The Fed is going to bear private risk that market refuses to. That is a bailout.
Calculated Risk also has things to say. Felix Salmon explains just how lax the requirements for collateral are…….
But what if the CDO is completely illiquid, and you can’t find a price for it at all? No worries, the Fed will still accept it as collateral, and lend up to 85% of par value. (There’s an interesting thought experiment here: what happens if a long-term CDO has a market value of, say, 90 cents on the dollar? In that case, an illiquid version of that CDO would actually be worth more to the Fed than the liquid version.)
Do keep on looking down that list, though: it turns out that banks can even put up as collateral subprime credit-card receivables – they don’t even need a AAA rating.
The Wall Street Journal has an explanation. Marginal Revolution has a take. So does Macro Man.
Ape Man is going to hate this. He wrote this rant before the bailout was announced.
Edit: I should have also included this from Bloomberg…
The Federal Reserve took advantage of emergency powers to authorize the auctions that officials felt were necessary to ease a credit squeeze, concluding it otherwise lacked legal permission to do so.
The Fed bypassed requirements for prior notice and public comment when writing the regulations to implement today’s agreement with the European Central Bank and three other central banks. The Fed’s official notice today said any delay caused by following standard procedures would have been “contrary to the public interest.”