The Federal Reserve's Term Auction Facility, TAF, has failed to produce the intended results - encourage more bank to bank lending at reduced rates. That should not be too surprising. If the Fed is willing to be a "swapper of last resort," why should banks risk lending to each other?



After all, bank-to-bank loans are unsecured. Who wants that risk, especially when banks have every reason not to trust each other? Please see Failures of the Term Auction Facility for detailed analysis of this situation.



CLOs Pawned Off To The FED



Now things are getting even crazier at the Fed's Swap-O-Rama as Buyout CLOs Are Being Used for Fed Loans.



Wall Street firms may be bundling high-yield, high-risk corporate loans into securities to use as collateral to borrow from the U.S. government, according to a report by Morgan Stanley analysts. Securities firms can borrow against collateralized loan obligations at the Federal Reserve's Primary Dealer Credit Facility, the analysts said. The Fed set up the facility last month, its first extension of credit to non-banks since the Great Depression.



Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, last month created the $2.8 billion Freedom CLO, the largest this year, out of loans that couldn't be readily sold to investors, such as for buyouts of payment processor First Data Corp. and power producer TXU Corp. JPMorgan Chase & Co., Deutsche Bank AG and Barclays Plc also underwrote CLOs in March, according to data compiled by Bloomberg.



They're also "an easy way for banks to reduce balance sheet risk, which indirectly helps reduce capital requirements, by funding the AAA through the Fed and selling the equity, which provides high yield to investors," said Peter Plaut, an analyst at hedge fund Sanno Point Capital Management in New York.

March Pool Stats

25.3% 60 day delinquent or worse

13.35% Foreclosure

4.44% REO

an easy way for banks to reduce balance sheet risk, which indirectly helps reduce capital requirements, by funding the AAA through the Fed and selling the equity, which provides high yield to investors

To Scroll Thru My Recent Post List