The Federal Reserve yesterday announced a plan to lend up to $200 billion of taxpayer money to Wall Street banks. The collateral? Essentially, a bunch of mortgages that have a piece of twine holding them together. The news sent the Dow Industrial Average reaching for the stars. Not so much today though. WSJ article here.
Blawgletter read somewhere that the Fed has authority to make loans like that but didn’t see anything about how the Fed valued the collateral for purposes of determining its adequacy as security for the $200 billion. Did it use face value? Something less? How much less?
Because the whole thing looks like moving the deck chairs around on that ship that sank after hitting an iceberg and inspired an interminable movie with nudity (and more!) in a jalopy aboard the vessel prior to its voyage to the bottom of the sea.
Moving a bundle of mortgages from the balance sheet of, say, Goldman Sachs to that of Uncle Sam doesn’t, in our view, make the bundle worth more. It just makes GS’s financial condition look better. And, if GS has to take the bundle back, what really has changed?
Perhaps Ben Bernanke has the magic wand that, by calming an irrational market, restores true value. But with underlying real estate values continuing to fall, we wonder if something less Disneyesque has happened.
Can you say bailout?