Maybe that would make logical sense except for cascade effect of highly leveraged debt and banks holding securities backed by stated income loans to people with barely a pulse and a SSN. How do we know that bonds FED is holding for Windfall TALF are not the same quality as the ones sold to Deutsche Bank in Abacus deal? Those securities lost 80% of it's value in ONE YEAR. Why should taxpayers be on the hook for deals like that? I am pretty sure no one on ths board would be able to get on deal like the one described in the article.
If you would have bothered to look at my link you'd have known that CDOs weren't allowable TALF assets. Prime mortgages were allowable, but only those using specific collateral and underwriting, as well as revised agency ratings criteria.
There were *specific* guidelines for TALF eligible assets. The issuer had to conform to specific guidelines, including additional reporting, executive compensation, underwriting, and servicing criteria. The assets couldn't be CLO/CDO and had to be sold directly from the underwriter.
The bulk of TALF eligible assets were prime auto loans, prime auto leases, auto wholesale, rental car bonds and small business leases. Throw in a smattering of other asset classes.
As I have stated before, *principal* loss for almost all assets outside of residential mortgages were very low, if almost non-existant. The *only* reason why RMBS experienced the loss it did was because underwriting of the loans did not correlate to the historical data used to set the enhancement for those loans.
As I said above, enhancement is set on a multiple of expected loss. The multiple is based upon probabilities of actual principal loss, a AAA being the least probable. These probabilities were based upon decades worth of loan underwriting and securitization performance.
However, the single biggest problem with historical performance is that it matches historical underwriting. If current underwriting is different, current performance will be different. As current underwriting widened vs historical, performance differences magnified.
This was compounded by the usage of "affordability" products, such as no/low doc loans and option-arms. Both of those products had valid historical uses, the former for self-employed people who didn't get a W-2, the latter from people who had low monthly income but high year-end income/bonus. However, performance expectations were based upon those borrowers, not "affordability" borrowers.
Further issues were that historical data didn't show a systemic deviation from historical lending underwriting, resulting in higher prices that would be offset by a bubble/bust. There was never a systemic nationwide housing decline, most local declines were muted (CA/Boston..etc). Thus, nobody really accounted for a systemic raise and fall, creating further deviations.
If you add this up, according to historical data, a Prime mortgage might default 1-2% of the time. A AAA prime mortgage might require 4x coverage, or 4-8% credit enhancement. However, that was historical, not accounting the above info, so suddenly you get 8% losses and a AAA bond now only has 1x loss coverage, equiv. to a far lower category.
Was this fraud? Not really, it was hubris, on everybody's part.
Now, the key two differentials between housing and almost everything else was that almost everything else had underwriting criteria that mostly stuck to historical criteria, albeit with some deviations. The second factor which is almost equal to the first, was that people simply lost utility in their "investment". An underwater house wasn't seen as a house, it was seen as an investment that had no utility as an investment, so what do you do if you can't flip it? Flop it.
However, with credit cards, one with open credit limit has utility. With a car, it has utility. With a lease, it has utility. With a small business loan or lease, it has utility. With CMBS, it can be rented and produce cashflow to offset a mortgage.
So, in reality, the Fed was pretty safe with its investments. Was it "risk free", not 100%, but it had very low risk, far lower than most AAA loans.
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