"On Wednesday, the Fed said it was teaming up with four other central banks, including the European Union's, in a scheme to inject capital into the market more broadly than it can through short-term loans at the discount window. ... You may wonder what Bernanke & Co. will take as collateral from banks for this handsome handout--pretty much anything a bank has in its vault short of the old electric typewriter and the battered desk chair with one brokern wheel. ... The Fed also will accept as collateral triple-A-rated [CDOs] and mortgage securities. In fact, it's willing to lend up to 98 percent of the face value of the notes. ... Will the Fed lose money on this? Probably, but that's how bailouts work. The government assumes the risk, and often the losses , when others can't. ... In fairness, the Fed is merely doing its job. Its mission calls for it to safeguard the integrity of our financial markets. To do that, the Fed is basically letting banks know it will shoulder any toxic debt they're holding on their balance sheets", Loren Steffy (LS) at http://www.chron.com/, 14 December.
Uh, oh. Beware central bankers being "creative". Learn from the Trojans, beware central bankers bearing "new anything". See my 28 November post. "Their first rule is to do no harm"? To whom? What about Hjalmar Schacht, a German Reichsbank director in 1922-23? No, SC, the problem is: the banks believe other banks are insolvent and lack good assets to use as collateral. "Dollars are in short supply outside of the United States", SC writes. Really? Communist China has $1.4 trillion in foreign exchange reserves as does Japan. SC, read the newspapers. It is almost always impossible to "distinguish illiquidity from insolvency". Again, many http://www.voxeu.org/ posts are nonsense. We can learn one thing from SC's piece: the banks are in much worse condition than anyone will publicly admit.
Yves Smith (YS) at http://www.nakedcapitalism.blogspot.com/, 13 and 16 December was comfortable with the new Fed Term Auction Facility (TAF). To YS's credit, he refers and provides a link to a 16 December post by Steve Waldman (SW) at http://www.interfluidity.com/ critical of the TAF and YS's analysis. I think SW's got this knocked as does LS. I finally understand my problem with the rating agencies. It's the product of a typing error. When the rating agencies are supposedly rating something "triple-A", what they mean to say is "tripe-A". Now I get it.