The Federal Reserve comes (almost) clean about all the crazy stuff it did in 2008.

Commentary about business and finance.
Dec. 2 2010 6:50 PM

Fed Cred

The Federal Reserve comes (almost) clean about all the crazy stuff it did in 2008.

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Supersecret hedge funds also availed themselves of the Fed's help. Indeed, firms like Magnetar—of the infamously skeezy Magnetar trade—borrowed billions from the government via the Term Asset-Backed Securities Loan Facility. The main purpose of TALF was to help ease the market for assets backed by things like student loans and credit cards, with the goal of restoring the flow of credit to consumers. Now we know that TALF also provided low-cost loans to firms like Magnetar and Pacific Investment Management Co., or PIMCO.

So, what don't we know? One missing piece is a complete set of details about collateral—what firms gave the Fed in exchange for the loans—Bloomberg notes. That's important stuff. To provide an admittedly silly example, say I offered to give you an asset worth $1.1 million in exchange for $1 million in cash. You might do it if I handed you a pillowcase filled with diamonds. But you might not if I handed you a finger painting, insisting it was a Picasso.

Starting on Sept. 15, 2008, when Lehman collapsed, the Fed announced it would start accepting the equivalent of finger paintings in exchange for cash—something it previously had not had to do. The Primary Dealer Credit Facility took more than $1 trillion in junk-rated assets—hundreds of billions rated CCC or lower, the real risky sludge. (Notably, all loans extended under the facility were paid back in full, with interest.) But details on the collateral remain incomplete. The Dodd-Frank law required "information identifying the types and amounts of collateral pledged or assets transferred." For three of six facilities, the Fed only provides general information about the type and rating of the collateral. (Obviously, that information can be useless.)

And there will be many more such questions to come. The trove is enormous. And a lot of people—investors, politicians, economists, bankers, Fed watchers—are working their way through it. Among them is Sanders. Other "members of Congress and I will be taking a very extensive look at all aspects of how the Federal Reserve functions," he promised in a press release. That means more headaches for the now slightly-less-secretive Fed.

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