Fed takes the Wall Street bailout to the next level

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We have TALF, TARP, and a whole bunch of other acronyms. Now we have TOP. What is TOP?

TOP offers options on a short-term fixed rate Term Securities Lending Facility (TSLF) bond-for-bond loan of general Treasury collateral against a pledge of eligible collateral. The term of the loan typically spans a short period of traditional collateral market dislocation, such as a quarter-end dates. While the price of the loan is fixed, the price of the option is determined by competitive bidding.

You read that right. The Federal Reserve has now jumped into that wonderful black hole that is sucking down the world's financial system - the derivatives market.
Happy days are here!

You may have noticed that this program is already a couple weeks old, but I haven't seen anyone writing anything about it and I just noticed myself.

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what does that even mean?

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what is an "eligible" collateral and what is a existing collateral?

It sure sounds like you're right, they are going to ?? derivatives on toxic derivatives?

Explained another way

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I found this at Forbes.

Under the TOP, dealers will be awarded options through an auction based on the lowest price at which bids are accepted. When the options expire, holders will have the opportunity to exercise the option by drawing on the underlying TSLF loan in increments of $10 million up to the amount of options held. A fixed rate on the loan will be announced prior to each option auction.

Dealers can also choose to let their option expire, but they will not be permitted to transfer that option.

The option fee will be calculated by multiplying the amount of the loan by the total quoted price of the borrowed securities (as measured a day before the option expiration) and divided by 360. The option fee is owed regardless of whether the option is exercised.

I'm not a trader, but this certainly sounds like an avenue for speculators.

A friend explained it this way: The failed gamblers can buy an option on the TSLF program, which is a swap of a Treasury held by the Fed for the toxic trash "eligible collateral" held by the failed financial finaglers.

that is smelly

Submitted by on

"awarded" an option? that isn't "buy" as I read it. Lowest price? awarding options at the lowest price? "draw on a loan" is it a loan?

and I love the fee calculation, oh divide by 360. Where is that number even coming from? You know if someone is using a static constant somewhere it's contrived...

I don't know where JV is but I'd love his take, I'm fairly certain he trades in futures/derivatives.

Dealers don't want their crap back

They are happy to unload it on the FED in exchange for AAA Treasuries. So what the heck do they need Options for? Will they start playing spreads?

It has always been about class warfare.

Is this some sort of back-door

guarantee on a treasury?

RebelCapitalist.com - Financial Information for the Rest of Us.

other blogs picking up on this

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Krugman is the latest and links to Calculated Risk on it.

Krugman:

Indeed. Every plan we’ve heard from Treasury amounts to the same thing — an attempt to socialize the losses while privatizing the gains. We’re going to buy up all the bad assets at premium prices; no, we’re going to offer the banks guarantees against losses; no, we’re going to let private investors buy the stuff, but offer them de facto guarantees against losses in the form of non-recourse loans.

Thank God for those little bloggers and lay people...
if none of us were here, would we even pick up on this
yet another taxpayer screw job?

Crap & Roses...

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You see, they're related. Roses love Manure, especially in spring. Except, here we're dealing with manure of an altogether different kind. That would be called...Dark Goo!
AKA...the Olde OkeeDoke. By now we have so many confusing open window programs that...we all be thoroughly confused,
even the rules makas:-)

Sort of like...Pirates of the Carribean at Disneyland.