TAF swaps: Large scale bank bailouts in the Billions

[Dan.Linehan]

The Federal Reserve began swapping US treasury debt for discounted mortgages late last year in order to bail out the insolvent United States banking system. Other international banks, such as The European Central Bank (ECB) and the Swiss National Bank (SNB) followed suit.

The new transactions being used for this purpose are called Term Auction Facility (TAF) trades. $150 billion in TAF swaps have taken place inn the US so far. The purpose of these swaps are to trade out degraded securities (sub-prime mortgages and massively over-leveraged, fictitious derivative structures created by Banks) for a type of security considered much more highly marketable: Treasury securities.

We can see here that the amount of securities being held by the Federal Reserve has dropped precipitously since these TAF swaps started. The Federal Reserve has traded away $260 Billion of securities in only six months in exchange for degraded mortgage securities.

At the current volume of trading TAF swaps the Federal Reserve would be completely divested of Treasury securities by the end of 2008. This would be unprecedented, since the Federal Reserve has held Treasury securities for nearly a century.

If you are wondering how banks got into this mess (cough *greed* cough,) read more here.

While the remaining $540 Billion dollars of securities the Federal Reserve has may sound like a lot, think again. Here is how much the major players owe in esoteric, unbacked derivatives. $540 Billion isn't going to make a dent in what these banks owe.

Level 2 Assets Ranked by Dollar Amount

1) Citigroup (C) $1.15 trillion
2) J.P. Morgan (JPM) $1.09 trillion
3) Merrill Lynch (MER) $1.02 trillion
4) Back of America (BAC) $781 billion
5) Goldman Sachs (GS) $620 billion
6) Bear Stearns (BSC) $332 billion
7) Fannie Mae (FNM) $321 billion
8) Morgan Stanley (MS) $304 billion
9) Prudential (PRU) $276 billion
10) Lehman Brothers (LEH) $200 billion

When a bank in the United States can't pay what it owes it becomes insolvent and has to file Chapter 11.

That'll definitely be interesting when it starts happening in late 2008 / early 2009.

[sunj]

The gov't needs to figure out a way to punish those who were in charge. Who was that guy from J.P. Morgan who took a $162m compensation package and decided to "retire" when the bubble burst? The gov't should put those people on trial and seize their assets.

[Dan.Linehan]

Problem is, corporations power the government; it's not really in the gov's best interest to regulate them harshly.

[sunj]

Yeah, and the thing with banks is that if the banks go down, everyone goes down. So they can't punish the banks for the mortgage mess. They have to keep the banks from going down by feeding them money.

[jimbos123456]

Let them all go under in my opinion all it does is help the wealthy, at the expense of everyone else. Most people aren't going to have more then 100k in their balance, and the ones that do are smart enough to keep their money offshore in banks less likely to default. Just honor the promises on the depositors and screw the wallstreet guys they deserve it. Let them live the rest of their lives as disgraced CEOs with that reputation hanging over them. I would rather have deflation over hyperinflation any day. These people were considered geniuses when the bubble was going up, now it's time for them to be considered idiots after it blew up =).