Federal Reserve Expands Securities Lending Program But At What Cost to Taxpayers?
At first glance, the Federal Reserve’s announcement to lend $200 billion in treasury securities to Wall Street banks and accept AAA-rated private label mortgage-backed securities as collateral sounds like a good way to provide liquidity to failing markets. But, if you looked a little deeper, it’s likely a band-aid solution that could end up costing taxpayers billions of dollars.
The reason is simple. The majority of the AAA-rated private label mortgage-backed securities are not AAA at all. In fact, it’s just the opposite – many of them do not meet the criteria of the ratings agencies for AAA securities and should be downgraded significantly. This means these kinds of securities not only are highly overvalued but also present far more risk to taxpayers than the Federal Reserve is letting on.Â
A March 11, 2008, article on Bloomberg.com by Mark Pittman sheds further light on this issue. According to Pittman, none of the 80 AAA securities in the ABX indexes that track subprime securities meet Standard & Poor’s requirements for AAA securities. Pittman went on to cite several examples of AAA-rated bond issues that fell far short of satisfying AAA requirements.  He concluded by stating that the proper evaluation of subprime securities would “strip at least $120 billion in bonds of their AAA status.†And that’s exactly what a number of analysts predict, as many AAA mortgage-backed securities are expected to be significantly downgraded in the not-too-distant future.
This makes it all the more questionable as to why the Federal Reserve would finance Wall Street banks by providing them with highly liquid, highly valuable treasury securities while accepting poor quality, illiquid, low value securities as collateral. In the end, it’s the American taxpayers who will suffer the consequences – again.Â
Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage related investment losses.
