Remember TALF? Launched by Paulson last November? Crummier name than TARP? Focused on consumers rather than banks? Yeah, that TALF. This was the so-called "consumer bailout" -- $220 billion to kickstart the private market's purchases of consumer asset-backed securities like auto loans, credit-card debt, and student loans. The money would go to magnify the investments of private lenders. A hedge fund, say, would put in a small portion of cash towards the purchase of a given security, and the Federal Reserve would multiply it to complete the transaction. If the asset appreciated, both stood to make money. If it bottomed out, the government absorbed most of the losses.Sound familiar?The problem is, it's not working. "Officials envisioned TALF supporting tens of billions of dollars a month in new lending, saying it could eventually total $1 trillion," reports Neil Irwin. "But in March, when it was launched, it backed only $4.7 billion in auto loans and credit cards. For April, it logged only $1.7 billion." And the reason must unsettle Geithner: Sources involved in the program said private investors have been reluctant to work with the government, which they view as an unreliable business partner. Separately, the brokerage houses that are crucial intermediaries are being exceptionally cautious in the contracts they draw up with participants in the program, in part out of wariness that any mistakes could draw the ire of Congress or the media.[...]But perhaps more significant than any established limitation on the business practices of TALF participants is a fear that the government could retroactively change the terms, exacting new limits on what investors can pay their executives, for example, or trying to claw back profits that firms make in the program.
The structure of TALF is similar, if not exactly analogous, to Geithner's plan to buy "legacy" assets. Government kicks in most of the funding, promises to absorb most of the losses. It's a sweet deal. The problem is that it's almost too sweet. The private sector doesn't believe in it. They think the public might notice the terms. And if that happens, populist pressure could build, or an election could loom, and Congress will change the game on them. Or, worse, they could be demonized for participating. It's a bit of an odd trap for Geithner: Private investors won't participate absent extremely advantageous terms. But private investors know that extremely advantageous terms exposes not only the program, but also the participants, to populist backlash.
