Ben Bernanke, soon to be America’s biggest car salesman?
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Mike Shedlock, who writes the Global Economic Trend Analysis blog, has a brutal assessment of the Federal Reserve’s plans to include financing for auto dealers in the central bank’s newest lending program aimed at unfreezing the credit markets.
Instead of letting the dealer business shrink drastically for its own long-term good, he says, Fed Chairman Ben S. Bernanke and peers are throwing it a financial lifeline. When dealers fail in spite of the Fed’s money, the central bank will end up with their assets, Shedlock says -- with the result that the Fed is ‘destined to become the world’s largest auto dealership.’
The new, $200-billion Fed lending program, called the Term Asset-Backed Securities Loan Facility, or TALF, will be up and running in February. Banks and other lenders and investors will be able to turn certain asset-backed securities they own -- bonds backed by car loans, credit card loans, student loans or small-business loans -- into cash by pledging them to the Fed and borrowing against that collateral.
Also eligible: securitized auto leases, and floor-plan loans to finance dealers’ inventories.
‘In spite of all evidence to the contrary, the Fed has decided that there are not too many car dealerships, and those dealerships don’t have too many cars,’ Shedlock says. ‘Instead the Fed has come to the conclusion that dealerships just need financing to get over this ‘short term’ blip.’
He notes that the loans under the TALF program can be for up to three years.
Shedlock writes:
Dealerships facing bankruptcy will come to the conclusion they have nothing to lose by applying for TALF funds. Indeed, faced with a choice of immediate bankruptcy vs. TALF, who would possibly turn down the money? And so weak dealerships that would otherwise quickly go bankrupt, have now been given a new lease on life, even if only for a few years or months. Note that the TALF program opens up huge fraud possibilities including but not limited to owners taking the money and paying themselves huge salaries and/or funneling the money into other ventures before handing over the keys of the dealership to the Fed and then walking away. And walk away they will, as soon as all collateral the Fed is willing to accept has been pledged. And that is how the Fed will become the world’s largest auto dealership.
And as with the mortgage bust, Shedlock writes, ‘Congressional investigations studying the Fed’s balance sheet a year or so down the road will come to the conclusion, ‘No one could possibly have seen this coming.’ ‘
-- Tom Petruno