Koop’s Recession Diary: Fan-TAF-tic! Now Show Me the Money

Our own Jeff Koopersmith applies for a TAF loan from the Federal Reserve Bank.

 

The Koopersmith Bank (Acccount)

 

20 February 2008

Federal Reserve Bank of Philadelphia
Credit and Risk Management Division, 7th Floor
Discount Rates Discount Rates
Attention: Vish P. Viswanathan, Vice President and Discount Officer
Ten Independence Mall
Philadelphia, PA 19106-1574
VIA Fax Number: 1 (215) 574-2507

RE: TERM AUCTION FACILITY [TAF]

Dear Vishy:

May I call you Vishy?

I am writing to make application for a citizen TAF (Term Auction Facility) because of the pressures evident today in short-term funding markets. I know the Board of Governors of the United States Federal Reserve System has approved this brilliant scheme for bankers and I know they will also approve my bank account for similar treatment.

As I understand it I can bid for an advance from my local Federal Reserve Bank (Philadelphia) at interest rates that rival the brilliance of Nora Jones' Steinway piano keys. This will be fantastic because it might help insure my liquidity even though "unsecured" banks are under "stress."

I understand that the TAF will auction term funds for one-month maturity. Cool. I want to assure you that I am as sound as any bank. Even more sound.

So you don't have to worry.

I see you require collateral but, thankfully, a "broad range" of same. Would my Porsche, BMW, Rolex, and three upside down mortgage homes in the United States and Europe be okay?

I thought so – thanks.

As to my Eligibility:

I am certainly a depository institution (DI) and also a customer of a foreign bank. I will also fill out Form OC-10 etc. and pledge the assets required, plus my signed photos of Fidel Castro.

I understand that bids must be in by Friday for the subsequent Monday auctions.

I also understand that the minimum bid amount is $10 million and higher – always in $100 thousand increments. Since I only really need about $2 million I might invest the other $8 million in various slippery customer bonds that the other bigger banks have issued and I am sure I can earn the $2 million back in less than a month plus the interest. Oh! I see I can borrow two times in one go. So I will borrow like $20 million and use the interest on the other $18 million to make even more money on those secured mortgage bonds.

I was also relieved to see that the Board only requires me to (i) be in "generally" sound financial condition; (ii) fill out a form OC-10 and related documents; and (iii) have pledged my assets to the Philadelphia Reserve Bank to secure my OC-10 Indebtedness. This is good. My Experian Credit Score is only 680 – But that is certainly "generally sound" in my book.

I do wonder why you are not allowing prepayment. Are you nuts? I thought we needed all the money we could get in this country? If I want to pay the money back early, why can’t I?

Then, to top it off, you are allowing the Federal Reserve to accelerate repayments if they feel like it?

That does not make sense. But what the heck – it is a rush program.

Hey! Wait a minute – reading the Rules I see you had $20 billion available in the TAF in December. Will you have even more this next round?

Since I am allowed to bid on 10% of the total, I heard from a little birdie – that you will have $50 billion available next. So, I want to inform you now that I will bid on $5 billion now instead of just a measly $20 million.

I can get 12% on the other 4.995 billion from a little banker I know Hong Kong. So that should earn me about $50 million at the 1% per month I can get from HK or even Palermo. See? No trouble paying it back! Even if I only get a half or quarter percent for the month from the other bank – I will still make out like a bandit! $25-even $12.5 million profit is nothing to sneeze at. That will allow me to bid again next time with even less collateral!

Oh and thanks for making it so easy for me to bid for this cheap cash.

I couldn't believe you got an 800 number so fast – "The Local Reserve Bank's normal toll-free discount window telephone hotline!” What a great name for it and a great idea too. And it's manned during the period between the Opening Time and Closing Time on the Bid Submission Date. How good can it get?

Anyway here is my information and what to expect:

The Bank of Jeff Koopersmith
ABA number – 100000-00000000
Submitter Name: DeNiro Koopersmith
Contact Number: 1.800.750.9069 (Toll free as well!)
Amount of Bid – $5,000,000,000.00 (Five billion United States Dollars)
Interest Rate with three decimal points: 1.111 – 3.512%
I am authorized to bid on behalf of my own bank account and will observe the same "standards" for submission of bids in the TAF.

[Signed] Jeffrey Koopersmith, DATE 20 February 2008

I also understand that if your phone lines are busy (Dream on!) I can just leave a message with all my details on the hotline voicemail – but I still must continue dialing for dollars. Then you say my bid left on the message machine won't count unless I get a Window staff member on the line – so what's the point of leaving a message? This seems messed up to me. I get it – this is like "Name that Tune" contest that KRLA in Los Angeles used to run where you had to be the first caller to actually get through to the DJ.

I see I cannot cancel my bid either. Well, that's okay. I want to win!

What I truly think is sheer genius is that "the data on Bids of individual Participants or of Participants will not be made public, except as required by law. That's great! Wow! I guess I am an “individual participant as opposed to just a “participant.” So, I will secretly get the $5 billion without anyone knowing. Does that include the IRS?

I do want to be clear about what kind of collateral is acceptable for the TAF. I see that's it the same as the Federal Reserve Bank asks for normally. That's good. I can put up some subprime loans then.

This line confuses me – could you explain:

"Collateral pledged to secure TAF credit will be assigned the same valuations and haircuts that apply for collateral pledged at the discount window."

Does this mean that you are giving free haircuts with every bid? I usually go to Fred Fekkai.

Ah, I love the flight route too. You say if my collateral disappears or goes way down in value I have to "pledge more collateral" to cover the shortfall – even though I already have the money from you. That seems fair. I can give you my ivory chess set and replica stoneware from Capidimonti.

I was also delighted to see that the Reserve Bank will NOT “undertake greater-than-usual measures such as more frequent revaluations or more intensive monitoring, to ensure that the value of collateral for TAF Advances remains adequate!”
Double Cool!

Really, is that true – No greater-than-usual measures. Does the public know about this?

Don't worry. It's our little secret.

I also love the fact that there are absolutely NO restrictions on the use of the funds I get from the TAF.

Good thinking.

My forms are on the way. Please put them at the top of your pile.

Best regards,

Jeff Koopersmith
American Politics Journal

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