TALF : Please read first before busting out the pitchforks

by mysticlaker

Community

(This content is not subject to review by Daily Kos staff prior to publication.)

Wednesday, Mar. 18, 2009 Wednesday, Mar. 18, 2009 at 4:54:27am PDT

The diary on the rec: list fails in many ways to give the whole view of TALF.

TALF is probably the best hope we have to free up liquidity now which is generally sitting in the hands of large institutions (hedge funds / investment banks / foreign countries) but don't have a safe place to invest it because of the reluctance to take additional risk. The liquidity freed up from TALF is directly targeted to consumer/business based loan needs. Yesterday was the first TALF sale, and thank God it was succesuful. A billion dollars in credit opened up yesterday without printing more money.

http://www.reuters.com/...

Other ABS investors agreed the deal met with very strong interest. "It quickly came and went," another investor said.

Automakers, which rely heavily on the securitization market for funding of their auto loans, are expected to benefit the most from the plan (yesterday's first sale).

The first asset-backed securities offering under the Federal Reserve's TALF program met with robust demand on Tuesday, leaving hungry investors clamoring for more of Nissan's $1.3 billion deal.

"The deal was four to five times oversubscribed in the first eight minutes that it was announced," said Mike Kagawa, portfolio manager at Payden & Rygel in Los Angeles, who did not get a chance to participate in the sale.

I'll hold on using bold and italics like the rec'd diary. No need for all the drama here.

A few points first. The main jist of the rec'd diary is to this "shadow banking system" and not getting the money directly to the banks to lend. The banks aren't lending because they are carrying huge amounts of bad assets on their books. TALF is designed to get liquidity back in the system focused on target markets(consumer and small business loans). Yes, the buyers are hedge funds among many others including mutual fund companies, but they are the people with money. Fixing the hedge fund system is a different issue, and I won't mix it up with TALF. There are lots of other buyers besides hedge funds (like foreign governements, direct investors, mutual funds, local cities, state governments etc).

The Fed can free up money aimed at specific loans by focusing on the securitization market which is what backs different types of loans. That is what makes this program so critical to work.

http://www.treas.gov/...

The Obama administration along with the Federal Reserve, the FDIC and the Comptroller of the Currency announced on February 10 a comprehensive package intended to restore stability to the financial system. An important goal of this program is to strengthen the economy by getting credit flowing to families and businesses throughout the country. The recently released Capital Assistance Program and the Homeowner Affordability and Stability Plan are important components of this package, and should help improve lending conditions in the economy. Another key component of the President’s package directed at increasing lending is the Consumer and Business Lending Initiative. The Term Asset-Backed Securities Loan Facility, a joint program of the Federal Reserve and the Treasury, is a program that falls under this initiative, and its goal is to improve credit market conditions by addressing the securitization markets. Taken together, these actions are a multi-pronged effort to unlock the credit markets in the U.S. economy.

Why are we doing this? Because investors (yes hedge funds and others) are scared shitless to put cash back in the system. Their liquidity is sitting on the side-line, and we need it back in the system. Otherwise, we are going to print money and likely cause a huge inflationary ripple effect once this downturn is over.

With the onset of severe dislocation in the credit markets, new issuance of consumer ABS declined precipitously in the third quarter of 2008 before coming to a virtual halt in October. Issuance of consumer ABS has remained near zero since October, which has significantly reduced the amount of credit extended to consumers throughout the economy. At the same time, interest rate spreads on AAA-rated tranches of consumer ABS have increased to levels well outside the range of historical experience, reflecting unusually high risk premiums.

The problems in these markets reflect three developments. First, many traditional investors in AAA-rated tranches of ABS have exited the market. The remaining traditional investors have suffered substantial mark-to-market losses on their ABS portfolios, are adversely impacted by the loss of liquidity and value on their portfolios, and have little appetite to increase their ABS holdings until their existing positions trade at more normalized levels. Second, nontraditional investors such as hedge funds, which may otherwise be willing to invest in these securities, have been unable to obtain funding from banks and dealers because of a general reluctance to lend. Third, investors are increasingly concerned about the prospect of a deep recession and resulting correlated defaults on loans to households and businesses.

So, what does the government do? Give the money directly to banks. No, it can't. Their balance sheets are so bad, and the can't handle any more risk on the market. So they create a market where they sell direct securitization investment pieces that have to be used for loans with low risk and guarantees. Once they are purchased (with ABS gurantees like government owned car fleets), the money is then directed to the credit bonds that back consumer/business lending.

The mechanics of the TALF program are as follows. Once a month investors can request Federal Reserve funding for loans against eligible consumer or small business ABS. Assuming that the borrower and the ABS it plans to pledge as collateral meet Treasury and Federal Reserve requirements, the investor will receive funding to purchase the ABS. Given that the loan is non-recourse, if the borrower does not repay the loan, the Federal Reserve Bank of New York will enforce its rights in the collateral and sell the collateral to a SPV established specifically for the purpose of managing such assets. The SPV is funded, in part, by a $20 billion investment by Treasury under the Troubled Assets Relief Program...

Focus remains on including securities that will have the greatest macroeconomic impact and that could most efficiently be added to the TALF at a low and manageable risk to the government. The Federal Reserve and Treasury currently anticipate that ABS backed by rental, commercial, and government vehicle fleet leases, and ABS backed by small ticket equipment, heavy equipment, and agricultural equipment loans and leases will be eligible for the April funding of the TALF. Other types of securities under consideration include private-label residential mortgage-backed securities, collateralized loan and debt obligations, and other ABS not included in the initial rollout. Treasury and the Federal Reserve expect to announce which additional classes of ABS will be eligible under the expanded program as soon as the analysis is completed.
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And what happens is this doesn't work? It would make the great depression look like a joke. It would mean there is no faith in the US government to back securities. I don't know, but mass unemployment, liquidity problems, and likely violence occur.

Whether you want heads about compensation and other aspects are fine. But not understanding the importance of TALF and what is means to YOU to be successful is just pure craziness.