Tracking the TALF
The TALF is a key element of the Federal Reserve and Treasury's efforts to provide needed liquidity into the economy. After several months of planning, in March, the Federal Reserve announced that it was commencing lending through the Term Asset-Backed Securities Loan Facility. The first installment is limited to $200 billion, but ultimately the facility is expected to enable the Fed to lend up to $1 trillion to financial intermediaries - unlike most other Fed programs that provide lending to depository institutions and more recently primary dealers, the TALF opens direct Fed lending to almost all financial intermediaries including hedge funds.
In summary, the TALF works by providing financial intermediaries the ability to obtain loans from the Federal Reserve; in exchange for the loans the Fed receives as collateral Asset-Backed Securities backed by a large variety of loans from credit-cards, to auto loans and other. The government is addressing markets whose liquidity is currently compromised in the hopes of revitilizing the securitization markets that in the past provided over a quarter of the total capital for the economy.
Currently the Federal Reserve is accepting as collateral asset-backed securities (ABS) that are new and of high-quality (AAA) - the Fed requires the three major rating agencies (i.e. Standard & Poors, Moody's and Fitch) to rate the quality of the bonds - a controversial move given that these are the same rating agencies that performed, in the most generous of assessments, a very poor job rating mortgage backed securities and other financial debt instruments.
The ABS accepted are backed by the following types of loans:
- car loans,
- credit card debt,
- student loans,
- small business administration guaranteed loans,
- rental, commercial and government lease vehicle fleets,
- small ticket equipment, heavy equipment and agricultural equipment loans,
- commercial mortgages,
- insurance premium finance loans.
Maturities range from three to five years, the latter are allowed for Commercial Mortgage Backed Securities (CMBS), student loans, and small business administration loans. For more details on the specifics of the program, you can check
the New York Fed's FAQ.How is the TALF performing?
The TALF saw a rather slow start, but it seems to be picking up steam. In March the TALF auctioned $8.2 billion in non-recourse loans backed by asset-backed securities; in April that figure fell to $2.57 billion, but May auctions saw a much stronger reception - close to $10.6 billion in non-recourse loans were auctioned on May 5th, June auctions were also strong at $11.4 billion, but July again so a contraction in demand ($6.1 billion), though for the first time CMBS securities were auctioned. So far, most auctions are backed by ABS written on credit-card (close to $17 billion) and auto loans (over $11 billion); student loans have also seen demand ($3.6 billion). All in all, $34.5 billion have been auctioned. See the table below for further details. The next auction will close on August 13, 2009.
Though still a far from reaching the $200 billion initial goal, and the eventual $1 trillion that the Federal Reserve and Treasury expected would be needed to provide liquidity to the securitization market, The pick-up in activity was welcomed as a potential sign that issuers were starting to gain confidence in the program.
In May the Federal Reserve announced that it would start accepting as collateral commercial-mortgage backed securities (CMBS) and securities backed by insurance premium financed loans. CMBS in particular are a key means of financing for many companies in the commercial real-estate market. The lack of liquidity has already caused severe stresses in that market; one related example of this was the bankruptcy of General Growth Properties which was in large part due to the inability of the company to refinance its numerous short term debt obligations (and the unwillingness of creditors to modify their terms). In order to support this market, the maximum maturity of TALF loans backed by CMBS collateral will be increased to five years - student loans and small business loans ABSs also will be able to take advantage of the longer maturity. The relatively small size of the CMBS offering in July may signal a lack of interest on the part of banks and other entities holding this instruments as the overall credit markets have recovered, but it is still too early to tell.