TALF: Trillion-Dollar Key for Locked Lending

The Term Asset-Backed Securities Loan Facility (TALF) is being expanded. The Obama administration is about to shout ‘CLEAR!’, pressing the the defibrillator button in an attempt to shock the shadow banking system back to life. The program can use up to $100 million of first loss backing from Treasury to enable $900 million of Fed lending, to support generation of $1 trillion of new securities backed by auto loans, credit card balances, student loans and small-business loans.

Under the program, the Fed will lend to investors who acquire new securities backed by auto loans, credit card balances, student loans and small-business loans at rates ranging from roughly 1.5 percent to 3 percent.

Depending on the type of security they are borrowing against, investors will be able to borrow 84 percent to 95 percent of the face value of the bonds. Investors would not be liable for any losses beyond the 5 percent to 16 percent equity that they retain in the investment.

This program will jump start the securitization market, but nobody knows how big the impact may be. The Fed loans are limited to AAA rated securities, so it implies that banks will have to hold the lower rated loans on their own books.

Including mortgages, $2 trillion of new ABS were sold in 2006, 2007. TALF doesn’t apply to mortgages, and I don’t know how rapidly the subsidized loans will taken up hedge funds — if all subscribed in 2009 the TALF would support about half the 2007 market.

Cheap credit and up to 12.5 : 1 leverage looks to generate investment returns up to 20%. I would like to have a piece of that. Who is going to get the subsidized loans from the Fed?

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