TALF Facility's Terms Spur Doubts On Its Potential Impact
25 Februar 2009 - 9:28PM
Dow Jones News
Even as the Federal Reserve finalizes terms of its Term
Asset-Backed Securities Loan Facility, or TALF, there's increasing
skepticism about the $200 billion program's likely impact.
TALF is an effort to expand lending to U.S. consumers; companies
have cut back on consumer loans amid a freeze in the debt market
where these borrowings have been traditionally financed.
The Obama administration has said it expects to expand the TALF
to as much as $1 trillion. TALF seeks to invigorate student
lending, auto loans, credit card lending, and (in the
administration's expansion) also include residential and commercial
mortgages. In this $4 trillion market, loans backed by these
different types of consumer credit are packaged and traded; by
packaging and selling the credit, companies free up funds to make
new loans.
But critics say that the program's eligibility requirements and
costs to investors will likely limit its relevance. This would
thwart its purpose of thawing the market for securities backed by
consumer loans.
Through the program, being overseen by the New York Fed, $200
billion of loans would be extended to investors to purchase
securities backed by consumer debt, including student and auto
loans and credit-card payments. The premise is that by spurring
investors to buy these out-of-favor securities, companies --
ranging from American Express Co. (AXP) to Sallie Mae (SLM) and
GMAC LLC -- that issue these kinds of credit will be encouraged to
lend to consumers. The program's start date is expected to be
announced soon.
Under this program, one of numerous efforts by the government to
get credit flowing through the economy, the loans would be made in
exchange for collateral made up of the highest-rated securities of
loans backed by the different types of consumer credit.
In addition, the Fed will collect a fee in the form of a
discount on the collateral. For instance, under the plan, the Fed
would discount by 10% a security maturing in two to three years and
backed by a pool of private student loans.
These conditions will likely restrict TALF's popularity,
analysts say, as they either eliminate certain kinds of consumer
loans or make it an expensive proposition for users.
"I don't see it as being a huge boon to credit-card and subprime
auto loans because their quality is heavily impacted right now by
deteriorating consumer credit," says Scott Valentin, an analyst at
FBR Capital Markets.
The highest credit-rating requirement, for instance, makes it
possible for just under a quarter - or $18 billion - of
asset-backed securities, made up of auto loans and leases and
issued in 2007, to be eligible for this program, according to the
American Financial Services Association, a trade group.
Separately, TALF may not appeal to credit-card issuers because
the bulk of them are bank holding companies that have access to
cheaper sources of federal funds.
"Publicly traded companies don't need to tap TALF," says Donald
Fandetti, an analyst at Citigroup Inc. Furthermore, "it's unclear
that TALF will revive the securitization business because of the
aversion to this market," says Fandetti.
Another concern is that the focus on only the highest-rated
securities leaves out lower-rated investments, which are under the
most stress as they are the first to be affected by
delinquencies.
FBR's Valentin says he's concerned investors will only buy the
highest-rated securities eligible for TALF, and continue to shy
away from lower-rated asset-backed securities.
This would leave companies with little choice but to keep the
riskier securities on their balance sheet, thus blocking funds that
they could have used to extend credit to consumers.
Still, the plan does have its benefits, particularly for
companies that lack a bank charter.
Sallie Mae (SLM), a large lender of student loans, said in
December that it has "ample assets" that would qualify for the TALF
facility.
It expects this facility "to be substantially less expensive"
than its borrowings from banks, said Al Lord, Sallie's chief
executive officer, speaking at a Goldman Sachs Financial Services
Conference in December. At the time, the company estimated about
$23 billion of its assets would be eligible for the TALF program. A
Sallie Mae spokeswoman was unavailable for comment.
-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729;
aparajita.saha-bubna@dowjones.com; and Anusha Shrivastava,
201-938-2371; anusha.shrivastava@dowjones.com