Wednesday, March 4, 2009

The Gordon Shumway (aka TALF)

If hadn't seen it, the U.S. government has taken extra steps to help out the market for asset-backed securities through its Term Asset-Backed Securities Loan Facility, or TALF. From the WSJ today:
The U.S. launched a program to finance up to $1 trillion in new lending to consumers and businesses, in an ambitious attempt to jump-start credit for everything from car loans to equipment leases.

The Federal Reserve and the Treasury Department hope to revive the moribund market for so-called securitized lending, which until last year was central to providing consumer and business loans. Starting March 17, large investors -- including hedge funds and private-equity firms -- can obtain cheap credit from the Fed and use the money to buy newly issued securities backed by such loans.

The Fed, which announced the program's outlines in November in tandem with the Treasury, had already expanded the size of the program and on Tuesday further expanded its targets. Originally limited to backing securities for consumer and small-business loans, it now will also target securitized loans for heavy industrial equipment, agricultural-equipment leases and rental-car fleets. And the central bank sweetened some terms to draw investors and debt issuers. For instance, participants won't have to adhere to limits on executive compensation that apply to banks that accept bailout government money. Such restrictions were originally planned for some participants.

A few thoughts:

  • Despite their role in the current crisis, asset-backed securities are not, in and of themselves, a horrible financial instrument. They, in theory, should allow borrowers to take advantage of lower interest rates by efficiently distributing the risks of the loans. But because they allow the originator of the loan to sell off the risk of holding it, they create an incentive for lenders to lower their underwriting standards. Only triple-A securities will be eligible for Fed funding, but given the rating agencies' recent performance in this area, I'd want a some more restrictions in place if I were the government.
  • Unfortunately, I'm not sure how much this will actually help the economy. Is lack of available credit really the reason people aren't spending money? People are petrified about the economy right now. I don't think they're as worried about being able to make a 3% car payment instead of a 4% car payment as they are about losing their job and not being able to make any car payment at all. But maybe the extension beyond consumers will help.
  • A side benefit to this is it could help out some investment bankers and lawyers that don't have much to do these days. As the chart below shows, issuance fell dramatically last year. That's a lot of lost fees.

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