TALF Talk

Story Highlights:

• Consumers' access to credit has been hampered by a dearth of demand for asset-backed securities (ABS).
• The Fed's new Term Asset-backed Loan Facility (TALF) is aimed at increasing the availability of consumer credit by boosting demand for ABS.
• Investors approached the program cautiously as questions still remain about the strings attached to these funds, but this program should ultimately contribute meaningfully to the wave of fiscal and monetary stimulus making its way around the globe.

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Despite ending on a sour note with a 2.0% drop today, US stocks managed to rise 1.6% this week. Not only did this mark thesecond consecutive week of gains, this week also saw the start of yet another Fed program (and of course, another acronym) aimed at loosening credit markets. The Fed's so-called Term Asset-Backed Securities Loan Facility (TALF) is intended to increase the availability of consumer credit by reinvigorating the secondary market for securitized consumer debt.

Consumers' access to credit has been hampered by a dearth of demand for asset-backed securities (ABS). The ABS market is an important source of funding for credit cards, auto loans, student loans, and other types of consumer and small business debt. Similar to mortgage-backed securities (MBS), which facilitate mortgage origination and investment, ABSs pool together consumer debt for sale to investors. But as investor appetite for securitized debt has dried up and credit markets have frozen, ABS issuance has dropped precipitously. In 2006, over $900 billion in ABS were sold to investors. In 2007, less than $600 billion in ABS were issued. And in 2008, ABS issuance fell dramatically to just over $150 billion. So far this year, less than $2 billion in ABS has been sold.

The Fed aims to boost this market through the TALF program by loaning money to investors to purchase highly-rated ABS. In some cases, investors can put down as little as 5% of the value of the ABS they're buying and borrow the rest from the Fed. And TALF are non-recourse loans, meaning if the debt comprising the ABS go bad, investors aren't on the hook for losses (the government will absorb them).

Despite these favorable terms, investor interest in TALF has been somewhat tepid. In total, the Fed hopes to extend up to $1 trillion of TALF loans. But in the first week, investors requested just $4.7 billion through the program. Investors have been apprehensive because it's not entirely clear what strings the Fed will attach. Initially, the Fed indicated executives of participating hedge funds, private equity funds, and the like would be subject to compensation limits as well as rigorous audits. Needless to say, managers of these funds balked at the onerous requirements. The Fed has since backed off and made terms more palatable, but the Fed's (and US government, generally) actions of late can hardly be described as consistent. So despite reassurances from the central bank, investors seem to be dipping their toes in the TALF waters gingerly before committing to a swim.

Eventually, TALF should contribute meaningfully to the massive wave of monetary and fiscal stimulus that will be making its way around the globe. Expect equity markets to move higher as this flood of money finds its way into the global economy.