The U.S. Department of the Treasury and the Federal Reserve launched a highly anticipated lending facility Tuesday aimed at generating up to $1 trillion in consumer and small-business loans.
The Term Asset-Backed Securities Loan Facility (TALF), which is scheduled to begin disbursing funds March 25, will make non-recourse loans to purchasers of AAA-rated securities backed by new auto, credit card, student and Small Business Administration (SBA) guaranteed loans. The facility will offer loans to entities including hedge funds. It is part of the comprehensive financial stability plan recently outlined by Treasury Secretary Timothy Geithner.
"By reopening these markets, the TALF will assist lenders in meeting the borrowing needs of consumers and small businesses, helping to stimulate the broader economy," the Treasury and Fed said in a joint statement.
Requests for funding from the facility will be accepted beginning March 17. The program will offer new funding on a monthly basis through December 2009 or later, at the Fed's discretion.
"The program could represent a turning point for the economy and the financial markets by jumpstarting lending in critical areas of the economy and by reviving the asset-backed securities market, where issuance has fallen to a crawl from a pace of about $1.5 trillion to $2.0 trillion in 2005-2007," Miller Tabak & Co. Chief Bond Strategist Tony Crescenzi said in a client note.
"If it works, a swath of economic data will be impacted, probably by the end of the second quarter or early in the third quarter, altering perceptions about the economy and boosting household, business, and investor sentiment," Mr. Crescenzi wrote.
The TALF is launching with up to $200 billion in funding from the Federal Reserve Bank of New York. Treasury will provide $20 billion from the Troubled Asset Relief Program (TARP) to finance the first asset purchases under the program.
The TALF is expected to grow into a $1 trillion facility, but even that may not be enough, according to Kevin Giddis, head of fixed-income at Morgan Keegan. Still, if the program becomes "a landfill of toxic assets .. it could be a very good thing for both the markets and the economy," he said.
At least one company, GMAC -- which has received $5 billion in government aid through the TARP -- has suggested the TALF's impact may be muted because of ratings requirements on securities. For GMAC, which provides financing for General Motors vehicles, "rating agencies are not willing to provide the required rating level while GM's situation remains unresolved," GM said in a report to Treasury last month.
Most TALF loans will offer fixed interest rates equal to the three-year LIBOR swap rate plus 100 basis points or floating interest rates of one-month LIBOR plus 100 basis points. Collateral haircuts will vary across asset classes and be based on securities' average lives.
The program, however, will offer lower interest rates and collateral haircuts on loans secured by government-guaranteed student loan and SBA-backed loans.
"The modifications are warranted by the minimal credit risk on these assets owing to the government guarantees, and, by making the terms of the TALF loans more attractive, they should encourage greater flows of credit to small businesses and students," the Fed and Treasury said.
The program could be further modified to include loans for commercial mortgage-backed securities and other types of AAA-rated newly issued asset-backed securities.
"The expanded program will remain focused on securities that will have the greatest macroeconomic impact and can most efficiently be added to the TALF at a low and manageable risk to the government," the Fed and Treasury said.
Government officials expect securities backed by rental, commercial and government vehicle fleet leases as well as those backed by small ticket equipment, heavy equipment and agricultural equipment loans could be eligible for TALF funding in April. Collateralized loan and debt obligations and securities backed by mortgage-servicer advances also could eventually become eligible for TALF funding.
The facility has the potential to "greatly expand" the Fed's balance sheet, the Treasury and Fed said. The Fed's asset holdings last week stood at $1.92 trillion and were above the $2 trillion mark as recently as January.
The Treasury and Fed said they plan to seek legislation that would give the Fed additional tools to manage reserve levels while providing funding for TALF as well as other credit and liquidity initiatives.
Source: The Wall Street Journal
The Term Asset-Backed Securities Loan Facility (TALF), which is scheduled to begin disbursing funds March 25, will make non-recourse loans to purchasers of AAA-rated securities backed by new auto, credit card, student and Small Business Administration (SBA) guaranteed loans. The facility will offer loans to entities including hedge funds. It is part of the comprehensive financial stability plan recently outlined by Treasury Secretary Timothy Geithner.
"By reopening these markets, the TALF will assist lenders in meeting the borrowing needs of consumers and small businesses, helping to stimulate the broader economy," the Treasury and Fed said in a joint statement.
Requests for funding from the facility will be accepted beginning March 17. The program will offer new funding on a monthly basis through December 2009 or later, at the Fed's discretion.
"The program could represent a turning point for the economy and the financial markets by jumpstarting lending in critical areas of the economy and by reviving the asset-backed securities market, where issuance has fallen to a crawl from a pace of about $1.5 trillion to $2.0 trillion in 2005-2007," Miller Tabak & Co. Chief Bond Strategist Tony Crescenzi said in a client note.
"If it works, a swath of economic data will be impacted, probably by the end of the second quarter or early in the third quarter, altering perceptions about the economy and boosting household, business, and investor sentiment," Mr. Crescenzi wrote.
The TALF is launching with up to $200 billion in funding from the Federal Reserve Bank of New York. Treasury will provide $20 billion from the Troubled Asset Relief Program (TARP) to finance the first asset purchases under the program.
The TALF is expected to grow into a $1 trillion facility, but even that may not be enough, according to Kevin Giddis, head of fixed-income at Morgan Keegan. Still, if the program becomes "a landfill of toxic assets .. it could be a very good thing for both the markets and the economy," he said.
At least one company, GMAC -- which has received $5 billion in government aid through the TARP -- has suggested the TALF's impact may be muted because of ratings requirements on securities. For GMAC, which provides financing for General Motors vehicles, "rating agencies are not willing to provide the required rating level while GM's situation remains unresolved," GM said in a report to Treasury last month.
Most TALF loans will offer fixed interest rates equal to the three-year LIBOR swap rate plus 100 basis points or floating interest rates of one-month LIBOR plus 100 basis points. Collateral haircuts will vary across asset classes and be based on securities' average lives.
The program, however, will offer lower interest rates and collateral haircuts on loans secured by government-guaranteed student loan and SBA-backed loans.
"The modifications are warranted by the minimal credit risk on these assets owing to the government guarantees, and, by making the terms of the TALF loans more attractive, they should encourage greater flows of credit to small businesses and students," the Fed and Treasury said.
The program could be further modified to include loans for commercial mortgage-backed securities and other types of AAA-rated newly issued asset-backed securities.
"The expanded program will remain focused on securities that will have the greatest macroeconomic impact and can most efficiently be added to the TALF at a low and manageable risk to the government," the Fed and Treasury said.
Government officials expect securities backed by rental, commercial and government vehicle fleet leases as well as those backed by small ticket equipment, heavy equipment and agricultural equipment loans could be eligible for TALF funding in April. Collateralized loan and debt obligations and securities backed by mortgage-servicer advances also could eventually become eligible for TALF funding.
The facility has the potential to "greatly expand" the Fed's balance sheet, the Treasury and Fed said. The Fed's asset holdings last week stood at $1.92 trillion and were above the $2 trillion mark as recently as January.
The Treasury and Fed said they plan to seek legislation that would give the Fed additional tools to manage reserve levels while providing funding for TALF as well as other credit and liquidity initiatives.
Source: The Wall Street Journal
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