TARP goes TALF as FRBNY lends against AAA ABS

  • Share
  • Read Later

For all those people out there who want to know why they’re not seeing more of this government bailout money directed at ordinary folk, boy do I have an acronym for you.

Meet TALF, the Term Asset Backed Securities Loan Facility. This morning the Treasury Department announced that the Federal Reserve Bank of New York (FRBNY—pronounced, I assume, “Fribnee”) will start making up to $200 billion in loans to juice the market for securities backed by lending to small businesses and consumers. The issuance of these securities, which gin up lending for things like auto loans, student loans and credit cards, essentially disappeared in October. This is a shot at getting it back—and helping people out there who are struggling to borrow money for cars and college and Christmas shopping. Does that make you feel any better about all the other things the government has been spending money on as of late?

Here are the specifics of how it will work: Under TALF, FRBNY will make loans to issuers of asset-backed securities (ABS) that have the highest investment-grade rating (like AAA) from a at least two nationally recognized statistical rating organizations (NRSROs). Small business loans must be guaranteed by the Small Business Administration (SBA). FRBNY will take the AAA (or otherwise NRSRO/SBA-sanctioned) ABS as collateral for loans that the ABS-issuers will ostensibly use to go out and make more ABS (and, in turn, more loans to consumers and small businesses). To manage the TALF loans, FRBNY will create a special-purpose vehicle (SPV). The SPV will buy the assets securing TALF loans. Treasury’s (UST’s) Troubled Assets Relief Program (TARP) will buy debt issued by the SPV to finance the first $20 billion of asset purchases. If more than $20 billion in assets are bought by the SPV through TALF, FRBNY will lend money to the SPV. So TALF and its SPV are FRBNY’s thing, but UST and TARP—i.e., BARF—are standing behind it. Like any BFF would.

In other news, the Federal Reserve said it will buy up to $100 billion in debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks (a.k.a. the housing-related government-sponsored entities, or GSEs), and up to $500 billion in mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac and Ginnie Mae. The market for those things hasn’t gone away like it has for the sorts of ABS TALF hopes to jump start, but the spreads on GSE debt and GSE-guaranteed mortgages have widened, making affordable mortgages incrementally harder to come by, which is why the Fed is jumping in. The other obvious difference is that the acronyms in this announcement aren’t nearly as much fun to play around with. I mean, GSE? Come on. It’s not the ’90s anymore.