TALF Is Having Trouble Getting Off The Ground

The shadow banking system is proving harder to recreate than anticipated. Bloomberg reports that the Fed delayed the March 17 deadline for submission of packages by two days as investors have had trouble agreeing to contract terms.

The first round is intended to include loans for autos, education, credit cards and small business loans. Given that two of the four — education and small business loans — typically carry government guarantees and the other two have been securitized for many years, the inability to quickly get a program off the ground is troubling. There wouldn’t seem to be that much wheel recreating going on here. The legal framework surrounding the securitization of these assets has been around for some time so, it’s the holdup is puzzling. The article unfortunately doesn’t get to that point.

Falling back on guesswork, the Fed has committed to purchase the AAA tranche of securities for these types of loans. They plan to loan from 84% to 95% of the face amount of the securities presented to them at interest rates of from 1% to 3%. The investors would hold the remaining tranches and of course could lay them off to third parties if any can be found that want the risk.

Without seeing the details of a completed package it’s difficult to say how good a deal this truly might be, but on its face it should be very lucrative. The haircuts are minimal and the interest rates amount to free money. So what’s spooking people, assuming they are spooked.

My guess is as good as the next guys, so I’ll venture that one of the problems may be the inability to get comfortable with the risk in the lower tranches no matter how good the economics look on a spread sheet. Having seen paper that many thought was money good crater over the past 18 months, investors might simply be saying they can’t underwrite the risk. Trust has been so strained if not destroyed that it’s entirely possible that many investors don’t think they can believe that the debt was originated with the due diligence that is represented. I know that I would be very wary of any reps and warranties that I received with regard to consumer receivables.

I could easily be reading too much into this as well. Maybe it is simply a documentation issue. Whatever the cause, it does serve as an illustration of the extent of the damage in this sector of the financial system. Returning anywhere near the status quo ante is going to take a long, long time. Getting the Fed out of the business may take even longer.

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