TARP For Insurance Companies And TALF For CMBS

You have to figure that some insurance companies are really desperate. The Wall Street Journal reports that the Treasury Department has decided to extend TARP funds to some.

From the WSJ:

The Treasury is expected to announce within the next several days the inclusion of life insurers that are bank holding companies or own a thrift, these people said.

How much money would be available to the insurers remains unclear. The Treasury says it has about $130 billion remaining in TARP funds. Life insurers that are bank holding companies have been eligible for TARP for some time, but the Treasury had not yet given the green-light to approve their applications.

Several have applied, including Prudential Financial Inc., Hartford Financial Services Group Inc. and Lincoln National Corp. No decisions have been made yet about which applications will be approved, these people said.

Not only do they assume the stigmata of being TARP recipients but they put themselves in the cross hairs of Congress and the media. It’s kind of scary to think that this is their only alternative, isn’t it.

On another bailout battlefield, it looks as if the Fed is about to extend the maturity of its TALF loans from three years to five in order to accommodate commercial mortgage backed securities.

The WSJ has the news and to be honest, the article is a bit confusing. I don’t know if it was poorly written or I’m missing something.

The Journal article advances the meme that the problem with the CMBS market is one of liquidity. Specifically, that CMBS maturing this year and next will not be refinanceable at the rates prevailing rates for the highest rated CMBS tranches. Those rates are currently running around 12% to 14%. Thus the Fed needs to step in and provide cheap financing. The maturity of the loans needs to go out to five years to accommodate normal commercial loan  durations.

There are more than a few people, myself included, who would argue that it’s a solvency problem first. Many of these commercial loans were advanced on the basis of pro forma income streams that never have been achieved. Yes, there is a problem with liquidity in the market but even the most liquid market would not refinance these loans unless a lot of the leverage is wrung out first.

I suspect that there may be a game here. If you can get money for the senior tranches from the Fed at extremely low rates there is probably plenty of room to take some hits on the rest of the capital structure and still make a fistful of profit. There may also be a play that lets the participants get their hands around the underlying asset. 

The fact that a lot of big players are gearing up for this suggests that there is money to be made. The Journal notes that BlackRock, ING and Prudential are all positioning themselves for the program. By the way, that is the same Prudential that is mentioned above as being one of the new TARP babies.

Quite aside from the issue of whether this is or is not another government supported bonanza for large financials is the concern about the Fed moving out its loan maturities. They have responded to the criticism that the TALF will hamstring them when it comes time to start pulling money out of the economy by pointing to the relatively short duration of their loans. This move will naturally weaken that argument.

And so we watch more and more of the economy come to depend directly on the government for its survival, funding and prosperity. It could end badly.

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