TALF And Hogs

Missed this until this evening. It’s from the Saturday WSJ.

It seems that TALF is providing financing for some securitizations that are a bit out on the curve. Lately they’ve been involved with a $500 million deal for Harley Davidson and a $709 million one for Alliance Data Systems. Now this isn’t to knock either Harley or Alliance but the underlying loans leave a bit to be desired.

In the Harley deal the documents say that the individual loan amounts may be as much as 70% over the manufacturer’s suggested retail price. The difference is attributable to throwing in customization costs for the bikes. Add the fact that about 18% of the loans were to borrowers with subprime-credit and you start wondering about the collateral.

In the case of Alliance the loans in the deal had a 27.3 yield. That’s subprime credit card territory. Kind of hard to square financing this with the push to limit credit card interest rates. More to the point, those kind of yields point to the type of risk that led to the ruin in the first place.

Now, before you start screaming about the Fed only taking the AAA portion of the pool let me remind you that’s what the banks also said they were doing. We should know by now how fast the top rated tranche can turn to junk. And let’s not forget our old friends that are rating these credits. They don’t have the most stellar track records.

The article points out something I hadn’t even thought about. There’s a real risk of the Fed getting stuck with junk in this program. As the securitization market improves there’s every chance that the gold plated deals get done in the private market and the scratchy ones end up using TALF. Of course, the Fed has a lot of experience in this sort of thing (not) and Moodys and S&P know what they’re doing (right?) so what could go wrong.

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