TALF Troubles

I should have known better than to cheat a friend
And waste a chance that I'd been given

-George Michael

The Term Asset-Backed Securities Lending Facility (TALF) was announced last November, but only had its second auction last week. The complications of providing relief to the securitized markets have proven far more complex than most imagined, and the lack of success may be an indication that government credibility is faltering.

Credit extended in the initial auction in mid-March totaled just $4.7 billion and the last week's operation netted just $1.7 billion, a drop of 64 percent. These dismal sums are not even within driving distance of the program's ultimate goal of up to $1 trillion of debt relief for the securitized markets, which are primarily consumer-related loans.

So, what gives?

While some believe it is too early to judge the success of this program (You have to have demand for these loans, too!), I believe we are seeing the effects of government intervention thus far. Many potential credit providers are shying away from getting in bed with the government after seeing how the auto manufacturers and the banking industry has been treated once they were deemed a "bailed out" institution. (Now, the government is reaching for the insurance industry under the TARP program as well.)

Breaking down credit creation we find that over half of credit outstanding has come from the securitized markets and most of that credit is consumer-related. This means the "banks" don't actually hold consumer-related loans on a grand scale, but this credit is subject to the whims of portfolio managers and institutional funds worldwide.

As these investors saw the writing on the wall for the U.S. economy, their natural inclination was to avoid investing in consumer-related bonds, which has driven up the cost of these loans. For evidence, look no further than your mailbox which contains far fewer zero-percent interest offerings if you'll just transfer your credit card balance. To be sure, the amount of junk mail has remained steady, but these offers have been replaced by property tax reduction schemes and class action lawsuit solicitations.

In response, the government created the TALF program, which includes low interest financing to get lenders (investors) to reenter the asset-backed markets. A terrific goal on the face of it, but given the recent track record of interfering with those businesses they are trying to help, it's no wonder investors remain hesitant to participate.

My mother used to tell me that you can tell the truth your whole life, but if you tell one lie to someone, they may never believe you again. The government has not been caught in any lie, although their credibility as a "business helper" has been severely damaged in recent weeks. Many businesses on the brink may choose to risk insolvency rather than partner with an entity who blithely and consistently changes the rules as the game is played.

Key Developments

Consumer credit declined by $7.5 billion in February, the fifth monthly decline in the current recession. Though movements in this index tend to be noisy in the short term, this was the second largest drop on record and surely evidence the consumer credit markets continue to deteriorate.

February's trade deficit plunged to only $26 billion after running in the $60 billion area from 2004 through 2008. Though a reduction in our trade deficit may seem a welcome sight, the fact is global trade is slowing, including a near-cessation in spending by the American consumer. The global economy will continue to flutter as long as the American consumer remains on the sidelines.