TALF TroublesOctober 22, 2012 Posted by: Joe Morgan, CFA
I should have known better than to cheat a friend
And waste a chance that I'd been given
The Term Asset-Backed Securities Lending Facility (TALF) wasannounced last November, but only had its second auction last week.The complications of providing relief to the securitized marketshave proven far more complex than most imagined, and the lack ofsuccess may be an indication that government credibility isfaltering.
Credit extended in the initial auction in mid-March totaled just$4.7 billion and the last week's operation netted just $1.7billion, a drop of 64 percent. These dismal sums are not evenwithin driving distance of the program's ultimate goal of up to $1trillion of debt relief for the securitized markets, which areprimarily consumer-related loans.
So, what gives?
While some believe it is too early to judge the success of thisprogram (You have to have demand for these loans, too!), I believewe are seeing the effects of government intervention thus far. Manypotential credit providers are shying away from getting in bed withthe government after seeing how the auto manufacturers and thebanking industry has been treated once they were deemed a "bailedout" institution. (Now, the government is reaching for theinsurance industry under the TARP program as well.)
Breaking down credit creation we find that over half of creditoutstanding has come from the securitized markets and most of thatcredit is consumer-related. This means the "banks" don't actuallyhold consumer-related loans on a grand scale, but this credit issubject to the whims of portfolio managers and institutional fundsworldwide.
As these investors saw the writing on the wall for the U.S.economy, their natural inclination was to avoid investing inconsumer-related bonds, which has driven up the cost of theseloans. For evidence, look no further than your mailbox whichcontains far fewer zero-percent interest offerings if you'll justtransfer your credit card balance. To be sure, the amount of junkmail has remained steady, but these offers have been replaced byproperty tax reduction schemes and class action lawsuitsolicitations....Read More