Tuesday, March 3, 2009

CNBC Video: Inside the new TALF

Today the Federal Reserve and Treasury launched a program to aid consumer lending. In the video below CNBC's Steve Liesman discusses the basics of the new TALF program.

"This might finally be something to get the securitization market going again," said Dr. David Krause, Director of Marquette University's Applied Investment Management Program. Knowing that the Federal Reserve is ready to plow up to $1 trillion in cheap funding into the asset-backed securitization market has driven down spreads on ABS (pooled credit-card and auto loans). Despite the bad news lately, Krause said, "This is a positive sign that investors might be ready to buy into the Fed and Treasury's latest liquidity program."

Spreads on 3-year credit-card securitizations have fallen to about 400 basis points from 650 basis points over swap rates at the end of last year, according to Barclays Capital. Spreads on 3-year prime fixed auto loans have fallen to about 350 from 600 at year's end and 850 at the end of November. Lower spreads indicate investors are demanding a lower yield compared with a commonly used rate benchmark to hold this debt, which uses revenue streams from credit-card and auto-loan payments to pay interest to the bond holder.

The seizing up of the ABS market prompted the Fed in late November to unveil yet one more liquidity program aimed at a frozen pocket of the credit markets. It worried that lenders that couldn't use the capital markets to fund new loans would further curtail originations, exacerbating the credit crunch. Last month it said it might expand the program to as much as $1 trillion and broaden it to encompass other collateral, such as commercial mortgage-backed securities. The launch, originally expected for February, was delayed.

Today it appears that it is finally on track. The Fed said that it expects issuers and investors in the private sector to begin arranging and marketing new securitizations of recently generated loans. The program will hold monthly fundings through year's end "or longer," the Fed added. The program will try to encourage investors to buy more consumer asset-backed securities by lending money to investors at below-market rates, using new ABS as collateral.

The opportunity to buy ABS using Fed-supplied leverage should entice more hedge funds and other institutional investors that have been big past buyers of these securities, using leverage to drive profits from these stable but historically low-yielding securities. Krause said, "This is a program that might begin to thaw out the securitization market."