Fed TALF Announced

Image by Roberto Rizzato ►pix jockey◄ via FlickrWhere There’s Smoke, There May Be A Screen

According to their website, the Federal Reserve provides the nation with a safe, flexible and stable monetary and financial system. Lately, that seems debatable. Each of us have our own opinions on the state of our financial system.

Nevertheless, this morning there are a couple of important releases on the Fed’s website that are of direct interest to us ‘little guys’. The first concerns a new purchase program aimed at supporting housing prices by increasing credit availability for housing purchases.

The second introduces the TALF, yet another program which seems to be just another smokescreen designed to support the Asset Backed Securities markets which siezed in late September, seen by many as the direct cause of the current global crisis.

Here is the Fed’s 1st press release:

Release Date: November 25, 2008
For release at 8:15 a.m. EST

The Federal Reserve announced on Tuesday that it will initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs)–Fannie Mae, Freddie Mac, and the Federal Home Loan Banks–and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae. Spreads of rates on GSE debt and on GSE-guaranteed mortgages have widened appreciably of late. This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.

Purchases of up to $100 billion in GSE direct obligations under the program will be conducted with the Federal Reserve’s primary dealers through a series of competitive auctions and will begin next week. Purchases of up to $500 billion in MBS will be conducted by asset managers selected via a competitive process with a goal of beginning these purchases before year-end. Purchases of both direct obligations and MBS are expected to take place over several quarters. Further information regarding the operational details of this program will be provided after consultation with market participants.

And this is the second:

Release Date: November 25, 2008
For release at 8:15 a.m. EST

The Federal Reserve Board on Tuesday announced the creation of the Term Asset-Backed Securities Loan Facility (TALF), a facility that will help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA).

Under the TALF, the Federal Reserve Bank of New York (FRBNY) will lend up to $200 billion on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans. The FRBNY will lend an amount equal to the market value of the ABS less a haircut and will be secured at all times by the ABS. The U.S. Treasury Department–under the Troubled Assets Relief Program (TARP) of the Emergency Economic Stabilization Act of 2008–will provide $20 billion of credit protection to the FRBNY in connection with the TALF. The attached terms and conditions document describes the basic terms and operational details of the facility. The terms and conditions are subject to change based on discussions with market participants in the coming weeks.

New issuance of ABS declined precipitously in September and came to a halt in October. At the same time, interest rate spreads on AAA-rated tranches of ABS soared to levels well outside the range of historical experience, reflecting unusually high risk premiums. The ABS markets historically have funded a substantial share of consumer credit and SBA-guaranteed small business loans. Continued disruption of these markets could significantly limit the availability of credit to households and small businesses and thereby contribute to further weakening of U.S. economic activity. The TALF is designed to increase credit availability and support economic activity by facilitating renewed issuance of consumer and small business ABS at more normal interest rate spreads.

Pig In A Poke

Importantly, this second release (which appears 1st on the Fed site) seems to be aimed at supporting the issuance and valuations of the very type of securities which precipitated the current financial crisis worldwide. Those so-called ‘AAA-rated tranches’ were and most likely still are filled with toxic waste. THAT is the reason folks stopped buying them, and there has been no indication that anything in that area has changed.

On the other hand, the types of ABS mentioned DO NOT include those backed by the mortgage industry, so that’s a plus. As of yet, we haven’t seen any indication that the types of loans backed by the named industries have been poisoned like the mortgage industry was.

My problem is that the way these securities are created allows toxic loan assets to be bundled in with truly triple-A rated assets and hidden from view. Remember, only one slice in each of these ABS tranches need to be rated AAA to qualify the ENTIRE tranch to be rated AAA. There is no way to know whether these tranches have any real quality at all.

I am Jon, and as much as I want to believe… I just cannot. It sounds trite, but time will tell us the truth.

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