Fed Gets $4.7 Billion in Loan Requests for Debut of TALF Plan
The Federal Reserve’s effort to unfreeze markets for securities backed by loans kicked off with requests for $4.7 billion of financing, a total that officials hope will surge to as much as $1 trillion after investors resolve contract terms with dealers and other concerns.
Investors could have used the Term Asset-Backed Securities Loan Facility to finance purchases of as much as $8.3 billion of securities. They asked for $1.9 billion in loans to buy securities backed by auto loans and $2.8 billion for debt linked to credit-card loans, the New York Federal Reserve Bank said yesterday.
“It’s an encouraging start given all the mechanics people had to work through in a short space of time,” said Richard D’Albert, co-chief investment officer of hedge fund Seer Capital Management LLC in New York. He didn’t participate in the TALF’s first round.
The Obama administration and the Fed are counting on the TALF to unfreeze credit and help bring an end to what may be the worst recession in the postwar era. Fed and Treasury officials are expanding the scale of the program by adding leases of business equipment and other types of loans.
The Fed’s efforts to lure hedge funds and other investors may be complicated by increasing anger among lawmakers and taxpayers over federal rescues of financial companies, said Julian Mann, who helps manage $4 billion in bonds at First Pacific Advisors LLC in Los Angeles.
The House of Representatives approved a bill yesterday that would set a 90 percent tax on bonuses paid to employees of companies that received at least $5 billion in federal bailout funds, targeting American International Group Inc. workers.
‘Congressional Tampering’
“Given the daily, evolving nature of congressional tampering with established contracts, it’s difficult to imagine how a fiduciary could prudently deploy capital into these instruments that appear to be heavily subject to ex post facto modifications,” Mann said.
Differences between dealers and investors and other delays in the TALF may have prompted the Fed on March 18 to announce it will begin buying Treasuries next week and more than double purchases of housing debt to $1.45 trillion, former Fed official Vincent Reinhart said.
“In an environment of a deteriorating economy, opening up your window doesn’t necessarily mean that you’ll get takers,” said Reinhart, former Fed monetary-affairs director and now resident scholar at the American Enterprise Institute. “They’re going to have to expand the scope of what goes into TALF.”
Eligible Assets
The first round of the program didn’t include securities linked with loans to students or small businesses, assets eligible under the TALF.
The Fed announced yesterday that the TALF will next month start accepting securities backed by car-rental fleets and three other asset types online cash advance. The Federal Open Market Committee said on March 18 the program would probably expand to cover “other financial assets.”
The finance arms of Ford Motor Co. and Nissan Motor Co. sold debt backed by auto loans for the TALF, as well as Huntington National Bank. Citigroup Inc. was the only issuer to sell credit-card backed securities.
“This is a good start for a program that we will continue to build on in the future,” New York Fed President William Dudley said in a statement yesterday. “It is encouraging that the spreads in the areas where the program is now focused have narrowed significantly. Our goal is to get the securitization market working again.”
Hitting Records
Spreads on credit-card-backed debt have narrowed since hitting record highs in December, though have widened in recent weeks. The spread on AAA credit-card-backed securities increased to about 320 basis points more than the one-month London interbank offered rate, or Libor, from 250 basis points in mid- February, according to JPMorgan Chase & Co. data on March 12.
Top-rated auto-loan bonds are trading at about 350 basis points more than Libor, compared with 425 basis points in mid- February.
Investors can take out a fixed-rate loan of 2.73 percent or floating rate of 1.52 percent to buy the securities. Depending on the collateral, investors borrow $84 to $95 for every $100 in asset-backed securities and put up $5 to $16 of their own capital.
“The standoff on the customer agreement is still a pretty significant issue,” said Brant Brooks, a partner at Good Hill Partners LP based in Westport, Connecticut. “People on the ‘buy’ side are waiting for a standardized agreement.”
First Phase
The first phase of the TALF will lend as much as $200 billion to finance the purchase of AAA rated securities containing loans for autos, education, credit cards and small businesses.
The Fed originally planned to start the TALF in February, then delayed the debut to ensure “all our legal and procedural steps had been taken,” Bernanke said in congressional testimony Feb. 25. On March 3, the Fed and Treasury said applications for the first deals would be due March 17, then extended the deadline by two days.
The Fed will disburse the loans on March 25 and accept applications once a month through at least year end. The next round of loan requests is due April 7, and the Fed will on March 24 provide “additional details” on the April loans.