Monday, October 5, 2009

TALF's progress painfully slow

The Fed's TALF program continues to struggle. It's a good sign for the taxpayer because the Fed's exposure to the program is quite modest relative to it's overall balance sheet. Exposure to AIG (including the Maiden Lane portfolios) is significantly larger than TALF for example. But it's bad news for the consumer, as credit cards and auto loans availability have been helped only marginally by the program.

The non-CMBS component of TALF issuance has been on a decline. That means that fewer participants are willing to take ABS equity risk for the investment returns they expect. Banks don't want to increase exposure to the US consumer, and not enough private investors want to be involved either.

The CMBS program is also fairly weak. The old notion of "give them leverage and they will come" did not play out. No new CMBS deals have been done under TALF. Only existing deals have been financed - someone who held old CMBS "AAA" tranches was able to borrow against them from the Fed. But this is not making a dent in the overall $700 billion CMBS market.

Given it's limited effectiveness, it is entirely possible the Fed will stick to the deadlines currently in place and terminate the program in the next few months:
The Fed: The facility will cease making loans collateralized by newly issued CMBS on June 30, 2010, and loans collateralized by all other types of TALF-eligible newly issued and legacy ABS on March 31, 2010, unless the Board of Governors extends the facility.

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