The federal government on Mar. 3 provided some long-awaited answers on how it plans to unlock consumer and small business credit markets, which have been frozen more solid than an icy tundra.
The $200 billion joint Federal Reserve Board and U.S. Treasury program, known as the Term Asset-Backed Securities Loan Facility, or TALF, is intended to get money flowing for small employers, student-loan providers, credit-card issuers, and auto lenders.
TALF was first announced late last year, but with only hazy parameters and few details. Whereas the better-known Troubled Asset Relief Program, or TARP, was created to bail out banks, TALF's purpose is to induce investors to buy up AAA-rated securities backed by new consumer and small business loans by offering $200 billion in low-interest loans to would-be investors. The idea is that these securities will spur enough investor interest to eventually generate up to $1 trillion of lending.
Since last year, the credit markets have been essentially at a standstill with no new investors willing to purchase securities backed by consumer loans.
Requests for loans—which have to meet certain terms and conditions—will be accepted starting Mar. 17, and funds will start being dispersed later in the month. The program will run through December, but could be extended. The $200 billion of Fed backing could also be increased if needed.Enough Investor Interest to Revive Lending?
TALF was supposed to begin a month ago, but in congressional testimony Fed Chairman Ben Bernanke counseled patience and said that a number of legal steps had to be taken before the program's rollout.
It remains to be seen, however, whether the program will coax investors back into the markets in a way that revives consumer lending. Much like mortgages, student loans, credit-card loans, and auto loans normally are packaged together into a security, which is then sold to investors. During the headier years, investors were all too pleased to invest in these securities backed by consumer loans. That enabled lenders to move the loans off their books, and get cash to make new loans.
After the mortgage meltdown, however, investors have grown wary of purchasing securities, because they're unsure of the risks for default. Also, some of those investors the Fed and Treasury are counting on are still struggling to off-load toxic securities backed by soured mortgages.
Initially the Fed had planned on offering one-year loans to investors. However, officials extended the length of the loans to three years. A longer loan life might help persuade investors to dip their toes in again. But like so many of the government's prior efforts to revive financial markets, it is difficult to predict how the market will respond.
Back in December, Dennis Moroney, a research director at TowerGroup, a financial-services industry research firm based in Needham, Mass., criticized the plan in a report on TALF's impact on the asset-backed securities market. In the report, Moroney and co-author and fellow research director Bobbi Britting said they felt the original pool of possible loans was too small. Now that the potential pool has been increased to $1 trillion, they think TALF is significantly improved and could really help consumers and small business owners seeking loans.
"We have to start thinking positive about this. It's also important that this gets AAA ratings," says Moroney.