With auto-related deals from Nissan, Ford, and Huntington National Bank, and a credit-card offer issue by Citigroup, the Federal Reserve’s Term Asset-Backed Securities Loan Facility is at least up and running, if not roaring. But the “final” iteration of TALF continues to receive mixed reviews, as favorable terms and a new flow of capital to smaller banks may still not be enough to induce institutional investors wary of Congressional claw-back legislation and the PR headache that may come from taking public money.
“In order to entice private sector investors to participate, the Fed needed to make the terms appealing – and they did,” says Bill May, senior analyst at the Global Association of Risk Professionals. Can the program restart the securitization market? “TALF is designed to address the supply of consumer credit in the market,” May notes. “Demand is the other side of the equation, however, and that has been quite weak.”
The public treatment of private sector executives whose firms have received public money may make potential participants gun-shy. Congressional claw-back legislation is also raising concerns among private investors. “For the government to impose restrictions on the use of funds or on the behavior of a firm in return for loans or other services is one thing,” says May. “To impose restrictions or other requirements after-the-fact is quite different and will make investors much more hesitant to partner with the government.”
Jane Storero, securities attorney with Blank Rome, also points to “uncertainty regarding whether originators of the credit exposures underlying the ABSs must comply with the executive compensation requirements under the TARP's [Capital Assistance Program], which keep changing, or other requirements.” Storero also believes that cram-down proposals “certainly are not going to help the situation and only continue the reluctance of private investors to participate in this and other government programs.”
TALF won’t just help the big banks, if it succeeds. “Securitization was plugged into everything else,” according to John Jay, a senior analyst at Aite Group. “Once you get that part of financing going, the larger banks will be able to consider doing business with small and mid-tier banks,” he says. Smaller banks who were “net lenders into the wholesale market from 2001 to 2007 lost that conduit when it shut down” as the financial crisis deepened, Jay says. Combined with the clean-up of toxic assets under the Public-Private Program for Legacy Assets, the “higher cost of financing, the stress on liquidity, and the rising cost of products for consumers” will be ameliorated, Jay believes, helping the entire banking sector. “It always comes down to what a bank can lend at versus what it can borrow at,” he adds.
Kenneth E. Bentsen, president of the Equipment Leasing and Finance Association (ELFA), says TALF will “scale down to smaller regionals and community banks because the conduits and the commercial and capital markets have come to a halt.” ELFA successfully lobbied Treasury and the Fed to include equipment finance asset-backed securities under the TALF umbrella, noting the move “may even attract some financial institutions that otherwise have not utilized ABS as a funding structure.”