The Federal Reserve’s incredibly expanding Term Asset-Backed Securities Loan Facility (TALF) just opened for business and now it’s an integral part of the Treasury-led Public-Private Program for Legacy Assets (PPIP). This is probably a good thing, according to some observers, since the Fed and the private equity sector worked very hard to re-work TALF into a less complex, more user-friendly program. In short, the Fed listened to TALF critics, and deals were done once the facility went live last week. The smooth start up was clouded by AIG outrage on Capitol Hill, however, and the confiscatory compensation bill passed by the House.

“A tremendous amount of effort has gone into the TALF,” says Kevin Petrasic, a senior associate in Paul Hastings’ banking and financial services unit and former special counsel of the Office of Thrift Supervision. The compromise was “unprecedented and tremendously important and reaches beyond the banking and financial sectors,” he adds. “Lots of entities will be able to tap into the facility. It is viewed as a method by which folks will be able to get more reasonable interest rates.” The fresh availability of funds will allow small businesses to continue operating, Petrasic notes. The shutdown of the securitization market has “really affected economic input and output.”

The attorney worries about “fly-specking the details of every single program. Perfection is not the goal. It would be very unfortunate if a program like TALF is sidetracked by external issues.”

Keefe, Bruyette & Woods analyst Mark Pawlak believes that the claw-back bill overwhelming passed by the House poses just that kind of threat, and indeed has quickly pushed potential TALF deals to the sidelines. Potential participants “fear that the rules of engagement will be changed ex post facto. In a partnership, mutual distrust is a problem.” Pawlak says the Fed and the private sector “did a tremendous job of streamlining the process. You did have pushback from the investment community, in terms of looking at the books and eligible collateral.” And the Fed responded. But now the unfreezing of the securitization is temporarily on hold amid concerns about the compensation issue.

This uncertainty spilled over into the toxic assets disposal plan announced by Treasury yesterday. The PPIP received some muted praise, and certainly the world bourses responded with zest at the amount of details. The best part of the plan may turn out to be the decision to piggyback on TALF. Observers seemed underwhelmed about the scope of the initiative—$500 billion-$1 trillion for a $1-$2-trillion problem.

And there are worries of a mismatch between bid and offer. “Will the banks sell at the prices the investors are willing to pay?” asks Brookings Institution fellow Douglas J. Elliott in a white paper released on March 23. “The value of the toxic assets is so uncertain that there are reasonable grounds for arguing that the average asset is worth anywhere from 30-60 cents on each dollar of face value,” Elliott writes. “That is, everyone agrees they have lost at least 40% of their value, but it could be as much as 70%. The PPIP provides substantial economic incentives for investors to bid higher and the regulators will presumably push banks to sell. However, the valuation gap mat imply be too large to bridge on reasonable terms for the taxpayer.”

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