TALF Summary Issues

March 16, 2009

Authored by: Robert Klingler

Since the collapse of Wall Street in October, 2008, and the immediate and severe deleveraging of available capital, the life-blood of the US economy has contracted from a torrent to a trickle.  The so-called “shadow market” that funded the crippled investment banks are no longer able to leverage their assets at a 40:1 ratio. Many of the very large national banks are reeling, seeing their share prices drop from 50% to 90% in the last six months.  We have often heard questions from those outside of the banking industry asking us “what do the bankers want?”  The answer is simple.  Banks want borrowers that can repay loans.  It’s that simple and that difficult.  If only there was an influx of credit-worthy borrowers.   If only there were purchasers of the consumer loans.  These exact issues were raised during Chairman Bernake’s 60 Minutes appearance on Sunday, March 15, 2009.

In stepped the Federal Reserve.  As opportunity funds and hedge funds across the country and across the world begin to digest the parameters, requirements, and restrictions relating to the Fed’s $1 Trillion lending initiative known as TALF (Term Asset-Backed Securities Loan Facility) attempting to revitalize the stagnant credit markets, several issues have begun to emerge.

The most important criterion for many of our clients is eligibility.  TALF was announced in November as an attempt to create a market for small business loans.  It has been enlarged to include equipment financing, auto paper, and other consumer credit.

The initial key for hopeful participants will be establishing the primary dealer relationship, as described in the FAQ.

How does an entity participate in the TALF program?

An eligible borrower must be a customer of a primary dealer and must have executed a customer agreement authorizing the primary dealer, among other things, to execute the master loan and security agreement (MLSA) as agent for the borrower and to perform all actions required on their behalf. The MLSA will provide further details on the requirements that will apply to the entities seeking to borrow from the FRBNY under the TALF.

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