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TALF Investments (May update)

May 20, 2009

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As we have previously discussed, the Term Asset-backed-securities Loan Facility (“TALF”) program of the Federal Reserve and US Treasury has piqued the interest of investors world-wide.  We are receiving multiple inquiries every week about how best to position our clients to benefit from the government program.  If you’re reading this, you likely already know that the TALF program was intended to create an artificial market to replace the “shadow market” of securitized loans that had fueled the US economy for the past decade, and which was largely responsible for its crash.

Since the other similar, and more recently announced PPIP program, has yet to gain any traction and which still raises far more questions than answers, investors seem more ready and willing to test the TALF waters.  It has been reported that the six TALF-eligible transactions announced for the May auction have been six to twelve times oversubscribed — roughly double the rate reported for the previous month’s auction.

As we have seen with TARP, the federal government has not been shy in changing the rules of its games in mid-play.  The potential benefits of the TALF program, namely risk limited leverage in the form of non-recourse 88%-95% financing, and attractive potential returns, which many estimate to be in the 15%-30% range, are seen by many to outweigh the risks that the uncertain parameters of the program pose.

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Summary of Public-Private Investment Program

On March 23, 2009, the U.S. Treasury Department (“Treasury”) announced the details of the Public-Private Investment Program (“PPIP”).  The program is designed to purchase mortgage backed securities and certain troubled loans from U.S. banks.  PPIP is part of the broader “Financial Stability Plan” introduced by President Obama.  The goal of PPIP is to cleanse the balance sheets of U.S. banks of troubled assets as part of the Troubled Asset Relief Program (“TARP”) and to create access to liquidity for banks and other financial institutions in order to cause the extension of new credit.  PPIP is broken up into two key components – the Legacy Loans Program and the Legacy Securities Program.

Legacy Loans Program

The Legacy Loans Program will be launched by Treasury and the Federal Deposit Insurance Corporation (“FDIC”).  The intent of this joint program is to combine (i) private capital, (ii) equity co-investment from Treasury and (iii) FDIC debt guarantees in order to assist market priced sales of distressed assets and improve the private demand for distressed assets.  The FDIC will supervise the formation, funding and operation of a series of Public-Private Investment Funds (“PPIFs”) which will purchase assets from U.S. banks.  Each PPIF will be comprised of a joint venture between private investors and the Treasury.  Treasury will manage its investment in the PPIF to ensure that the interest of the public is protected and preserved.  However, private investors will retain control of the asset management subject to “rigorous supervision” of the FDIC.

Private investors in the Legacy Loans Program are expected to include but are not limited to financial institutions, individuals, insurance companies, mutual funds, publicly managed investment funds, pension funds, foreign investors with a headquarters in the United States, private equity funds, hedge funds and other long-term real estate investors.  U.S. banks of all sizes will be eligible to participate in the program.  U.S. banks participating in the program will consult with the FDIC, banking regulators and Treasury to identify assets that they propose to sell.  Eligible assets are required to be predominately situated in the United States.  The FDIC will hire third party valuation consultants to analyze the assets and determine the level of debt that the FDIC will be willing to guarantee on such properties.  The debt guaranteed by the FDIC will not exceed a 6 to 1 debt-to-equity ratio.  The FDIC will receive an annual fee for providing the guaranty and such guaranty will be collateralized by the pool of assets purchased.

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GAO Report Offers More Clarity

GAO Report Offers More Clarity

April 1, 2009

Authored by: Robert Klingler

On March 31, 2009, the Government Accountability Office released its March 2009 report on TARP, as well as an accompanying statement.  Highlights of the report include almost 2,000 applications still being processes for the TARP Capital Purchase Program, another breakdown of how Treasury is spending the TARP funds (including an apparent 45% reduction in TALF), and a little more guidance on the applicable executive compensation limits.

TARP Capital Recipients and Applications

As of March 27, 2009, 272 publicly held institutions, 248 privately held institutions and 12 community development financial institutions had received TARP Capital Purchase Program funding.  Treasury was still in the process of reviewing approval recommendations for 1,190 qualified financial institutions, and more than 750 applicants were still being viewed by the federal bank regulators.  More than 250 financial institutions have withdrawn applications, and no applications have been formally denied by Treasury.

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TALF Primary Dealers

March 27, 2009

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TALF Primary Dealers

March 27, 2009

Authored by: Robert Klingler

As of February 11, 2009, those banks qualifying as “primary dealers” were:

  • BNP Paribas Securities Corp.
  • Bank of America Securities LLC
  • Barclays Capital Inc.
  • Cantor Fitzgerald & Co.
  • Citigroup Global Markets Inc.
  • Credit Suisse Securities (USA) LLC
  • Daiwa Securities America Inc.
  • Deutsche Bank Securities Inc.
  • Dresdner Kleinwort Securities LLC.
  • Goldman, Sachs & Co.
  • Greenwich Capital Markets Inc.
  • HSBC Securities (USA) Inc.
  • J. P. Morgan Securities Inc.
  • Mizuho Securities USA Inc.
  • Morgan Stanley & Co. Incorporated
  • UBS Securities LLC.
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TALF Summary Issues

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.

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Treasury and the Federal Reserve Announce the Term Asset-Backed Securities Loan Facility

On November 25, 2008, Treasury and the Federal Reserve announced the creation of the Term Asset-Backed Securities Loan Facility (“TALF”).  The intent of TALF is to assist the credit markets in meeting the needs of consumers and small businesses by facilitating the issuance of, and improving the market for, asset-backed securities (“ABS”).  To fulfill this intent, the Federal Reserve Bank of New York (“FRBNY”) will provide up to $200 billion for non-recourse loans that are fully secured by eligible ABS.  Treasury will use funds from TARP to provide $20 billion in credit protection to the FRBNY.

Collateral eligible for a TALF loan includes dollar-denominated, ABS that not only must receive the highest possible long-term investment rating from at least two nationally recognized ratings agencies but also cannot be rated by any rating agency below the highest possible long-term rating.  Newly or recently originated auto loans, student loans, credit card loans, or small business loans guaranteed by the U.S. Small Business Administration must comprise all or substantially all of the credit exposure underlying the ABS. The underlying credit exposure cannot include exposures that are themselves cash or synthetic ABS.

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Another Day, Another $20 Billion

Another Day, Another $20 Billion

November 25, 2008

Authored by: Robert Klingler

On November 25, 2008, the Treasury announced it will allocate $20 billion under the Troubled Asset Relief Program (TARP) to back the Federal Reserve Bank of New York’s new lending facility for consumer asset-backed securities.  The Federal Reserve Bank of New York is creating this Term Asset-Backed Securities Loan Facility (TALF) to assist the credit markets in accommodating the credit needs of consumers and small business by facilitating the issuance of asset-backed securities (ABS) and improving the market conditions for ABS more generally.  Our summary of the TALF term sheet is available here.

When combined with the previously announced TARP programs, the Treasury has $15 billion left under TARP that it can invest or otherwise use without Congressional approval (in addition to the amounts that remain available under the TARP Capital Purchase Program).

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