TALF Launches Today to the Tune of $1 Trillion

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TALF, Term Asset-Backed Securities Loan Facility, set up by the Federal Reserve to back the loans made to consumers and small businesses, launched today in to what may ultimately become a $1 trillion backstop to investors of asset backed securities.

The government is trying to inject liquidity in to the ABS markets for ABS comprised of auto loans, student loans, credit card debt, home loans, etc. The idea being that investors have not bought these securities because they have been unable to secure financing to purchase them through the private sector. The government will make financing available to those investors that purchase AAA-rated ABS to try to reopen the market and make more credit available to main street USA.

There are a couple of problems with this of course. AAA-rated is dubious in nature (see subprime mortgages) and doesn’t guarantee that the government won’t experience losses on that money. And now with agencies trying to regain their reputation as responsible evaluators of risk there are smaller amounts of AAA-rated securities than before.

Additionally, as we’ve seen, most of America is tapped out. Banks are putting tough underwriting standards on loans, cutting lending limits, freezing home equity lines and credit cards left and right. The additional financing does not make the population more credit worthy. With late mortgage payments, piles of credit card debt and people losing jobs, it’s tough to see how the general populous can absorb more financed debt.

With those challenges in front of them the Fed soldiers on (h/t Mortgage Insider):

The TALF is designed to catalyze the securitization markets by providing financing to investors to support their purchases of certain AAA-rated asset-backed securities (ABS). These markets have historically been a critical component of lending in our financial system, but they have been virtually shuttered since the worsening of the financial crisis in October. By reopening these markets, the TALF will assist lenders in meeting the borrowing needs of consumers and small businesses, helping to stimulate the broader economy.

Under today’s announcement, the Federal Reserve Bank of New York will lend up to $200 billion to eligible owners of certain AAA-rated ABS backed by newly and recently originated auto loans, credit card loans, student loans, and SBA-guaranteed small business loans. Issuers and investors in the private sector are expected to begin arranging and marketing new securitizations of recently generated loans, and subscriptions for funding in March will be accepted on March 17, 2009. On March 25, 2009, those new securitizations will be funded by the program, creating new lending capacity for additional future loans.

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Additional details of the TALF and the CBLI can be found at http://www.financialstability.gov/. Further information on the Federal Reserve’s credit and liquidity programs is available at http://www.federalreserve.gov/monetarypolicy/bst.htm.