Saturday, February 7, 2009

Fed Steps Back From February Plan to Start TALF Loans

By Scott Lanman on Bloomberg:

The Federal Reserve stepped back from plans to start lending this month under a $200 billion program to prop up consumer and small-business credit, saying it will announce a start date later in February.

The start of the Term Asset-Backed Securities Lending Facility will be announced this month, the Fed said today in updated terms and guidance on the program. The central bank omitted previous guidance that it will “commence lending” in February. The Fed also set interest rates and “haircuts,” or how much it will lend under the plan against each type of collateral.

Chairman Ben S. Bernanke and his colleagues, after cutting the benchmark interest rate almost to zero, are counting on the so-called TALF to help revive credit and end what may become the deepest U.S. recession since World War II. The unemployment rate last month reached the highest level since 1992.

“Everything needs to be now, not six months from now or a year from now,” said Kurt Karl, chief U.S. economist at Swiss Reinsurance Co. in New York, before today’s announcement. “If you can stop the downward spiral of consumer spending sooner, it’s always going to be better.”

Today’s announcement is an update of previous terms released by the Fed and doesn’t include any information about expanding or accepting other types of securities.

Hedge funds seeking to participate in the TALF must be organized and managed in the U.S., though they may be units of offshore funds, the central bank said.

Foreign Government

Investment funds aren’t eligible if they’re at least 25 percent controlled by a foreign government, the Fed said.

“Investment funds that are organized in the United States and managed by an investment manager that has its principal place of business located in the United States are eligible borrowers for purposes of the TALF,” the Fed said in a “Frequently Asked Questions” document released today.

The restriction means a hedge fund based outside the U.S. must use a unit organized and managed in the U.S. to invest in the TALF, the Fed said.

TALF loans will be made each month. Borrowers can choose either a fixed rate of 100 basis points over the London Interbank Offered Rate three-year swap rate, or a floating rate of 100 basis points over one-month Libor, the Fed said. The New York Fed will assess an administrative fee of 5 basis points of the loan amount. A basis point is equal to 0.01 percentage point.

Collateral Haircuts

Collateral haircuts range from 5 percent on prime bank-card loans of two years or less to 16 percent on an auto-dealer floor-plan loan of four to five years, the Fed said.

A report this week showed consumer spending in the U.S. fell in December for a record sixth consecutive month, capping the worst year since 1961. The economy shrank 3.8 percent in the fourth quarter, the most since 1982.

The New York Fed’s Web site says on a page from December that the TALF “is expected to commence lending in February 2009, contingent on completion of the work necessary to operationalize it.”

Under the program the Fed will lend up to $200 billion to holders of AAA rated debt backed by “newly and recently originated” loans. Those include education, car and credit-card loans, and borrowing guaranteed by the Small Business Administration. The central bank announced the TALF in November.

The TALF, if successful, could be expanded to finance commercial mortgage-backed securities, Fed Vice Chairman Donald Kohn said last month. The program is being initially seeded by $20 billion of capital from the $700 billion Troubled Asset Relief Program.

Eligible Borrowers

The Fed said on Dec. 19 it extended the term of TALF loans to three years from one year and will lend to all eligible borrowers rather than through an auction process.

The Fed’s Open Market Committee said in its Jan. 28 policy statement that it will “assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.”

The central bank’s Board of Governors has authorized the TALF to make loans through Dec. 31.

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