Term Asset-Backed Securities Loan Facility
Encyclopedia
The Term Asset-Backed Securities Loan Facility (TALF) is a program created by the U.S. Federal Reserve (the Fed) to spur consumer credit lending. The program was announced on November 25, 2008 and was to support the issuance of asset-backed securities
(ABS) collateralized by student loan
s, auto loans, credit card
loans, and loans guaranteed by the Small Business Administration
(SBA). Under TALF, the Federal Reserve Bank of New York
(NY Fed) lent up to $1 trillion (originally planned to be $200 billion) on a non-recourse
basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans. As TALF money did not originate from the U.S. Treasury
, the program did not require congressional approval to disburse funds, but an act of Congress forced the Fed to reveal how it spent the money.
and consumers. Yet, the program closed after only funding the purchase of $43 billion in loans. Barbara Kiviat, TALF money was not to go directly to those small businesses and consumers, but to the issuers of asset-backed securities. The NY Fed would take the securities as collateral
for more loans the issuers would ostensibly make. To manage the TALF loans, the NY Fed was to create a special-purpose vehicle (SPV) that would buy the assets securing the TALF loans. The U.S. Treasury's Troubled Assets Relief Program
(TARP) of the Emergency Economic Stabilization Act of 2008
would finance the first $20 billion of asset purchases by buying debt in the SPV.
Eligible collateral included U.S. dollar-denominated cash ABS with a long-term credit rating in the highest investment-grade rating category from two or more major nationally recognized statistical rating organizations (NRSROs) and do not have a long-term credit rating of below the highest investment-grade rating category from a major NRSRO. Synthetic ABS (credit-default swaps on ABS) do not qualify as eligible collateral. The program was launched on March 3, 2009.
Under TALF, the Fed lent $1 trillion to banks and hedge funds at nearly interest-free rates. Because the money came from the Fed and not the Treasury, there was no congressional oversight of how the funds were disbursed, until an act of Congress forced the Fed to open its books. Congressional staffers are examining more than 21,000 transactions. One study estimated that the subsidy rate on the TALF's $12.1 billion of loans to by buy commercial mortgage backed securities (CMBS) was 34 percent.
s from their' balance sheets. The program was to revive the market for unpackaged loans and mortgage securities not backed by Fannie Mae, Freddie Mac or other government-supported institutions.
There were two primary programs, the Legacy Loans Program and the Legacy Securities Program. The Federal Deposit Insurance Corporation
(FDIC) was to provide non-recourse loan guarantees for up to 85 percent of the purchase price; asset managers were to raise money from private investors, with capital and loans from taxpayers through the U.S. Treasury, TARP and TALF providing the rest of the funds. The initial size of PPIP was projected to be $500 billion of the $1 trillion limit and was expected to free up money for lending.
The major stock market index
es in the United States rallied on the day of the announcement rising by over six percent, with shares of bank stocks leading the way. Economist Paul Krugman
was very critical of the program, arguing the non-recourse loans led to a hidden subsidy that would be split by asset managers, banks' shareholders and creditors. Banking analyst Meridith Whitney argued that banks would not sell bad assets at fair market value
s because they would be reluctant to take asset writedowns. However, just months after PPIP began, the debt became a money-maker when the bonds rallied and banks, instead of purging their balance sheets of toxic assets, began buying more home loan bonds lacking government guarantees. Bank of America
, Citigroup
, Morgan Stanley
and Goldman Sachs
added a combined $3.36 billion of the debt, which just months earlier, had been of little interest to buyers.
Michael Schlachter, the managing director of an investment consulting firm in Santa Monica, California called it "absolutely ridiculous" that banks may profit from speculating on toxic debt, when their pursuit of it caused the financial crisis. Schlachter said, “Some of them created this mess, and they are making a killing undoing it.” The prices for some of the securities that PPIP was to buy almost doubled between March 2009 and the end of the year, a rally that was in part caused by traders jumping in before the PPIP funds were available, according to one trader. The director of research at an investment consulting firm said that banks increased their debt holdings following the announcement of PPIP was hardly surprising. “Any time the government says, ‘We’re going to buy something in the securities market,’ they’re putting out a sign that says, ‘Free money, come and get it’,” he said.
, Bahrain
and Bavaria
, billions of dollars were sent to several Japanese automobile companies, Citigroup
and Morgan Stanley
each received $2 trillion in loans and billions were sent to millionaires and billionaires with addresses in the Cayman Islands. Said Warren Gunnels, an aide to Senator Bernie Sanders
, sponsor of the amendment calling for Fed transparency, "Our jaws are literally dropping as we're reading this." Gummels said each one of the transactions was "outrageous".
In one example highlighted by Rolling Stone
, nine loans were made to Waterfall TALF Opportunity, an offshore company
formed in June 2009. Two of the chief investors of Waterfall are Christy Mack and Susan Karches, who have little or no previous business experience. Mack is married to John Mack
, former chairman of Morgan Stanley and Karches is the widow of Peter Karches, once the president of Morgan Stanley's investment banking division and good friends of the Macks. Waterfall was capitalized with $14.87 million, presumably from Mack and Karches. Two months after the company was established, the Fed gave them low-interest TALF loans totaling $220 million. The way TALF loans were set up, 100 percent of any profit is retained by the borrower, but the Fed and the Treasury absorb any losses. The Fed and the Treasury are funded by taxpayers. Waterfall used the $220 million TALF loans to buy securities, including a large pool of commercial mortgages managed by Credit Suisse
, a company once headed by Mack's husband. As of autumn 2010, about 68 percent, some $150 million, had not yet been paid back.
The Fed refuses to provide any information on how it priced individual securities bought with TALF funds. It only provides lump sums of what was spent on a block of securities, but without indication of how many units were bought, making analysis of TALF impossible. The public has no way of knowing how much Waterfall earned on the securities it bought, although the Fed values them at $253.6 million. Securities lawyer and whistleblower
Gary J. Aguirre
says the pricing information is essential to validating the Fed's role in TALF, to judge how the taxpayers' funds were used. Senator Chuck Grassley
has requested detailed information from Waterfall about its transactions and Sanders has asked Federal Reserve chief Ben Bernanke
for more detailed information on loans made to Waterfall, former Miami Dolphins
owner H. Wayne Huizenga and John Paulson
, a hedge fund manager.
Asset-backed security
An asset-backed security is a security whose value and income payments are derived from and collateralized by a specified pool of underlying assets. The pool of assets is typically a group of small and illiquid assets that are unable to be sold individually...
(ABS) collateralized by student loan
Student loan
A student loan is designed to help students pay for university tuition, books, and living expenses. It may differ from other types of loans in that the interest rate may be substantially lower and the repayment schedule may be deferred while the student is still in education...
s, auto loans, credit card
Credit card
A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...
loans, and loans guaranteed by the Small Business Administration
Small Business Administration
The Small Business Administration is a United States government agency that provides support to entrepreneurs and small businesses. The mission of the Small Business Administration is "to maintain and strengthen the nation's economy by enabling the establishment and viability of small businesses...
(SBA). Under TALF, the Federal Reserve Bank of New York
Federal Reserve Bank of New York
The Federal Reserve Bank of New York is one of the 12 Federal Reserve Banks of the United States. It is located at 33 Liberty Street, New York, NY. It is responsible for the Second District of the Federal Reserve System, which encompasses New York state, the 12 northern counties of New Jersey,...
(NY Fed) lent up to $1 trillion (originally planned to be $200 billion) on a non-recourse
Nonrecourse debt
Non-recourse debt or a non-recourse loan is a secured loan that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable. If the borrower defaults, the lender/issuer can seize the collateral, but the lender's recovery is limited to the...
basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans. As TALF money did not originate from the U.S. Treasury
United States Department of the Treasury
The Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue...
, the program did not require congressional approval to disburse funds, but an act of Congress forced the Fed to reveal how it spent the money.
Purpose
The Fed explained the reasoning behind the TALF as follows:TALF structure and terms
According to the plan, the NY Fed would spend up to $200 billion in loans to spur the market in securities backed by lending to small businessSmall business
A small business is a business that is privately owned and operated, with a small number of employees and relatively low volume of sales. Small businesses are normally privately owned corporations, partnerships, or sole proprietorships...
and consumers. Yet, the program closed after only funding the purchase of $43 billion in loans. Barbara Kiviat, TALF money was not to go directly to those small businesses and consumers, but to the issuers of asset-backed securities. The NY Fed would take the securities as collateral
Collateral (finance)
In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation...
for more loans the issuers would ostensibly make. To manage the TALF loans, the NY Fed was to create a special-purpose vehicle (SPV) that would buy the assets securing the TALF loans. The U.S. Treasury's Troubled Assets Relief Program
Troubled Assets Relief Program
The Troubled Asset Relief Program is a program of the United States government to purchase assets and equity from financial institutions to strengthen its financial sector that was signed into law by U.S. President George W. Bush on October 3, 2008...
(TARP) of the Emergency Economic Stabilization Act of 2008
Emergency Economic Stabilization Act of 2008
The Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008 (Division A of , commonly referred to as a bailout of the U.S. financial system, is a law enacted in response to the subprime mortgage crisis...
would finance the first $20 billion of asset purchases by buying debt in the SPV.
Eligible collateral included U.S. dollar-denominated cash ABS with a long-term credit rating in the highest investment-grade rating category from two or more major nationally recognized statistical rating organizations (NRSROs) and do not have a long-term credit rating of below the highest investment-grade rating category from a major NRSRO. Synthetic ABS (credit-default swaps on ABS) do not qualify as eligible collateral. The program was launched on March 3, 2009.
Under TALF, the Fed lent $1 trillion to banks and hedge funds at nearly interest-free rates. Because the money came from the Fed and not the Treasury, there was no congressional oversight of how the funds were disbursed, until an act of Congress forced the Fed to open its books. Congressional staffers are examining more than 21,000 transactions. One study estimated that the subsidy rate on the TALF's $12.1 billion of loans to by buy commercial mortgage backed securities (CMBS) was 34 percent.
The Public-Private Investment Program
On March 23, 2009, U.S. Treasury Secretary Timothy Geithner announced the Public-Private Investment Program (PPIP) to help struggling banks by buying up to $1 trillion of toxic assetToxic asset
Toxic asset is a popular term for certain financial assets whose value has fallen significantly and for which there is no longer a functioning market, so that such assets cannot be sold at a price satisfactory to the holder...
s from their' balance sheets. The program was to revive the market for unpackaged loans and mortgage securities not backed by Fannie Mae, Freddie Mac or other government-supported institutions.
There were two primary programs, the Legacy Loans Program and the Legacy Securities Program. The Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
(FDIC) was to provide non-recourse loan guarantees for up to 85 percent of the purchase price; asset managers were to raise money from private investors, with capital and loans from taxpayers through the U.S. Treasury, TARP and TALF providing the rest of the funds. The initial size of PPIP was projected to be $500 billion of the $1 trillion limit and was expected to free up money for lending.
The major stock market index
Stock market index
A stock market index is a method of measuring a section of the stock market. Many indices are cited by news or financial services firms and are used as benchmarks, to measure the performance of portfolios such as mutual funds....
es in the United States rallied on the day of the announcement rising by over six percent, with shares of bank stocks leading the way. Economist Paul Krugman
Paul Krugman
Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...
was very critical of the program, arguing the non-recourse loans led to a hidden subsidy that would be split by asset managers, banks' shareholders and creditors. Banking analyst Meridith Whitney argued that banks would not sell bad assets at fair market value
Fair market value
Fair market value is an estimate of the market value of a property, based on what a knowledgeable, willing, and unpressured buyer would probably pay to a knowledgeable, willing, and unpressured seller in the market. An estimate of fair market value may be founded either on precedent or...
s because they would be reluctant to take asset writedowns. However, just months after PPIP began, the debt became a money-maker when the bonds rallied and banks, instead of purging their balance sheets of toxic assets, began buying more home loan bonds lacking government guarantees. Bank of America
Bank of America
Bank of America Corporation, an American multinational banking and financial services corporation, is the second largest bank holding company in the United States by assets, and the fourth largest bank in the U.S. by market capitalization. The bank is headquartered in Charlotte, North Carolina...
, Citigroup
Citigroup
Citigroup Inc. or Citi is an American multinational financial services corporation headquartered in Manhattan, New York City, New York, United States. Citigroup was formed from one of the world's largest mergers in history by combining the banking giant Citicorp and financial conglomerate...
, Morgan Stanley
Morgan Stanley
Morgan Stanley is a global financial services firm headquartered in New York City serving a diversified group of corporations, governments, financial institutions, and individuals. Morgan Stanley also operates in 36 countries around the world, with over 600 offices and a workforce of over 60,000....
and Goldman Sachs
Goldman Sachs
The Goldman Sachs Group, Inc. is an American multinational bulge bracket investment banking and securities firm that engages in global investment banking, securities, investment management, and other financial services primarily with institutional clients...
added a combined $3.36 billion of the debt, which just months earlier, had been of little interest to buyers.
Michael Schlachter, the managing director of an investment consulting firm in Santa Monica, California called it "absolutely ridiculous" that banks may profit from speculating on toxic debt, when their pursuit of it caused the financial crisis. Schlachter said, “Some of them created this mess, and they are making a killing undoing it.” The prices for some of the securities that PPIP was to buy almost doubled between March 2009 and the end of the year, a rally that was in part caused by traders jumping in before the PPIP funds were available, according to one trader. The director of research at an investment consulting firm said that banks increased their debt holdings following the announcement of PPIP was hardly surprising. “Any time the government says, ‘We’re going to buy something in the securities market,’ they’re putting out a sign that says, ‘Free money, come and get it’,” he said.
Congress demands oversight
In April 2009, Congress passed legislation that included an amendment telling the Fed to reveal the names of the banks and other institutions that received $2.3 trillion in taxpayer-backed bailout loans and other financial assistance. Limited information on 21,000 transactions made by the Fed between December 1, 2007 and July 21, 2010 was released on December 1, 2010 and is now being examined by Senate and House staffers. In the history of the Fed, this is the first time it has opened its books to Congress. Bailout aid was sent to banks in MexicoMexico
The United Mexican States , commonly known as Mexico , is a federal constitutional republic in North America. It is bordered on the north by the United States; on the south and west by the Pacific Ocean; on the southeast by Guatemala, Belize, and the Caribbean Sea; and on the east by the Gulf of...
, Bahrain
Bahrain
' , officially the Kingdom of Bahrain , is a small island state near the western shores of the Persian Gulf. It is ruled by the Al Khalifa royal family. The population in 2010 stood at 1,214,705, including 235,108 non-nationals. Formerly an emirate, Bahrain was declared a kingdom in 2002.Bahrain is...
and Bavaria
Bavaria
Bavaria, formally the Free State of Bavaria is a state of Germany, located in the southeast of Germany. With an area of , it is the largest state by area, forming almost 20% of the total land area of Germany...
, billions of dollars were sent to several Japanese automobile companies, Citigroup
Citigroup
Citigroup Inc. or Citi is an American multinational financial services corporation headquartered in Manhattan, New York City, New York, United States. Citigroup was formed from one of the world's largest mergers in history by combining the banking giant Citicorp and financial conglomerate...
and Morgan Stanley
Morgan Stanley
Morgan Stanley is a global financial services firm headquartered in New York City serving a diversified group of corporations, governments, financial institutions, and individuals. Morgan Stanley also operates in 36 countries around the world, with over 600 offices and a workforce of over 60,000....
each received $2 trillion in loans and billions were sent to millionaires and billionaires with addresses in the Cayman Islands. Said Warren Gunnels, an aide to Senator Bernie Sanders
Bernie Sanders
Bernard "Bernie" Sanders is the junior United States Senator from Vermont. He previously represented Vermont's at-large district in the United States House of Representatives...
, sponsor of the amendment calling for Fed transparency, "Our jaws are literally dropping as we're reading this." Gummels said each one of the transactions was "outrageous".
In one example highlighted by Rolling Stone
Rolling Stone
Rolling Stone is a US-based magazine devoted to music, liberal politics, and popular culture that is published every two weeks. Rolling Stone was founded in San Francisco in 1967 by Jann Wenner and music critic Ralph J...
, nine loans were made to Waterfall TALF Opportunity, an offshore company
Offshore company
The term offshore company is ambiguous. It may refer to either:# A company which is incorporated outside the jurisdiction of its primary operations regardless of whether that jurisdiction is an offshore financial centre i.e...
formed in June 2009. Two of the chief investors of Waterfall are Christy Mack and Susan Karches, who have little or no previous business experience. Mack is married to John Mack
John J. Mack
John J. Mack is the current Chairman of the Board at Morgan Stanley, the New York-based investment bank and brokerage firm. Mack announced his retirement as Chief Executive Officer on September 10, 2009, which was effective January 1, 2010. Former Co-President James P...
, former chairman of Morgan Stanley and Karches is the widow of Peter Karches, once the president of Morgan Stanley's investment banking division and good friends of the Macks. Waterfall was capitalized with $14.87 million, presumably from Mack and Karches. Two months after the company was established, the Fed gave them low-interest TALF loans totaling $220 million. The way TALF loans were set up, 100 percent of any profit is retained by the borrower, but the Fed and the Treasury absorb any losses. The Fed and the Treasury are funded by taxpayers. Waterfall used the $220 million TALF loans to buy securities, including a large pool of commercial mortgages managed by Credit Suisse
Credit Suisse
The Credit Suisse Group AG is a Swiss multinational financial services company headquartered in Zurich, with more than 250 branches in Switzerland and operations in more than 50 countries.-History:...
, a company once headed by Mack's husband. As of autumn 2010, about 68 percent, some $150 million, had not yet been paid back.
The Fed refuses to provide any information on how it priced individual securities bought with TALF funds. It only provides lump sums of what was spent on a block of securities, but without indication of how many units were bought, making analysis of TALF impossible. The public has no way of knowing how much Waterfall earned on the securities it bought, although the Fed values them at $253.6 million. Securities lawyer and whistleblower
Whistleblower
A whistleblower is a person who tells the public or someone in authority about alleged dishonest or illegal activities occurring in a government department, a public or private organization, or a company...
Gary J. Aguirre
Gary J. Aguirre
Gary J. Aguirre is an American lawyer, former investigator with the United States Securities and Exchange Commission and whistleblower. After working in a law firm briefly, he became a public defender, then worked as a trial lawyer in California. Having reached his professional and financial...
says the pricing information is essential to validating the Fed's role in TALF, to judge how the taxpayers' funds were used. Senator Chuck Grassley
Chuck Grassley
Charles Ernest "Chuck" Grassley is the senior United States Senator from Iowa . A member of Republican Party, he previously served in the served in the United States House of Representatives and the Iowa state legislature...
has requested detailed information from Waterfall about its transactions and Sanders has asked Federal Reserve chief Ben Bernanke
Ben Bernanke
Ben Shalom Bernanke is an American economist, and the current Chairman of the Federal Reserve, the central bank of the United States. During his tenure as Chairman, Bernanke has overseen the response of the Federal Reserve to late-2000s financial crisis....
for more detailed information on loans made to Waterfall, former Miami Dolphins
Miami Dolphins
The Miami Dolphins are a Professional football team based in the Miami metropolitan area in Florida. The team is part of the Eastern Division of the American Football Conference in the National Football League...
owner H. Wayne Huizenga and John Paulson
John Paulson
John Alfred Paulson is an American hedge fund manager, he is the founder and President of Paulson & Co., a New York-based hedge fund....
, a hedge fund manager.
See also
- H.R. 1424
- Mark PittmanMark PittmanJames Mark Pittman was a financial journalist covering corporate finance and derivative markets. He was awarded several prestigious journalism awards, the Gerald Loeb Award, the George Polk Award, a New York Press Club award, the Hillman Prize and several New York Associated Press awards.-...
– filed Freedom of Information Act request leading to release of Fed transactions in December 2010
External links
- Official TALF website at the New York Federal Reserve