Consumer-Loan Plan Is Off to Slow Start Article

--distrust between hedge funds and banks and concern over the exposure to political strings maded hedge funds balk at the TALF programs. By LIZ RAPPAPORT and JON HILSENRATH A program aimed at reviving consumer lending is stumbling out of the gate, pressured by distrust on Wall Street between banks and hedge funds as well as worries that the government will keep changing the rules in its rescue efforts. The Federal Reserve and Treasury program, which launches Thursday, allows hedge funds and other investors to borrow from the central bank on favorable terms. Investors in turn use the cash to buy new securities backed by auto loans, credit-card debt and other consumer financing. The credit crisis has cut off lending to consumers hoping to buy cars or borrow on their credit cards because investors, worried about rising defaults, have shunned that debt. The market for the asset-backed securities backed by this debt has shrunk from more than $1 trillion in 2006 to just $3 billion during the first two months of 2009, according to Dealogic. The goal of the program, called the Term Asset-Backed Securities Loan Facility, or TALF, is to make it more attractive to buy this debt and easier for consumers to get loans and spend money. Wall Street firms, after scrambling to get investors on board, generated enough interest for three deals associated with the program. In its early stages, the program has an outer limit of $200 billion, but that could grow to $1 trillion as the program is expanded to new asset classes. The first round of deals will be a tiny fraction of that, likely totaling about $5 billion, and many of the investors won't tap the Fed to fund their purchases of these securities. "Stillborn would be too harsh, but it is off to a pretty rough start," said Michael Ferolli, a J.P. Morgan economist. Officials have tempered their expectations for the launch. But they anticipate that the program will gain traction and were encouraged that three deals were launched to kick off the program. "Some positive momentum has developed over the past couple of days as investors and primary dealers appear to be working out their difficulties," one Fed official said. "Getting TALF off the ground is a big step in bringing the credit markets back to life," a Treasury spokesman said. A month ago, bankers say, they thought they would be selling at least 10 deals in the first round of the program. Most of these have been put on hold, say people familiar with the matter. The first issuers on tap are Nissan Motor Co., Ford Motor Credit Co. and Huntington National Bank, which are preparing to sell securities backed by loans to car buyers. One reason for the slow start: the outcry over bonuses paid by American International Group Inc., the troubled insurer that received federal bailout money. Some investors are concerned that they too could be exposed to a political storm should they make too much money from the taxpayer-funded program. Also hanging over the launch has been a breakdown of trust between hedge funds and banks. Banks will funnel the Fed's money to hedge funds, which could be big buyers of the debt. Hedge funds are balking at a requirement for them to sign agreements with the banks as well as the Fed. Some hedge-fund managers fear the agreements have been written in a way that could put them on the hook for losses. They also worry they may be caught up by a provision in fiscal-stimulus legislation that restricts the use of foreign workers by firms that accept government money. Investors are concerned that terms may keep changing midstream. "We would like to participate in the program as long as the terms are consistent with the original program guidelines," said Jonathan Lieberman, an executive at Angelo Gordon & Co., a distressed-debt specialist. The Fed's program is also launching after the market for these securities has improved in recent weeks, which could reduce borrowing costs for consumers. Write to Liz Rappaport at liz.rappaport@wsj.com and Jon Hilsenrath at jon.hilsenrath@wsj.com