Thursday, March 12, 2009

Fed tweaks Talf rules to allay investors' fears

--Investors can borrow up to 95% of the value of new securities --concession on contentious points, powers to insepect borrower's boook -> limited to the loan and collatearl under the TALF agreement. --remove the compentation restrictions By Aline van Duyn in New York Published: March 12 2009 02:00 Last updated: March 12 2009 02:00 The Federal Reserve announced further changes to its $1,000bn loan financing plan in the hope that enough hedge funds and other investors will sign up to use it in time for deals to be launched next week. A number of changes were made to the main document that investors have to sign in order to borrow money from the Fed. This money will be used to buy securities backed by consumer loans, such as car, student and credit card loans, in an effort to make credit available to consumers as traditional funding sources have dried up. The first $200bn leg of the term asset-backed securities loan facility (Talf) is due to start next Tuesday, March 17, leaving only a few days for enough investors to sign up in time for deals to be launched. Dealers and lawyers said the most important change related to "inspection rights". Under the original draft of the document, the Fed and its officials or representatives would be allowed to look into the investors' financial affairs. This has now been limited to only allowing such inspection rights related to the Talf loans. "The changes address some of the concerns that investors have raised," said Rob Toomey, managing director at the Securities Industry and Financial Markets Association (Sifma). Mr Toomey added the Fed and dealers were trying to move fast on making changes to the documents given the very tight timeline. The asset-backed securities (ABS) market has virtually seized up in the financial crisis, as the departure of large numbers of investors, whose demand was pumped up by leverage, has pushed funding costs to unaffordable levels for issuers. In order to fill part of this gap, the Fed is stepping in by providing leverage for investors such as hedge funds to encourage them to buy AAA rated securities backed by loans. The first deals being prepared are for car loans. Dealers involved said that if the documentation aspects had not been resolved in time to launch these deals by next week, they expected the deals to be sold in April when the next round of Talf loans will be made. from WSJ TALF Investors Wary of Collateral Damage By PETER EAVIS Right now, you would think it would be easy to lend $200 billion of low-cost money. That is the aim of the Federal Reserve's Term Asset-Backed Securities Loan Facility. The TALF aims to reignite the securitization markets and increase the availability of consumer loans by encouraging investors to buy asset-backed bonds using borrowed money. Yet even though the program offers as much as 20-to-1 leverage at generous interest rates, investors have pushed for concessions during the consultation process. And the Fed has agreed to some changes. One thorny issue: what to do when an asset-backed security purchased with TALF loans is subsequently found to be ineligible under the program. It is a valid concern, given the poor loan collateral shoveled into asset-backed securities during the credit boom. The original agreement said when collateral is discovered to be ineligible, investors would have to pay back their loans or find eligible collateral. But investors felt this meant TALF loans weren't truly nonrecourse -- meaning the lender can only claim the collateral it holds and the borrower's potential losses are capped. The new agreement should ensure the loans really are nonrecourse. In the Fed's defense, the TALF demands that heavy screening of collateral gets done upfront. Investors, still wary of how bad losses could get on even new consumer loans, need encouragement to commit capital. And since the TALF is the most ambitious of the Fed's market-support programs, it was bound to be the hardest to get off the ground. But if investors get too sweet a deal, Capitol Hill will be breathing down the Fed's neck. Write to Peter Eavis at

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