TALF Is Reworked After Investors Balk Article

By LIZ RAPPAPORT After failing to sign up enough investors in time to launch the Term Asset-Backed Loan Facility early this coming week, the Federal Reserve and Wall Street are reworking the TALF program at the 11th hour. The Fed delayed the program's launch by two days, until Thursday. Wall Street dealers, including J.P. Morgan Chase & Co. and Barclays PLC's Barclays Capital, have created vehicles to participate in the TALF that would allow investors in the program to circumvent many of the restrictions laid out by the Fed. The vehicles resemble collateralized debt obligations, or CDOs, and use some of the financial engineering that was partially responsible for the collapse of the credit markets. The Fed, eager to get what it hopes will be a $1 trillion program up and running, has blessed the vehicles because they open the TALF up to a much larger group of investors, say people familiar with the matter. The vehicles emerged late in the past week, after investors cringed at signing agreements with Wall Street firms that would facilitate the Fed's loans. They objected to the level of scrutiny that dealers would have over their books, arguing that the dealers' rules attached too many strings. Dealers were saying they take plenty of risk to facilitate the program and need to be protected in situations where the collateral or the client made mistakes or wound up ineligible. The Fed's main goal in forming the TALF is to bring to life the asset-backed securities market that effectively subsidizes loans to consumers and businesses to buy cars, pay for their educations, buy farm equipment or use credit cards. The Fed has said it could expand the TALF to include commercial and residential mortgage lending. Through the program, an investment fund can put down $5 to $14 for every $100 it plans to spend, borrowing the remaining $95 to $86 cheaply from the Fed. It agrees to buy highly rated securities issued by lenders that the Fed deems eligible collateral for the loans. Much is at stake for TALF, including more than $10 billion in expected deals for companies, including auto lender World Omni Financial Corp. and Ford Motor Co.'s Ford Motor Credit Co., say bankers. Likewise, the Fed has a lot riding on the program after it expanded its scope before the launch. "Should the TALF not be embraced enthusiastically by the financial community, the Fed will have to turn to further alternative steps to repair the credit system," said Joseph Brusuelas, economist at Moody's Economy.com. Under the new proposal, a bank such as Barclays or J.P. Morgan would set up a trust to buy securities with money borrowed from the Fed. The trust would then sell investors securities in the trust. Those securities would give returns similar to the TALF loan, but without the strings attached. The dealers say they could create markets for these derivative securities to trade, and a presentation by Barclays says they may be rated by credit-ratings companies and listed on the Irish Stock Exchange, a home for many CDOs. The vehicles also would make it easier for investors that aren't eligible for TALF loans to buy into the program, like investors that are restricted by their investment guidelines from using borrowed money to buy securities. Smaller hedge funds that can't vie for large allocations of deals could also buy in through these vehicles. Some investors have raised concerns, however, noting that the structure puts these dealers at an advantage in bidding and influencing the price of new offerings. They also say the derivative securities present old and familiar problems, such as keeping the end holder of the risk of the TALF securities several steps away from the pricing of that risk. Write to Liz Rappaport at liz.rappaport@wsj.com