The Term Asset-Backed Securities Lending Facility

Abstract

In the second half of 2008, the issuance of auto, credit card, and student loan asset-backed securities (ABS) all but stopped while secondary market spreads on AAA-rated tranches of consumer ABS reached historical levels. If sustained, the break-down of the originate-to-distribute model for consumer credit would force banks which made new loans to retain them on their balance sheets, increasing demands on liquidity and capital, and threatened to amplify the impact of a housing recession through a consumer credit crunch. In response to these conditions, the Federal Reserve and US Treasury announced in November 2008 the Term Asset-backed securities Liquidity Facility (TALF). In order to promote lending to consumers and small businesses, the facility provides up to $200 billion in three-year non-recourse loans to investors in the AAA-rated tranches of new issue consumer ABS as well as pools secured by SBA loans. Given the positive reaction of the market to the announcement of the facility, the Administration recently announced an expansion of the TALF to include additional asset classes, including but not limited to new issue ABS secured by the following asset classes: commercial and residential real estate; equipment loans, leases, and floorplan; rental fleet lease; and servicer advances. In the paper, the authors will not only document the bottlenecks in each of the markets targeted by the TALF, but will also document the impact of the facility on ABS issuance starting with the first funding in late March 2009. Finally, the authors outline various exit strategies of the public sector, and speculate on how securitization should work in the future.