Asset-Backed Securities Loan Facility

On November 25, 2008, the U.S. Treasury and the Board of Governors of the Federal Reserve System made several announcements outlining new programs to unlock frozen credit markets. The first is a program designed to facilitate the issuance and sale of asset-backed securities (ABS) for consumer and small business loans. The Federal Reserve noted that new issuances of ABS declined dramatically in September 2008 and came to a halt in October. At the same time, interest rate spreads on AAA-rated tranches of ABS increased to levels well outside the range of historical experience, reflecting unusually high risk premiums. The Federal Reserve noted that the ABS markets historically have funded a substantial share of consumer credit and SBA-guaranteed small business loans, and that continued disruption of these markets could significantly limit the availability of credit to households and small businesses. In response, the Treasury and the Federal Reserve created the Term Asset- Backed Securities Loan Facility (TALF). The TALF is a facility designed to support the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA).

Under the TALF, the Federal Reserve Bank of New York (FRBNY) will lend up to $200 billion on a non-recourse basis to holders of certain AAArated ABS backed by newly and recently originated consumer and small business loans. The FRBNY will lend an amount equal to the market value of the ABS less a haircut and will be secured at all times by the ABS. The U.S. Treasury Department--under the Troubled Assets Relief Program (TARP) of the Emergency Economic Stabilization Act of 2008--will provide $20 billion of credit protection to the FRBNY in connection with the TALF. As in the TARP and other emergency financial programs, originators of the credit exposures underlying eligible ABS (or, in the case of SBA guaranteed loans, the ABS sponsor) must agree to comply with, or already be subject to, the executive compensation requirements in section 111(b) of the Emergency Economic Stabilization Act of 2008. The TALF will cease making new loans on December 31, 2009, unless the Federal Reserve agrees to extend beyond this date.

Purchases of GSE Sponsored Obligations

The Federal Reserve also announced today that it will initiate a program to purchase the direct obligations of housing-related governmentsponsored enterprises (GSEs)--Fannie Mae, Freddie Mac, and the Federal Home Loan Banks--and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae. The Federal Reserve stated that this action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.

Under the plan, up to $100 billion in GSE direct obligations will be purchased through the Federal Reserve's primary dealers through a series of competitive auctions and will begin next week. Up to another $500 billion in MBS will be purchased by asset managers selected via a competitive process with a goal of beginning these purchases before year-end. Purchases of both direct obligations and MBS are expected to take place over several quarters. Unlike the TARP program that carries a number of conditions, including executive compensation and corporate governance conditions, no such conditions have been announced for participants in this Federal Reserve program.

As a side note, a year ago the Federal Reserve had assets of $868 billion of which approximately 90 percent were in Treasury obligations. Prior to today’s announcement, it had increased its assets to $2.2 trillion of which only 22 percent were in Treasuries. Much of that increase represents special facilities and direct investments in financial institutions. In all likelihood that $2.2 trillion will be increased substantially as a result of the $600 billion in programs announced today. While the Treasury is rapidly exhausting its TARP appropriation, it does not appear as if the Federal Reserve is under any such constraints.

FDIC Mortgage Foreclosure Relief Program

We noticed in the government’s rescue of Citigroup that as a condition to the FDIC’s participation in guaranteeing losses up to $10 billion, the FDIC required Citigroup to implement the IndyMac mortgage modification program. This requirement was also imposed on U.S Bancorp in connection with its acquisition of Downey Savings and Loan and PFF Bank and Trust. The IndyMac Bank Loan Modification Program is designed to make mortgage payments affordable for borrowers. Under the program, eligible mortgages may be modified by permanently capping the interest rate at the current Freddie Mac survey rate for conforming mortgages. The modifications are designed to maintain at 38 percent the debt-to-income ratio of principal, interest, taxes and insurance. To reach this ratio, lenders may adopt a combination of interest rate reductions, extended amortization and principal forbearance. We believe that going forward, to the extent that an acquirer of a troubled or failing bank seeks and obtains assistance from the FDIC, it will likely have to make a commitment to implement the FDIC’s IndyMac Bank Loan Modification Program.