With the roll-out of another seemingly complex financial products program identified by another alphabet soup acronym, the federal government continues to make unprecedented efforts to increase the availability of credit at low rates to U.S. consumers. With the implementation of the Term Asset-Backed Securities Loan Facility (TALF), the administration is committed to jump start the availability of credit at low interest rates to consumers and small businesses. This credit was historically provided (unbeknownst to the average consumer) through the asset-backed securities (ABS) market. The same ABS market, like many other financial markets, is at a standstill as investors have ceased trading the securitized auto, student, credit card, small business and other loans that constitute the market.

Rather than provide direct loans to the consumers or small businesses, TALF is designed to provide the investors of ABS with inexpensive financing to purchase targeted securities and limit the investors’ risks against defaults. The hope is that by rejuvenating the ABS market, the benefit to the consumers will be exponentially larger than if the TALF provided direct assistance to the consumer and small businesses. The views of many financial pundits are split, not surprisingly, many along party lines.

Under TALF, the Federal Reserve Bank of New York (FRBNY) will lend up to $200 billion from late March 2009 through December 2009 to eligible owners of the most highly rated (AAA) ABS. Originally designed to fund ABS backed by newly and recently originated auto loans, credit card loans, student loans and certain small business loans, TALF has since been expanded to include ABS backed by heavy industrial equipment loans, agricultural equipment leases and rental car fleet loans. Additional asset classes such as commercial and residential mortgage loans are currently being considered for future fundings, creating the possibility for the program’s expansion to up to $1 trillion.

To facilitate the policy behind TALF, the requirements for eligible borrowers are minimal. Any U.S. company (which is broadly defined but designed to benefit U.S. tax paying entities) that owns eligible ABS may borrower under TALF provided that the company maintains an account relationship with a primary dealer and pledges the ABS collateral to FRBNY. The broad definition of an eligible borrower opens the door for many new investors, such as hedge funds and private equity firms, to participate in and take advantage of the TALF.

To further assist the goals of TALF, the loan terms are borrower friendly. TALF loans are non-recourse to the borrower, so the borrower will not be personally liable for any losses beyond the value of the assets pledged to the TALF. Loans may be requested monthly, and a borrower is not limited to any number of loans; however, each loan must have a minimum principal balance of $10 million. Prepayments are allowed and TALF loans do not contain prepayment penalties. If the ultimate consumers fail to pay the underlying loans and the related securities suffer losses, the U.S. taxpayers, and not the investors in ABS, may incur the majority of the losses since the investors are permitted to walk away from their TALF loans by surrendering the ABS collateral to the FRBNY, which is currently backed by the Treasury with $20 billion in TARP funds (increasing up to $100 billion, as the program expands to $1 trillion).

By instituting TALF, the federal government is providing the investors with significant incentives to re-enter the securitization markets: they receive low interest rate loans to purchase securities; increased potential for significantly higher returns; reduced exposure with the federal government taking the risk of the ABS losses; and no personal liability for the failure to repay the loans. In return, the government is hoping the originators of what have traditionally been ABS-destined consumer loans will once again find an active ABS market which supports consumer lending at lower rates.

It is uncertain whether this stimulus will take hold and generate interest from investors currently sitting on the sidelines and ultimately achieve the goal of thawing the credit markets and increasing the availability of affordable loans to households, consumers and small businesses. Time will tell whether or not TALF is another complex alphabet soup program or a step in the right direction to ease the current economic crisis.