On June 4, William Dudley, President of the Federal Reserve Bank of New York, spoke at a Securities Industry and Financial Markets Association conference regarding his preliminary assessment of the Term Asset-Backed Securities Loan Facility (TALF). Mr. Dudley noted that prior to August 2007, as much as 60% of consumer credit was provided through the markets for asset-backed securities (ABS). However, beginning in August 2007, the yield spreads on ABS soared and the market for consumer ABS and commercial mortgage-backed securities (CMBS) effectively shut down. According to Mr. Dudley, the TALF program offers three attributes that the private sector has had difficulty in providing since that time: (i) leverage to purchase highly rated, low-risk assets, (ii) term financing, and (iii) protection against very adverse economic outcomes.
As evidence of the TALF program’s effectiveness, Mr. Dudley pointed to the gradual increase in ABS issuance, the fact that the market for those ABS deals is not wholly reliant on TALF (with more than half of the ABS subscriptions coming from non-TALF investors), and the fact that ABS spreads have decreased substantially. He deflected criticism that the TALF program may result in very high returns to investors by stating that high returns were necessary to stimulate investor interest. Finally, he stated that the continuing challenges facing the TALF program include (i) assuring investors that participation in TALF will not restrict their ability to conduct business in unforeseen ways, (ii) increasing participation by investors who are not permitted to use leverage, such as mutual funds, pension funds and insurance companies, and (iii) expanding TALF to include newly issued CMBS, legacy CMBS and possibly legacy residential mortgage-backed securities.