The Spend to Date

The Emergency Economic Standardization Act of 2008 (the “EESA”) empowered the U.S. Treasury to infuse capital into financial institutions, to purchase mortgage assets and any other troubled assets that the U.S. Treasury and the Federal Reserve deemed necessary to promote stability in the financial markets.  

The EESA produced the Troubled Asset Relief Program (“TARP”), under which the U.S. Treasury was allocated $350 billion, with access to another $350 billion upon Congress’s approval, to buy troubled assets like under-water mortgage-backed securities from financial institutions, in order to help unlock frozen credit markets and help restore market confidence.  

All but $20 billion of the initial $350 billion of TARP money has been spent by the U.S. Treasury, including $250 billion injected as capital into the banks, $40 billion used to bail out AIG, and $25 billion to Citibank. In addition, on Nov. 25, 2008, the U.S. Treasury announced the allocation of $20 billion of TARP funds as credit protection under the $200 billion TALF program, with the Federal Reserve Bank of New York (“FRBNY”) acting as lender.  

Term Asset-Backed Securities Loan Facility (“TALF”)

Under TALF, the FRBNY will auction a fixed amount of loans each month until Dec. 31, 2009, unless it agrees to extend the facility. The loans will be to holders of highly rated asset-backed securities backed by consumer and small business loans. TALF loans will be non-recourse to the borrower, fully secured by Eligible Collateral (as defined herein). The move is intended to assist credit markets in accommodating the credit needs of consumers and small businesses by facilitating the issuance of asset-backed securities.  

It is anticipated that TALF will be up and running by February 2009. The Federal Reserve has set forth the Terms and Conditions under which it will make the loans available. To review the Terms and Conditions, click here.  

Borrowers Under TALF

All U.S. persons, including natural persons, U.S. business entities with non-U.S. parents, and U.S. branches of foreign banks, may participate in TALF.  

Eligible Collateral

There are two primary areas of analysis in determining “Eligible Collateral.” First, the securities for the loan must be U.S.-dollar-determined non-synthetic asset-backed securities (“ABS”) with long-term credit ratings in the highest rating category from two or more National Statistical Rating Organizations. Second, the assets underlying the ABS must be newly or recently created Receivables* from U.S. domiciled obligors, and initially must be auto loans, student loans, credit card loans or small business loans guaranteed by the U.S. Small Business Administration. Eligible Collateral for a particular Borrower must not be backed by Receivables originated by the Borrower or an affiliate of the Borrower. In addition, an originator of Receivables must have agreed to comply with the executive compensation restrictions under the EESA.  

TALF Loans

TALF loans will have a one-year term, with interest payable monthly. Any remittance of principal or interest on Eligible Collateral must be used immediately to pay interest due on, or reduce the principal amount of, the TALF loan. TALF loans will not be subject to mark-to-market or re-margining requirements.

Collateral haircuts, or discount rates applied to determine the value of the underlying ABS, will be established for each class of Eligible Collateral. Haircuts will be determined based on price volatility of each class of Eligible Collateral. Presumably, such volatility will be revealed in the monthly auctions held for the TALF loans.  

Implementation  

FRBNY will form a special purpose vehicle (“SPV”) to purchase and manage assets received in connection with any TALF loan. The SPV will commit to purchase all assets securing a TALF loan that are received by the Federal Reserve at a price equal to the TALF loan amount, plus accrued but unpaid interest. To access TALF, each Borrower must use a primary dealer as its agent and deliver Eligible Collateral to a clearing bank.  

The mechanics of the TALF program are likely to be similar to the Primary Dealer Credit Facility administered by the FRBNY. The FRBNY will offer a fixed amount of loans under the TALF on a monthly basis. The TALF loans will be awarded to Borrowers each month based on a competitive sealed-bid auction process. The FRBNY will set minimum spreads for each auction.  

Conclusion  

Underlying the Terms and Conditions, many questions remain as to how the TALF program will be implemented, including questions as to the methodology to be used for valuing ABS; whether the loan will be structured as a repurchase facility; and the meaning of “recently originated” in relation to ABSs, to name just a few. Similar to the approach taken in TARP, the FRBNY has reserved the right to make adjustment to TALF “including the size of the program, pricing, loan maturity, and asset and borrower eligibility requirements.” Although many details need to be worked out prior to launching TALF, the program is likely to help stimulate consumer-related ABS issuances, thereby increasing the availability of credit to consumers.