Only two lenders have applied for this months tranche of issued bonds under the Fed’s Term Asset-backed securities Liquidity Facility (TALF). The two borrowers, CarMax and World OMNI, are autolenders. If no other applications are submitted by the application deadline this afternoon, the issuance under the plan would be just $1.4 billion.
The TALF is supposed to kickstart the securitization market, creating discount-priced government guaranteed bundles of consumer and auto loans. The hope is that this will get flowing again to households for the purchase of consumer goods and motor vehicles. The TALF program is now authorised to provide up to $1 trillion of financing for the purchase of newly-issued asset-backed securities, which is is approximately one-third of the net created by the financial system in 2007 and half that created during 2008, when the credit crunch had already contracted consumer credit.
The decline in interest in the TALF is troubling. As our “light at the end of the tunnel” story demonstrated this morning, there are high hopes that the TALF will effectively create economic growth. Last month’s $4.7 billion issuance was already way below expectations, even after the Fed loosened the rules and made it clear that limits on executive compensation wouldn’t apply to TALF participants. It was basically a flop. None of the big funds participated in the issuance, despite reassuring words from the likes of Wilbur Ross. It was viewed by many as a deal in which the “smart money” stayed home.
And now we’ve got a flop even twice as bad as last month’s. Things could look even worse if you keep in mind that the Fed actually expanded the types of loans that could be securitized under the program, including business equipment loans and “floor plan loans” that allow wholesalers to finance retail inventory.
So what’s going wrong? There seem to be three main problems with the TALF.
- Lack of consumer and business demand. Joblessness keeps climbing and job insecurity among the employed keeps belts tightening. Unemployment benefits make up an ever larger portion of total consumer spending power. This is no doubt reducing overall demand, especially for big purchases like cars and appliances. Businesses are cutting back on inventory and equipment spending, as well.
- Other programs may be more attractive. The proliferation of government aid programs may be reducing interest in the TALF. Some investors may consider the Public-Private Investment Partnerships from the Treasury a better investment.
- Fear of political backlash. Although the Fed and Obama administration has made it clear that they do not plan to put compensation and other restrictions on those who issue or buy TALF bonds, its not clear that these promises would or could be kept if an AIG-style populist backlash arises.