Comments on: TALF: A bailout if one reads the fine print http://www.creditwritedowns.com/2009/02/talf-a-bailout-if-one-reads-the-fine-print.html a finance news and opinion site Sun, 14 Mar 2010 12:14:51 +0000 hourly 1 By: CapVandalhttp://www.creditwritedowns.com/2009/02/talf-a-bailout-if-one-reads-the-fine-print.html#comment-4149 CapVandal Sat, 28 Feb 2009 08:10:47 +0000 http://www.creditwritedowns.com/?p=6415#comment-4149 It is at least theoretically possible that the investment banks don't have to fix their balance sheets to do these deals. That is, the loans could get originated, securitized, and sold without any change or bailout to the legacy investment banks. The so called "toxic assets", if limited to structured securities, aren't on the balance sheet of commercial banks -- just investment banks. There seems to be a big effort to blur the distinction, but the commercial banks in the top 20 without significant investment banking operations simply don't have ABS's in quantity -- just whole loans. Some of those portfolios may be awful (Pick a Pay), but as whole loans aren't the same sort of problem. You can look at the balance sheets of companies like WFC and USB and won't find much. Wells has some auto loans, but they don't seem to be a problem. It is at least theoretically possible that the investment banks don’t have to fix their balance sheets to do these deals. That is, the loans could get originated, securitized, and sold without any change or bailout to the legacy investment banks.
The so called “toxic assets”, if limited to structured securities, aren’t on the balance sheet of commercial banks — just investment banks. There seems to be a big effort to blur the distinction, but the commercial banks in the top 20 without significant investment banking operations simply don’t have ABS’s in quantity — just whole loans. Some of those portfolios may be awful (Pick a Pay), but as whole loans aren’t the same sort of problem. You can look at the balance sheets of companies like WFC and USB and won’t find much. Wells has some auto loans, but they don’t seem to be a problem.

]]> By: CapVandalhttp://www.creditwritedowns.com/2009/02/talf-a-bailout-if-one-reads-the-fine-print.html#comment-4148 CapVandal Sat, 28 Feb 2009 08:01:33 +0000 http://www.creditwritedowns.com/?p=6415#comment-4148 I agree with Brian's comment and have written a blog post about Harley Davidson, who needs to securitize loans and is currently jammed up. HOG is a decent company and their ABS's should be appropriate. Since the treasury is the buyer, they could have as much input into the details of the security as they want. In addition, the credit rating agencies seem to have gotten religion in some cases and have been pretty quick on the trigger. It is really a question of how many assets like the Harley dealer loans are clogging up balance sheets. I agree with Brian’s comment and have written a blog post about Harley Davidson, who needs to securitize loans and is currently jammed up.
HOG is a decent company and their ABS’s should be appropriate.
Since the treasury is the buyer, they could have as much input into the details of the security as they want.
In addition, the credit rating agencies seem to have gotten religion in some cases and have been pretty quick on the trigger.
It is really a question of how many assets like the Harley dealer loans are clogging up balance sheets.

]]> By: robinmarchttp://www.creditwritedowns.com/2009/02/talf-a-bailout-if-one-reads-the-fine-print.html#comment-4144 robinmarc Sat, 28 Feb 2009 04:51:28 +0000 http://www.creditwritedowns.com/?p=6415#comment-4144 I'm puzzled by the suggestion that TALF will have the government buying toxic assets.If the government was offering to lend against or buy loans originated in 2007 and rated AAA in 2007, I could see the concern. But as I read this, the underlying collateral must be NEWLY originated AND AAA rated. Are folks here suggesting that NEWLY originated loans in a structure rated AAA (presumably not a legacy AAA) are "toxic?" I’m puzzled by the suggestion that TALF will have the government buying toxic assets.

If the government was offering to lend against or buy loans originated in 2007 and rated AAA in 2007, I could see the concern. But as I read this, the underlying collateral must be NEWLY originated AND AAA rated. Are folks here suggesting that NEWLY originated loans in a structure rated AAA (presumably not a legacy AAA) are “toxic?”

]]> By: Brianhttp://www.creditwritedowns.com/2009/02/talf-a-bailout-if-one-reads-the-fine-print.html#comment-4131 Brian Fri, 27 Feb 2009 00:05:13 +0000 http://www.creditwritedowns.com/?p=6415#comment-4131 1) "Eligible ABS must be issued on or after January 1, 2009." - Big difference from the 'toxic waste' most people seem overly concerned is going to end up in this program and given that very little ABS issuance, of any type, was actually going on pre-TALF 2009 most issuance will be post-February.2) My reading suggests that CDOs are not eligible collateral given that the direct collateral of a CDO is other debt obligations not a car, house, etc...3) Haircuts range from 5% to 16%, so every investor/borrower is going to need to bring some capital to play. Higher credit quality and shorter average lives mean lower haircuts. A 3-year loan collateralized by the 'AAA' tranche of a subprime securitization with a 5-year average life will cost a borrower 10% of their own money. It is unlikely they are going to earn a spread (ABS interest - TALF interest) sufficient to cover the loss of that 10% in a three year period so repayment had best be the exit strategy of a borrower at origination. Any principal payments received must be proportionately remitted to the New York Fed. 1) “Eligible ABS must be issued on or after January 1, 2009.” – Big difference from the ‘toxic waste’ most people seem overly concerned is going to end up in this program and given that very little ABS issuance, of any type, was actually going on pre-TALF 2009 most issuance will be post-February.

2) My reading suggests that CDOs are not eligible collateral given that the direct collateral of a CDO is other debt obligations not a car, house, etc…

3) Haircuts range from 5% to 16%, so every investor/borrower is going to need to bring some capital to play. Higher credit quality and shorter average lives mean lower haircuts. A 3-year loan collateralized by the ‘AAA’ tranche of a subprime securitization with a 5-year average life will cost a borrower 10% of their own money. It is unlikely they are going to earn a spread (ABS interest – TALF interest) sufficient to cover the loss of that 10% in a three year period so repayment had best be the exit strategy of a borrower at origination. Any principal payments received must be proportionately remitted to the New York Fed.

]]> By: janhttp://www.creditwritedowns.com/2009/02/talf-a-bailout-if-one-reads-the-fine-print.html#comment-4129 jan Thu, 26 Feb 2009 18:12:41 +0000 http://www.creditwritedowns.com/?p=6415#comment-4129 What's even worse is that Geithner's "Public Private Investment Fund", is going to work the same way -- with non-recourse loans. That will ensure that the government overpays for the worst of the worst toxic assets. What’s even worse is that Geithner’s “Public Private Investment Fund”, is going to work the same way — with non-recourse loans. That will ensure that the government overpays for the worst of the worst toxic assets.

]]> By: Russhttp://www.creditwritedowns.com/2009/02/talf-a-bailout-if-one-reads-the-fine-print.html#comment-4128 Russ Thu, 26 Feb 2009 17:48:09 +0000 http://www.creditwritedowns.com/?p=6415#comment-4128 <i>The investment company’s asses are depressed due to overly bearish sentiment and poor liquidity. </i>Enjoyed the Freudian typo! The investment company’s asses are depressed due to overly bearish sentiment and poor liquidity.

Enjoyed the Freudian typo!

]]> By: RebelEconomisthttp://www.creditwritedowns.com/2009/02/talf-a-bailout-if-one-reads-the-fine-print.html#comment-4123 RebelEconomist Thu, 26 Feb 2009 15:19:26 +0000 http://www.creditwritedowns.com/?p=6415#comment-4123 Hello, I followed across from naked capitalism. Does anyone know in more detail what happens on default? I find it hard to believe that there is really no cost of default other than loss of assets? For example, a mortgage defaulter would struggle to get another mortgage for a while. Maybe if a firm walks away from one under-water asset, they can no longer use the facility for other assets? That would provide some disincentive to default. Hello, I followed across from naked capitalism. Does anyone know in more detail what happens on default? I find it hard to believe that there is really no cost of default other than loss of assets? For example, a mortgage defaulter would struggle to get another mortgage for a while. Maybe if a firm walks away from one under-water asset, they can no longer use the facility for other assets? That would provide some disincentive to default.

]]> By: Kid Dynamitehttp://www.creditwritedowns.com/2009/02/talf-a-bailout-if-one-reads-the-fine-print.html#comment-4122 Kid Dynamite Thu, 26 Feb 2009 13:57:45 +0000 http://www.creditwritedowns.com/?p=6415#comment-4122 isn't the TALF just the good bank / bad bank plan in disguise, with the Fed eating all the bad assets?as for the ratings - oh man - it's UNREAL that they're using existing ratings. isn’t the TALF just the good bank / bad bank plan in disguise, with the Fed eating all the bad assets?

as for the ratings – oh man – it’s UNREAL that they’re using existing ratings.

]]> By: Economics of Contempthttp://www.creditwritedowns.com/2009/02/talf-a-bailout-if-one-reads-the-fine-print.html#comment-4113 Economics of Contempt Thu, 26 Feb 2009 08:59:47 +0000 http://www.creditwritedowns.com/?p=6415#comment-4113 Haircuts are listed here: http://www.newyorkfed.org/markets/talf_terms.htmlI'm a structured finance lawyer, and I'm not wild about the TALF either. The government is essentially making a huge bet on the rating agencies, since a triple-A seal is all that's required to access the TALF. Trust me, the rating process for ABS is more of a negotiation than an independent analysis -- and the Street ALWAYS wins those negotiations. The Street will try to ram a crappy ABS through first (sub-30% subordination), and if they can get a triple-A for the crappy ABS, they'll rev up the Great Securitization Machine again. I've seen that movie before, and it doesn't have a happy ending.The Fed is also going to expand the TALF to include CMBS, and probably non-agency RMBS too.I don't think people realize that the TALF is the real bailout program, especially now that the Fed has pushed back the cut-off dates for when the underlying credit exposure was originated (from 2009 to around late 2007). All the ABS that the banks weren't able to sell off before the securitization market collapsed -- which the banks are refusing to mark to market -- will suddenly be monetized by the Fed, at higher-than-market prices.The press seems content to focus on trivial aspects of the bailout like the "stress test" and the public-private bad bank, quoting academic economists with very little knowledge of capital markets on whether the trivial programs will "work." Meanwhile, the Fed is negotiating with the banks over the details of the real bailout. That's fine with me, actually -- I haven't seen a pundit offer an informed opinion on the financial markets in months. Haircuts are listed here: http://www.newyorkfed.org/markets/talf_terms.html

I’m a structured finance lawyer, and I’m not wild about the TALF either. The government is essentially making a huge bet on the rating agencies, since a triple-A seal is all that’s required to access the TALF. Trust me, the rating process for ABS is more of a negotiation than an independent analysis — and the Street ALWAYS wins those negotiations. The Street will try to ram a crappy ABS through first (sub-30% subordination), and if they can get a triple-A for the crappy ABS, they’ll rev up the Great Securitization Machine again. I’ve seen that movie before, and it doesn’t have a happy ending.

The Fed is also going to expand the TALF to include CMBS, and probably non-agency RMBS too.

I don’t think people realize that the TALF is the real bailout program, especially now that the Fed has pushed back the cut-off dates for when the underlying credit exposure was originated (from 2009 to around late 2007). All the ABS that the banks weren’t able to sell off before the securitization market collapsed — which the banks are refusing to mark to market — will suddenly be monetized by the Fed, at higher-than-market prices.

The press seems content to focus on trivial aspects of the bailout like the “stress test” and the public-private bad bank, quoting academic economists with very little knowledge of capital markets on whether the trivial programs will “work.” Meanwhile, the Fed is negotiating with the banks over the details of the real bailout. That’s fine with me, actually — I haven’t seen a pundit offer an informed opinion on the financial markets in months.

]]> By: Edward Harrisonhttp://www.creditwritedowns.com/2009/02/talf-a-bailout-if-one-reads-the-fine-print.html#comment-4103 Edward Harrison Thu, 26 Feb 2009 00:06:10 +0000 http://www.creditwritedowns.com/?p=6415#comment-4103 @HN, those are my thoughts exactly. Basically, you have two possible outcomes.1. Irrational Despondency: The investment company's asses are depressed due to overly bearish sentiment and poor liquidity. As the government steps in with liquidity, all of this changes and the assets rise to their true value. The company sells the asset and/or repays the loan. All is well.2. Continued Deleveraging: asset price depreciation reflects actual distress. The asset values remain low and the investment company is unable to repay the loan. The Fed seizes the asset and puts it into an SPV owned by the government. The Fed takes a loss on the investment. But, this doesn't matter since it can print money at will.As to the haircut Uncle Sam takes? Bernanke seemed to address this last month in this video:http://www.creditwritedowns.com/2009/01/bernanke-speech-at-the-lse.html @HN, those are my thoughts exactly. Basically, you have two possible outcomes.

1. Irrational Despondency: The investment company’s asses are depressed due to overly bearish sentiment and poor liquidity. As the government steps in with liquidity, all of this changes and the assets rise to their true value. The company sells the asset and/or repays the loan. All is well.

2. Continued Deleveraging: asset price depreciation reflects actual distress. The asset values remain low and the investment company is unable to repay the loan. The Fed seizes the asset and puts it into an SPV owned by the government. The Fed takes a loss on the investment. But, this doesn’t matter since it can print money at will.

As to the haircut Uncle Sam takes? Bernanke seemed to address this last month in this video:

http://www.creditwritedowns.com/2009/01/bernanke-speech-at-the-lse.html

]]> By: HNhttp://www.creditwritedowns.com/2009/02/talf-a-bailout-if-one-reads-the-fine-print.html#comment-4102 HN Wed, 25 Feb 2009 23:51:16 +0000 http://www.creditwritedowns.com/?p=6415#comment-4102 Hmm.. smells like a sale masquerading as a loan. Anyone know what haircut the Fed will apply? Surely Uncle Sam aint lending par, is he ? Hmm.. smells like a sale masquerading as a loan. Anyone know what haircut the Fed will apply? Surely Uncle Sam aint lending par, is he ?

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