Toxic assets program slowly building steam
Ultimately, if TALF is successful, investors will use the Fed loans to buy up troubled commercial mortgage backed securities, but investors are not quite ready for that step. Right now, they're choosing to purchase primarily credit card ($6.2 billion of TALF funds) and car loans ($3.3 billion of TALF funds). This should free up money for credit card and auto lending.
Investment groups remained on the sidelines in March and April, avoiding TALF loans mainly because of concerns that the Fed could impose the same constraints on compensation that it imposed on TARP participants. Those fears have been calmed and investors are gradually getting their feet wet. The three-year, non-recourse funding being offered as part of TALF is now attractive to private investors.
Freeing up the stranglehold on consumer debt is a top priority of TALF. Consumer debt issuance dropped to just $4 billion from $50 billion in previous quarters, but is now picking up thanks to TALF. The total amount requested in the first four rounds of TALF is about $28.5 billion, which represents just 14 percent of the $200 billion promised by the Fed in the initial phase.
If successful, the Fed has said TALF could total $1 trillion. Phase two of the program will include applications for newly issued commercial mortgage-backed securities. In July, the so-called legacy commercial mortgage backed securities will become part of TALF lending. Those legacy securities are a critical part of the government plan to get toxic assets off banks' balance sheets and free up money for lending.
If this all works and banks decide to lend the money rather than hoard it or use it to buy other banks, consumer and small business lending should be on the mend by summer. I'll believe it when I see it.
Lita Epstein has written more than 25 books including Trading for Dummies.