Thursday, March 5, 2009

Munching on TALF

Line 1 here basically sums it up:

The government is still applying cyclical remedies to a secular problem.

The more you look at the different things that government is saying and doing, the more you start to realize that despite the talk of there being no quick fix and whatnot, they are fundamentally treating this whole works as a liquidity problem, and not a solvency problem.  If you are a dyed in the wool democrat, and choose to let the audacity of hope triumph over the snicker of cynicism (insane as that sounds at this point) you can maybe, maybe maintain that Obama is forcing all structural reforms through the fiscal policy side with the new budget, while deliberately sending Geithner and Bernanke out to commit harakiri on the front lines.  I don't really know how to evaluate that statement.  I do know that at this point anything that comes out of the mouth of one of those two is bound to disappoint.  This is no longer wait and see.  We've waited.  We've seen.  We've got bupkes.

The latest example is the Term Asset-Backed Securities Loan Facility, or TALF, designed to reinvigorate the market for bundled consumer and small-business loans and, possibly, commercial mortgages, collateralized debt obligations and more.

That sounds great, if only there were massive pent-up demand for credit going unmet, as is often the case at the end of recessions caused by the ups and downs of the business cycle.

In my opinion, this analysis is correct.  I looked into the TALF as an investment opportunity.  Any US company can get in on TALF and start making making new student loans and car loans and credit card loans.  The program only applies to new loans however, so it does nothing to help the banking system, and really could only serve to try a re-inflate the lending bubble that came before by providing an explicit government support of what was before an implicit government backing in the form of the Geithner put -- the "too big to fail" doctrine.  The thing is structured to restore lending without being accused of giving away taxpayer funds, so it has no risk sharing or loss limitation provision.  It's just a cheap source of guaranteed leverage that can't be called away from you for 3 years. 

"I've been explaining to investors that TALF is not a free lunch," says Carlos Mendez, senior managing director at ICP Capital, an investment bank specializing in credit products.

Mostly, TALF seems to be yet another pipeline for pumping cash into the financial system, in hopes of keeping banks hanging around long enough to enjoy an economic revival, thus avoiding a final, painful reckoning of their assets.

Tim Backshall, chief strategist at Credit Derivatives Research, says: "The longer that goes on, the more likely we are to be in a Japan-type situation, where we're not facing up to the losses and moving on."

As an investment opportunity, this is fine if you're into that sort of thing.  You can get between 7 and 20 times leverage, depending on the type of loan, at attractive rates and with no refinancing risk.  It should entice some people to make loans to ... er ... who?  It's not like you can make a risky loan.  The government is not backstopping sloppy underwriting.  There is no loss sharing or loss limitation.  In the end, I agree with Tim Duy:
Bottom Line:  TALF limitations provide protection for the taxpayer, but curtail the program's effectiveness.  This is not meant to imply that efforts should not be made to support the normal functioning of credit markets; simply to keep expectations about effectiveness in check.

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