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Term Asset-Backed Securities Loan Facility (TALF) Likely to Have Only Marginal Success
December 18, 2008
Despite good intentions of its framers to help stabilize the world financial system by making funds available through asset-backed securities (ABS), the Term Asset-Backed Securities Loan Facility (TALF) is likely to have only marginal success in its current form, according to new research from TowerGroup. TowerGroup believes the size and design of TALF will in fact prevent it from becoming a long-term answer to what will amount to a virtual freeze-up of the US consumer credit markets, partly because of lack of funding hitherto available from ABS.
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According to research co-authors - Dennis Moroney, research director in the TowerGroup Bank Cards practice, and Bobbie Britting, research director in the Consumer Lending practice - the establishment of TALF does not fully address the most pressing issue facing consumer lenders, which is a prospective lockdown or "freeze" in lending. While TALF is welcome in concept, TowerGroup finds the following:
- The size of TALF as initially configured is dwarfed by the size of the market of outstanding asset-backed securities.
- TALF does not address lenders' anxiety about the source of their funding and the flexibility of their portfolio management, especially regarding recent changes to rules and legislation.
- Proposed changes by the Federal Reserve Board and legislation before both houses of Congress could inhibit pricing flexibility and reconfigure the risk profile of US consumer lending.
- Proposed rule changes by the Financial Accounting Standards Board (FASB) would repatriate billions of dollars of credit card debt onto card issuers' balance sheets, effectively changing the character of the US credit card industry indefinitely.
- A positive provision of TALF is its focus on new loans to stimulate activity for small business lending and consumer loans, including auto loans, student loans, and credit cards. Recent tightening of business and consumer credit has limited the availability of credit for these segments. TALF is intended to boost institutional confidence in instruments that governments and regulators create to lessen the effects of the global financial crisis.
The new TowerGroup report titled "Can TALF Save US Consumer Lending, or Have Forces Already Killed the Goose That Laid the Golden Egg?" is co-authored by Moroney and Britting. To request a copy of the research or to arrange an interview with either analyst, please contact Jorge Lavina at +1.917.595.3047 or jlavina@cooperkatz.com. Those interested in subscribing to a TowerGroup research service may call +1.781.292.5200 or email service-info@towergroup.com.
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