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Treasury Secretary Timothy Geithner notified Congress today that the $700 billion Troubled Asset Relief Program (TARP) would be extended until October 3, 2010 – a move that, although expected, adds fuel to an ongoing debate on Capitol Hill whether to wind down the politically unpopular program or utilize its excess funds for broader economic recovery efforts.

In a letter sent to House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid, Geithner sought to quell political concerns by outlining a TARP “exit strategy” and narrowing the program’s focus to three specific areas in 2010: home foreclosure mitigation; small-business lending; and the Term Asset-Backed Securities Loan Facility (TALF) in order to facilitate lending through securitization markets.  According to Geithner, no TARP funds will be spent beyond these specific areas “unless necessary to respond to an immediate and substantial threat to the economy.”  In addition, the Capital Purchase Program – aimed at boosting bank lending through nearly $250 billion in direct capital injections – will cease.

Key to the administration’s TARP extension is the assumption that only $550 billion of the $700 billion program will be necessary for deployment, a figure buoyed by Treasury estimates that TARP-recipient banks could repay as much as $175 billion by the end of 2010.  Sanguine figures such as these have opened the floodgates to recent congressional proposals that would use TARP proceeds to create or expand economic recovery initiatives -- including a job-creation proposal outlined yesterday by President Obama – and, at the same time, remain budget-neutral.

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Not surprisingly, the Federal Reserve announced today that it is extending the TALF program from the December 31, 2009 deadline to March 31, 2010 for newly issued ABS and legacy CMBS and to June 30, 2010 for newly issued CMBS. While the Fed acknowledges that conditions in the financial markets have improved, it still views the markets for asset backed securities and commercial mortgage backed securities as "impaired." The Fed is also leaving the door open to further extensions should conditions warrant. Another outstanding issue is whether to expand the TALF to include other types of eligible collateral. The Fed said in its announcement that it and Treasury will reconsider the issue "if financial or economic developments indicate that providing TALF financing for investors' acquisitions of additional types of securities is warranted."

Federal Reserve Press Release, August 17, 2009

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Yesterday afternoon, the Federal Reserve announced the expansion of TALF to include "certain high-quality commercial mortgage backed securities issued before January 1, 2009 (legacy CMBS)" as eligible collateral for TALF loans. When the Fed originally announced the expansion of the program to include CMBS, it limited eligible CMBS to those issued after January 1, 2009.  Noting the CMBS market "came to a standstill in mid-2008," the Fed's move to include legacy CMBS is aimed at promoting price discovery and liquidity in the CMBS market in the hopes of reviving the market and stimulating the issuance of new CMBS. That would then enable borrowers to purchase new commercial properties or refinance existing mortgages. The TALF Terms and Conditions list the criteria for legacy CMBS to be eligible TALF collateral.  A few noteworthy ones are that legacy CMBS must be senior in payment priority to all other interests in the underlying pool of commercial mortgages; they must have at least two triple-A ratings from DBRS, Fitch Ratings, Moody's Investors Service, Realpoint, or Standard and Poor's; and they must not have a rating below triple-A from any of those rating agencies.
 

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The Federal Reserve announced this afternoon that starting in June, commercial mortgage backed securities (CMBS) would be eligible assets for the Term Asset Backed Securities Loan Facility (TALF). The Fed is also expanding the term on some CMBS TALF loans to five years, up from three year terms for other assets. The Federal Reserve Bank of New York plans to set up a separate TALF subscription cycle for CMBS, which will occur later each month than the regular TALF cycle. The longer-term CMBS loans will also have larger haircuts.

Term Asset-Backed Securities Loan Facility (CMBS): Terms and Conditions

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At last Treasury has come forward with its Public Private Investment Program for dealing with toxic assets, only now that there is a plan, the proper term is “troubled legacy assets.” Stocks have rallied since Treasury announced the plan this morning, and legislators on Capitol Hill have halted their rush to claw back the AIG bonus money, some say partly in order to study the new plan. The Treasury Secretary is scheduled to testify before the House Financial Services Committee on Thursday. Will the positive momentum continue up to and following his hearing performance? Secretary Geithner has a lot riding on this week.

The plan, which will use $100 billion of TARP funds, has two parts intended to revive the anemic financial system—the Public Private Investment Fund (PPIF) for Legacy Loans and the PPIF for Legacy Securities. Both are aimed at residential and commercial real estate-related assets. Banks tend to hold the assets as loans and entities such as insurers, pension funds, mutual funds and individual retirement accounts tend to hold the assets as securities backed by loans. The Federal Deposit Insurance Corporation with Treasury will work to create PPIFs that will purchase “loans and other asset pools” from participating banks, and the FDIC will determine eligibility criteria. The FDIC will also be using contractors to help it analyze loan pools and determine the level of debt to be issued by the PPIFs (with leverage not exceeding a 6 to 1 debt-to-equity ratio). The FDIC will then auction off each loan pool to the highest bidder. Treasury will provide 50 percent of equity financing and the private sector auction winner will provide the other 50 percent. The private sector winner can obtain financing by issuing new debt, which the FDIC will guarantee, that is collateralized by the purchase.

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Some surprises were included in today's announcement by the Federal Reserve and the Treasury on new developments with the soon-to-be $1 trillion Term Asset-Backed Securities Loan Facility (TALF). Of particular note is the statement that the two agencies will push for legislation to re-tool the program.

According to the joint release, the TALF is “designed to catalyze the securitization markets by providing financing to investors to support the purchase of certain AAA-rated asset-backed securities” and will at first be limited to newly and recently originated auto, credit card, student, and SBA-guaranteed small business loans. The TALF funds will go out monthly starting in March, and they are already anticipating a program expansion for April that will include “asset backed securities (ABS) backed by rental, commercial, and government vehicle fleet leases and ABS backed by small ticket equipment, heavy equipment, and agricultural equipment.” The Treasury and the Fed are also analyzing how to expand the program in future months to include commercial mortgage backed securities and other AAA-rated, newly issued ABS.

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It appears the Federal Reserve will announce this week a substantial round of investments through the Term Asset Backed Securities Loan Facility (TALF) program in securitized credit card, auto loan, student loan, and other consumer debt. These investments will be from the initial TALF program allocation of $200 billion. The Fed is now turning its attention to the commercial real estate sector and they appear to recognize this is the next "shoe about to drop" as mortgage holders are unable to refinance in today's marketplace. We anticipate the next round of TALF investments—made available by increasing the facility up to $1 trillion—will include a focus on the commercial sector.

In addition to its efforts on asset-backed loans, the Fed is also working, in concert with Treasury, to reassure dubious investors and potential investors in the banking sector that no institutions are going to fail and that nationalization of banks is not on the agenda. Reports in today's media that the government is contemplating taking up to a 40 percent stake in Citicorp may not allay these concerns however.

Another development of interest over the weekend was the assessment of the economy that emerged from the nation's governors after they met separately in Washington on Saturday with Federal Reserve Chairman Ben Bernanke and with Mark Zandi of Moody'sEconomy.com. In the hallways of the National Governors Association conference and in pages of newspapers like the New York Times, one could see that the combined effect of the two briefings to the Governors was to intensify their sense that recovery will be a very slow process. The Times article appearing in the paper on Sunday, cited pessimistic assessments from Democratic and Republican governors alike. Public pronouncements by both the Fed and Zandi have been diverging in recent weeks, with the Fed indicating the economy will begin to turn around in the second half of 2009 and with Zandi saying that is not likely until late in 2010. One can infer from the articles that followed the meetings that the Governors gave somewhat more weight to the Zandi assessment.

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The Federal Reserve announced two new programs today, committing an additional $800 billion in order to spur lending. U.S. Treasury Secretary Hank Paulson also announced that $20 billion from the Troubled Asset Relief Program (TARP) would be used to support one of the programs. The first, worth $600 billion, is aimed at helping the housing market; and the second Fed program, worth $200 billion, is directed at thawing the frozen consumer credit markets.

The Fed announced this morning that it will "initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs)—Fannie Mae, Freddie Mac, and the Federal Home Loan Banks—and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae." The Fed will work with "primary dealers through a series of competitive auctions" for purchases of up to $100 billion in "GSE direct obligations" beginning next week. For purchases of up to $500 billion in MBS, the Fed will select asset-managers through a competitive process and plans to start these purchases before the end of the year. The Fed said in a release that it will provide operational details after "consultation with market participants," and added that "Purchases of both direct obligations and MBS are expected to take place over several quarters."

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