Is the TARP is Dead? Will the TALF and P-PIP Live Long Enough to Help CMBS?

      How many of you knew the $700 Billion TARP (Troubled Asset Relief Fund) – was all but abandoned by now former Treasury Secretary Henry Paulson within a month of deploying, but not before about ½ of the funds were used to bail out CitiGroup and the insurance group AIG, among others.  And neither the TARP, nor its successors (the TALF and P-PIP) are successfully addressing the Commercial Mortgage Backed Securities Market. 

TALF

       The US’s new bailout plan is the $800 Billion TALF (Term Asset-Backed Securities Loan Facility), primarily sponsored by the Federal Reserve, is funded by printing money.  With this new bailout program the Federal Reserve will purchase loans in two consumer based categories:

1. Consumer loan guarantee program designed to help deal with defaulting consumer debt from auto loans, credit-card debt, and student loans, in which the Federal Reserve will allocate $200 billion to essentially insure the debt if a borrower defaults. Treasury department will provide $20 billion from the $700 billion the TARP fund to reimburse the Federal Reserve for any losses.
2. Residential Mortgage program will purchase up $600 billion in debt and mortgage-backed securities from Fannie Mae, Freddie Mac, and Ginnie Mae, the three government-sponsored finance firms established to promote home ownership.

       Under the TALF program, the Federal Reserve Bank of New York will make non-recourse loans to issuers of asset-backed securities (ABS) with investment-grade ratings from at least two nationally recognized rating organizations.  Also available for purchase would be small business loans guaranteed by the Small Business Administration.  Substitution of collateral during the term of the loan will not be allowed. TALF loans will have a one to three year terms, with interest payable monthly. The term of TALF loans may be lengthened later if appropriate. TALF loans will not be subject to mark-to-market or re-margining requirements.  The TALF Fund is scheduled to stop making loans on December 31, 2009, unless the Board agrees to extend the facility[i]. 

     The Federal Reserve Bank of New York will pay for the securities by simply making a bookkeeping entry that unilaterally increases a member bank’s cash position with the Fed, thereby increasing the nation’s money supply.  When the economy recovers, the Fed will decrease the money supply by selling the securities back on the open market. 

P-PIP

      On March 23, 2009, U.S. Treasury Secretary Timothy Geithner announced a two part, $500 Billion Public-Private Investment Program (P-PIP) to buy so-called toxic assets from banks’ balance sheets.

1. Legacy Loan Program will purchase residential loans with the FDIC providing up to 85% loan guarantees. Private sector and the US Treasury will provide additional support.
2. Legacy Securities Program, will purchase investment grade securitized mortgages (RMBS, CMBS and ABS) with funding split 50% from TALF and 50% from TARP.

       The stated goal of this Public Private partnership program is to restart the market for legacy securities, allowing banks and other financial institutions to free up capital and stimulate the extension of new credit[ii]

So, How are things going so far? 

      The Federal Reserve started purchasing commercial paper in October 2008 in an attempt to unfreeze the credit market.  The Fed has said that up to $1.3 trillion in commercial paper could qualify for one of its programs.   The purchase of Government Sponsored Enterprise (GSE) mortgages from Fannie Mae, Freddie Mac and Ginnie Mae started January 5 in an attempt to bolster the housing market.  

 

Federal Reserve Assets (Average for the week in $ billions)[iii]
Week Ending Wednesday (2009):	April 15	April 8
Commercial Bank	$      48.5	$      49.2
Investment Firm	$     12.9	$      17.6
Net Holdings of Commercial Paper	$    250.2	$    349.0
Net Holdings of Residential (GSE) Mortgages	$    287.2	$    236.6
Total Assets	$ 2,098.0	$ 2,068.8

       The assets on the Federal Reserve balance sheet have more than doubled since the Fed started its emergency lending programs in October 2008. As the assets of the Fed increase, so does the nation’s money supply. According to the Quantity Theory of Money, inflation occurs when the growth in the velocity of money (number of times a dollar is used in a year) times the quantity of money exceeds the growth in industrial productivity.  There is evidence that the credit freeze has drastically reduced the velocity of money, so the impact of the increase in money supply will not be as inflationary as some expect.  Fed Chairman Ben Bernanke repeated assurances that the Fed will reduce the money supply correspondingly when economy recovers. 

        To date, these programs do not seem to be as successful as hoped.  The  Federal Reserve is currently considering how to further expand the programs to cover commercial mortgage backed securities (CMBS).  However, to be effective, these commercial loans would need to have terms of five years or more.  The Feds are concerned that loans of these longer terms will interfere with their ability to withdraw credit and raise interest rates when the economy recovers.  The real estate market is concerned that without the source of funds traditionally provided by the CMBS, as a record number of commercial loans become due between now and 2012, real estate prices will be depressed and defaults rise as borrowers are unable to refinance loans.[iv]   

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[i] “Term Asset-Backed Securities Loan Facility (TALF) – Terms and Conditions” Federal Reserve, November 25, 2008.
http://www.federalreserve.gov/newsevents/press/monetary/monetary20081125a1.pdf

[ii] “Public Private Partnership Investment Program Fact Sheet” US Treasury, March 23, 2009 http://www.treas.gov/press/releases/tg65.htm

[iii]Crutsinger, Martin “Banks, Investment Firms trim borrowing from Fed” The Journal Record (Associated Press) April 17, 2009 p 13A

[iv]Hilsenrath, Jon and Lingling Wei, “Fed Looks Long Term for TALF” The Wall Street Journal, April 17, 2009, p C-2