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What you don't know about TALF
The Federal Reserve Building in Washington, D.C.
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Kai Ryssdal: Ever since the financial crisis got really hairy, the Federal Reserve's been running a hodge-podge of programs that are designed to get credit flowing back through the economy as quickly as possible. It's not overstating the case to say Ben Bernanke and his colleagues have been throwing money at the problem.
One of those programs, the TALF, or Term Asset-Backed Securities Loan Facility, is quite possibly the biggest government program you've never heard of. Even though it's providing the financing for a lot of the things you're buying. From New York, Marketplace's Jeremy Hobson reports.
JEREMY HOBSON: The money comes from the Federal Reserve, not the U.S. Treasury, so the program didn't require Congressional approval. Nevertheless, up to a trillion dollars will be lent to big investors to buy pools of debt. Asset-backed securities they're called, in which the assets are my debt, your debt, the neighbor's debt. Here's UCLA Forecast Economist David Shulman.
DAVID SHULMAN: Student loans are in this package, small business loans are qualified collateral, and they've also opened it up to commercial real-estate loans, so it covers quite a bit of lending that goes on in the economy.
Shulman says when the financial crisis started last fall...
SHULMAN: The market for asset-backed securities stopped. So as a result, auto credit began drying up, credit-card credit began drying up, student-loan credit began drying up because the originating financial institution had no ability to take the loan and sell that loan into the marketplace.
In other words, when your bank or your car dealership makes a loan to you, they'll take your IOU. Add it to hundreds of others. And sell that pool of IOUs to investors who make money on the interest you pay. That way, the IOU is at least partly off the bank or dealership's balance sheet, and they can make new loans to new people.
If investors are willing to buy this debt, then lenders are able to extend more credit to you and me at a low interest rate. This way of doing business may seem roundabout, but Shulman says it's the world we live in.
SHULMAN: The asset-backed securitization is extraordinarily important in our credit system because that's where the bulk of the loans were made in the 21st century. So this market has to work. If this market does not work, we're going to be in a lot of trouble.
Enter the Federal Government -- last November -- with a program called TALF.
It rhymes with Alf, I know, but the only alien life forms here are the asset-backed securities. Through TALF, the government is lending investors as much as 94 percent of the cost of these securities, made up of new loans to get the market for them rolling again.
It's mostly rich people and institutions like money-market funds that are investing. Reed Auerbach is a lawyer with McKee Nelson, who is now devoting almost all of his billable hours to TALF deals. We met outside a car dealership in Manhattan, and here's why.
REED AUERBACH: Whilst individuals standing outside this dealership walking in today to go buy a car is not thinking, gee, I'm getting a low 2 percent financing rate on my car because this dealership was able to package my security into a thousand other securities and issue a TALF eligible bond -- they're not thinking that. In fact, that's exactly what's happening.
Auerbach says investor participation in the program is picking up. The Fed lent investors just a couple billion dollars a month in March and April and $11 billion last month. That's getting closer to what investors were spending on these securities before the financial crisis. So does that mean the TALF's working? Maybe. And Auerbach says if it does work, it'll be because TALF doesn't have the same strings attached as other programs, like the bank bailout, which requires banks to submit to executive pay limits and hiring requirements.
Investors are more willing to participate in TALF, Auerbach says, because it doesn't have those restrictions. Maybe because few people know about it. At least for now.
In New York, I'm Jeremy Hobson for Marketplace.
About the author
Jeremy Hobson is host of Marketplace Morning Report, where he looks at business news from a global perspective to prepare listeners for the day ahead. Follow Jeremy on Twitter @jeremyhobson
In Jeremy Hobson's piece on the TALF, both he and Mr. Auerbach make conclusions about why investors are participating in the program, both of which overlook the obvious: the TALF is nothing more than yet another program where the taxpayers provide cheap money to investors to use and then the taxpayers retain the risk of default through guarantees. The lack of "strings attached" that Mr. Auerbach celebrates is simply icing on the cake of yet another government subsidized and guaranteed profit stream for investors. This is not evidence of a recovering economy or of how everything would be great if the investors could only get their subsidies without strings attached. This means nothing more than evidence that if you set out a risk free pile of money, someone will come and take it.
TALF sounds familiar: low interest rates in an unregulated market ultimately backed by the taxpayer. The real story is the fees and commissions which pay for extravagant perks, bonuses, and salaries by directing consumers and values toward consumption and away from infrastructure and community assets. All in the name of short term profits for the few.
TALF sounds familiar: low interest rates in an unregulated market ultimately backed by the taxpayer. The real story is the fees and commissions which pay for extravagant perks, bonuses, and salaries by directing consumers and values toward consumption and away from infrastructure and community assets. All in the name of short term profits for the few.
This is the second Marketplace interview I've heard that seems completely irresponsible to be aired by any media--especially public radio. Everyone knows we are in the worst financial crisis the country has seen since 1929 and that we got there by allowing consumer debt to grow completely out of control and investment banks and insurers and lenders to amass mountains of unratable asset-based securities, CDO's and other instruments (and grotesquely inflated commissions and bonuses) without critical government regulation and transparency. This regulation and transparency was specifically demanded by the European Community from the SEC because the securities were unintelligible and the whole thing was a giant recipe for fraud and abuse--which is exactly what we got. According to the Times, the SEC had held a meeting, promised to regulate and then never conducted a single audit of the trilion dollar market that quickly evolved.
It disgusts me to hear Marketplace buying in to this scheme all over again through TALF on the same premise as before--anything goes if it speeds up the lending cycle.
The second outrageous interview was a few weeks ago of a college-age woman who told us how cool it was to use her credit card to run up debt for all sorts of expenditures we might not have otherwise thought of. Again, Marketplace ended the interview with a "Why not?--sounds fine to us."
This is not a joke here. People's lives have been devastated. What in the world has happened to basic ethics and a sense of responsibility on the part of the media?
