TARP Covers Everything

The U.S. Treasury Department today announced it will allocate $20 billion to back a lending facility for the consumer asset backed securities market established by the Federal Reserve Bank of New York.  Asset backed securities is a sweeping term used to define a type of debt security that consists of a pool of assets.  The pool of assets can be any security from mortgages to auto loans or credit cards.  The asset backed security is established and collateralized by the cash flows from the specific pool of assets in the particuliar asset backed security being identified .  Trading asset backed securities in the secondary market has been similar to that of trading corporate bonds and mortgage-backed securities, up to the time that the credit market started to freeze and sekepticism arose over the perceived quality of the assets that are supposed to yield the cash flow that makes the asset backed security a viable fianncial investment tool.
 
Certainly, the credit markets are in an irrational period of skepticism that is curtailing the issuance of even good quality credit and bond products.  But many asset backed securities are not very liquid because their prices of the underlying assets are not transparent and the value of the cash flow that in term determines the value of the security is questioanble.  The asset backed securities market has become essential to our economy to provide liquidity to financial institutions which increases the supply of credit for continued asset backed investments.  The asset backed securities the Treasury is trying to assist are those used for small business loans and consumer lending such as auto loans, student loans, and credit cards.  Per the Treasury department asset backed security issuances in these categories were roughly $240 billion in 2007, issuance of consumer asset backed securities declined precipitously in the third quarter of 2008 before essentially coming to a halt in October.  Continued disruption in the asset backed security market could further deteriorate credit availability for consumers and increase the prospects for further deterioration in the economy generally.

The press release from the Department of the U.S. Teasury adds, this facility, the Term Asset Backed Securities Loan Facility, is intended to assist the credit markets in accommodating the credit needs of consumers and small businesses by facilitating the issuance of ABS and improving ABS market conditions.  The underlying credit exposures of eligible securities initially must be newly or recently originated auto loans, student loans, credit card loans or small business loans guaranteed by the U.S. Small Business Administration.  The facility may be expanded over time and eligible asset classes may be expanded later to include other assets, such as commercial mortgage-backed securities, non-agency residential mortgage-backed securities or other asset classes.

Under the new facility, the Federal Reserve Bank of New York will lend up to $200 billion on a non-recourse basis to holders of newly issued AAA-rated ABS for a term of at least one year.  The Federal Reserve will lend an amount equal to the market value of the ABS less a haircut and will be secured at all times by the ABS.  The U.S. Treasury Department will provide a $20 billion of credit protection to the Federal Reserve in connection with the facility, using its authorities in the Emergency Economic Stabilization Act of 2008.

This entry was posted on Tuesday, November 25th, 2008 at 10:45 am and is filed under Money Rates. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.