Fed's Loan Finance Plan Set For Launch
Thursday, 26 February, 2009
The US Federal Reserve will launch its financing -programme, worth up to $1,000bn, for consumer and business loans in the coming days, amid concerns that hedge funds might find it difficult to take advantage of the scheme. The programme - the term asset-backed securities loan facility (Talf) - is the cornerstone of the US authorities push to jump-start the credit market. Officials at the central bank say it will be up and running by the end of this month.
Fed and Treasury officials say this is an essential complement to efforts to repair the banking system. The idea is to boost the supply of new credit-card loans, student loans and car loans by providing low-cost finance to investors who buy these loans bundled up as securities in the secondary market. But the Talf relies on private-sector investors being willing and able to take advantage of the financing the Fed makes available.
Consultations have revealed potential obstacles to participation. The most significant of these are limits on the ability of investors who use Talf finance to buy an asset to transfer the loan when they sell it. An asset sold with low-cost three-year financing attached would command a higher price than an asset that had to be financed in distressed private markets at the point of sale.
Moreover, most hedge funds do not have permanent capital, so they have to consider the risk that redemptions could force them to sell the assets before the three years are up. Central bank officials have tried to meet this concern by allowing investors to transfer the funding to an eligible purchaser subject to the approval of the New York Fed. But legal constraints mean that the Fed cannot allow the loan to be transferred beyond the date at which the Fed board deems "unusual and exigent conditions" no longer prevail in the financial markets.
At present, the board expects these exceptional conditions to prevail until the end of 2009. However, the time frame might well be extended again. When the Fed deems that more usual circumstances have returned, private financing may be available at reasonable rates. Nonetheless, a hedge fund taking out a Talf loan to buy an asset-backed security at present can expect to be able to sell on the asset with the loan attached only for the first nine months of the three-year term - a problem for many.
If big investors do not join the scheme, the high hopes for it could founder. Fed officials, however, are optimistic that firms will structure investment vehicles specifically to take advantage of Talf financing and that attractive rates will ensure sufficient participation to make the scheme a success.
Source: http://www.ft.com/
