Treasury Secretary Timothy Geithner's announcement of his Financial Stability Plan created a buzz at last week's American Securitization Forum conference - ASF 2009 - held in Las Vegas.
Although conference attendees were mostly disappointed by the lack of details in Geithner's speech, there was general optimism that the government was "trying to do something" to help the beleaguered securitization industry.
Geithner's plan, which is a six-pronged approach, is aimed at helping to "restart the flow of credit, clean up and strengthen our banks, and provide critical aid for homeowners and for small businesses." His approach also includes "new, higher standards for transparency and accountability," the Treasury Secretary said in a speech delivered last Tuesday morning.
The part of the new plan that got the most attention from conference attendees was the Consumer and Business Lending Initiative, which "builds off, broadens and expands" the reach of the previously announced Term ABS Loan Facility (TALF).
Under this revised initiative, the Treasury aims to use $100 billion to leverage $1 trillion in lending and expands the TALF to include CMBS. The Treasury will also continue to consult with the Federal Reserve on the potential expansion of the TALF to cover other asset classes, such as non-agency RMBS as well as assets collateralized by corporate debt.
The TALF has obviously inspired conference attendees' imagination. In fact, some panelists mentioned that primary dealers are already thinking about structuring securities that combine leverage with a TALF bond, and putting these into conduits. Participants said that the TALF allows the creation of leverage of the non-recourse nature, thereby potentially giving rise to a new type of security for investors to look at.
At the general session called TARP, TALF and Other Government Programs: Securitization Market Implications, held on Tuesday, speakers weighed in on Geithner's just-announced enhancements to the TALF.
Nellie Liang, associate director at the Federal Reserve Board, said that the TALF has "come a long way" since it was first announced. She said that the government had to achieve a delicate balance between reducing the costs of term financing and protecting taxpayers by making sure that the TALF bonds are "secured to our satisfaction." The problem with expanding the TALF, she said, is that there's a maturity mismatch between the assets that the market wants the TALF to cover - specifically non-agency RMBS - and the short-term financing that the Fed typically provides. The put option, Liang said, is also something that needs to be considered, which might make transactions uneconomical as the maturities on the securities covered by the TALF get longer.
Ish McLaughlin, managing director in investment grade syndicate at Citigroup, said the changes that have been made to the TALF since its inception have been helpful, specifically the elimination of the auction rate procedure, which allows for certainty of funding. He also cited the reasonably attractive loan rates that have been provided under the program, as well as the detailing of players who could participate in TALF, specifically making it clear that hedge funds "could play in the space."
Richard Johns, vice president and head of securitization at Capital One, said that an issuer's decision to make transactions TALF-eligible would depend on what options they have. For instance, making use of the Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program (TLGP) might make more sense for certain credit card issuers. TLGP was created to guarantee the newly issued senior unsecured debt of banks, thrifts, and certain holding companies by offering full coverage of non-interest-bearing deposit transaction accounts, regardless of the dollar amount. Since under the TALF program, there is not much differentiation in terms of the haircut between prime and subprime collateral, this might make the borrowing cost higher for prime issuers. Thus, some firms might benefit more under the TLGP or from accessing the commercial paper market.
The Fed's Liang said, however, that the haircuts under the TALF program were not determined solely from a credit perspective. "The put option to the Fed has some value even though there is no credit risk," she said.
Aside from not covering non-agency residential mortgages for now, only newly packaged triple-A loans will be purchased under the TALF. One reason for not buying so-called legacy assets, panelists said, is that the primary market is more homogeneous compared with the secondary, and loan rates and haircuts - from this perspective - are easier to determine.
Pricing becomes an issue because public policy dictates that taxpayers don't overpay for these assets. Doug Magnolia, managing director at The Bank of New York Mellon, argued that there is a need for a pricing methodology to determine the right value for assets purchased under the TALF.
Programs' Impact
Panelists agreed that the government programs that have so far been initiated and announced, including the TALF, have stabilized the markets somewhat, but it's too soon to tell what the long-term impact of these initiatives will be.
Capital One's Johns acknowledged that the various government programs that have been instituted thus far "have done a lot to heal liquidity issues." Citi's McLaughlin echoed this, saying that the capital injections made under TARP I had restored liquidity and stability into the market, as evidenced by Libor rates coming down and staying down. But he also said that the market is still "stressed and more needs to be done."
Doubts remain. In another panel, nonperforming asset investors talked about how banks are still not selling their assets because of unacceptable prices. "They thought pricing in the 80s was bad, then it became 60s last year and it's now in the 40s, which is harder for these banks to swallow," a distressed investor said. "Even with Troubled Asset Relief Program (TARP) money, no one wants to take the pain but someone has to. Time will heal and perhaps a decrease in unemployment."
Panelists pointed out that other risks present in the market today are negating the positive impact of all the current government initiatives. These include the use of mark-to-market and fair-value accounting that exaggerates losses and the potential mortgage cram-downs.
In the investors roundtable session, for instance, panelists lamented that the regulatory and legislative risks that have created uncertainty in the ABS market have caused clients to change their credit mandates, with some simply refusing to participate in the non-agency RMBS space.
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