When only $1.7 billion in Talf (term asset-backed securities loan facility) loans were issued in April’s opening for funding, it provided critics of the US government’s attempts at solving the financial crisis with yet more ammunition. But are such negative perceptions of the programme warranted? Talf has, opposed perhaps to other acronymic programmes, been well-thought-out, with the end consumer in mind, rather than the banks. Investors are keen to participate but issuers who tend to be cautious in their borrowing are understandably nervous.
Perhaps most damaging to its success has been the proposal of the PPIP (public private investment programme) which essentially plans to offload banks’ toxic assets on to the private sector. It is difficult to find investors that believe the PPIP will work, and with good reason. It is in the banks’ interest to make sure they get a good price for the assets but it is the investors’ interest to obtain a low price. Just where this price should be is impossible to tell and there are hints that banks are already trying to manipulate prices of their toxic asset portfolios in an upward direction.
The mismatch of interests makes it tough for the plan to get under way, and by introducing proposals at the same time as launching Talf, there is confusion as to where Talf ends and where PPIP might begin. This has tarnished Talf’s appeal without good reason. Talf is operating already, whereas PPIP is nothing more than conjecture.
As anti-bank sentiment increases, the US government urgently needs to make it clear that Talf is not a bank bail-out. US consumers are becoming increasingly negative, having seen the banks receive hand-outs from Tarp (troubled assets relief programme) only to increase credit card interest rates. Such increases are a sensible business move for the banks and their shareholders as defaults are expected to climb. However, for the US government it is nothing more than a backfiring of its intentions for Tarp. By protecting their shareholders and businesses, the banks have made it clear to the US government that they are not prepared to be a partner, and that their interest in reviving the US economy and helping consumers comes second to profits – that is capitalism after all. Add in the dubious first-quarter earnings results of the banks, and it seems clear that the government is out of its depth when it comes to controlling Wall Street.
Regret must be rife in Congress for rushing in to save Wall Street and trusting that Wall Street would be grateful. Any financial market participant can tell you that government social policy and profit-seeking banks rarely mesh well.
Talf to some extent seems the middle ground for the two, and Washington needs to make it as easy as possible for the primary dealers to sign up investors. There is little in it for the banks other than that it reopens issuer-bank relationships. That aside, Washington needs to focus its attention on issuers who share its interest in increasing consumer spending and auto-loan take-up. A mere $11 billion of issues eligible for Talf loans have been launched so far. Furthermore, issuers need to be assured that they will not have imposed on them the same restrictions that Wall Street is vehemently fighting. Only then, when more issuers step in, will Talf and its good intentions prove the naysayers wrong.
