Another "Rescue the Markets" Program Flagging?

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Yesterday, we highlighted yet another indication that one of two parts of the infamous Public Private Investment Partnership, the so called Legacy Loans Program, was being delayed, possibly on a permanent basis (or more likely, it will be launched eventually to save bureaucratic face and have weak to non-existent take-up). Its evil twin, the program for securities, was to have been operational as of May 1. The target start date has been pushed back to July.

Another program, the TALF, or Term Asset Backed Securities Lending Program, may also be in the process of being curtailed. The TALF was envisioned as a way to restart the securitization market by letting investors borrow on a non-recourse basis against newly issued AAA asset backed securities, from asset pools consisting of credit card receivables, student loan, auto loans, SBA loans. The TALF was expanded from its original $200 billion size to $1 trillion, and would include certain types of commercial mortgage paper. The Fed also flagged residential mortgage securities as “an area of possible expansion.”.

Since then, a couple of things have happened. First, the Fed appears to be pulling back on the residential mortgage idea. From Bloomberg (hat tip DoctoRx):

The Federal Reserve may not start lending against residential mortgage-backed securities under its Term Asset-Backed Securities Loan Facility, Federal Reserve Bank of New York President William Dudley indicated.

“We’re still in the process of assessing whether a legacy RMBS program is feasible, and if it were feasible, whether it would be significant enough to make a major impact,” Dudley said….

His comments add to signs that Treasury Secretary Timothy Geithner’s Public-Private Investment Program to boost debt prices and rid banks of devalued assets to expand lending is stalling, after helping to spark a rally in stocks and bonds….

Responding to questions after a speech at the conference, Dudley said each home-loan security is different and must be separately evaluated for the size of the haircut that should be applied, so “there’s a huge administrative hurdle” to expanding the TALF to the bonds….

Last month, the Fed’s program to finance commercial- mortgage bonds was potentially hampered by Standard & Poor’s saying it may downgrade many AAA securities, rendering them ineligible under the central bank’s rules. As much as 90 percent of so-called super senior commercial-mortgage bonds sold in 2007 may be affected as the ratings firm changes how it assesses the debt, New York-based S&P said…..

The TALF and PPIP plans contributed to a rally among many types of home-loan bonds. Typical prices for the most-senior prime-jumbo securities jumped to about 83 cents on the dollar on May 14, from about 63 cents March 19, before steadying, according to Barclays Capital. Similar bonds backed by Alt-A loans with a few years of fixed rates rose to 45 cents, from 35 cents, according to the bank’s reports. Alt-A mortgages fall between prime and subprime in terms of expected defaults.

“Just the announcement of legacy RMBS being included in TALF has already had a major impact,” Roger Lavan, a portfolio manager in New York at Stone Harbor Investment Partners LLP, a fixed-income asset manager, said in an e-mail today. “Not including legacy RMBS in TALF would be a big mistake.”

Another factoid that Bloomberg failed to mention: participation to date is underwhelming, with only $30 billion uptake so far.

Many commentators chose to focus on Dudley’s speech, in which he defended the use of AAA ratings as the basis for determining eligibility for the program (the argument being that it is safe). But as insulting to the intelligence as it is to hear him say that, this has been the program’s design from the get-go.

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  1. joebhed

    Lest we forget.
    These failures were the jewels of the Summers-Geithner-Bernanke team of financial seers.
    The turnaround scenario of the smartest kids in the room is starting to look a little fairy-tailish.
    Pssst..Obama !
    Look elsewhere.

    We've known from day one that they were making it up as they went along.
    For good reason.
    We have NEVER been here before.
    Unprecedented times.
    Trend curves are meaningless.
    The only real solution is a new money system.
    And, of course, in the meantime there'll be a lot of "shorting" the American people from their effort to get out of this financial abyss.
    Dare we mention that it was these jewels that the equity markets pointed to as confidence-builders to pump some rip-roaring growth into the stock market?
    So, now that we're eight months and numerous $$Trillions of new taxpayer debt into putting out the fire, maybe someone can take a serious look at what went wrong.
    Wha 'appen?
    And start looking for an exit strategy.

  2. Luke Lea

    Does this refer to those apprently not-so-impossible-to-value assets we've heard so much about:

    'The TALF and PPIP plans contributed to a rally among many types of home-loan bonds. Typical prices for the most-senior prime-jumbo securities jumped to about 83 cents on the dollar on May 14, from about 63 cents March 19, before steadying, according to Barclays Capital. Similar bonds backed by Alt-A loans with a few years of fixed rates rose to 45 cents, from 35 cents, according to the bank’s reports. Alt-A mortgages fall between prime and subprime in terms of expected defaults.'

  3. Steve

    The Fed already owns plenty of legacy RMBS, from Bear Stearns. But Treasury agreed to absorb the losses on that paper; not so for TALF. If the Fed takes any significant loss on TALF, its independence is finished (and if it needs to be recapped, a dollar panic is not unthinkable).

    I'm getting the eerie sense that even the government can't afford to absorb the losses of the private sector. I'm sure there are other factors at work here; but if AAA RMBS starts dropping again with the Fed out of the picture, watch out. Plan B time.

    (As a general observation, it's odd that people continue to look to the equity markets for report cards on the credit markets — equities took months to figure out what had started happening in the money markets in July, 2007.)

  4. a stranger

    That is really some factoid. How is it meaningful without the appropriate context? 30 billion is underwhelming compared to what? 2006 issuance? 2008 issuance? 2009 issuance? I'd say that ~27 billion is actually a fairly good participation number given what was TALF-eligible in the first place – I wouldn't call the 50-70% uptake in the first three auctions underwhelming. TALF requires new issuance with underlying new loans, remember? (Although to be nitpicky, this is not entirely true for SBA loans.)

    Although how you can say a program is being "curtailed" when they never actually expanded into the space in the first place is a bit beyond me. BB also doesn't mention the fact that TALF is of fairly limited use given that its enactment is only under 13(3) rules. Given that they do auctions once a month and only have until the end of 2009 to do this (unless they can continue to say that 13(3) is still relevant and can extend the program), RMBS is a bit of a waste of resources anyway.

  5. Yves Smith

    a stranger,

    I didn't put it in because I did not have the link, but non-agency securitized credit issuance in 2006 was $1.8 trillion globally. I don't have the global figures for 2007, but in the US, it was over $900 billion in 2007 and even in considerably shell shocked 2008, $150 billion. So $30 billion is not much at all relative to the size of this market, or presumably the level of activity the powers that be would like to see again.

    And the folks in securitization-land have said the model is broken. This is not the sort of situation where a jump start might lead to a renewal of the former level of activity. Look at how Freddie and Fannie have had to backstop a vast amount of the mortgage market, when their pre-crisis market share was about 40%.

    I will confess I did not track down other Fed statements on its intentions re the RMBS program beyond the initial press release. However, the market reaction said investors certainly believed the program was a go. Dudley sounds as if he is trying to rein in expectations.

    And the amount of possible uptake is being curtailed by the expected S&P downgrades on CMBS, which are now part of the program.

  6. Richard Kline

    From MLEC on, the manifest need of these 'buy them clean' proposals from the financial industry, their constant sine qua non, is to find A Greater Fool. There are hundreds of billions of dollars of these things out their in their various tranches. Their value is declining, and can be expected to continue to do so. Securitized as they are, they are effectively non-renegotiable: you buy them, and you're stuck with them. More accurately, they stick _to you_, like the Blob. Money could be made on them surely, but only for buying them at a small enough fraction of face to protect oneself from any further (probable) downside surprises. That's a 'worse than fire sale' price, which would leave the current holders bankrupted . . . since the current holders ARE bankrupted. So the only solution is to find a greater fool to pay near to face.

    Well no, even the US Guvmint doesn't have that kind of dough. Uncle Feddy could pixelate some up, but our currency and interest rates has a great potential to discorporate in that scenario, and uncontrollable inflation is extremely likely (if hyperinflation is far from certain). Every cheery 'Son of MoLEC' proposal is hopefully vomited up in the wish that A Greater Fool will rush forward to guzzle down the spew—but no. No greater fool has stepped forward yet, not will one ever.

    That leaves only the last first hope of the financial industry for their 'buy us clean, Daddy' Plan A, for the US Guvmint to buy all of this stuff directly from private holders at delusional near-to-face values. This has never gotten off the ground politically, and we may hope that it never does; certainly, it will be total political suicide for any party or individual who endorses this. That was the reason, of course, why the industry has hoped to have this 'approved theft' done by faceless bureaucrats with the stroke of a keyboard, in the Fed, err, the Treasury, well no, the _FDIC_: look they don't care, but step on it. After which said faceless bureacrats would/could leave 'under a cloud' for a nice sunny spot offshore with a nice big salary provided for services rendered. But even _THAT_ hasn't yet gotten off the ground.

    Can we just stop this invidious nonsense? Please, Timmy?? Put those bankruptee OUT OF BUSINESS, not in the money. They gambled; they lost; they've cost the rest of us big time; and this continuous effort to shove their failure upon the public by any orifice available is worse than disgraceful. There is no fool greater than those that have wraught their own implosion. So bury them, already. If you aren't man enough for that, than resign and let us find somebody who is.

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