Another Day Another $1 Trillion – TALF

February 10, 2009

By Nicole Mayer:

$1 Trillion More to go to Financial Institutions and Investors

There has been a lot of news about the American Recovery and Reinvestment Act discussed by President Obama last night and passed by the Senate today. Today, we also heard from Treasury Secretary, Timothy Geithner, about a new Financial Stability Plan, consisting of three parts. One of the three being the Term Asset Backed Lending Facility (TALF) introduced last November.

TALF was first presented as a $200 billion package on November 25, 2008, meant to stimulate growth in the areas of student lending, automotive lending, credit card lending and small business lending. Throughout 2008 and the beginning of 2009, the amount marked for the TALF program remained at $200 billion, that is, until today. Today, the Federal Reserve Board announced that the TALF program could expand to $1 trillion and may include “commercial-backed securities, private label residential mortgage-backed securities and other asset-backed securities.” Geithner’s description of the Financial Stability Plan today confirmed that TALF has increased five-fold overnight. As a result of this increase, the Treasury will have to use $100 billion, instead of the planned $20 billion, to leverage up to $1 trillion of lending from the Federal Reserve.

The date the TALF will begin will be announced later in the month; however, there was no mention today of the terms of the TALF program. With no mention of terms, one wonders whether the previous terms and conditions set forth for the TALF will still apply. Those terms and conditions contain a key restriction that renders an asset-backed security ineligible for TALF if it was “backed by loans originated by the borrower or an affiliate of the borrower.” This provision seeks to ensure that those companies that made the risky loans in the first place are not bailed out by the TALF program. However, with the introduction of the Financial Stability Plan it is unclear whether new terms and conditions will be put in place.

Additionally, President Obama recently announced a limitation on top executive compensation of $500,000 for companies that received a substantial amount of federal funds. There has been no mention on whether the same condition, or any other supervision of executive compensation, will apply to the institutions participating in the TALF program.