Viewpoint: Goodbye TARP, Hello FSP
Yes. The new administration has renamed the plan to save the financial system. The acronym for the new scheme, FSP, stands for Financial Stability Plan. Right off this disappoints. We could say TARP, could make TARP puns, could even dress in TARP. Shall we call this F(i)SP? F(in)S? FinStab? Plain old Stab? Second disappointment: Treasury Secretary Timothy Geithner did not reveal much more about FiSP than had already been leaked -- and in many media outlets, deeply garbled or even, it felt made up. (What’s the risk a journalist would ever be subpoenaed to give up the name of a “source” that supplied stupid or false information on unformulated economic policies?) In fact, perhaps because he had the facts, he had a bit less to say than the media has reported he was planning to say. Still, FiSP brings some new muscle into the game. I was heartened to hear that recipients of CAP (Capital Assistance Program, the old Capital Purchase Program) will be subjected to comprehensive stress testing to product a realistic assessment of the exposures on their balance sheets. This isn’t pie-in-the-sky -- as an ex-research analyst, I know the software exists to analyze portfolios of MBS and ABS over multiple interest rate and credit loss scenarios, and maybe the regulators will actually license and use it. (Even the ratings companies have re-jiggered their old models to earn fees doing this sort of thing.) It’s just too bad this approach wasn’t considered before B of A was encouraged to buy Merrill, or TARP money was poured into Citibank. In fact, I don’t think the Treasury looked at a call report or asked for a CAMEL rating before pouring out the first round of TARP cash. Support for Small Business Administration loans was overdue. “Small business” just wasn’t a phrase you expected Paulson or Kashkari to utter. Geithner called for increasing the federally guaranteed portion of SBA loans and giving the SBA more power to expedite loan approvals. And securitization of SBA loans, which allows lenders to get these loans off their books and once had occupied a little corner in the ABS markets, could be reignited under TALF. But to my ears, the best news is that the Treasury will quintuple its participation in TALF (a pronouncable acronym for the Term Asset-Backed Securities Loan Facility) from $20 billion to $100 billion. In turn, the New York Federal Reserve Bank will leverage the FiSP funding to make up to $1 trillion in non-recourse loans secured by ABS issued since January 1, 2009. The securities must be backed by recently originated loans (different cut-offs for different asset classes). Any investor may borrow TALF funds for eligible collateral, which means TALF support extends from new issuance to support trading in these new securities. The hope is that TALF can re-start lending to consumers and small businesses as well as revive stalled ABS markets. Eligible collateral includes auto and student loans, credit card receivables, SBA-guaranteed small business loans, commercial real estate mortgages and private mortgages. There’s already been some thoughtful analysis of TALF among the handful of fixed income research groups still standing. For example, analysts at Barclays Capital concluded that TALF-financed investments can provide attractive new issue returns. And, as they point out, since the loan is non-recourse, borrowers essentially have a put -- if the collateral declines in value below the haircut by the end of the loan term, they can walk away. It they walk away, the NYFRD enforces its rights in the collateral and sells it into a special purpose vehicle established to manage such assets and capitalized with the $100 billion of FiSP funds from Treasury. In other words, the Treasury and the Federal Reserve are backstopping investor’s downside risk. At $20 billion of Treasury funds, the Barclay analysts thought TALF was a sign of strong commitment and a necessary step to get credit flowing again. At $100 billion, it actually might be the deux ex machina the markets have been praying for. The biggest disappointment was that “the comprehensive plan to address the housing crisis” is still TBA. Details, vowed Geithner, will be announced in the next few weeks. Worse than six more weeks of winter, this means several more weeks of talking heads and word slingers padding out the hours, minutes, newsprint and web pages with speculation about bankruptcy reform and loan modifications and bad banks, and what all. For which there is only one refuge: daytime TV. I wasted no time taking the cure and channel surfed over to The View, where the ladies were talking in rapid succession with Joan Rivers about locating the g-spot (Joan calls hers Amelia Earhart because “no one’s looked for it in 40 years”), which plastic surgeries Joan regrets now (none apparently), and why comics can make fun of their bodies and regular women can’t. In 3.2 minutes, I was cheered up, better informed than I’ve been in days, and ready to cough up a hairball of my own. Editor’s note: Linda Lowell is a 20-year-plus veteran of MBS and ABS research at a handful of Wall Street firms. She is currently principal of OffStreet Research LLC.