The Federal Reserve on Friday revealed financing terms for a $200bn lending facility that is expected to entice hedge funds to buy securities backed by auto loans and credit cards.
The lending programme is aimed at providing much-needed financing for auto loans, credit cards and student loans in light of the collapse of the securitisation markets that have long been used for this purpose.
The success or failure of the $200bn (€154bn, £135bn) term asset-backed lending facility (Talf), announced in November, will be very closely watched.
If it works, the programme is expected to be expanded to include securities backed by other types of assets, such as residential mortgages, in an effort to fill the huge financing gap hurting the economy as banks and investors continue to struggle with toxic assets, losses and writedowns. “The Fed has set the terms to make sure Talf works,” said Joseph Astorina, securitisation analyst at Barclays Capital.
As the Fed takes on the role traditionally played by banks, it has to balance the need to inject credit into the economy with the potential losses taxpayers could face if the investments go sour.
Hedge funds have not traditionally been significant buyers of triple A rated securities backed by consumer loans. However, the surge in yields available on these securities as the market has seized up, combined with the cheap financing now being offered by the Fed, is likely to entice many to invest.
The Fed will lend hedge funds, private equity funds and other US investors the value of the underlying asset-backed security. It will then subtract a “haircut”, set at between five and 16 per cent, depending on the riskiness of underlying loans and their maturity.
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