Bernanke Tries to Push an Unpopular TALF Program

Federal Reserve Chairman Ben Bernanke last Friday touted the benefits of continuing the Term Asset-Backed Loan Facility (TALF), but the program has been largely unused to date.

“In response to the financial crisis that began more than two years ago, the Federal Reserve has introduced various programs to improve the functioning of key financial markets, with the goal of helping to restore the flow of credit that our economy needs. Usage of many of these programs has been winding down as markets improve, but one program for which an ongoing need still clearly exists is the Term Asset-Backed Securities Loan Facility, or TALF,” Bernanke told the Congressional Black Caucus Foundation’s Annual Legislative Conference. “This program, which was implemented this year, has helped restart the securitization markets for various types of consumer and small business credit. Securitization markets are an important source of credit, and their virtual shutdown during the crisis has reduced credit availability for many borrowers. Since its inception, the TALF has indirectly financed nearly 3 million loans to households (excluding credit card loans) and nearly 400,000 loans to small businesses.”

However, the actual use of the TALF, now at about $40 billion, is a far cry from the $1 trillion available in the program, said Dan North, chief economist at Euler Hermes ACI, a trade credit insurance firm.

“I’m puzzled that there hasn’t been greater participation,” North said. “The asset-backed securities in the TALF should go up over time. And if they fall, the government absorbs a significant portion of the loss. Other loans are far more risky because they don’t have this government backstop.”

Investors participate in the TALF by receiving loans from the Federal Reserve to finance purchases of asset-backed securities. TALF was designed from the start to be available to a diverse set of participants: TALF loans to purchase asset-backed securities are available to virtually any U.S.-domiciled firm, and firms can participate with investments as low as $500,000. There have been 121 borrowers so far, including investors of all sizes, according to Bernanke.

But with chargeoffs continuing to rise, lenders are unlikely to participate in the program until there is a clearer picture that the economy is well into a recovery stage, North said.

John Jay, senior analyst at Aite Group, agreed, saying that lenders won’t feel comfortable with various credit granting programs until there is a sign that job losses have stopped and companies are hiring again. The latest monthly unemployment figures come out Friday, with many economists expecting the figure to inch nearer to 10 percent.

“Banks are still grappling with credit card losses,” Jay said. “They are still rationalizing the credit that they give. So they are not granting credit to people, which puts the kibosh on the growth of the TALF.”