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Fed's consumer ABS liquidity plan spurs confusion

The US Federal Reserve's plan to boost consumer lending and reignite the fledgling asset-backed securitization market met with a muted response on Tuesday as investors struggled with the details.

The Fed, with the backing of the Treasury, launched a $200 billion Term Asset-backed Securities Loan Facility, or TALF, aimed at supporting the new-issue ABS sector, a crucial market for consumer lending.

The market for securitizations backed by auto loans, credit cards and student loans came to a halt in October as the credit crunch intensified and financing costs soared.

“Continued disruption in the ABS market could further deteriorate credit availability for consumers and increase the prospects for further deterioration in the economy generally,” the Treasury said in a statement on Tuesday.

The Fed's TALF program was created to stimulate lending at the consumer end and fuel spending to support the slowing US economy. But market participants said the program falls short.

One investor said the program does nothing to address the gridlock in the secondary market, where trading in ABS securities remains illiquid and spreads are holding at record wides.

“The plan is intended to ensure consumers have continued access to financing by indirectly purchasing recently originated assets, but does nothing to address existing ABS bonds,” said James Grady, portfolio manager at Deutsche Asset Management. “The response has been very muted because it does nothing for existing positions in the secondary market.”

The Fed's announcement was met with surprise and confusion and left investors clamoring for more details as to how the actual program would work.

Spreads on “AAA” consumer ABS debt were quoted flat to a touch tighter after the announcement, traders said.

“This does not facilitate willing buyers and willing sellers, if you shop around a bond but there are no takers and you can get a better deal from the Fed,” said Darcy Morrision, senior ABS analyst at Evergreen Investments.

In an afternoon conference call with brokers and investors, the New York Fed said it hoped to have the TALF facility up and running by February, but details were still to be ironed out, market sources said.

The term of the facility, currently set for one year, raised concerns.

“One of the fears in the market is if you cap it at one year, issuers will be less likely to go out longer in their tranches,” said one investor. “The Fed said it would be a minimum of a year but they would look to extend it if they needed to.”

Investors also sought clarity concerning the purchases of new securities and what would be deemed as new.

“They actually meant the origination date of collateral versus the origination date of the deal,” an investor said.

Market sources said the Fed believed the loans made would be fixed but collateral accepted would be fixed- and floating-rate securities.

Another market source said the program is being used as a form of leverage for the market.

“This is basically to add some leverage to the market because there is none. My question is, If having way too much leverage in the financial market is what caused the bubble and then deleveraging caused the crash, why are we adding leverage?” said the source who declined to be named.

Some likened the Fed's recourse loan to a repo transaction and said it was likely to benefit bank balance sheets and some funds that allow for the use of leverage.

“You basically keep the securities and keep the income stream, while making your interest payment on the loan, then take the money you receive and invest in something else which creates a second income stream,” said the source.

“It sounds very much like a repo transaction, but they're calling it a non-recourse loan,” the market source said. (Reuters)