Wednesday, April 08, 2009

TALF: Anoat system?

This is the second time I've made an Anoat allusion in a week. That has to be a record of some kind.

Anyway, how worried should we be about the lack-lustre start to the TALF? The thing that really worries me long-term is that we fall into a deflationary spiral, which really would result in Great Depression: Episode II. As you can see in this graph...

... bank reserves have sky-rocketed. Meaning that while the Fed has been busy "crediting bank reserves (i.e. printing money) to pay for their programs, banks have been shoving that money under the proverbial mattress.

The so-called shadow banking system is even worse. The ABS market has completely collapsed (at least until the TALF, more on that coming). Thus all spigots to consumer credit have slowed to a trickle. That has serious implications for the de facto money supply, which by my estimation is sharply negative.

TALF aims to reverse that. We might not be able to force banks to lend, and maybe we really want them to rebuild capital anyway. And we do want consumers to save and rebuild their own balance sheets. But we also don't want them to over-save. That's how we become Japan. But if we get a decent new issue ABS market doing, then at least consumers who can afford credit can access credit.

The TALF was supposed to work by basically giving a tax-payer subsidized free lunch. A nearly guaranteed arbitrage. But in fact, no one is showing up at the Fed to take out TALF loans.

Its worrisome, but we shouldn't panic yet. First, we don't really care how much the Fed lends under the TALF program. We actually only care that the ABS market gets back on its feet. So far, we've only had very high quality ABS deals get done since the TALF: a couple auto loan deals, a couple credit card deals, and a student loan deal back by the Department of Education.

ABS traders I've talked to say there is plenty of demand for those deals, but for whatever reason it isn't TALF demand. Its possible that buyers have other funding options away from the TALF. Amidst worries about Congressional interference in compensation and other BS, I'd sure as hell take some other funding option even if it were at a higher cost. The ability to bring back my girlfriend from the dead just isn't worth making a deal with Darth Pelosi.

There is also supposedly strong secondary demand for ABS, which is stuff that wouldn't be TALF eligible anyway. Its almost like a market that's properly functioning! People are looking for good bonds at decent spreads!

Anyway, its possible that the TALF actually revives the market without being used heavily. This is basically what happened with the Fed's commercial paper program. It revived that market at least to the point where the top issuers can access the market.

So the thing to watch is not TALF loans, which I'm sure is what the media will focus on. Watch ABS issuance.


In Debt We Trust said...

Student loan demand should remain strong.

Especially since it is legally impossible (short of death) to escape student loan obligations.

Brian said...

What bloomberg functions do you typically use to monitor the ABS market?

Jeffrey Beaumont said...

TALF eligible World Omni and Carmax deals have priced their last cash flow seniors well inside a non-TALF eligible Case New Holland deal.

How do used car loans present a better risk profile than loans for agricultural equipment? All things being equal, they don't. And I'm not an economist, but I wouldn't assume they lead to a more productive economy either. The government should be using whatever capability it has to ease the refinancing of worthy loans, not to create more dubious loans.

ab said...

Take your point Jeff, but not a great comparison. World Omni is ~90% new cars, and Carmax's structure makes it tough to compare the bonds directly to CNH (subordination of 14% vs 2.5% protecting the A4s).

More significant though, if we're looking to spur consumer spending (which I think is what the TALF is supposed to address), the auto loan market probably is more important than the Ag equipment loan market.

Sameer said...

How does a small time retail investor participate in this free bailout lunch?

Are there mutual funds that invest in this stuff? Or I need to have serious $$$ to show up at the party?

In Debt We Trust said...


Bill Gross has been buying this stuff for ages. So have a bunch of other funds. Also, look into Allianz (parent company of Pimpco) bonds.

Disclaimer - Do your own d.d. I am not responsible for any trading losses.

Flow5 said...

Other things being equal, wouldn't banks continue to "roll over" their paper with the same party, and maybe even receive discounted terms for their continued business?

What would be the incentive to change?

Accrued Interest said...




Car loans are a bigger sector and seen as more liquid, in addition to what others are saying.


Not sure I follow.

nades said...

LOL I had to look up an Anoat!

And i found out they have a wookipedia!

Learning more and more every day!

Thanks for the blog! :)

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mojakus said...

Just a quick clarifying note - the increase in excess reserves held by banks is not in and of itself proof that banks aren't lending. The total level of excess reserves can only be brought up or down by the Fed - i.e. only the Fed has the power to create or destroy top-line system-wide reserves; banks can only trade their relative holdings of the total amount among themselves. Excess reserves (broadly part of the monetary base) are subject to a multiplier which yields aggregate monetary supply.

That being said, combining an analysis of excess reserves with other indicators such as the Fed loan surveys is a good way to see what banks are doing with their asset portfolios.

re: TALF, the Fed/Treasury can't be too happy that more card deals aren't getting done (big issuers are generally holding out for a L+50 funding rate and financing the assets on-balance-sheet via TLGP issuance).

P.G. said...

"Darth Pelosi"?

I love it!

Lockstep said...

Good post

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