Will TALF Soar? Or Fall Flat?

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No Student Loan Participants Yet

Among the prime auto-loan issuers that have announced plans to tap into TALF, Nissan Motor's (NSANY) finance arm sold $1.3 billion of triple-A bonds on Mar. 19, and Ford Motor (F) said it soon will issue $2.95 billion of TALF-eligible bonds. Huntington Auto has also mentioned a debt offering.

While private student-loan providers, such as Sallie Mae and First Marblehead, didn't apply for the first round of TALF, they are considering it for future rounds, according to Mark Kantrowitz, publisher of www.FinAid.org, a free Web site for advice and tools on student financial aid. Improved terms, such as lower interest rates, may make TALF loans attractive to private lenders, especially for consolidation loans, which many lenders have been unable to securitize because the margins are too thin, he says.

The main impediment to student-loan providers using TALF is the mismatch between the three-year term on TALF loans and the average 12-year life of private student loans, which can stretch out to 30 years.

"I'm not entirely certain this is going to lead to an improved liquidity situation," says Kantrowitz. It may serve as an incentive for lenders who have considered securitization but remain undecided. The three-year term, however, means lenders would need to find an alternate source of liquidity after the three years are up, he says.

Credit-Card Decline

Despite the request for $2.8 billion in loans to finance credit card securities in the first round, Valentin says it may be tough to attract a great number of credit-card issuers to the TALF. Currently, credit-card issuers are all bank holding companies, which are in no rush to securitize their receivables. That's partly because credit-card use is shrinking, not growing, and partly to consumers having other funding sources, including savings deposits and funds from the Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program (TLGP), says Valentin.

"Credit-card issuers are waiting to see what the price [of loans] will be," he says. "If the cost is low enough, and it's cheaper to issue debt than go through the TLGP, they'll use [TALF]."

Elliott at Brookings thinks there will be interest among credit-card issuers. "If you're American Express (AXP) and you're not able to securitize your old [loans], the ability to fund new stuff with securitization through TALF is a godsend."

To expand TALF to include commercial mortgage-backed securities will require a somewhat different structure, says Davis. Either the program will have to provide funding for longer than the current three years, or the securities that qualify for loans will have to be expanded to include longer maturities. Keefe Bruyette & Woods, in a Mar. 19 research note, said CMBS would require funding for seven years, while funding for nonagency residential mortgage-backed securities would need to run five years.

For Davis, the real purpose of TALF is to break the pervasive negative psychology in the market, which has killed investor appetite for risk. Investor confidence often depends on leadership in policy. Contrary to 1931 and 1932, when little leadership was apparent and confidence evaporated as a result, the Fed has been very aggressive this time on the policy front.

"The stakes haven't been this high for policy in a long time," Davis says.

Bogoslaw is a reporter for BusinessWeek's Investing channel.