Jump-Starting Securitization

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The tepid reaction is understandable. Many worry that asset prices will continue to tumble. Others fear the government will interfere in their operations, later deciding to recoup what's seen as excessive pay and profits or restricting participants' ability to hire foreign workers.

But TALF is also a work in progress, and the program may ultimately entice investors and jump-start securitization. Among the kinks: the list of eligible assets that investors can purchase. Under the current TALF rules, new securities backed by auto loans, credit-card debt, student loans, small-business loans, and other marginal loan categories qualify for government aid. But such asset classes have historically made up a small piece of the overall securitization market, so hedge funds and the like traditionally don't find those sorts of securities all that appealing.

Crucial Categories

Meanwhile, there aren't that many loans to securitize. Cars aren't selling, and consumers are cutting back on their credit cards. Plus, banks are tightening their lending standards, says Rod Dubitsky, an analyst at Credit Suisse (CS). "It's a new program; these things take time to work out," says one regulator involved with TALF. With one big deal, "the market could ramp up quickly."

To ensure that happens, the government is crafting TALF 2.0. The new incarnation of the program likely will include commercial and residential real estate debt. Those two categories are crucial, since they represent a significant part of the securitization market. There's also pent-up demand for those types of loans.

Consider commercial mortgages. Some $37 billion of such loans are due this year, with an additional $85 billion due by 2011. With the securitization market stalled, those assets can't be refinanced, leaving many analysts fearful the economy could suffer another blow if those loans aren't rolled over. TALF could help alleviate that looming problem by attracting more investors. "Over time, [TALF] will have a far greater impact," says Jean-Francois Tremblay, a vice-president at credit rating agency Moody's (MCO).

Money managers are gearing up for the new-and-improved version of TALF. NewOak Capital, an asset manager that specializes in commercial and residential mortgage securities, has created a TALF fund for big investors. Clients haven't signed on yet, but NewOak Managing Director Andrew Akers is confident there will be interest once the government tweaks the program. "We are ready to provide this for our customers," says Akers.

NewOak isn't alone. In the past month more than a dozen entities have been incorporated with "TALF" in their names, including the TALF Opportunities Fund and TALF Catalyst Partners. A handful of big banks, including Barclays (BCS), JPMorgan Chase (JPM), and Deutsche Bank (DB), are putting together investments pools that would allow wealthy clients to profit potentially from TALF. The banks are waiting for the Fed to greenlight the deals. Says KBW's Cannon: "If the stars line up, TALF will help."

With Jessica Silver-Greenberg.
Sasseen is Washington bureau chief for BusinessWeek. Goldstein is a senior writer at BusinessWeek.