The Term Asset-Backed Securities Loan Facility (TALF) is a program created by the

U.S. Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...

(the Fed) to spur consumer credit lending. The program was announced on November 25, 2008, and was to support the issuance of asset-backed securities (ABS) collateralized by

student loan A student loan is a type of loan designed to help students pay for post-secondary education and the associated fees, such as tuition, books and supplies, and living expenses. It may differ from other types of loans in the fact that the interest r ...

auto loan Auto may refer to: * An automaton * An automobile * An autonomous car * An automatic transmission * An auto rickshaw * Short for automatic * Auto (art), a form of Portuguese dramatic play * ''Auto'' (film), 2007 Tamil comedy film * Auto (play), ...

credit card A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's accrued debt (i.e., promise to the card issuer to pay them for the amounts plus the o ...

loans, and loans guaranteed by the

Small Business Administration The United States Small Business Administration (SBA) is an independent agency of the United States government that provides support to entrepreneurs and small businesses. The mission of the Small Business Administration is "to maintain and stre ...

(SBA). Under TALF, the Federal Reserve Bank of New York (NY Fed) authorized up to $200 billion of loans on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans. (However, only approximately $70 billion was ever lent, and only approximately $50 billion at any one time.) As TALF money did not originate from the

U.S. Treasury The Department of the Treasury (USDT) is the national treasury and finance department of the federal government of the United States, where it serves as an executive department. The department oversees the Bureau of Engraving and Printing and t ...

, the program did not require congressional approval to disburse funds, but an act of Congress forced the Fed to reveal how it lent the money. The TALF began operation in March 2009 and was closed on June 30, 2010. TALF 2 was initiated in 2020 during the

COVID-19 pandemic The COVID-19 pandemic, also known as the coronavirus pandemic, is an ongoing global pandemic of coronavirus disease 2019 (COVID-19) caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2). The novel virus was first identi ...

Purpose

The Fed explained the reasoning behind the TALF as follows:

Structure and terms

According to the plan, the NY Fed would spend up to $200 billion in loans to spur the market in securities backed by lending to small business and consumers. Yet, the program closed after only funding the purchase of $43 billion in loans.Wilson, Linus, Toxic Asset Subsidies and the Early Redemption of TALF Loans (August 17, 2011). Available at SSRN: http://ssrn.com/abstract=1742640 Barbara Kiviat, TALF money was not to go directly to those small businesses and consumers, but to the issuers of asset-backed securities. The NY Fed would take the securities as

collateral Collateral may refer to: Business and finance * Collateral (finance), a borrower's pledge of specific property to a lender, to secure repayment of a loan * Marketing collateral, in marketing and sales Arts, entertainment, and media * ''Collate ...

for more loans the issuers would ostensibly make. To manage the TALF loans, the NY Fed was to create a special-purpose vehicle (SPV) that would buy the assets securing the TALF loans. The U.S. Treasury's

Troubled Assets Relief Program The Troubled Asset Relief Program (TARP) is a program of the United States government to purchase toxic assets and equity from financial institutions to strengthen its financial sector that was passed by Congress and signed into law by President ...

(TARP) of the

Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008, often called the "bank bailout of 2008", was proposed by Treasury Secretary Henry Paulson, passed by the 110th United States Congress, and signed into law by President George W. Bush. It became ...

would finance the first $20 billion of asset purchases by buying debt in the SPV. Eligible collateral included U.S. dollar-denominated cash ABS with a long-term credit rating in the highest investment-grade rating category from two or more major nationally recognized statistical rating organizations (NRSROs) and do not have a long-term credit rating of below the highest investment-grade rating category from a major NRSRO. Synthetic ABS (

credit default swap A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a debt default (by the debtor) or other credit event. That is, the seller of the CDS insures the buyer against som ...

s on ABS) do not qualify as eligible collateral. The program was launched on March 3, 2009. Under TALF, the Fed lent $71.1 billion, but never more than $49 billion at any one time before it stopped making new loans in July 2010. About $11.6 billion in loans remained outstanding as of then, according to Fed data. No credit losses have been reported.
"Factbox: How the TALF loan program worked"
Retrieved March 28, 2020 Because the money came from the Fed and not the Treasury, there was no congressional oversight of how the funds were disbursed, until an act of Congress forced the Fed to open its books. Congressional staffers are examining more than 21,000 transactions.Matt Taibbi
"The Real Housewives of Wall Street"
''Rolling Stone'' (April 12, 2011). Retrieved April 18, 2011 One study estimated that the subsidy rate on the TALF's $12.1 billion of loans to by buy commercial mortgage backed securities (CMBS) was 34 percent.

The Public-Private Investment Program

On March 23, 2009, U.S. Treasury Secretary

Timothy Geithner Timothy Franz Geithner (; born August 18, 1961) is a former American central banker who served as the 75th United States Secretary of the Treasury under President Barack Obama from 2009 to 2013. He was the President of the Federal Reserve Bank o ...

announced the Public-Private Investment Program (PPIP) to help struggling banks by buying up to $1 trillion of toxic assets from their' balance sheets. The program was to revive the market for unpackaged loans and mortgage securities not backed by

Fannie Mae The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the N ...

Freddie Mac The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is a publicly traded, government-sponsored enterprise (GSE), headquartered in Tysons Corner, Virginia.Christopher Condon and Jody Shenn
"No Good Deed Goes Unpunished as Banks Seek Profits"
Bloomberg (January 4, 2010). Retrieved April 19, 2011 There were two primary programs, the Legacy Loans Program and the Legacy Securities Program."Fact Sheet: Public-Private Investment Program"
(PDF) U.S. Treasury (March 23, 2009). Retrieved March 26, 2009 The

Federal Deposit Insurance Corporation The Federal Deposit Insurance Corporation (FDIC) is one of two agencies that supply deposit insurance to depositors in American depository institutions, the other being the National Credit Union Administration, which regulates and insures cr ...

(FDIC) was to provide non-recourse loan guarantees for up to 85 percent of the purchase price; asset managers were to raise money from private investors, with capital and loans from taxpayers through the U.S. Treasury, TARP and TALF providing the rest of the funds. The initial size of PPIP was projected to be $500 billion of the $1 trillion limit and was expected to free up money for lending. The major stock market indexes in the United States rallied on the day of the announcement rising by over six percent, with shares of bank stocks leading the way.Edmund L. Andrews and Eric Dash
"U.S. Expands Plan to Buy Banks’ Troubled Assets"
''The New York Times'' (March 23, 2009). Retrieved April 19, 2011 Economist

Paul Krugman Paul Robin Krugman ( ; born February 28, 1953) is an American economist, who is Distinguished Professor of Economics at the Graduate Center of the City University of New York, and a columnist for ''The New York Times''. In 2008, Krugman was ...

was very critical of the program, arguing the non-recourse loans led to a hidden subsidy that would be split by asset managers, banks' shareholders and creditors. Banking analyst Meridith Whitney argued that banks would not sell bad assets at

fair market value The fair market value of property is the price at which it would change hands between a willing and informed buyer and seller. The term is used throughout the Internal Revenue Code, as well as in bankruptcy laws, in many state laws, and by sever ...

s because they would be reluctant to take asset writedowns. However, just months after PPIP began, the debt became a money-maker when the bonds rallied and banks, instead of purging their balance sheets of toxic assets, began buying more home loan bonds lacking government guarantees.

Bank of America The Bank of America Corporation (often abbreviated BofA or BoA) is an American multinational investment bank and financial services holding company headquartered at the Bank of America Corporate Center in Charlotte, North Carolina. The bank ...

, Citigroup,

Morgan Stanley Morgan Stanley is an American multinational investment management and financial services company headquartered at 1585 Broadway in Midtown Manhattan, New York City. With offices in more than 41 countries and more than 75,000 employees, the fir ...

and Goldman Sachs added a combined $3.36 billion of the debt, which just months earlier, had been of little interest to buyers. Michael Schlachter, the managing director of an investment consulting firm in Santa Monica, California called it "absolutely ridiculous" that banks may profit from speculating on toxic debt, when their pursuit of it caused the financial crisis. Schlachter said, “Some of them created this mess, and they are making a killing undoing it.” The prices for some of the securities that PPIP was to buy almost doubled between March 2009 and the end of the year, a rally that was in part caused by traders jumping in before the PPIP funds were available, according to one trader. The director of research at an investment consulting firm said that banks increased their debt holdings following the announcement of PPIP was hardly surprising. “Any time the government says, ‘We’re going to buy something in the securities market,’ they're putting out a sign that says, ‘Free money, come and get it’,” he said.

Congress demands oversight

In April 2009, Congress passed legislation that included an amendment telling the Fed to reveal the names of the banks and other institutions that received $2.3 trillion in taxpayer-backed bailout loans and other financial assistance."Congress to Fed: Open the Books"
Bernie Sanders, U.S. Senator for Vermont. (April 29, 2009). Retrieved April 21, 2011 Limited information on 21,000 transactions made by the Fed between December 1, 2007 and July 21, 2010 was released on December 1, 2010Don Bauder
"The Federal Reserve's Money Orgy"
''San Diego Reader'' (April 27, 2011). Retrieved May 1, 2011 and is now being examined by Senate and House staffers. In the history of the Fed, this is the first time it has opened its books to Congress. Bailout aid was sent to banks in

Mexico Mexico (Spanish: México), officially the United Mexican States, is a country in the southern portion of North America. It is bordered to the north by the United States; to the south and west by the Pacific Ocean; to the southeast by Guatema ...

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and

Bavaria Bavaria ( ; ), officially the Free State of Bavaria (german: Freistaat Bayern, link=no ), is a state in the south-east of Germany. With an area of , Bavaria is the largest German state by land area, comprising roughly a fifth of the total lan ...

, billions of dollars were sent to several Japanese automobile companies, Citigroup and

each received $2 trillion in loans and billions were sent to millionaires and billionaires with addresses in the Cayman Islands. Said Warren Gunnels, an aide to Senator Bernie Sanders, sponsor of the amendment calling for Fed transparency, "Our jaws are literally dropping as we're reading this." Gummels said each one of the transactions was "outrageous". In one example highlighted by ''

Rolling Stone ''Rolling Stone'' is an American monthly magazine that focuses on music, politics, and popular culture. It was founded in San Francisco, California, in 1967 by Jann Wenner, and the music critic Ralph J. Gleason. It was first known for its ...

'', nine loans were made to Waterfall TALF Opportunity, an

offshore company The term "offshore company" or “offshore corporation” is used in at least two distinct and different ways. An offshore company may be a reference to: * a company, group or sometimes a division thereof, which engages in offshoring business pr ...

formed in June 2009. Two of the chief investors of Waterfall are Christy Mack and Susan Karches, who have little or no previous business experience. Mack is married to John Mack, former chairman of Morgan Stanley and Karches is the widow of Peter Karches, once the president of Morgan Stanley's investment banking division and good friends of the Macks. Waterfall was capitalized with $14.87 million, presumably from Mack and Karches. Two months after the company was established, the Fed gave them low-interest TALF loans totaling $220 million. The way TALF loans were set up, 100 percent of any profit is retained by the borrower, but the Fed and the Treasury absorb any losses. The Fed and the Treasury are funded by taxpayers. Waterfall used the $220 million TALF loans to buy securities, including a large pool of commercial mortgages managed by Credit Suisse, a company once headed by Mack's husband. As of autumn 2010, about 68 percent, some $150 million, had not yet been paid back. The Fed refuses to provide any information on how it priced individual securities bought with TALF funds. It only provides lump sums of what was spent on a block of securities, but without indication of how many units were bought, making analysis of TALF impossible. The public has no way of knowing how much Waterfall earned on the securities it bought, although the Fed values them at $253.6 million. Securities lawyer and

whistleblower A whistleblower (also written as whistle-blower or whistle blower) is a person, often an employee, who reveals information about activity within a private or public organization that is deemed illegal, immoral, illicit, unsafe or fraudulent. Whi ...

Gary J. Aguirre says the pricing information is essential to validating the Fed's role in TALF, to judge how the taxpayers' funds were used. Senator

Chuck Grassley Charles Ernest Grassley (born September 17, 1933) is an American politician serving as the president pro tempore emeritus of the United States Senate, and the senior United States senator from Iowa, having held the seat since 1981. In 2022, h ...

has requested detailed information from Waterfall about its transactions and Sanders has asked Federal Reserve chief Ben Bernanke for more detailed information on loans made to Waterfall, former

Miami Dolphins The Miami Dolphins are a professional American football team based in the Miami metropolitan area. They compete in the National Football League (NFL) as a member team of the league's American Football Conference (AFC) East division. The team p ...

owner H. Wayne Huizenga and John Paulson, a hedge fund manager.

References

External links