U.S. Treasury Secretary Henry Paulson introduced the Term Asset-Backed Securities Loan Facility (TALF) in November 2008 as part of the ongoing U.S. effort to stabilize global financial systems and boost confidence among lenders. The move came in response to significant declines in the asset-backed securities (ABS) market, especially in the credit card sector.
Intended to jumpstart lending among consumers and small businesses by making funds available through ABS, TALF was funded with $200 billion to open up lending in nonrecourse loans (loans secured through collateral, typically real estate) through the New York Federal Reserve Bank. The U.S. Department of the Treasury is also backing the loans with $20 billion in cash in the form of credit protections to the NYFRB.
However, according to new research from TowerGroup, the size and design of TALF will prevent it from becoming a long-term answer to a possible freeze of U.S. consumer credit markets.
"The reason is that its size is fairly modest in terms of what they're trying to accomplish," said Dennis Moroney, TowerGroup's Research Director, Bank Cards. "However, in fairness to Paulson, TALF will eventually be expanded into other loan types. The distinction here is that they need to get investors back into the market, and they're trying to come up with creative ways to do that. So, they're modestly sticking their toes in the water to avoid bigger problems later on."
U.S. credit card issuers rely on ABS to fund as much as half of their lines of credit. Between 1991 and 2002, the number of cards, transaction volume and receivables increased more than 10 percent annually.
But lending institutions have tightened lines of credit, which dropped from a $86 billion total in the first quarter 2007 to $56 billion in the second quarter 2008, meaning $30 billion less was available for consumer lending. This has led to lower transaction volumes and smaller ticket sizes in the payments sphere.
Additionally, proposed changes by the Federal Reserve Board, the Congress and the Financial Accounting Standards Board could inhibit pricing flexibility, reconfigure consumer credit risk profiles and repatriate billions of dollars of credit card debt back to the card issuer's balance sheets. This could effectively alter the credit granting process and the amount of lending capital available.
"The lenders have to make loans; they have to have a market to sell or securitize loans," said Bobbie Britting, Research Director, Consumer Lending Practice at TowerGroup.
"If financial institutions can't securitize their portfolios, they have no money to make loans, and card usage is adversely impacted."
TowerGroup believes these changes will adversely affect credit card issuers' profitability by reducing interest and penalty fees, which generate approximately 80 percent of total credit card income. "I'm not saying that the banks are without sin - some of their tactics are borderline aggressive, but this is something that happened over time when people went to other forms of borrowing on credit, like home equity loans," Moroney said.
"Credit card companies needed a way to come up with the difference in the earnings they weren't getting from customers who stopped revolving their balances. So, they came up with these punitive fees, and now people are crying financial stress."
Moroney believes real stimulation entails providing people with additional cash flow so they have money to spend. "But unless the government can improve confidence in the market, both lenders and consumers are going to basically have a circle the wagons mentality," he said. "Lending and spending will plummet. TALF could help secure those assets, yes, but until you can bolster confidence in the marketplace, it doesn't matter how well-intentioned you are."
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