The Federal Reserve Bank of New York has released results from the fourth round of funding under the Term Asset-Backed Securities Loan Facility (”TALF”).  The results show that TALF - designed to promote consumer and small business lending and reduce borrowing costs - has continued to gain momentum.  The program, as discussed in a previous post on this blog, provides financing to investors to encourage the purchase of certain AAA-rated asset-backed securities (”ABS”).  During the first round of funding, which commenced in March, TALF made approximately $4.7 billion in loans.  During the April offering, investor demand dropped to $1.7 billion.  Since then, however, investors have requested $10.6 billion in loans during the May offering and $11.5 billion in loans during the June offering. 

Apart from the amount of loans being requested by investors, the number of sectors to which the ABS relate has also expanded.  During the first offering in March, investors sought loans for the purchase of ABS in the automobile and credit card sectors.  During the recent June offering, however, investors also sought loans for the purchase of ABS in the equipment, premium finance, small business, student loan and servicing advance sectors.

Shortly after the close of the June application period, Federal Reserve Bank of New York President and Chief Executive Officer William C. Dudley offered a preliminary assessment of TALF.  In the assessment, he addressed the criticism that TALF investors achieve relatively high returns.  He explained that while such possibility would likely diminish over time, it was absolutely essential now in order for TALF to improve the availability of credit and bring down the cost of borrowing.  Dudley also explained that one of the challenges that remains for the TALF program is striking an appropriate balance between sufficient protections against abuse of the program, on the one hand, and the degree of red tape and restrictions that could make the program unattractive to issuers and investors, on the other hand.

Dan Knox

President Obama yesterday signed into law S. 386, the Fraud Enforcement and Recovery Act of 2009, or FERA.  (Yes, “FERA” is a statutorily authorized short title for the statute.)  Although FERA was passed primarily to expand criminal sanctions for fraud and to authorize additional appropriations for enforcement, it also establishes a Financial Crisis Inquiry Commission to examine the causes, domestic and global, of the current financial and economic crisis.

The ten-member Commission will be composed of six Democrats and four Republicans and will have a professional staff and subpoena power.  In its examination of the causes of the financial and economic crisis, it is directed to give specific attention to a dizzying list of specific factors running the gamut from A to V; apparently Congress ran out of steam after the first 22 factors, but there are no immediately obvious omissions.  The Commission will also examine the causes of the collapse of each major financial institution that failed (including institutions that were acquired to prevent their failure), or was likely to have failed if not for the receipt of exceptional Government assistance, during the period beginning in August 2007 through April 2009.  The Commission will submit its report on December 15, 2010.  Its authority will terminate 60 days thereafter, using that additional time to provide congressional testimony and disseminate the final report.

John Baker

The Treasury Department announced earlier this week that it had received more than 100 applications for the Legacy Securities component of the Public-Private Investment Program (”PPIP”).  The press release explained that a variety of financial institutions have applied, including fixed income, real estate and alternative asset managers.  The goal of the PPIP’s Legacy Securities program is to clear up the balance sheets of banks and other financial institutions from what have become known as “toxic assets” in order to free up capital and stimulate the extension of new credit.  A further goal of the program is to indirectly establish a process of price discovery which will likely reduce the uncertainty surrounding these assets.  The Legacy Securities program combines financing from the Federal Reserve and Treasury with equity capital from the private sector.  This co-investment aims to align public and private interests by providing leverage to private investors while providing taxpayers with the opportunity to share in any upside gain.  The application deadline was April 24th and Treasury expects to inform applicants of its preliminary approval prior to May 15th.  Once an applicant receives approval, it may begin the process of raising the minimum of $500 million in private capital to be matched.  Treasury anticipates opening the program up to smaller fund managers in the future.

Dan Knox 

FundLaw has this post on FASB’s adoption of FASB Staff Position 157-4:

The Financial Accounting Standards Board has issued revised valuation guidance on valuing financial assets and liabilities when the volume and level of activity for the asset or liability have significantly decreased.   The new guidance applies to entities that value financial assets at fair value, specifically including investment companies. FSP FAS 157-4 replaces the guidance FASB issued in October, FSP FAS 157-3, on valuing financial assets in inactive markets. It generally is more deferential to current market conditions and prices than was the proposed version, Proposed FSP FAS 157-e. It also drops 157-e’s proposed two-step process for determining whether a market transaction is orderly.

As a basic principle, FSP FAS 157-4 states that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. The last four words are crucial: Regardless of the weight to be given to individual market transactions, and regardless of the period of time that the reporting entity intends to hold the asset or liability, the valuation process is intended to determine the point that is most representative of fair value under current market conditions (that is, in the inactive market).

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President Obama, in an April 14 speech, has indicated that he expects to implement a comprehensive new regulatory framework by year end:

We cannot rebuild this economy on the same pile of sand. We must build our house upon a rock. We must lay a new foundation for growth and prosperity — a foundation that will move us from an era of borrow and spend to one where we save and invest; where we consume less at home and send more exports abroad.

It’s a foundation built upon five pillars that will grow our economy and make this new century another American century: Number one, new rules for Wall Street that will reward drive and innovation, not reckless risk-taking — (applause) . . . .

That’s the new foundation we must build. That’s our house built upon a rock. That must be our future — and my administration’s policies are designed to achieve that future.

Let me talk about each of these steps in turn. The first step we will take to build this foundation is to reform the outdated rules and regulations that allowed this crisis to happen in the first place. It is time to lay down tough new rules of the road for Wall Street to ensure that we never find ourselves here again. Just as after the Great Depression new rules were designed for banks to avoid the kind of reckless speculation that helped to create the depression, so we’ve got to make adaptations to our current set of rules: create rules that punish shortcuts and abuse; rules that tie someone’s pay to their actual job performance — a novel concept — (laughter); rules that protect typical American families when they buy a home, get a credit card or invest in a 401(k). So we’ve already begun to work with Congress to shape this comprehensive new regulatory framework — and I expect a bill to arrive on my desk for my signature before the year is out.

 

 The President gave no details on the rules that would tie pay to job performance, but that obviously is a high-profile issue that has excited much public interest.   However, in his March 26 testimony before the House Financial Services Committee, Treasury Secretary Timothy Geithner said that regulators must issue standards for executive compensation practices across all financial firms, and those guidelines should encourage prudent risk-taking, incent a focus on long-term performance of the firm rather than short-term profits, and should not otherwise create incentives that overwhelm risk management frameworks.   Geithner’s testimony, and a sometimes more-detailed Treasury press release issued the same day, are summarized in this FundLaw post:

 Secretary of the Treasury Timothy Geithner, in testimony before the House Committee on Financial Services and in a separate press release, has provided an initial framework for the Obama administration’s proposed reform of the regulation of financial services. Senator Chris Dodd (D – CT), Chairman of the Senate Committee on Banking, Housing and Urban Affairs, and Congressman Barney Frank (D – MA), Chairman of the House Financial Services Committee, have announced that they agree on the administration’s core principles and have pledged to work with each other and with the administration to modernize the financial regulatory system.

The regulatory reform framework will focus on four broad components:

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The Treasury Department has released a term sheet which makes mutual banks or savings associations eligible for TARP funding through the Capital Purchase Program (”CPP”).  Mutual banks - unlike traditional banks which are owned by the shareholders of a bank holding company - are owned by their depositors.  The application deadline for mutual banks to apply for CPP funds is May 14, 2009.  This expansion is consistent with Treasury’s goal of encouraging participation among a broad range of financial institutions, diverse in size, business focus, customer base, geographic coverage and product offerings.  Yet even as the program has now been expanded to include mutual banks, life insurance companies continue to wait for Treasury to further expand the program to allow for their participation.  This as many large life insurers are in the midst of reporting another quarter of losses.  Reports as recently as last week indicated that Treasury was set to approve life insurance company participation in the CPP program for those insurers that are bank holding companies or own a thrift.  Note that the funds which AIG received through TARP were not received through the CPP, but rather, where invested in AIG as a “systemically significant failing institution.”  The funding provided to AIG was in response to losses related to credit default swaps and not its life insurance operation.

Dan Knox

Federal Reserve Chairman Ben Bernanke and Federal Reserve Bank of New York President William C. Dudley recently responsed to a set of questions posed by the Congressional Oversight Panel regarding TALF.  In their joint response, they defended the programs commitment to rebuild the market for collateralized debt obligations (”CDOs”) and explained that TALF does not accept asset-backed collateral that might be regarded as complex CDOs.  They also described the safeguards that are built into the program which are designed to protect taxpayers from risk stemming from the fact that investors purchase asset-backed securities through the program on a highly-leveraged basis.  The questions posed by the panel - in large part - mirrored the concerns which were recently set out in an article by The Wall Street Journal®.  Apart from the responses, the Federal Reserve Bank of New York has also provided details on the TALF loan requests for the April 7th subscription period; an additional $1.7 billion in loans was requested for the auto and credit card sectors.  The results show that investors are continuing to move only slowly toward the TALF program.  The new loans will bear either a 2.8725% fixed or a 1.4694% floating rate.

Dan Knox

Five banks which received funding through the Troubled Asset Relief Program (”TARP”) have repayed the funds to the government.  The repayments - which are set forth on the most recent TARP Transactions Report - total $353 million.  While one of the bank’s cited its strong capitalization as the primary reason for repayment, others were quick to mention the restrictions on executive compensation within the stimulus bill.  Two other banks, both large insitutions which were among the first to receive TARP funding, have also expressed interest in repayment.  However, the terms of the TARP Capital Purchase Program permit repayment only with funds from an equity offering of similar amount approved by the institution’s primary federal bank regulator.

Dan Knox

The Securities and Exchange Commission (”SEC”) will hold an open meeting on April 8th to consider whether to reinstate the “uptick” rule.  The SEC intially adopted the “uptick” rule - which was embodied in Rule 10a-1 of the Securities Exchange Act of 1934 - as a means to restrict short selling in a declining market.  In basic terms, the “uptick” rule provided that a listed security could be sold short only at a price above the price at which the immediately preceding sale was effected.  The rule was abolished in July of 2007 following several economic studies which found that it had no impact on market volatility.  SEC Chairman Mary Schapiro previously indicated her support for the reimposition of the rule during her confirmation hearing in January.

Dan Knox

The Federal Reserve Bank of New York has released results from the first round of Term Asset-Backed Securities Loan Facility (”TALF”) funding.  In addition, the Federal Reserve Board has expanded the scope of collateral which may be pledged during the second round of funding.  The TALF program, as discussed in a previous post on this blog, provides financing to investors to support their purchases of certain AAA-rated asset-backed securities (”ABS”).  The goal is to increase credit availability and support economic activity by facilitating renewed issuance of consumer and small business asset-backed securities.  Investors benefit under the program as they are able to take advantage of the spread between the interest rate on TALF loans and the coupon rates on the asset-backed securities themselves. 

During the March 17th to 19th subscription period - for which funding settled on March 25th - TALF made approximately $4.7 billion in loans.  These loans relate both to the Auto and Credit Card sectors and were issued with either fixed rates of 2.733% or floating rates of 1.523%.   Although the amount of loans issued was less than anticipated, that fact should not be interpreted to mean that TALF is a failure.  Many potential investors are still working through the complex legal issues involved or have decided to wait and see how well the program works before participating.  Larger loans are expected to be made under future offerings.

In regard to the subscription period scheduled to begin on April 7th - for which funding will settle on April 14th - the Federal Reserve Board has announced that four additional types of collateral will be eligible under the program.  These include: (1) ABS backed by mortgage servicing advances (i.e. loans extended to cover missed mortgage payments); (2) ABS backed by loans or leases relating to business equipment; (3) ABS backed by leases of vehicle fleets; and (4) ABS backed by floorplan loans.

Dan Knox