Sometime today The Fed and Treasury will unveil their latest funding facility. Here is a Bloomberg News article Treasury Fed to Unveil Plan to Boost Consumer Financing. Similar to the facility, funded by the Federal Reserve to purchase A-1, P-1, F-1 (highest rated) commercial paper (both primary issuance and secondary market), I think a new facility will be created to buy AAA rated securities backed by auto loans and potentially credit card debt. As we have talked about many times, the Wall Street securitization machine ("The Sausage Factory") became the primary source of liquidity for these consumer loan assets over the last decade. The Street would underwrite deals that used say, new car auto loans made by the financing arms of one of the"Big Three" auto makers. We would create a trust to house the loans and structure a deal whereby a large percentage of the auto loans formed a AAA rated, floating rate security. The rest of the structure would serve to protect the AAA bond from losses.
These deals were very "plain vanilla" and served to provide tremendous liquidity for consumer loans for more than a decade. For the most part these deals were a positive example of how securitization of loans or receivables like credit cards, worked to provide liquidity and disperse risk. Demand for these deals from money market funds and overseas investors looking to park dollars was voracious. Now, with the credit freeze, the demand has gone away and the liquidity for such things as auto loans and consumer credit have gone away with it. This past October we saw the first month in fifteen years where not one credit card securitization was underwritten. Not coincidentally, a few days later American Express (the credit card and charge card company) applied for a bank holding company charter. They needed funding because the Sausage Factory was shut down.
It took a while, but Treasury and the Fed have learned that the securitization machine that some might call "The Shadow Banking System" was providing approximately forty percent of consumer credit financing. This new facility that they are going to unveil will most probably buy the most senior AAA rated (and the rating companies, for the most part, didn't screw this one up) classes of auto and credit card deals, both primary issuance and in the secondary market. I imagine that as we head into the worst recession in our lifetimes, these deals will require a lot more subordination or "credit enhancement" to create AAA rated bonds. The government will need some expertise in evaluating these new deals to make sure they are adequately protected.
This program will be designed to kick start consumer borrowing and consumption. The problem we may very well run into is that we are starting this program too late into the credit freeze. The recession that we are in is already effecting consumer behavior to the point that even if great financing deals are offered, the consumer is already tapped out. There is a risk that the only borrowers we get, especially in the credit card sector, are the ones going down for the last time. Stay tuned.***
And here is the plan Full Text of "Term Asset Backed Security Loan Facility"
Comments