Will TARP shift spell relief for consumer ABS market?

By Nancy Leinfuss - Analysis

NEW YORK (Reuters) - The $2.8 trillion U.S. asset-backed securitization (ABS) market may experience a thaw if the U.S. Treasury follows through on its latest plan to aid strapped consumers.

Issuance of asset-backed securities slumped by 80 percent to $153 billion in the third quarter as recession fears hit home, down from $791.7 billion in the same period a year ago.

"It's hard to venture a guess about where issuance of ABS will go in 2009, because there are too many unknowns," said Darcy Morrison, senior ABS analyst at Evergreen Investments in Charlotte, North Carolina.

"We still need to see what the TARP bailout is really going to do and for whom. We need to see who the survivors will be in the corporate world," she said.

In a securitization, loans are pooled together and sold as securities to investors, allowing lenders remove the debt from balance sheets and offer new loans.

Consumer debt tied to credit cards, auto and student loans were the primary drivers of ABS supply this year, after a major collapse in the U.S.subprime mortgage market shut down the mortgage bond market in 2007.

The U.S. housing market slump and the decline in mortgage bond values contributed to the demise of investment bank Lehman Brothers, the rescue of U.S. housing finance firms Fannie Mae and Freddie Mac, and trillion dollar losses in the stock market, forcing the U.S. Congress to approve a banking sector rescue package known as the Troubled Asset Relief Program or

TARP.

The Treasury's $700 billion TARP was originally designed to buy up troubled mortgages as well as recapitalize banks.

But on Wednesday, Treasury Secretary Henry Paulson announced a shift in the TARP focus away from mortgage assets and toward further capital injections for banks.

Paulson also said support was needed for markets that securitize credit outside the banking system and mooted the creation of a liquidity facility for highly-rated "AAA" asset-backed securities.

The change of approach created resentment as well as hope for the ABS market as it seeks to emerge from its deep freeze.

"Paulson told us one thing but did another. It's the whole bait and switch routine. How can he abandon the mortgage market? This has totally destroyed confidence," said Mike Kagawa, portfolio manager at Payden & Rygel in Los Angeles.

SHIFTING FOCUS

The list of lower-rated ABS securities for sale in the secondary market grew on Thursday as market participants looked to unload securities included in the original TARP plan, but buyers were sparse, traders said.