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US Rep Frank, other lawmakers question Fed's TALF

WASHINGTON, May 8 (Reuters) - A U.S. Federal Reserve program to bolster consumer and small business credit markets came in for another round of skeptical questioning on Friday, this time from 11 lawmakers who raised concerns about low lending volumes.

House of Representatives Financial Services Committee Chairman Barney Frank and 10 other Democrats wrote to officials to raise issues with the Fed’s massive Term Asset-backed Securities Loan Facility, or TALF.

“We have some questions and concerns regarding the implementation of this program,” said the lawmakers’ letter to Treasury Secretary Timothy Geithner and Fed Chairman Ben Bernanke.

The TALF was initially launched in March at $200 billion but was expanded to $1 trillion, with $100 billion of Treasury bailout funds as capital. It was created to revive a paralyzed market for securitized small business and household debt amid a global credit crunch.

But the lawmakers noted that the facility funded only $1.7 billion in loans in April, “a figure that was dramatically less than that provided by the program when it was first rolled out in March.”

The lawmakers also sought information about a technical problem that may be limiting funding. The TALF was created to allow newly created securities with triple-A ratings to be used as collateral for Fed loans. However, creation of new triple-A tranches of securities require additional tranches of lower-rated, riskier tranches.

“Please explain what sort of market there is for these speculative tranches at a time when credit markets are frozen and when subsidized credit is needed to purchase securities at the height of the capital structure (never mind at the bottom of it),” the lawmakers wrote.

“To what extent has the lack of demand for secondary and tertiary tranches dampened overall demand for TALF financing?”

The lawmakers also expressed concerns about the integrity of ratings given to triple-A asset-backed securities, especially since many structured mortgage securities that are now considered toxic assets were once given triple-A ratings.

“In light of these concerns, please discuss what due diligence you are performing to ensure that ratings are reasonable and accurate, the lawmakers wrote.

The letter to Bernanke and Geithner follows criticism of the TALF from the congressional watchdog for U.S. government financial bailout efforts on Thursday.

Elizabeth Warren, chairman off the Congressional Oversight Panel, said it was unclear whether the TALF was working, saying it was not clear whether the “program is well designed to attract investors.” (Reporting by Kevin Drawbaugh and David Lawder; Editing by Diane Craft)

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