NEW YORK (Reuters) - The debut of the Federal Reserve’s long-awaited program to resuscitate consumer and small business lending got off to a stuttering start on Thursday, as investors largely stayed away.
Big investors applied for only $4.7 billion in loans in the first round of the Fed’s Term Asset-Backed Securities Loan Facility, known as TALF. That’s far below the up to $200 billion the U.S. central bank had pledged to lend. The Fed has said eventually the program could grow to $1 trillion.
TALF is part of the Fed’s massive efforts to revive lending and help pull the economy out of a painful and deepening recession by lending money to investors who want to buy newly issued securities backed by assets such as credit card, small business, student and auto loans.
Political fury over retention bonuses paid out to executives at bailed-out insurer American International Group had been expected to dampen some demand, as investors worried that the government would get too involved in their day-to-day operations.
“It’s not looking like you’re going to get anywhere near to filling to capacity,” said Michael Feroli, economist at JPMorgan in New York. “What we are hearing is a lot of concern that there will be after-the-fact restrictions placed on people who use this facility.”
Investors requested $1.9 billion of loans to buy securities backed by auto loans and $2.8 billion for loans to buy credit card asset-backed securities, the New York Fed said.
There was no demand for loans for securities backed by student or small business loans in the March 17-19 subscription period for this first round.
A lot is riding on the long-term success of TALF, which was welcomed when it was announced last fall as the Fed’s premier rescue program for the economy. It is also seen as somewhat of a blueprint for the government’s toxic asset program, known as the Public Private Investment Fund (PPIF), which has yet to be launched.
“It’s probably below what we’d been expecting, but it’s not completely surprising because it’s a test run,” said Tony Crescenzi, chief bond market strategist at Miller Tabak.
“It is a problem in the sense that the PPIF is based on a model similar to the TALF. And if you can’t sell AAA, imagine how difficult it will be to sell all those distressed assets that people have been saying for a long time now are so difficult to value,” he said referring to top-rated AAA bonds.
The Fed had tried to soothe some investor concerns late last week by limiting its ability to comb through their books — given the importance investors, especially hedge funds, place on their privacy. The Fed also earlier this month dropped curbs on pay for executives at participating firms.
But investors said this week they were worried about shifting government policy on the Troubled Asset Relief Program and on the bailout of AIG.
Only three ABS deals eligible for TALF funding priced this week, and one has yet to price.
Citigroup sold a $3 billion deal, Ford priced a $2.95 billion deal and Nissan sold a $1.3 billion bond on Thursday. On Wednesday, Huntington National Bank offered a $963 million TALF-eligible deal.
“You can argue that a chunk of that (credit card loan requests) came from a largely government-controlled institution, Citi,” said Feroli.
In a typical TALF deal, a fund manager would borrow $9 million from the Fed, and put up $1 million of its own money to buy $10 million in newly originated securities backed by credit card, auto, student and small business loans.
TALF is intended to jump-start securitization markets that have collapsed since the bursting of the U.S. housing bubble forced a large number of mortgages into default.
Perhaps teething problems are not surprising, given the complexities of the securitization market, said Neal Soss, economist at Credit Suisse.
“I’m not surprised it’s awkward for a relatively small and specialized institution like the central bank to try and step in an recreate a market from scratch.”