Term Asset-Backed Securities Loan Facility

The Term Asset-Backed Securities Loan Facility (TALF) is a program created by the U.S. Federal Reserve (the Fed) to spur consumer credit lending. The program was announced on November 25, 2008 and was to support the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA). Under TALF, the Federal Reserve Bank of New York (NY Fed) lent up to $1 trillion (originally planned to be $200 billion) on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans. As TALF money did not originate from the U.S. Treasury, the program did not require congressional approval to disburse funds, but an act of Congress forced the Fed to reveal how it lent the money.

The Fed explained the reasoning behind the TALF as follows:

New issuance of ABS declined precipitously in September and came to a halt in October. At the same time, interest rate spreads on AAA-rated tranches of ABS soared to levels well outside the range of historical experience, reflecting unusually high risk premiums. The ABS markets historically have funded a substantial share of consumer credit and SBA-guaranteed small business loans. Continued disruption of these markets could significantly limit the availability of credit to households and small businesses and thereby contribute to further weakening of U.S. economic activity. The TALF is designed to increase credit availability and support economic activity by facilitating renewed issuance of consumer and small business ABS at more normal interest rate spreads.

According to the plan, the NY Fed would spend up to $200 billion in loans to spur the market in securities backed by lending to small business and consumers. Yet, the program closed after only funding the purchase of $43 billion in loans. Barbara Kiviat, TALF money was not to go directly to those small businesses and consumers, but to the issuers of asset-backed securities. The NY Fed would take the securities as collateral for more loans the issuers would ostensibly make. To manage the TALF loans, the NY Fed was to create a special-purpose vehicle (SPV) that would buy the assets securing the TALF loans. The U.S. Treasury's Troubled Assets Relief Program (TARP) of the Emergency Economic Stabilization Act of 2008 would finance the first $20 billion of asset purchases by buying debt in the SPV.

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