Treasury launches Talf, drops compensation caps

In a frequently asked questions document published on the Fed website yesterday, it revealed that compensation limits, which would have been imposed on banks receiving aid through the Talf plan, have been dropped. "Given the goals of the Talf and the desire to encourage market participants to stimulate credit formation and utilise the facility, the restrictions will not be applied to Talf sponsors, underwriters and borrowers," the statement reads. The Fed refused to comment on the reason for the concession. Limits on executive pay were expected to discourage participation in the programme. Similar restrictions written into the Troubled Assets Relief Program were reportedly weakened at the last minute for the same reason.

The Treasury and Fed also announced some other minor changes to the Talf's format, including a reduction in interest rates and collateral haircuts for loans secured by ABSs guaranteed by the Small Business Administration or government-guaranteed student loans.

The Talf was announced last November by the Fed, looking to lend up to $200 billion in non-recourse financing to holders of new or recently originated AAA-rated asset-backed securities (ABSs) backed by student loans, auto loans, small business loans and credit card loans. By jump-starting the ABS market - which saw a dramatic reduction in issuance last October - the Fed hopes to catalyse these lenders into extending credit to households and small businesses.

In February, shortly after being sworn in as Treasury secretary, Timothy Geithner stated the Talf would increase to as much as $1 trillion and recently issued AAA commercial mortgage-backed securities (CMBSs) would also be eligible under the programme. The Treasury also began considering other asset classes for inclusion in the scheme, such as non-agency residential mortgage-backed securities and assets collateralised by corporate debt.

In yesterday's statement, the Treasury confirmed the Fed will lend up to $200 billion to owners of certain AAA-rated ABSs. CMBSs and other types of recently issued AAA-rated ABS are still not eligible for the programme, as the Fed and Treasury continue to analyse appropriate terms and conditions for accepting such securities.

Assets that will be eligible for Talf funding in April include ABSs backed by rental, commercial and government vehicle fleet leases, as well as ABSs backed by equipment loan and leases. Collateralised debt obligations and colleralised loan obligations are also under consideration, along with ABSs backed by non-auto floorplan loans and mortgage-servicer advances. The Treasury confirmed the proposed expansion of the Talf - which is currently due to expire in December - could increase the total size of the scheme to $1 trillion.

See also: Federal Reserve extends liquidity programmes
Fed opens $800 billion war chest to aid securitisation recovery

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