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Thursday, March 5, 2009
More On TALF's Proposed Overkill
As the chart below indicates non-agency RMBS, CMBS and ABS were running about $240 billion per quarter at the market's peak, which confirms our previous point that at $1 trillion max capacity, the TALF's $1 trillion in purchase power equates to 2.7 years of issuance at the peak 2001-2005 levels, and will likely not be filled any time soon. Furthermore as the TALF appears eligible only for new ABS issuance not ABS securities created before 2009, the rally in pre-2009 ABS is indicative of speculation that the administration will adjust this mistake mid-stream and include older ABS positions in TALF eligibility (one loophole would be taking pre-2009 loans and packaging them currently). Unless there is yet another administration flip-flop on policy, the aggressive run up in older vintage ABS will be yet another governmental front-running mistake committed by most funds and result in rampant selling of these securities which had seen a big higher recently. (hat tip reader Mike)
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3 comments:
I disagree with prior assertions that TALF investments are risk-free. You can't lose more than the capital you put up, but if losses exceed the credit enhancement of that particular pool of auto loans, for example, the leveraged holder of the AAA investment would start to lose their equity. It may not be a likely event, but it's a possible one. Historically, losses on AAA ABS (e.g., auto loans and credit cards) are extremely rare, but these are uncharted waters. 20% looks like a very fair risk-return, but not a guarantee.
very good point.
(one loophole would be taking pre-2009 loans and packaging them currently)
heh, that will be a fun show-trial to watch!
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