Kirkland Alert January 2009

On December 19, 2008, the Federal Reserve Bank of New York released a revised set of terms and conditions for the Term Asset-Backed Securities Liquidity Facility, known inelegantly as the TALF. We refer here to the original terms as TALF 1.0 and to the new terms as TALF 2.0.

The Fed’s goal for the TALF is to provide liquidity to the market for asset-backed securities (ABS) backed by pools of consumer assets in order to facilitate new issuances, and in turn revive consumer lending. The TALF 1.0 terms, released the day before Thanksgiving, provided little for which to be thankful. Poorly designed and seemingly conceived without market input, TALF 1.0 failed to elicit much interest from potential participants. To its credit, the Fed solicited market views, went back to the drawing board, and developed more promising terms. The Fed has broadened asset eligibility, clarified several ambiguities and significantly lengthened the maturity of TALF loans. But TALF 2.0 still has significant shortcomings.

The Fed hopes to make TALF 2.0 operational in February 2009. In our view, TALF 2.0 will not reboot the frozen market for consumer ABS. We believe further enhancements to the program will be needed to make it effective.