Word: creditably
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Critics contend the plan does too much to stimulate demand for top-rated securities and not enough to draw in buyers for riskier bonds that have always been harder for banks to sell. "We need to get credit buyers back into the market," says John McElravey, director of asset-backed research at Wachovia Capital Markets. "But TALF only addresses part of the problem." (See the top 10 financial-crisis buzzwords...
...heart of the program - and the biggest cause of complaints - is an effort to reignite the process by which most banks get the money they use to make consumer loans. To fund credit-card, auto and education lending, banks typically gather up loans they already have made and pass them off to an investment bank. Wall Street firms then package these into bonds that pay interest based on borrowers' loan payments. Completing the money-recycling loop, investors buy the bonds, and investment banks pass most of that money, minus a fee, back to the lenders. The lenders can then...
...sometime last year, the mechanism broke down. Investors backed away from all types of consumer credit after getting burned in the mortgage market. Less than $200 billion in asset-backed loans was securitized in 2008, down from an annual rate of a trillion dollars at the height of the credit boom. This year there has been only a few billion dollars in securitized-debt deals. (See the worst business deals...
...that's what causes the problem. Every securitization deal creates some AAA-rated bonds and some lower-quality debts. In a typical credit-card securitization, as much as 15% of the bonds created will have ratings lower than AAA. And the government plan does nothing to help banks get those riskier bonds off their books. Worse, TALF might actually discourage investors who would normally be interested in these higher-yielding bonds from buying them...
...buyers will not get access to those low-cost government loans. Plus, these days, few investors are willing to take more risk than they have to. With no one to sell the lower-quality stuff to, banks may be stuck holding it. The good news is that so far, credit-card and auto loans have not had the same high rates of default as home loans. But as the economic downturn worsens, analysts say it will become harder and harder for consumers to make even the minimum payments on credit-card debts that have racked up over years of overspending...