Word: loan
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...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...
...government hopes to revive securitizations by luring buyers back into the market. To do so, the TALF program offers cheap loans to investors who want to buy bonds backed by consumer loans. Even better, some of the TALF loans won't have to be paid back. If the bonds pay as expected, investors will have to repay the government loans with interest. But if the bonds go bust, investors are off the hook, after losing the small down payment they made on the original loan. To limit taxpayer losses, the government is going to make loans only against bonds rated...
That's because TALF significantly sweetens the returns that can be earned from buying the AAA-rated bonds. Take a typical auto-loan bond. A top-rated auto ABS bond pays a dividend these days of about 3.5%, or a return of $3.5 million on an investment of $100 million, as long as the bond doesn't go into default. That's actually not a terrible yield right now. Just ask anyone with a savings account. (See 5 reasons for economic optimism...
Under TALF, though, an investor has to make a down payment of just $8 million to get a loan from the government to buy $100 million in auto bonds. The loan costs 1.5% a year, or $1.5 million on $100 million, which lowers the investor's take-home return to $2 million. But remember, the investor had to put up just $8 million. That means the annual return on the much smaller up-front investment zooms to a fat 25%. Lower-rated auto loans can pay as much as 30%, but they have a much higher rate of default...
...better position to refurbish or repair cars and trucks than local mechanics are. Their service departments have almost uniformly well-trained people. They have access to new parts from the manufacturer. They have the ability to schedule and control the flow of service to customers. They can loan customers cars. And, they are literally dying for business...