How Obama Hopes to Kick-Start Securitization
The Obama administration hopes to boost securitization with a program of up to $1 trillion in low-cost loans and guarantees to the hedge funds and private equity firms that buy bundled consumer and business loans.
Banks have been reluctant to issue new loans because they are unable to wipe their books clean by bundling current loans and selling them to investors such as hedge funds. The process broke down after bundled mortgages began showing big losses.
Now President Obama hopes to get this process moving again with its new program, the New York Times reports.
The first phase of the program begins in early March, when $200 billion will be released to lend to investors that buy securitized assets such as credit card balances and loans used to finance auto purchases, education and small businesses, the Times says. The interest rates on the loans will range from about 1.5 percent to 3 percent, but they can only be used to buy triple-A rated securities.
The hedge funds and other investors would be able to borrow 84 percent to 95 percent of the face value of the securities, depending on the type, the Times story says. The investors would not be liable for losses beyond the 5 percent to 16 percent of their equity.
The program is known as the Term Asset-Backed Securities Loan Facility, or TALF.
