TALF for Dummies: What is it and How Can it Help Small Business?
Many small business owners caught in the credit crunch have given up on waiting for a TARP trickle down, but maybe they’re still hoping for some help from TALF. What is TALF anyway?
According to the Federal Reserve, “The TALF is intended to assist the credit markets in accommodating the credit needs of consumers and small businesses by facilitating the issuance of asset-backed securities (ABS) and improving the market conditions for ABS more generally.”
Ok…..but what exactly does this mean? It means government is trying to get banks to lend to small business owners again by making attractive loans available to those who would repurchase these loans from the banks. Still confused? Well you need to understand how it used to work in “the good old days”.
In the recent past (recent because in the even older “good old days” they didn’t do this), banks used to package their loans into pools and immediately sell them to investors. Think largely unregulated hedge funds and private equity. The banks would then use the proceeds from these sales to make more loans to consumers. The investors made a profit by issuing securities based on the pools, and everyone was happy as long as borrowers were making payments. With the recent widespread defaults, however, many of these investors lost a lot of money, so now nobody wants to invest in asset-backed securities, and the banks have to keep every loan they make. This is a big reason banks have less money to lend these days.
So how is TALF going to change all this, and how will it affect small business in particular? Well, TALF (Term Asset-Backed Securities Loan Facility) plans to make $200 billion of attractive loans available to those who purchase AAA-rated securities, including those backed by Small Business Administration-backed loans. Will this work? Who knows, because many small businesses have already been hit too hard by this crisis economy to qualify for new loans that banks would then package for these investors. The other unknown is the whole concept of this little understood or regulated hidden banking system that has operated over the last 10 years or so. Many would argue it caused this crisis to begin with, so why perpetuate it with TALF?
