Financial Markets in Crisis: Housing and Credit Markets Get TARP Boost

November 25, 2008

The Gibson, Dunn & Crutcher Financial Markets Crisis Group is tracking closely government responses to the turmoil that has catalyzed dramatic and rapid reshaping of our capital and credit markets.

We are providing updates on key regulatory and legislative issues, as well as information on legal issues that we believe could prove useful as firms and other entities navigate these challenging times.

This update focuses on the Term Asset Backed Securities Loan Facility (TALF) and a Federal Reserve program to stimulate the housing market, two new developments under the Troubled Asset Relief Program (TARP) announced by the federal government today, as well as an extension of the Money Market Guarantee Facility.

The Term Asset Backed Securities Loan Facility

Today, the Department of the Treasury unveiled the TALF, a facility designed to promote the issuance of asset backed securities (ABS).  Financial institutions depend on ABS to provide liquidity so that they can offer small business loans and consumer lending, including automobile loans, credit cards, and student loans.  Treasury will allocate $20 billion to this facility. 

The Federal Reserve Bank of New York (NY Fed) will establish the TALF, under which it will make up to $200 billion in loans.  Some of the details of the program are as follows:

  • The loans will be one year, non-recourse loans, and will be fully securitized by ABS;
  • Asset purchases will be made through Special Purpose Vehicles (SPVs), much as the Federal Reserve’s Commercial Paper Funding Facility is structured;
  • Under the terms of the program, institutions can receive funding for securities collateralized by newly issued auto, student, and credit card loans, and loans guaranteed by the Small Business Administration;
  • The NY Fed indicates that the list of ABS eligible for purchase may be expanded  to include commercial mortgage-backed securities, non-Agency residential mortgage-backed securities, or other asset classes;
  • U.S. persons that own eligible ABS may participate in the program but must do so through a primary dealer;
  • Originators of the credit exposures behind ABS must agree to abide by executive compensation standards established by the Emergency Economic Stabilization Act and implemented through Treasury guidelines;
  • Awards will be made through a monthly sealed bid auction process; and
  • The $20 billion in TARP funds will serve as first loss protection for the NY Fed.  Cash from SPV assets will be used first to repay NY Fed loan principal and interest and second to cover the subordinated TARP loan.

Federal Reserve to Stimulate Housing Market

Also today, the Federal Reserve announced that it will return to what originally was conceived as the heart of TARP – the purchase of troubled asset and housing related securities. The Fed explained that it will begin purchasing up to $100 billion in direct obligations of the housing-related GSEs, including Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, and up to $500 billion in mortgage-backed securities (MBS) backed Fannie Mae, Freddie Mac, and Ginnie Mae.  The Federal Reserve’s primary dealers will conduct auctions to facilitate the purchase of the direct obligations starting as early as next week, while Treasury will select asset managers to conduct the purchase of the MBS, which the Department hopes to begin by the end of the year. 

It is not clear yet whether the Federal Reserve will implement its MBS purchase plan as the Treasury intended to implement TARP prior to its decision to forego purchases of whole loans and mortgage-related securities.  Recall that, on October 6, 2008, Treasury issued four solicitations, for whole loan and securities asset managers, a custodian/auction manager, and an investment management consultant.  Treasury selected a custodian/auction manager and an investment management consultant but, despite receiving hundreds of submissions for asset managers, did not select any.  Moreover, Secretary Paulson subsequently indicated that the TARP would not be used to purchase troubled mortgage assets, as originally intended.  Last week, before the House Committee on Financial Services, Secretary Paulson explained the change in course as follows:  "It became clear that, while in mid-September, before economic conditions worsened, $700 billion in troubled asset purchases would have had a significant impact.  Half of that sum, in a worse economy, simply isn’t enough firepower."

Interestingly, and with considerably less fanfare, this new MBS purchase plan, combined with an expansion of the TALF to include commercial- and non-Agency residential mortgage-backed securities, could provide more MBS-purchase "firepower" than dedication of the entire TARP corpus (which would also have been used to purchase mortgage whole loan). 

Money Market Guarantee Facility Developments

Yesterday, the Treasury announced that it would extend its money market guarantee facility until April 30, 2009.  The program guarantees funds that shareholders had in money market accounts as of September 19, 2008.  Only money market funds that currently are participating in the program are eligible for the extension; no new funds may join the program.  If managers wish to extend fund participation, they need to submit a fee, calculated on a sliding scale according to the fund’s net worth as of September 19, 2008, and the extension notice by December 5, 2008.

Gibson, Dunn & Crutcher LLP

Gibson Dunn has assembled a team of experts who are prepared to meet client needs as they arise in conjunction with the issues discussed above.  Please contact Michael Bopp (202-955-8256, in the firm’s Washington, D.C. office or any of the following members of the Financial Markets Crisis Group:

Public Policy Expertise
Mel Levine – Century City (310-557-8098,
John F. Olson – Washington, D.C. (202-955-8522,
Amy L. Goodman
– Washington, D.C. (202-955-8653,
Alan Platt – Washington, D.C. (202- 887-3660,
Michael Bopp – Washington, D.C. (202-955-8256,

Securities Law and Corporate Governance Expertise
Ronald O. Mueller
– Washington, D.C. (202-955-8671,
K. Susan Grafton – Washington, D.C. (202- 887-3554,
Brian Lane – Washington, D.C. (202-887-3646,
Lewis Ferguson – Washington, D.C. (202- 955-8249,
Barry Goldsmith – Washington, D.C. (202- 955-8580,
John H. Sturc
– Washington, D.C. (202-955-8243,
Alan Bannister – New York (212-351-2310,
Adam H. Offenhartz – New York (212-351-3808,
Mark K. Schonfeld – New York (212-351-2433,

Financial Institutions Law Expertise
Chuck Muckenfuss – Washington, D.C. (202- 955-8514,
Christopher Bellini – Washington, D.C. (202- 887-3693,
Amy Rudnick – Washington, D.C. (202-955-8210,

Corporate Expertise
Howard Adler – Washington, D.C. (202- 955-8589,
Richard Russo – Denver (303- 298-5715,
Dennis Friedman – New York (212- 351-3900,
Stephanie Tsacoumis – Washington, D.C. (202-955-8277,
Robert Cunningham – New York (212-351-2308,
Joerg Esdorn – New York (212-351-3851,
Stewart McDowell – San Francisco (415-393-8322,
C. William Thomas, Jr.
– Washington, D.C. (202-887-3735,

Private Equity Expertise
E. Michael Greaney – New York (212-351-4065,

Private Investment Funds Expertise
Edward Sopher – New York (212-351-3918,

Real Estate Expertise
Jesse Sharf – Century City (310-552-8512,
Alan Samson – London (+44 20 7071 4222,
Andrew Levy – New York (212-351-4037,
Fred Pillon – San Francisco (415-393-8241,
Dennis Arnold – Los Angeles (213-229-7864,
Michael F. Sfregola – Los Angeles (213-229-7558,
Andrew Lance – New York (212-351-3871,
Eric M. Feuerstein – New York (212-351-2323,
David J. Furman – New York (212-351-3992,

Crisis Management Expertise
Theodore J. Boutrous, Jr. – Los Angeles (213-229-7804,

Bankruptcy Law Expertise
Michael Rosenthal – New York (212-351-3969,
David M. Feldman – New York (212-351-2366,

Oscar Garza – Orange County (949-451-3849,
Craig H. Millet – Orange County (949-451-3986,
Janet M. Weiss – New York (212-351-3988,
Matthew J. Williams – New York (212-351-2322,
J. Eric Wise – New York (212-351-2620,

Tax Law Expertise
Arthur D. Pasternak – Washington, D.C. (202-955-8582,
Paul Issler – Los Angeles (213-229-7763,

Executive and Incentive Compensation Expertise
Stephen W. Fackler – Palo Alto (650-849-5385,
Charles F. Feldman – New York (212-351-3908,
Michael J. Collins – Washington, D.C. (202-887-3551,
Sean C. Feller – Los Angeles (213-229-7579,
Amber Busuttil Mullen – Los Angeles (213-229-7023,

© 2008 Gibson, Dunn & Crutcher LLP

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