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February 2009 Investment Perspectives

Bailout Alphabet Soup

John Kenley, CFA, Director

As liquidity in the financial markets has seized up over the last year, the U.S. Government has created a veritable alphabet soup of targeted programs to attempt to stabilize and reintroduce liquidity to the market. Since its hard to keep up given the rate at which new programs and acronyms are being created to try and return the market to functionality, we thought it would be worthwhile to provide a brief description of the programs created thus far.

TAF Term Auction Facility

This program was announced in December 2007 by the Fed to alleviate problems in the short term funding markets. The TAF is a new version of the discount window, but borrowing under the TAF is anonymous and can be as long as 84 days. The TAF was created to relieve stress in the interbank lending market, where volumes were low despite high demand as banks were unwilling to lend to each other because of concerns about ABS and MBS values and the net worth of other institutions. Traditionally, discount window lending through the Fed served as a last resort for depository institutions; however, despite the system wide stress, few depository institutions were willing to borrow from the discount window due to the associated stigma. Since program inception, the Fed has held auctions at least every other week.

TSLF Term Securities Lending Facility

This program provides liquidity to primary dealers by lending up to $200 billion in Treasuries secured by other collateral including Agencies, Agency MBS, non-Agency AAA MBS, AAA ABS, investment grade corporates, and municipal bonds. Auctions are held weekly.

PDCF Primary Dealer Credit Facility

This program provides liquidity to primary dealers by lending overnight on a secured basis. The program is essentially identical to TSLF except for being overnight instead of term lending.

AMLF Asset Backed Commercial Paper (ABCP) Money Market Mutual Fund (MMMF) Liquidity Facility

This mouthful of a program was created to add liquidity to the money market space, where mutual funds were under significant redemption pressure and unable to find buyers for ABCP. Under the program, banks can purchase ABCP securities from MMMF including their own, with funds lent by the Fed. The Fed takes responsibility for any losses on the paper and allows for a $0 reserve requirement for the securities.

EESA Emergency Economic Stabilization Act of 2008

Often referred to as thebailout bill, this was signed into law on October 3, 2008 after passing in the House on the same day and in the Senate on October 1, 2008. The EESA began as a three page proposal from Treasury Secretary Paulson, which gave sweeping powers to the Treasury with no oversight. The early version of the bill failed, but it passed after the addition of oversight and judicial review. In addition, curbs were placed on executive pay for participants, and the Treasury was required to take warrants. The bill created the $700 billion TARP, increased FDIC insurance from $100,000 to $250,000; allowed losses on Fannie and Freddie preferred to be counted against ordinary income instead of capital gains; extended the Mortgage Forgiveness Debt Relief Act through 2012; allowed the Fed to expand its balance sheet; and increased the interest paid on deposits held for reserve requirements.

TARP Troubled Assets Relief Program

This program permitted the Department of the Treasury to purchase or insure up to $700 billion in assets, specifically mortgage related securities, with wide latitude to declare other assets eligible. The initial passage authorized the first $350 billion in funds and President Obama has been pushing for authorization of the remaining half of the funds. On October 14, 2008 the Treasury announced a change to the program: they would purchase equity stakes in U.S. banks instead of buying MBS. Through January 9, 2009, $292 billion in TARP funds had been used and split between the following:

Capital Repurchase Program (purchase of bank preferred stock): $192 billion

Systemically Significant Failing Institutions (AIG preferred): $40 billion

Automotive Industry Financing Program (Preferred or Debt): $19.4 billion

Targeted Investment Program (2nd Citigroup infusion): $20 billion

CPFF Commercial Paper Funding Facility

This program was created to reduce the problem of high short term rates due to a large amount of commercial paper being rolled daily because few investors were willing to lend longer than overnight. The program is conducted by a special purpose vehicle (SPV) which directly purchases CP and is financed by the New York Fed. Proceeds from the investments are used to repay the financing provided by the Fed.

TLGP Temporary Liquidity Guarantee Program

This program was created to help financial institutions roll their near term maturities. Under the program, financial institutions can issue debt with maturities up to June 30, 2012 and have the debt fully guaranteed by the FDIC. This new issuance is limited to 125% of debt maturing between September 30, 2008 and June 30, 2009, and the issuer is charged fees ranging from .50% to 1% based on the maturity of the issue.

MMIFF Money Market Investor Funding Facility

This program was created to return liquidity to short term debt markets after money market mutual funds had been unable to raise sufficient liquidity to meet redemptions. The Fed provides senior secured funding to SPVs, which buy money market instruments up to a maximum maturity of 90 days. The instrument sellers are then required to buy a 10% subordinated first loss share of the SPV, while the Fed funds the remaining 90%.

TALF Term Asset-Backed Securities Loan Facility

This program was created by the Fed on November, 23, 2008 to provide liquidity to the Asset-Backed Security(ABS)market. The program can lend up to $200 billion to holders of AAA-rated ABS, backed by newly and recently originated loans, to consumers and small businesses. The program lends on a secured basis at market prices less a hair cut, and has $20 billion in credit backing from the TARP. The program was intended to restart consumer and SBA lending, which had all but stopped in September and October as the ABS market locked up.

The information contained herein reflects the views of Galliard Capital Management, Inc. and sources believed to be reliable by Galliard as of the date of publication. No representation or warranty is made concerning the accuracy of any data and there is no guarantee that any projection, opinion, or forecast herein will be realized. The views expressed may change at any time subsequent to the date of publication. This publication is for information purposes only; it is not investment advice or a recommendation for a particular security strategy or investment product. Graphs and tables are for illustrative purposes only. Galliard’s advisory fees are disclosed in the firm’s SEC ADV Part II which is available upon request. Past performance is not an indication of how any investment will perform in the future.

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© 2009 Galliard Capital Management, Inc.