TALF Ready to Go

Nissan became one of the first firms to utilize the Fed-Treasury TALF program today, selling $1.3 billion in automobile debt to the facility. Today is the official start of this new, experimental public-private initiative.

TALF, which attempts to restart the market for ABS, allows banks and corporate finance divisions to sell NEW assets to TALF -- essentially a new market sponsored by the government. To encourage buying of these assets, TALF will provide loans to hedge funds and private equity groups to purchase the assets. Using public money, the government is hoping to restart this "frozen" market, allowing private funds to engage in transactions without putting up much of their own money.

The portion that private equity and hedge funds will be contributing is determined by a haircut term specified by the government (see below). A haircut is a discount applied to the value of an asset; in this case, a haircut specifies the maximum amount the government will lend out. For example, a $100 security with a 10% haircut would require a private investor to provide $10 to the transaction, with $90 being picked up by the government.

However, some experts think a predetermined haircut would force the government to become too overexposed to the cost of funding the purchase of such assets. Instead, a bidding system that lets private money determine the amount they are willing to fund would allow the government to calculate the appropriate haircut percentage. The article I linked illustrates this system using the following scenario:

For example, Bidder A is willing to fund $10 billion with 50% coming from government credit, and Bidder B is willing to fund $10 billion with 60% coming from government credit, and so on. When the government receives all bids, it can determine the right level of government credit, say 70%, that’s necessary to get to the $100 billion.

There are certainly strong arguments for a bidding system like this; however, I believe the current term sheet by the government is essential for the early stages of TALF's $200 billion appropriation. As more lending is approved (upwards of $1 trillion), and credit spreads between triple-A ABS and Treasuries begin to fall, the thawing of these particular securitization markets may provide the government with an opportunity to increase haircut terms or introduce some form of a bidding system.

Jamie Dimon: Future Political Career?

Here's another Jamie Dimon highlight:

Dimon recently spoke at the U.S. Chamber of Commerce about the financial crisis, emphasizing a handful of initiatives that must be taken by Washington and Wall Street in 2009 and beyond. While Dimon alluded to revising our current regulatory structure, he commanded the government to end a "vilification" of corporate America. Such divisions, he said, would clout efforts to bring stability to the economy since the cooperation is absolutely essential to sustained progress.

Dimon's comments represented a form of leadership we have yet to see from a corporate America CEO. His comments were out of the realm of JPMorgan itself and directed at comprehensive, specific changes that must be made within the American financial system.

Jamie Dimon: Future politician? Treasury secretary? Time will tell.

Too Big To Fail

Great perspectives from yesterday's All Things Considered discussion on what it means to be "too big to fail" from NPR:

Listen Now

I particularly appreciate the viewpoint that a future GM would focus more on design and specialty parts/products rather than its current form. A bankruptcy would certainly help prioritize these new possibilities. Comparative advantage tells us that trade (in essence, globalization) benefits both countries when efforts are made to capitalize upon what the other nation produces best.

If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it from them with some part of the produce of our own industry employed in a way in which we have some advantage.

- Adam Smith

Market Rallying on Citi's Profitability, Uptick Rule

The market has rallied nearly 333 points today on news of Citi's profitability during January and February 2009 as well as hints from Rep. Barney Frank about the re-institution of the uptick rule (though inherently an SEC decision).

Have we reached bottom? Certainly, from a qualitative perspective, there is optimism today among investors and experts that we may be nearing the end of falling stock prices; but data sets have yet to validate this hopefulness.

Unemployment numbers are going to the biggest indicators of slowing downside momentum. Today, United Technologies announced 11,600 layoffs and put out this statement: "The economic recovery previously anticipated in the second half of 2009 now appears unlikely."

With companies unable to forecast potential end-of-year earnings due to the market's lack of confidence and fragmentation of information, layoffs may continue to rise in coming month. Until we see consistent market rallies, today's gains may be easily sold during tomorrow's session. As CNBC's Matt Nesto put it, stocks hit-hard like Citi (C) need to gain 100% returns over several sessions before we see it trading at "normal" market levels.

JPMorgan's Loan Modification Program

Check out this CNBC interview with Jamie Dimon, CEO of JPMorgan:Jamie Dimon is perhaps one of the smartest CEOs Wall Street has in their midst right now. JPMorgan's loan modification plan, recently expanded a few weeks ago, allows for a five year interest rate reduction on troubled mortgages. Encouraged through federal incentive programs, JPMorgan would convert affected mortgages after the five year moratorium into fixed, prime rate loans. This is important to note; unlike ARMs, where interest rates become variable after a period of time, JPMorgan's modified loans will revert into long-term stable rates.

Though this does not solve the fact many homes are currently underwater, it helps prevent more mortgages from defaulting and homes from foreclosing. Equitably, principal reductions are not necessarily fair either; the potential for moral hazard would be high given the precedent that would be set.

If other Wall Street firms mimic JPMorgan's actions, then financials may begin seeing brighter quarters ahead.