Investors Wary of Program to Revive Consumer Lending

By Neil Irwin
Washington Post Staff Writer
Wednesday, April 8, 2009

Participation in the government's signature program to restart lending to consumers was weak this month, as would-be participants were put off by legal complexities and fear that outrage in Congress could hurt them if they take part.

Only $1.7 billion in government support for credit card loans and auto loans was supplied in the second month of the Term Asset-Backed Securities Loan Facility, or TALF. That is down from $4.7 billion in the first month, and the Federal Reserve and Treasury Department ultimately envision the program deploying up to $1 trillion to support all sorts of lending.

The program is designed to use Fed and Treasury money to support the markets for securities that ultimately fund most credit cards, auto loans, student loans and small-business loans. It relies on investors, such as hedge funds, to buy the packages of loans with government help.

But experts say those investors are wary, concerned that if they participate in the program and ultimately make high returns, Congress will place retroactive limits on their behavior, particularly executive compensation and the hiring of immigrants through the H-1B visa program.

"It's definitely off to a slow start," said Peter Hooper, chief economist at Deutsche Bank Securities. "That appears to be because of investor caution concerning what the rules of engagement could be down the road."

There are also more technical problems that the Federal Reserve Bank of New York, which administers the program, is working through. The contracts between the private parties involved in TALF have proved immensely complicated and are taking time to work out, people involved with the efforts say. And many private investors participating are unfamiliar with the world of student loans and Small Business Administration loans, so it is taking them time to get up to speed.

The credit crunch is making it harder for Americans to get loans, as shown by new Fed data yesterday indicating that Americans' consumer credit fell by $7.5 billion in February, a 3.5 percent annual rate. Banks and other lenders are disinclined to make loans, and Americans, fearful of losing their jobs, are reluctant to take on more debt through credit cards or to buy a car.

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