As Prime Brokers Tighten Lending to Hedge Funds, the Federal Reserve Increases Hedge Fund Financing Capacity with Expansion of the TALF
Hedge Fund Law Report
The Federal Reserve Bank of New York and the United States Treasury have announced that financing available under the Term Asset-Backed Securities Loan Facility (TALF) program will be substantially increased, from a previously announced $200 billion up to $1 trillion, and that eligible collateral for loans under the TALF could be expanded (although such an expansion is not yet certain) to include newly and recently issued AAA-rated commercial mortgage-backed securities (MBS) and private-label residential MBS. As originally envisaged, eligible collateral was limited to AAA-rated asset backed securities (ABS) backed by newly and recently originated auto loans, credit card loans, student loans and Small Business Administration-guaranteed small business loans. The expansion of the TALF would be supported by a commitment from the Treasury of additional funds from the Troubled Asset Relief Program. Hedge funds, who historically have not been eligible to borrow from the Fed, will become eligible to do so under the TALF with respect to investments in certain ABS. We explain the background and mechanics of the revised TALF and the related Public-Private Investment Fund, and enumerate the benefits and burdens to hedge funds of participating in the program.