Thursday, August 13, 2009

TALF leverage overview

A number of Sober Look readers have asked to see the leverage levels the Fed is providing via TALF. The leverage varies by maturity and by asset class. There are several ways to show leverage - here we show it as "assets to equity" ratio. That is if you invest a dollar, how many dollars worth of assets you would control. The maximum leverage permitted under TALF is 20 times ($1 buys you $20 of assets) on something like a short-term prime credit card portfolio. The leverage permitted is based on the Fed's view of how risky the assets are. For example auto leases are deemed riskier than auto loans (given the resale risk.)

Small business loans and government guaranteed student loans have only two leverage categories - less than 5 years and greater than 5 years. All other assets have the full spectrum of maturities vs. leverage. The chart below shows that as maturities get shorter, an investor can get incrementally more leverage. Each maturity bucket (term- in years) is shown as a different color.

We show TALF CMBS leverage separately, since it's almost a separate program. Maximum leverage on CMBS is 6.7 times.

Note that on "legacy" CMBS, the leverage is smaller, since the paper is valued below par. So for a senior note that trades at 75c on the dollar, the leverage would be 75% of what's shown in the chart above.

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