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BlackRock & PIMCO Are Kings of The TALF

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A new study of the Fed's TALF program has discovered that BlackRock & PIMCO appear to be the clear winners in the Fed's TALF sweepstakes.

The information comes to NetNet from a recently published paperby Dr. Linus Wilson, an Assistant Professor of Finance at University of Louisiana at Lafayette.

I spoke with Dr. Wilson earlier today in his first interview about his new findings.

The TALF—or Term Asset-Backed Securities Loan Facility—was a program established by the Fed in late 2008 to help add liquidity to the troubled asset-backed securities market.

The idea behind the TALF was to offer low-interest loans to investment managers so they could purchase asset-backed securities. The loans were also backed by commercial asset-backed securities. The federal government provided borrowers with access to capital—at rates far beneath what the market would've charged based on the credit worthiness of the underlying collateral that was posted.

Wilson's data suggests that two asset managers came out ahead of the pack: "The investment managers who did the best for the Federal Reserve—and the taxpayers—were PIMCO and Blackrock. They paid back all their loans early—or at least most of their loans: over 90 percent for Blackrock and over 80 percent for PIMCO," Wilson said.

"That was strongly statistically significant. Even after you control for other factors, Blackrock was twice as likely as other investment managers to pay back its loans early. And PIMCO was more than 60 percent more likely to pay back their loans early than other investment managers," Wilson continued.

"Whenever people pay back their loans in full," Wilson said "the taxpayers aren't going to lose money on the loan—they are always at least going to break even. They're going to get their interest and their principal back."

When asked what his findings might suggest, Wilson said: "There may be a reason why PIMCO and Blackrock are among the biggest investment managers. Maybe there is some element of skill that has allowed them to be some the largest managers of funds for bonds in the world."

(In one fund ranking from 2009, Blackrock is listed as the world's largest asset manager, on a total assets under management basis, with $3.3 trillion of assets under management. PIMCO's parent company, The German Allianz Group, ranks third with $1.8 trillion on an assets under management basis. The second ranking asset management company, State Street Global, did not buy asset-backed securities through the TALF program.)

As for some of the other, smaller asset managers, says Wilson: "The jury is still out. We really don't know whether they're going to pay back the loans are not—because we haven't gotten to maturity yet."

Wilson also points out that the tax payers are in the first loss position on the TALF loans.

The structure, in fact, was created with that purpose explicitly in mind.

As Wilson explains, "The U.S. Treasury issued subordinated debt to the Fed—which meant that if the Fed loses any money on these TALF structures, the first losses are borne by taxpayers, through the treasury. "

Wilson continues: "The Fed is not allowed by law to make risky bets. They are only supposed to lend against 'good' collateral. The way they got around that with the TALF was to have the treasury take the first losses. If losses are greater than 10 percent on the TALF, the Fed will absorb the additional losses."

In other words, if the aggregate losses on the TALF are 12 percent, taxpayers absorb the first 10 percent—essentially getting wiped out on their portion of the investment—and the Fed absorbs the remaining 2 percent.

Beyond 10 percent losses, the Fed absorbs 100 percent of the loss.

When the statistics and acronyms and issues seem abstract, it's helpful to remember that we all have skin in the game on this one.

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