Questions and Answers about TIAA's Participation in the Term Asset-Backed Securities Loan Facility
New York, July 27, 2009
Is TALF the same as TARP?
No. TALF is a different program than the Troubled Asset Relief Program, or TARP, which is a government program to purchase distressed assets from financial institutions for the purpose of strengthening their balance sheets. Neither TIAA nor CREF has applied for or received TARP funds.
What is TALF?
TALF, or the Term Asset-Backed Securities Loan Facility (TALF) is a Federal Reserve credit program that provides low interest rate loans to investors like TIAA to finance the purchase of asset-backed securities collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the U.S. Small Business Administration.
The TALF program is part of an overall effort to thaw frozen credit markets and get the economy going. In years past, about half of all consumer credit in the U.S. has come through the securitization markets.
Does this mean that TIAA is not sound?
No, on the contrary, TIAA continues to have a strong capital base to help ensure its claims-paying ability. As a stable financial company, our involvement with TALF reflects our support for the government's efforts to restore the flow of credit and get the economy moving, which benefits all investors.
How does participation benefit TIAA policyholders?
TIAA has an opportunity to earn better risk-adjusted returns on investments in certain asset-backed securities, a type of investment that we have long experience with, than we could absent the financing.
For example if we purchase $100 million in eligible securities with cash and three years later the value of those securities increases to $110 million, TIAA earns a 10 percent return. If in three years the value of the securities falls to $80 million, we would have lost $20 million.
However, if we purchase those same securities with $10 million in cash and $90 million from a TALF loan, and sell the securities three years later for $110 million, we can repay the $90 million loan and have earned a 100% return on our $10 million cash investment.
Because TALF loans generally are non-recourse to borrowers like TIAA (i.e., the lender can recover only the securities and not any additional amount from the borrower), if in three years the value of the securities falls to $80 million, we can simply hand over the securities to the Federal Reserve to retire the $90 million loan and lose our $10 million initial investment, without additional penalty or risk.
Please note that these examples exclude the impact of the interest TIAA would earn, the interest we would pay on the TALF loans or features of asset-based securities such as amortization.
Will the government take ownership in TIAA as a condition of the TALF financing?
No. TALF confers no ownership stake in the borrower. Loans are secured exclusively by the asset-backed securities purchased and are without recourse to the borrower. This means that in the event of default the Federal Reserve Bank of New York, the lender, can recover only the securities and not any additional amount from TIAA, the borrower.
What types of securities are eligible collateral for a TALF loan?
TALF loans are used to finance the purchase of certain asset-backed securities that have a credit rating in the highest long-term or short-term investment-grade rating category from two or more major nationally recognized rating organizations.
Eligible securities must be student loans, credit card loans, equipment loans, floorplan loans (to finance auto dealer inventories), small business loans fully guaranteed as to principal and interest by the U.S. Small Business Administration, or receivables created by principal and interest, tax and insurance, and corporate advances made by Fannie Mae- or Freddie Mac-approved residential mortgage servicers under pooling and servicing agreements. In general, eligible securities must be issued on or after January 1, 2009.
But aren't asset-backed securities themselves risky?
TIAA has invested in these types of securities for over a decade and knows them well. TIAA can pay off the loans at any time, and, because the loans are without recourse to the borrower (defined above), surrender the collateral back to the Federal Reserve at the end of the term if the value of the loan exceeds the value of the securities.
How much money will TIAA invest via TALF?
The amount we will invest is still being determined, though it will be consistent with TIAA's investment strategy, which supports the company's claims-paying abilities and obligations to participants. Participation will be relatively small compared with the total assets that TIAA-CREF manages.
What are the terms of a TALF loan?
TALF loans have a three-year term, with interest payable monthly. Loans will generally be non-recourse to the borrower (see above) and will be fully secured by the assets purchased.
The New York Federal Reserve Bank, which lends the money, also will assess an administrative fee equal to 5 basis points of the loan amount on the settlement date of each loan transaction. TALF loans will be pre-payable in whole or in part at the option of the borrower. TALF loans are not subject to mark-to-market or re-margining requirements.
What bearing does participating in TALF have on TIAA's financial strength?
We expect participation in TALF to have no negative effect on TIAA's financial strength or balance sheet.
What is TIAA's exposure to sub-prime loans and other securities that have presented such problems for financial companies?
TIAA has had, and maintains, limited exposure to collateralized debt obligations and other types of highly leveraged securities that have produced large losses for some financial companies.
This reflects a sober approach to risk management has enabled our organization to minimize exposure to products that other financial institutions offered that required those firms to take risks that may not have been in the long-term financial interest of clients saving for retirement. For additional information on TIAA's investment performance please see 2008 Investment Performance of the TIAA General Account.
What types of investors may take part in TALF?
Many types of institutional investors may participate. They include insurance companies like TIAA, pension funds, hedge funds and other large investors.