26 Nov Fed’s New Aid Package

…Under the new Term Asset-Backed Securities Loan Facility, the Treasury will use taxpayer funds to protect the Fed against the first $20 billion of losses, or 10 percent, of $200 billion in exposure to AAA rated securitized consumer debt.

“I am willing to believe that these things that are rated AAA might have a maximum 10 percent loss if the assets behind them never changed,” said Ann Rutledge, a principal at R&R Consulting in New York, which specializes in structured finance. “The collateral in credit card asset-backed securities changes.”

Ratings may be harder to judge when credit quality is deteriorating. Also, the government has less information than issuers, who could back the bonds with assets that pose the most risk of declining quality, Rutledge said.

Officials yesterday said the risk of loss is minimal, and noted that the Fed will put haircuts on the value of the ABS that it takes on.

– Craig Torres and Scott Lanman, “Fed Risks ‘Spitting in the Wind’ With New Aid Pledges,” Bloomberg, November 26, 2008