Toxic Asset Subsidies and the Early Redemption of TALF Loans

37 Pages Posted: 19 Jan 2011 Last revised: 19 Aug 2011

See all articles by Linus Wilson

Linus Wilson

University of Louisiana at Lafayette - College of Business Administration

Multiple version iconThere are 2 versions of this paper

Date Written: August 17, 2011

Abstract

This paper develops a formula to numerically estimate the unsubsidized, fair-market value of the toxic assets purchased with Federal Reserve loans. It finds that subsidy rates on these loans were on average 33.9 percent at origination. Yet, by the 3rd quarter of the 2010, there was on average no subsidy in TALF loans. The theoretical model is used to predict the early redemption of Term Asset-Backed Securities Loan Facility (TALF) loans used to purchase commercial mortgage backed securities (CMBS). The predictions of the model are strongly supported by the data. In addition, this paper looks at the determinants of early redemption. CMBS originated inside the peak bubble years of 2005-2007 were much less likely to be redeemed early. The giant investment managers, Blackrock and PIMCO, were much more likely to redeem their TALF loans early than smaller investment managers.

Keywords: Alternative Investments, Bailout, Banking, Blackrock, Call Options, Commercial Mortgage Backed Securities, CMBS, CDOs, Dodd-Frank, EESA, Emergency Economic Stabilization Act, Lending, Legacy Securities Program, Mortgages, PIMCO, PPIP, TARP, Troubled Asset Relief Program

JEL Classification: G12, G13, G18, G21, G28, G38

Suggested Citation

Wilson, Linus, Toxic Asset Subsidies and the Early Redemption of TALF Loans (August 17, 2011). Available at SSRN: https://ssrn.com/abstract=1742640 or http://dx.doi.org/10.2139/ssrn.1742640

Linus Wilson (Contact Author)

University of Louisiana at Lafayette - College of Business Administration ( email )

Department of Economics & Finance
214 Hebrard Blvd., Room 326
Lafayette, LA 70504-0200
United States
(337) 482-6209 (Phone)
(337) 482-6675 (Fax)

HOME PAGE: http://www.linuswilson.com

Register to save articles to
your library

Register

Paper statistics

Downloads
192
rank
125,067
Abstract Views
1,827
PlumX Metrics