By Lynn Tilton, CEO of Patriarch PartnersAlthough I am the holder of a U.S. patent on a complex financial model, I am befuddled and confused by the financially engineered structures and the thought process that defines TALF -- the Term Asset Loan Facilities program recently introduced by the Department of Treasury. I understand and applaud the intent to replace frozen credit markets with catalytic federal loans that stimulate the use of private funds and inspire lending. TALF 1.0 is a stepping stone on the path of creative liquidity, but it carries with it a broad burden of many of the most-broken facets of this decade's securitization processes, some of which is the subject of an SEC investigation. More important, and more urgent to the rebuilding of America, the priority TALF puts on asset classification is woefully misplaced. In its current form, TALF does not adequately address the emergency needs of the credit-starved small- and mid-sized industrial companies that are the backbone of the American economy. In the world of turnarounds, it is essential to work from the final outcome backward, from the goal towards the reality, and to ensure the shortest distance and the most direct route between the two. In the realm of restructuring, it is important to unravel the tapestry thread by thread, and reweave leaving behind those threads that are tattered or off color. So, in keeping with this theory, if TALF had been properly financially designed, those in power would not have reengineered a securitization platform that inherited the weak DNA that has helped bring the financial system to the precipice of failure. Ironically, TALF has done exactly that.
In order to create the future, one must look closely at history and tack between the past, present and that which is to come. TALF is aimed at reviving investment in Asset Backed Securities ("ABS") but much of what is lacking in its inherent structure is a consequence of not going back to the genesis of the true objective. The TALF program must and should be designed around "lending," providing commercial loans to credit starved businesses so they might employ our nation's populace, and to consumers so that those employed might be able to borrow to buy cars, homes and to pay tuition. So we must first examine what worked in our history in terms of both the provision of loans and the ability of lenders to collect or monetize without exorbitant rates of default. Perhaps it is time to return to smaller, better controlled lending institutions or investment funds with relationships at their core and origination and collection under the same roof. Perhaps evaluating risk of default should revert to a time of higher equity and lower leverage, rather than third party subjective ratings at the forefront of the congressional debate on the mortgage market failure. The first salvo of TALF belies every premise to which I note above. It does not start at the beginning of job creation and sustenance, but rather makes loans for the purchase of cars or the expansive use of credit cards the foremost priority. TALF demands the decoupling of origination and monetization as it mandates that the originator of the loans cannot be the borrower of government funds, leaving the maker of risk and the taker of reward in distinct camps, a non-sensical role reversal.
Most absurd of all, the risk of repayment of taxpayer monies is desperately dependent, under this construct, on the subjective ratings of third party rating agencies such as S&P, a division of McGraw-Hill ( MHP), and Moody's ( MCO), which are beneficially broken and must themselves look at their own mistakes and role in the collapse of our financial system, before the rebuild and relaunch of a refined ratings process that can protect investors. The answer seems simple but quite distant from the one, to date, presented. If taxpayer money is to be used to ignite the economy and to provide credit during this tenor of fear and tenure of crisis, then the first priority must be to provide credit for struggling middle market and small companies. Next month when the Treasury and Federal Reserve announce TALF 2.0, they must address the deepest need of our nation -- emergency loans to small- and mid-sized companies. Even if banks do not want to return to their pre- Glass Steagall states of relationship lending, with origination and monetization under one roof, there are many investment funds that, with federally assisted structures, would fill the void left by the death of relationship banking. Survival of American industry must be the noblest of all our causes. This will mean direct lending to small and middle market companies through a TALF structure that allows alternative lenders to use government funds, side by side with its own, to provide desperately needed funds to companies struggling for continued existence. This must be our foremost priority as absent employment, credit cards, auto loans and home mortgages are out of reach to our nation's people. If we return to the genesis of our ultimate objective and carefully construct programs that accomplish such ambition, we might actually achieve the exodus from this financial nightmare that seems, at this very moment, absolute in its reach and infinite in duration.